الاقتصاد المصري وأزمة فيروس كورونا المستجد (كوفيد-19)
مايو 22, 2020الجائحة والنظام العربي تداعيات فيروس كورونا المستجد على المستوى العربى
مايو 22, 2020Ambassador Magda Shahin
Abstract:
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Introduction
The Coronavirus crisis wreaking havoc on economies around the world, Egypt is no exception. As a multifaceted crisis, COVID 19 has hit hard the health sector as well as the social and economic fabrics of Egypt’s society and well-being. After a 3-year successful structural adjustment program, Egypt was on the verge of taking off to the next level towards an inclusive, private sector led growth of the economy. However, Egypt’s successful structural adjustment did not vow for it in these dire times of COVID 19, which had its grip felt, pushing Egypt to resort back to the IMF programmes for Structural Stand-by Arrangements (SBA) and Rapid Financial Instruments (RFI), lest it loses its pre-COVID achievements.
Yet, sooner rather than later, the economy is set to rebound. Egypt will have to be ready, as the government will have to move forward with structural adjustment to tap the potential of the private sector and to modernise its economy, while endorsing inclusive and sustainable growth.
In the following, we endeavour to look at Egypt’s pre- and post-COVID 19 period. We will study the extent of the latter implications on the economic growth, as well as delve into the question of whether Egypt’s economy is apt for a quick rebound. Lastly, we explore the way forward for Egypt’s economy to survive the crisis with the least possible damages and to move towards a sustainable, inclusive and dynamic economic growth.
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The successes of the 3-year adjustment program
Starting with ever-bold reforms including the liberalisation of the exchange rate in November 2016, Egypt showed resilience throughout to bring its reforms to success. Prior to the eruption of the COVID crisis growth had been improving steadily and expectations were to remain in the same vein for the coming years. Egypt was prone to take off to deeper institutional reforms after having stabilized its macroeconomic indicators in its three-year arrangement with the IMF (2016-19). Inflation as well as unemployment levels were at single digits; Egypt had reached an unprecedented level of growth as well as driving public debt to a downward trajectory.[1]
Orchestrated by the Central Bank, Egypt managed to achieve tangible progress in the fiscal situation, which prompted private and public consumption and gave a breathing space to the economy to grow. A reduction in interest rates due to the rise in foreign reserves was meant to incentivise the domestic private sector to lead the second wave of reforms. Despite of the decline in foreign reserves from a peak of $45.5 billion in 2019 to $40 billion in the first quarter of 2020, reserves remain solid, covering nearly an 8-month period of merchandise imports.[2]
One of the priority objectives of structural reforms was geared in essence towards boosting job creation, not as a trickle-down effect but on its own merit, providing social safety nets, particularly to the vulnerable groups, notably youth and women.
Prior to the crisis, the outlook was favourable for Egypt with a projected GDP growth of 6% in 2020, that would have counted among the highest worldwide, a readiness for further institutional and transformational reform, as well as a more conducive business environment for the private sector. To say the least, the reform program was able to provide confidence and the right impulse for the economy to grow.
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The impact of the crisis on Egypt’s economy
COVID-19 came to hit the very indicators that Egypt worked so hard throughout the adjustment programme to stabilise and the heavy sacrifices the people had to undergo to support. As noted, the crisis is multifaceted and the government of Egypt has no easy task to mitigate the combined socio-economic and health implications of the COVID-19 outbreak.
Without going into much detail, it suffices to point out that the IMF forecast re-evaluated the increase in real GDP growth to drop to 2% in 2020 from initial expectations close to 6% with the continued impact of the Coronavirus pandemic. Measured against the 2.3% rate of population growth, which is one of the highest global growth rates, means that Egypt will equally suffer a negative per capita growth rate. In addition, unemployment rates returned to their previous level five years ago to attain nearly 12% after having reached 8% in 2019, the lowest level ever within 20 years because of implementing the reform program. Furthermore, the public debt declined from 103% in 2016/17 to about 85% in 2018/19, which is a healthy downward trend, nevertheless remains high in proportion to GDP, thus continuing to pose sustainability risks. This will exacerbate if the crisis causes a discontinued fiscal consolidation.
It is not unique that due to the global impact of the pandemic and the worldwide lockout, Egypt is encountering a huge drop in its net financial inflows. It is most unfortunate that such a shortage of finance comes at a time when the prevailing conviction was that Egypt was pulling itself out of the bottleneck. Egypt lost its income from the tourism sector, faced significant drop in the Suez Canal revenues, and sharp contraction of export proceeds. The steep descent overnight in global oil and gas prices, from $60 per barrel to no more than $25 per barrel, are leaving their marks on Egypt’s budgetary outlays. Adding to all this, the fall of remittances by 20% globally will have a devastating effect on Egypt’s economy, as the world fifth largest recipient of remittances.[3] To put things into perspective, the World Bank stipulates that the decline in remittances is “unprecedented,” with the closest comparison being the Global Financial Crisis (2008/9), when remittances fell around 5%.[4] Remittances and tourism are the two largest sources of foreign currency for Egypt and the two have dried up in the post-Corona era that will be difficult to recoup in the short term. In light of the huge losses that Egypt incurs in its revenues, it will have to, according to its Minister of Finance, reassess its budget downward and review ways of maintaining and increasing public spending on sectors such as education and health.
Placing Egypt’s rate of growth in a regional context, it is useful to look closer at the projected changes the IMF has made to the 2020 GDP forecasts as a result of COVID 19.
Pre-COVID 19 2020 IMF Growth Forecasts |
Post-COVID 19 IMF Growth Forecasts |
|
Algeria |
2.6% |
-5.0% |
Bahrain |
2.5% |
-4.3% |
Kuwait |
3% |
-2.5% |
Oman |
2.5% |
-5.0% |
Qatar |
3.6% |
-5.9% |
Saudi Arabia |
2.5% |
-4.3% |
UAE |
3.0% |
-5.0% |
Egypt |
5.9% |
+2% |
Jordan |
2.4% |
-3.7% |
Lebanon |
0.9% |
-12% |
Morocco |
3.7% |
-3.7% |
Tunisia |
2.4% |
-4.3% |
While it is obvious that all countries are hard hit by COVID-19 sliding to negative growth rates, Egypt is apparently better off than other countries. Losing a 4% of its growth level, Egypt’s positive rate of growth will wither, as noted, once we factor in the rate of growth of the population. Additionally with the high disparity in the standards of living in Egypt, the vulnerable segments of the population will be the hardest hit. According to United Nations figures, over 30 percent of the population live below the poverty line.[5]
One thing is also clear; Egypt will hardly be able to resort to its Gulf friends to ease its quandary, as COVID-19 has spared no one. All are obviously in the same boat.
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Egypt is well-disposed for additional finance
Having shortly completed a stringent structural program with the IMF, under which it obtained a loan of $12 billion, to restructure its economy and stabilize macroeconomic indicators; Egypt is in a better shape over its peers. It started getting its first tranche in October 2016 and got the last one in December 2019. Egypt implemented this program with merit and succeeded in enhancing business/investors’ confidence in its economy and fixing its international credibility, which made it fully eligible to borrow to face the pandemic, which no one knows its extent.
Despite the huge difficulties, Egypt did not hesitate to make every strenuous effort to tackle the Coronavirus crisis at an early date to limit its spread. It took preventive plans and strict measures to confront the pandemic in the governorates, equipping hospitals, examining, and sterilizing streets and squares to combat the transmission of infection. The government of Egypt has also embarked promptly on effective steps to mitigate the economic impact on the most vulnerable households and irregular workforces, including fiscal stimulus. This amounts to cover million people working in construction, agriculture, fishing, plumbing and other fields. The Central Bank has also taken other steps, including monetary easing, and liquidity and regulatory measures for the financial sector and for borrowers. There is need for further stimulus, especially expenditures on health, food, and income support for vulnerable households and support for businesses.
Egypt, however, amidst these hardships has refrained from relinquishing its reform efforts. In fact, one should give tribute to the government to having reacted quickly to lessen the negative impact on the economy. The GOE did not shy away from resorting once again — in spite of the adverse reaction incited and promulgated by the media — to the IMF for programmes to pursue its structural reforms and attenuate the financial blow on the country’s economy of the its own and international lockdowns. The GOE clearly understands that the completion of the Extended Financing Facility (EFF) reform programme with the Fund does not mean at any rate ending its dealings with the Bretton Woods institutions. Like other developing countries, Egypt is in constant need of technical advice and capacity development in many fields that it requires from these institutions, which have high professional expertise. The IMF – and there, is no shame in it – monitors and supervises the development of Egypt’s economy, comparable to all developing and developed member states through ‘Article IV’.
Throughout its long history and credibility in its dealings with the Fund as well as with other international and regional institutions and creditors, Egypt has proven worthy of their confidence. There is nothing wrong, as many would like to think, resorting once again to the Fund. It is to the GOE’s credit to have recourse to emergency programmes that the IMF assigns to its member states affected by unforeseen crises. It is the sign of governance maturity and responsible membership of the international community of nations.
The fight to contain the Coronavirus has not derailed Egypt’s authorities from pursuing its pre-Corona achievements and in continuing with its second wave of reforms. In fact, the ‘Stand-By-Arrangement’ (SBA) with the Fund is particularly geared towards averting the potential risks of losing the accomplishments of Egypt’s IMF-supported structural adjustment programme and ready it for the next set of reforms. Accordingly, the GOE submitted a request for additional financing from the Fund to benefit from the SBA.
But, Egypt is also entitled to profit from another specialised window, the ‘Rapid Financing Instrument’ (RFI) to address specifically the immediate needs of the balance of payments and support the most affected groups. It is well-established that all eligible member states facing urgent financial needs are in a position to benefit from either of these two programmes or both. However, the SBAs, which are more precautionary in nature and for balance of payment support are used more by the developed and middle-income countries (Egypt is a low-middle-income country), as the least developed countries (LDCs), a recognised UN defined group, have other instruments that are more concessional and accessible to their needs, of which Egypt is not a member. The RFI provides fast financial assistance to countries facing an urgent need for balance of payments. It is a more flexible tool for meeting the diverse emergency needs of member states. The access for countries under this instrument is up to 100 percent of their quota share, however, the precise amount is to be decided by the IMF Board. According to the IMF regulation, the country will have to commit in its letter of intent, to ensure that this assistance is used for the urgent purpose agreed under the emergency financing. Both mechanisms, SBA and RFI, are essentially short-term for one or two years. However, in case of necessity they can be extended to three years at most. As all Fund’s arrangements, the IMF follows and monitors closely the expenditures in both credit lines, SBA and RFI and follows ex-post assessment procedures. The conditions of the Fund prevails, such as transparency and anti-corruption measures to its loans, requiring governments to conduct independent audits, publish procurement plans, including the names of beneficial owners, et cetera. Anti-corruption measures are part of the macroeconomic issues within the framework of the Extended Fund Facility arrangement for structural reforms.
By responding to Egypt’s demands, the Fund is keen not to risk the successes previously achieved by the reform programme and macroeconomic policies. Egypt and the IMF need to work jointly to protect the significant gains made in the framework of the three-year reforms. And, as approved by the IMF Executive Board on 11 May, a $2.772 billion (100% of quota) for the new comprehensive package of financial support will achieve a dual-purpose. First, help Egypt cope with its current plight due to the repercussions of the Coronavirus pandemic. Second, safeguard previous successes, support future reform needs and help provide the basis for a strong economic recovery through accelerated reform efforts aimed at supporting broad-based private sector led development and at making growth more inclusive and sustainable. As the IMF Board has acquiesced to Egypt’s loan, it is expected that other financial resources, from the sister and other regional institutions (IFC, EBRD, Afrexim Bank and others), each with its own defined objective, will flow easier into the country, assisting in overcoming the predicament at hand and stimulating development.
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The Way Forward
In a related context, there is no doubt that, in the aftermath of the pandemic, Egypt will have to delve into the structural transformation of its economy. Egypt is compelled in light of the Corona pandemic to move swiftly from a rent economy to a more dynamic, diversified and competitive economy based on the ability to produce goods and services. Egypt will have to dispense largely – in the short to medium term – on the income it receives from tourism, workers’ remittances and perhaps counts on less returns from the Suez Canal and its oil exports after its price collapse. The situation will continue to be fluid and volatile long after the world abates the Coronavirus pandemic.
The challenge is the consolidation and the effective implementation of the long-spoken about private-public partnership. The GOE will have to continue the efforts to kick-start private sector led inclusive growth, which requires – now as before – the alleviation of longstanding constraints, lessening the red tape and further enhancement of the business environment. This, however, should not deny the government its continued role in several areas post-Corona, as public investment in the health and education sectors remains key to inclusive growth.
The best way forward to Egypt is to transition into a digital economy. This should give a positive twist to the negative impacts of COVID 19. The ITC sector is topping the priority list for investment to allow the economy to grow. The lockdown of the Coronavirus pandemic has made it all the more necessary to move into digitalisation of practically all sectors of the economy, health, education, finance, and trade. There is no alternative to e-commerce, digital marketing, e-learning, hybrid-learning, online platforms, and delivery businesses to rise to the top in the Egyptian market. We already witness the fundamental changes in the education sector because of the crisis, and the overwhelming trend towards distance education using modern technology. Egypt was fortunate to have already introduced – though on a narrow scale – the tablet that provides the hardware needed for this new type of education, which became very useful in the face of the crisis. Egypt is also to invest in health, as the call to link all health units in all villages with technology has shown its vitality to combat the pandemic. Digitalisation will certainly help advance the inclusion of the more disadvantaged population in economic growth, so that no one is left behind.
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Conclusion