Egypt Economy Grows 1.8% In H1

Egypt’s economy grew between 1.8 and 2 percent in the fiscal year that ended in June 2012, the country’s finance minister said late last week.

The preliminary figures for GDP growth cited by Momtaz El-Saeed were in line with predictions for 2011/12 made by experts in Cairo.

Beltone Financial, a local investment bank, previously forecast an acceleration of real GDP growth from 1.8 percent in financial year 2010/11 to 2 percent in 2011/12.

A note from Beltone Thursday predicted 3 percent growth in the 2012/13 fiscal year, which started July 1, dependent on newfound political stability spurring domestic demand.

But the bank suggested that growth could falter if continued political upheaval postpones economic policy-making.

“Domestic pressures are also now coupled with external pressures emanating from a weakening global growth, which negatively impacts Egypt’s external sector and pressures its domestic currency even further,” the note said.

The International Monetary Fund (IMF) said in its latest World Economic Outlook (WEO) report that Egypt will not be spared the considerable negative economic spill over from the economic problems in Europe.

The WEO report specifies two main sources of external challenges for countries in the Middle East and North Africa region (MENA); oil prices and trade linkages with Europe.

An overall growth of 4.2 percent is projected for the region in 2012, dropping to 3.7 percent the following year.

Another IMF’s report after the Deauville Partnership Meeting in April in Washington said the country’s public debt-to-GDP ratio would decline somewhat, reflecting strong nominal GDP growth and a lower fiscal deficit.

In addition, foreign financing would be critical to help bridge financing gaps. Allowing the pound to move more in line with market forces-while avoiding excessive short-term volatility-would help limit the international reserves drain and maintain external sustainability going forward.

In the medium-term, sustaining rapid and more socially inclusive growth will require policies to leverage Egypt’s large economic potential, the report noted.

This can be achieved by creating a more transparent and competitive business environment, especially for small enterprises, and providing more equal access to job and business opportunities for all sections of society, including through more investment in human capital and infrastructure, and improved access to financing.

Maintaining a stable macroeconomic environment will be a necessary condition to achieve high growth that benefits the population at large. For this, fiscal consolidation to reduce government debt and create space for countercyclical policy will be central. This requires raising tax revenues, including through a transition to a modern value-added tax (VAT), and improving the quality of public spending by replacing the inefficient and inequitable system of generalized subsidies (costing more than 8 percent of GDP in FY2011/12) with a better-targeted social safety net.

The report further said Egypt’s outlook for FY2012/13 portends a slow recovery of economic activity and continued balance of payments pressures.

Real GDP growth is expected to pick up only gradually, reaching 31/4 percent given a challenging external environment and the negative fiscal impulse from the needed consolidation in the FY2012/13 budget.

Sectors most hit by the unrest (tourism, manufacturing, construction) are expected to contribute to the recovery.

However, despite the modest growth prospects, inflation is likely to increase, driven by higher global commodity prices. Unemployment is expected to remain elevated, with job creation still weak and with a structurally large number of labor market entrants.

For oil importing countries, including Egypt, strong oil prices, anemic tourism, social unrest as well as weaker trade with Europe constitute the main sources of concern. The WEO report indicates that GDP growth in Egypt is expected to drop to 1.5 percent in 2012, from 1.8 in 2011. In 2013, however, the IMF estimates Egypt’s economy will grow by 3.3 percent.

Oil exporters could be undermined by a possible depression in oil prices should the crisis in Europe continue. North African countries, on the other hand, will be affected by a drop in trade, remittances, and tourism.

Inflation in the region is expected to be subdued by the weak growth outlook as well as by receding commodity prices. It is expected to fall to 8.7 percent in 2013, down from 9.6 in 2011.

Egypt’s inflation, however, is seen to contradict the inflation trend of its neighbors. Inflation is projected to surge to 12.1 percent in 2013, up from 11.1 percent in 2011. Nonetheless, 2012 inflation is estimated to drop to 9.5 percent.

Despite the relative improvement in GDP, the report does not foresee similar progression on the unemployment front in Egypt. Unemployment rate is forecast to reach 11.5 and 11.4 percent in 2012 and 2013, respectively, up from 10.4 percent in 2011.

On the policy side, the IMF puts preserving macroeconomic stability while evolving towards a model for inclusive growth as the key policy priority for MENA countries, especially those facing unrest.

Poverty reduction through productive investment is among the key medium-term policy objective highlighted by the report. The current patterns of fiscal spending, however, are unsustainable.

“Increased spending on fuel and food subsidies…along with pressures to raise civil service wages and pensions, is straining public finances,” the report read.

It indicated that an increased targeting of subsidies as well as subsidy reform is highly needed to ease the strain.