What does COVID-19 mean for Egypt’s economy?

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COVID-19 has disrupted both supply and demand around the world. Egypt is not immune to the recessionary trends caused by the sudden halt in supply chains and the sharp decline in demand, domestically and globally, resulting from the rapid spread of the virus. The drop in economic activity is even more evident in a country that has adopted fiscal consolidation measures and increased public spending on major infrastructure projects that are now underway. These policies worked while the economy was strong, but it is time to consider new strategies to promote the private sector as the government faces some tough decisions ahead.

The Egyptian government adopted an ambitious reform program starting in 2016, which included a currency devaluation, liberalization of certain sectors, and a phased lifting of state subsidies. The implementation of these reforms was coupled with a high inflation rate, and as a result disposable income has been shrinking and consumer demand in the domestic market has weakened.

Signs of improvement in early 2020

Despite a drop on the demand side, however, the Egyptian economy was showing significant signs of improvement at the start of this year. Egypt had a GNP growth rate of 5.6 percent in FY2018/2019, unemployment stabilized at around 8 percent, while inflation was down to single digits and seemed to be under control. According to the Central Bank of Egypt (CBE), the annual consumer price inflation rate declined from 7.2 percent in January 2020 to 5.3 percent in February. The Egyptian pound (EGP) steadily gained strength against the American dollar in 2019 and was deemed one of the year’s top performing currencies.

In addition, remittances from Egyptian expats working overseas reached $26.6 billion in 2019. This made Egypt the 5th largest recipient country in the world, according to the World Bank, and remittances are an important revenue stream for many Egyptians.

Last year also witnessed the revival of the tourism industry, a critical pillar of the economy. It is a source of significant employment and foreign currency, with revenues reaching $12.4 billion in FY2018/2019. This represents a rise from $3.93 billion in Q1 of FY2018/2019 to $4.19 billion in Q1 of FY2019/2020.

But there are serious challenges on the horizon

While it is too early to gauge the total economic impact that COVID-19 will have on the global economy as well as on individual economies, there are certain areas in which Egypt is likely to face serious challenges.

The disruption of supply chains will negatively affect industries that depend on inputs from China and other foreign markets, thereby affecting production levels for the domestic market as well as for exports. The decline in international trade as a result of the disruption of supply chains will also have adverse effects on revenues from the Suez Canal, which reached $5.8 billion in 2019.

The oil-rich Gulf countries are struggling with the economic impact of COVID-19 given the decline in demand for oil, especially from China, as well as the recent and sharp fall in prices stemming from the Russia-Saudi Arabia dispute, with Brent trading for under $30/barrel as of late March. This will result in a tightening of economic policies in the Gulf states and may require wage cuts and layoffs among expatriate workers, which in turn will affect the remittances of Egyptian expats, who account for a high percentage of the workforce in the Gulf.

The tourism industry is unlikely to see a revival until next season in light of ongoing travel restrictions and the lingering psychological impact of health risks associated with international travel. The demand crunch both globally and domestically will spill over into recessionary trends that will affect domestic investments and employment.

In addition, in light of the global uncertainty around the current situation and the expanding role that governments will play in safeguarding their economies, countries such as Egypt might find it even more difficult to access the finance needed to support their economies and carry out their stimulus plans. Global financial institutions like the International Monetary Fund may not be able to handle the huge demands that are likely to arise as a result of this crisis given the sheer number of countries affected.

The need for government action

In anticipation of these challenges, the Egyptian government has been quick to introduce stimulus measures. The CBE announced on March 16 that it was cutting borrowing rates by 3 percentage points to stimulate industries and boost demand, while increasing credit limits for businesses to support working capital and payment of salaries. At the same time, with fear of dollarization and to ease expected pressures on the currency, public banks are offering new certificates of deposit at a rate of 15 percent for one year, which is only available online without any need for personal interaction.

Furthermore, the CBE has instructed all banks and lenders to provide a six-month grace period on all loans as an emergency tool to ease the burden on the population and the private sector. The government also announced the following measures: the allocation of EGP 100 billion (around $6.25 billion) to combat the virus; a reduction in the price of natural gas and electricity for industries; the immediate release of export subsidy arrears; and the provision of support for the tourism and real estate industries through banking finance initiatives.  

As the world changes in the wake of the COVID-19 pandemic, Egypt has an opportunity to address some of the structural reforms in the economy by boosting the confidence of the domestic private sector, as well as moving at a faster pace to promote technological transformation, particularly in the financial and health care industries.  

Based on what we are seeing globally, Egypt is likely to face some serious public health and economic challenges in the days ahead. It is important to act quickly and creatively to anticipate and mitigate them.

This article was originally published on Middle East Institute. Yasser Elnaggar is a senior advisor of Basilinna and the CEO of EN Investment.

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