Emerging Market Economies

Egyptian Economy
A story of Resilience

Faculty: Prof. Sangita Kamdar

Submission by MBA (Core) 2020-2022 - Division G - Group 2

Sana Nizam H003

Shailja Dutt H036

Harshavardhan Ramchandran H045

Rohan Kshirsagar G016

Nishtha Negi G040

Vivek Rai G056

Date: Tuesday, 24th August, 2021

 Emerging Market Economies | Project Report
Submission by MBA Core - Div A - Group 2

Introduction
Egypt's economy is one of the most developed and diverse in the Middle East. Until 2010,
Egypt's economy grew at a rate of 5% every quarter, thanks to a series of economic reforms
that attracted foreign investment. The economy and living standards of the bulk of the
population improved throughout this time. However, the typical Egyptian's living conditions
remained poor, and enormous income discrepancies continued to widen, causing public
unrest. Economic slowdown has resulted from the 2011 revolution that toppled President
Hosni Mubarak's dictatorship, as political and institutional uncertainty, as well as increased
insecurity, continue to harm tourism, manufacturing, and construction. In 2020, Egypt's gross
domestic product (GDP) will expand at a rate of 3.57 percent. The Egyptian economy is
expected to rise by 5.84% in 2026, according to projections at the time.

Egypt is a middle
income country that
relies on remittances
from the Egyptians
working abroad,
money from the Suez
Canal, and oil as its
primary sources of
income. Population is
the underlying
contextual
determinant of various
growing development
challenges in Egypt.
Nearly a quarter of Egyptians (24.3%) lived below the national poverty line in 1991. Poverty
perpetuation, rising youth and women's unemployment rates, food shortages, and
fragmentation of cultivable land, in combination with high rates of illiteracy, housing and
water resource limitations, and environmental concerns were all compounded by Egypt’s
population growth. Around the year 2000, the figure had dropped to 16.7%, but has quickly
risen to 20% in the year 2008. These specific facts have had a significant impact on the
political determination to invest more resources in addressing population challenges.

Over the last decade, it has gone through considerable political upheavals, with political
turmoil from 2011 to 2014 followed by significant amendments to the country's constitution.
Long-term structural economic issues were aggravated by the extended political instability,
and Egypt began implementing an IMF-backed reform programmed in 2016. A series of
reforms have resulted in massive economic restructuring that has helped to stabilize the
macroeconomy while also having significant economic and social implications. Over the last
10 years, Egypt’s economy has been mainly driven by Services (45%-50%), followed by
industry (35%-40%) and agriculture contributes to about 12% of the country’s GDP.

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Submission by MBA Core - Div A - Group 2

Egypt's recent macro-

economic and structural
reforms have helped to
stabilise the economy,
allowing the country to join
the global COVID-19 crisis
with improved fiscal and
external balances. However,
the pandemic's negative
consequences have already
eroded this recent progress,
exposing long-standing
difficulties. Sluggish private
sector activity and job
creation, particularly in the formal sector, underperforming non-oil exports and Foreign
Direct Investment (FDI), elevated government debt-to-GDP ratio, below-potential revenue
mobilisation, and an unfavourable budget structure with limited allocations to key sectors like
health and education are just a few of them.

Macroeconomic Indicators
I. Inflation

Egypt's annual inflation rate jumped to 5.4 percent in July 2021, up from 4.9 percent the
month before. It’s the highest rate since December, driven up by food prices amid increasing
consumption during the summer months and recent increases in fuel, power, and tobacco
prices. Food and beverage expenses, the largest single component of the inflation basket,
increased by 4.9 percent on an annual basis; transportation costs increased by 6.6 percent, and
alcohol and tobacco costs increased by 2.9 percent. Consumer prices grew 0.9 percent on a
monthly basis, up from 0.2 percent the previous month, owing to higher prices for oils and
fats, meats, vegetables, and housing and utilities.

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II. Interest rate

The Central Bank of Egypt (CBE) left the overnight deposit, overnight lending, and main
operation rates unchanged at 8.25 percent, 9.25 percent, and 8.75 percent, respectively, at its
monetary policy meeting on August 5. The decision was in accordance with market analysts'
predictions, as it was the sixth hold in a row. The Bank made its decision amid relatively low
inflationary pressures so far this year, with June inflation coming in at 4.9 percent (May: 4.8
percent) and so maintaining below the 5.0 percent target floor. Furthermore, an accelerated
economic recovery, with preliminary data indicating 2.8 percent annual growth in FY
2021—implying GDP expanded 5.6 percent in April–June 2021 (January–March 2021: +2.9
percent yoy)—likely offered the Bank more leeway to hold rates steady.

III. Unemployment Rate

We can see that the unemployment rate in Egypt remained high during the 1990’s in the range
of 8-11%. During the year 1991 Egypt launched the Economic Reform and Structural
Adjustment Program (ERSAP) which led to downsizing of the public sector which offered
fewer government jobs. The private sector was not able to keep pace with the GDP growth
and could not absorb the excess graduates. From 1998 onwards, the unemployment rate
began to rise again due to education-occupation mismatch. The increasing size of youth
population pressure increased the demand for jobs and the private sector was not able to keep
up. By the end of December 2010, Arab Spring erupted which brought social unrest and later
years of Egypt saw political conflicts. The repercussions of these events were absence of
social security and favorable reforms for the country. The oversaturated labor market then
could not absorb the increasing population growth of Egypt. But later Egypt saw its
unemployment rate curve dropping due to aggressive reforms which included liberalization
of the Egyptian pound, elimination of the subsidies and introduction of new taxes. This led to
drop in imports and hence there was demand for local products driving production. Also,
there were many construction projects and reclaiming acres of lands for agriculture leading to
demand in the workforce.

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IV. Exchange Rate (Local Currency Unit per US$):

The exchange rate remained constant until the early 1990s, when it was devalued with the
implementation of economic reforms, reaching EGP 1.5 to the dollar in 1990. The Egyptian
pound's value plummeted to EGP 4 per dollar in 2002, then plunged after the decision to float
it in 2003, reaching as high as EGP 7 per dollar before regaining strength and stabilizing at
EGP 5.85. For the first time, the pound was weaker than Gulf currencies. During November
2016, the Central Bank of Egypt fully floated the Egyptian Pound (EGP) in order to stabilize
the economy which had been hit by a shortage of foreign currency inflows and political
instability. Foreign currency inflows declined due to lower remittances, tourism was affected
due to terrorist attacks and decrease in Suez Canal fees. The main objective was to boost
competitiveness through a weaker currency and attract foreign investors back to the country
with more transparency.

Fig. USD to EGP exchange rate

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V. Import and Export (in USD Million)

From 1998 onwards, there was liberalization of the trade regime where the government
reduced the maximum tariffs in most products from 50% to 40%, lifted the ban on most
textiles in compliance with WTO Agreement, along with reducing ban on other products too.
This led to the increase in imports from 1998 onwards. The exports have also seen an
increase from the year 2000 onwards. Egypt is a part of various regional and global trade
initiatives which have helped Egypt in its international trade. The political instability from
2011 onwards brought down both the imports and exports for the country.

Imports (in USD Million):

Exports (in USD Million):

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Key Challenges & Risks of Investment

1. Geo Political issues

Even though the Egyptian regime has been playing a pivotal role in stabilising
regional terrorism which has helped them build close relations with USA, UAE, Saudi
Arabia and Europe. But the country is still struggling with issues related to river water
sharing of the Nile river which supplies nearly 90% of the drinking water supply of
the country. Apart from the water supply issue, they also have gas supply
development issues in the eastern Mediterranean region. The country’s relations with
Turkey have also been strained for quite some time over Libya.

2. Lack of Fiscal consolidation

Egypt has a high public deficit which has further worsened due to the new support
plan due to expenditure close to nearly 2% of the GDP and their debt has been
substantially due to their excessive expenditure(close to 50% of their revenue). They
have focused on arranging bilateral loans and even multilateral loans which make
around 70% of the international financing. The recent crisis has brought down the
current account deficit by a slight margin and the government will maintain reserves
of close to six months of imports.

3. Government Intervention
The government's taxation policies have also resulted in risk for both companies and
individuals as the breakdown of the taxation requirement and bureaucracy has led to
delays in approvals and hence it has led to MNCs focusing on other emerging markets
apart from Egypt’s. There is also lack of transparency from the officials’ side in terms
of the reason when a investment proposal is rejected.

Government Policies
The Egyptian revolution of 1952 was a major event in which the monarchy of Egypt was
brought down and replaced, resulting in the resultant creation of a Republic. At the very
beginning of the republic state, a focus was put on land reform. This was due to the fact that
less than 6% of the total population owned close to 2/3 of all the land with a third of all fertile
land being owned by less than half of a percent of the general population. Land reforms such
as these along with the establishment of cooperatives for farmers and limits on land
ownership made the Egyptian leader at the time (Nasser) popular and the outlook of the
government was considered to be the start of what’s known as “Arab Socialism”. Keeping in
mind the geopolitical situation at the time (Cold War), the government tactically nationalised
the erstwhile Suez Canal Company. This resulted in a mini-conflict with western powers and
Israel. In spite of this, domestic socialist policies paired with international policies against
imperialistic tendencies were well liked by the general population.

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I. Intifah – “Open Door” Policy

Following Nasser’s death, Anwar Sadat took power in the country. Following another war
with Israel (1973) which resulted in a draw in terms of objectives for both sides, Sadat was
able to position it as a victory using the limited successes (regaining the Sinai Peninsula)
achieved and was able to restore Egyptian pride. Sadat used this opportunity to soon push for
economic reform that had the intent to shift away from the socialist controls initiated by
Nasser and go towards encouraging private investment and business activity. These reforms
are in total known as “Intifah” or “Open Door” starting in 1974.

The policy would allow for the influx of foreign capital either in the form of joint
ventures/limited partnerships with private/public capital removing any caps on the foreign
share within the venture/partnership. There were incentives offered to encourage foreign
investment. These included exempting Joint Ventures from having to get an import or export
license for project-related machinery, equipment and material. Restrictions and caps were
only put in sensitive areas such as banks, construction companies and house projects.
However, further amendments to the policy also created economic free-zones which allowed
for complete foreign ownership if approved by authorities along with tax incentives. These
zones were hoping to bring in foreign manufacturing with offers of low-labour cost, cheap
land and flexible policies to improve the nation’s GDP. The Exim (export-import) market
doubled in the decade following but there wasn’t a significant increase in GDP as hoped.

The reasons for these were many. The economic reforms had led to removal of subsidies on
foodstuffs and this had led to discontent and broke down into the infamous Bread Riots. The
free-zones that had been established in cities and around ports had attracted a large number of
migrants coming from the rural regions. The lack of planning led to increased levels of
poverty and desperation for the migrants. This also resulted in overloaded infrastructure and
port congestion causing high costs for loading/unloading docks. Further border conflicts with
Israel caused trade of oil over the Suez to dry up, hurting Egypt in terms of both capital flow
and employment. There was an ambiguously complex dual-structured forex system which
was ripe for exploitation using an arbitrage loophole which saw a large loss in exchange.
Finally, and probably most fundamentally, the Egyptian bureaucracy was itself bloated, slow,
inefficient and encumbered by corruption. This further complicated the Open-Door policy
that Egypt had tried to implement.

II. Economic Reform and Structural Adjustment Programme (ERSAP)

Following the assassination of President Sadat in October 1981, Vice President Hosni
Mubarak took over. While the Intifah policy had been a first step, there was more economic
reform that was needed across the board. Domestic and International
complexities/uncertainties like the oil price shock, rising interest on foreign debts had further
exacerbated the unemployment (10% by 1990) and inflation (about 20%) troubles. The
government initiated further reforms called “Economic Reform and Structural Adjustment

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Programme” (ERSAP) between 1991-1993 in order to alleviate the comprehensive economic

concerns Egypt faced.

Macroeconomic reform was carried out to reduce the skyrocketing inflation (reducing it to
6.3% from 21%) and turn around the GDP growth rate (from -1% to 3.4%). A uniform
exchange rate was established along with a more stringent credit policy. Domestic pricing
within 3 years was instituted for Domestic Price Liberalisation Reform. Transport and Energy
were exempted to allow for a stratified exit from government to the control of market forces.

Public Enterprise reform was initiated with the intent to have the Government only to act as a
major shareholder in public enterprises and allow for the enterprise to restructure in order for
them to have commercial, managerial and financial autonomy. Realising the issues that had
come up with the 1974 reforms, there was a transitional phase of the reforms in order to
protect the poor and reintegrate the domestic migrant workers in the country. These
individuals were assisted with the Social Fund for Development.

The ERSAP initiative saw the GDP growth rate further increase over the 90’s reaching 5.3%
growth from negligible growth prior to the programme. The exchange rate unification policy
and pegging it to the US dollar was vital in preventing the overvaluation of the local currency
(Egyptian Pound), incentivising capital flows into Egypt’s International reserves which
served well to reduce the deficit. Debt relief programmes also helped reduce the debt burden
Egypt faced. The liberalisation of interest rates and credit brought down rates and private
enterprise reform strengthened the BFSI and broader financial sector.

III. 21st Century Uncertainties and IMF Restructuring

These policies served its purpose at the time. However, turbulent times would follow in the
21st century. From the global economic crisis in 2008 to the Arab Spring and the Tahrir
square protests that followed, Egypt was fundamentally changed again with Abdel Fattah
Al-Sisi seizing power. The rapid disruptions in the preceding years had once again led to high
inflation and debt, falling foreign exchange reserves and an inadequate monetary policy to
face the challenges of growth and employment. This forced the need for further economic
reform in 2016 with an agreement with the International Monetary Fund (IMF) in order to
achieve macroeconomic stability and avoid economic crisis. The IMF provided a $12 Billion
loan and coupled it with the requirement for Egypt to adopt a floating rate system for
currency. This resulted in the value of the EGP to depreciate and adjust. The move helped in
reducing imports as it became more expensive to buy foreign goods. Exports of non-oil
products were boosted as well due to it becoming cheaper for other countries to import goods
from Egypt.

There were other critical fiscal measures that needed to be taken to limit inflation and reduce
debt. A 3-year plan was launched in order to reduce the budget deficit (10%) which at the
time was the highest in the region. Fiscal consolidation was initiated with an increase in VAT
(Value-Added Tax) and custom duties to bring down the deficit. Monetary policy was also
tightened with an increase in interest rates.

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 Emerging Market Economies | Project Report
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Recommendations & Conclusion

Egypt is braving the herculean challenge of reconstructing its politics and economy at the
same time, with no broad societal agreement on either. State institutions that support both,
from the legislative and judicial branches to executive agencies with direct responsibility for
economic management, need major, if not complete, overhauls. The most important issues
that face Egypt over the coming years are tied to a rapidly growing population, the
modernization of its economy, and how best to ensure a modern social safety net to protect
the most vulnerable in society.

In the road ahead, given the Government’s prudent policies, it is expected that the growth of
Egypt will rebound to 5.2% but the outlook is still clouded by the uncertainties due to the
pandemic under which the world is reeling right now. Though in 2020, Egypt was one of the
few emerging market countries to have a positive growth rate. The Egyptian economy
exhibited resilience in the face of the epidemic as a result of the government's quick and wise
policy reaction, combined with IMF help. But going forward it is important that economic
stability should be continued and public debt should be reduced. With the immediate effects
of the crisis subsiding, it will be critical to focus on structural reforms in order to encourage
private-sector-led growth, such as policies to increase revenue for financing critical public
goods like education, health and social safety nets, improve governance and transparency,
and expand financial markets. In order to unleash Egypt’s enormous growth potential, it is
important to reduce the role of state in the economy, increase Egyptians integration into
international trade by reducing trade barriers. This will also reduce poverty and increase
inclusiveness.

It will be critical to maintain economic stability and minimise public debt in the future. With
the immediate effects of the crisis subsiding, it will be critical to focus on structural reforms
to encourage private-sector-led growth, such as policies to increase revenue for financing
critical public goods such as health, education, and social safety nets, improve governance
and transparency, and expand financial markets.

Reducing the government's role in the economy, ensuring a level playing field for all
businesses, improving the business environment, and increasing Egypt's integration into
global trade by lowering trade barriers and ensuring the predictability of customs procedures
will all be crucial in unlocking Egypt's enormous growth potential, reducing poverty, and
improving inclusiveness. As specific policy measures to promote these objectives are
established and implemented, the IMF will continue to support Egypt's reform efforts.

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References

★ Egypt - United States Department of State

★ https://www.google.com/amp/s/www.businessinsider.com/heres-what-egypts-instabilit

y-means-for-foreign-investment-2012-7%3Famp

★ https://www.bakermckenzie.com/-/media/files/insight/publications/2016/03/bk_egypt

_dbi_2016.pdf?la=en

★ https://www.imf.org/en/News/Articles/2021/07/14/na070621-egypt-overcoming-the-c

ovid-shock-and-maintaining-growth

★ Egypt Economic Outlook

★ https://www.worldbank.org/en/country/egypt/overview

Appendix

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