Egypt avoids recession despite COVID impact on the economy

Dubai: Egypt is the only country in the Middle East and North Africa (MENA) that avoided a negative GDP growth in 2020 despite the impact of COVID-19 on the economy, according to latest data from the Institute of International Finance (IIF).

“The economy has weathered the COVID-19 pandemic well, supported by a timely and effective public health response, deployment of a comprehensive set of fiscal and monetary measures, and adequate funding from the International Monetary Fund (IMF), in the form of a Rapid Credit Facility and a Stand-by Arrangement,” said Garbis Iradian, Chief Economist, MENA of the IIF.

The IIF forecasts GDP growth to moderate from 3.6 per cent in 2019-20 to 2.3 per cent in 2020-21, supported by accommodative monetary and fiscal policies, and the progress in reforms prior to the pandemic.

Partial lockdowns and other restrictions may have less of a detrimental economic impact in the second half of the current fiscal year, as consumers and business have found ways to adapt and capitalize on the major progress made in digital transformation and fintech.

Swift response

The IIF said the COVID response measures have been adequate and the funding from the IMF allowed the authorities to swiftly implement an emergency response package that significantly increased health and other social spending and provided support to the private sector.

Despite the success so far, the IIF warns that the outlook remains subject to exceptional uncertainty, with much of the risks depending on the evolution of the pandemic and progress on the vaccine front in both Egypt and globally. It remains to be seen whether the new variants of the coronavirus will trigger an-other surge in cases.

Monetary policy support

The monetary policy stance is accommodative and there might be room for further easing in the absence of inflationary pressures. It remains consistent with the inflation target of 7 per cent in fourth quarter of 2022.

The Central Bank of Egypt (CBE) has reduced its policy rates by 400 basis points (4 per cent) since end-2019, and on February 4, it kept the overnight deposit and lending rates, at 8.25 per cent and 9.25 per cent, respectively. Other measures implemented include EGP 100 billion (1.7 per cent of GDP) guarantee to cover lending at preferential rates to the agricultural and manufacturing sectors; deferral of up to 50 per cent of the value of monthly installments for banks’ clients facing difficulties in settling their loans; and extending existing lending initiative to the tourism sector until end-2021.

The economy has weathered the COVID-19 pandemic well, supported by a timely and effective public health response, deployment of a comprehensive set of fiscal and monetary measures, and adequate funding from the International Monetary Fund (IMF), in the form of a Rapid Credit Facility and a Stand-by Arrangement.

Garbis Iradian, Chief Economist, MENA of the IIF

Concern over debt, deficit

Despite limited fiscal space and high public debt, the authorities have expanded their social programme, with focuses on tackling the health emergency. Electricity tariffs have been reduced for the industrial and tourism sectors, and the capital gains tax has been postponed until further notice. A COVID-19 tax of 1 per cent has been imposed on public and private salaries with proceeds earmarked to SMEs most affected by the pandemic.

The IIF expects the fiscal deficit to widen to 8.5 per cent of GDP in 2020-21 because of lower growth in tax revenues and scaled-up spending. Strong fiscal consolidation will be unavoidable once the COVID-19 crisis abates, to put public debt-to-GDP ratio back on a downward path.

“Our projections show that the debt will edge up to 92 per cent of GDP by June 2021. A minimum primary surplus of 2 per cent of GDP will be needed to put the debt back on downward trajectory,” said Iradian.

Healthy banks

The banking system remains healthy with strong capitalization levels and low non-performing loans. The Tier 1 capital ratio was high at 17.7 per cent, and the NPLs ratio remained low around 4 per cent in Q2 2020. Funding risks remain low as banks have one of the lowest loans-to-deposits ratios among emerging economies. The net foreign assets of banks recovered in recent months to $3.8 billion in December 2020. The NPLs ratio is likely to rise slightly this year due to the further slowdown in economic activity, on the back of a virtual halt in tourism and other services.

Need for deep reforms

The IIF said achieving higher and sustainable economic growth requires focusing on structural challenges that remain un-addressed, including the large footprint of the state and the military establishment, excessive regulation, lack of competition, and governance and institutional weaknesses.

Facilitating private-sector participation in all sectors would reduce the vulnerabilities and inefficiencies from relying on a few large players in the economy. In particular, the authorities should aim at reforming public procurement– breaking the iron grip of the state and the army in the economy—to improve resilience, boost growth potential, and deliver broad-based benefits for all Egyptians.

“We are encouraged by the progress made in digital trans-formation, which could also improve competitiveness and raise the productivity of labor and capital. The pandemic has accelerated demand for e-commerce,” said Iradian.