News

By Klaus Enders
IMF Middle East and Central Asia Department
February 13, 2008

Growth in Egypt has picked up steadily since 2004 (see chart), making it one of the Middle East's fastest-growing economies.
It launched bold reforms in 2004 that, along with a favorable external environment, have triggered an impressive acceleration of growth, to 7 percent in 2006/07.

In its most recent review of Egypt's economy, the IMF says the expansion has broadened from energy, construction, and telecommunications to such labor-intensive sectors as agriculture and manufacturing.

According to the IMF, the Egyptian economy will continue to grow at 7-8 percent if ongoing improvements in the business environment succeed in raising investment to more than 25 percent of GDP.
Between end-2004 and end-March 2007, 2.4 million jobs were created. As a result, unemployment—chronically high in this emerging market economy—has dropped from 10.5 percent to 9 percent. Exports and imports also rose sharply, along with workers' remittances, Suez Canal receipts, and tourism revenues.

Better business climate
The reforms have started to tackle critical impediments to private business and investment.

Governance and financial soundness of state banks and banking supervision have been strengthened in the context of broader, ongoing financial sector reforms. Those reforms are also modernizing the insurance sector and capital markets. Structural reforms were complemented by prudent macroeconomic policies. Monetary policy, underpinned by greater exchange rate flexibility, has become more effective in targeting and containing core inflation. The fiscal deficit for 2006/07 was reduced to about 7.7 percent of GDP from an average of 9 percent in recent years. The decline is due to the tax reforms, fuel price adjustments, wage restraint, and windfall receipts from a telecom license sale.

In a global environment flush with cash, investors took notice. Large capital inflows—mostly foreign direct investment—from Europe, the countries of the Gulf Cooperation Council, and North America reinforced the growth impact of the reforms. Egypt's balance of payments has recorded a surplus since 2004/05, bringing official reserves to the equivalent of more than 6 months of imports and 8 times short-term debt—strong insurance against any reversal of capital flows (see table).

Tasks ahead
With Egypt's labor force growing rapidly, sustained growth that produces jobs will be essential. This will require sustained higher investment. Structural reforms therefore need to continue to tackle constraints on business development, such as inadequate infrastructure, red tape, poor public service delivery, and the scarcity of skilled labor.
To improve access to finance, particularly for smaller firms, the authorities aim to rapidly complete the bank recapitalization and restructuring program and further improve banking supervision. Complementary regulatory and judicial reforms—such as setting up specialized economic courts and enhancing the role of the private sector-led credit bureau—should help improve contract enforcement and creditor protection. These steps will facilitate bank lending to smaller enterprises.

The authorities have also started to tackle the underpricing of energy. They hiked diesel prices in mid-2004; further adjusted retail prices in mid-2006; and, in late 2007, launched a three-year program to phase out most industrial energy subsidies.
However, prices for most energy products are still far below international prices. This distortion could attract investment into sectors where Egypt does not have a long-run comparative advantage. It also encourages levels of energy consumption that impose high environmental costs and uses up public funds that could be spent more productively, for example on education or infrastructure.

Fiscal consolidation
Reducing the budget deficit is key to raising national saving to finance higher investments. It is also key to supporting monetary policy in containing inflation and speculative inflows and to reducing the net public debt. The government has embarked on a program that aims to reduce the deficit gradually to 3 percent of GDP by 2010/11, which would put public debt on a firmly declining path. Achieving the fiscal targets will require continued retrenchment in the wage bill, reform of sales and property taxes, more efficient cash management and public spending, and lower subsidies. The favorable external environment and Egypt's continued strong growth provide an opportunity for early action in these areas. Early action would also contribute to a strong and swift investor response. At the same time, the authorities should continue to strengthen social safety nets and help the poorest segments of society benefit from opportunities offered by a growing economy.

Egypt is among the three largest recipients of Foreign Direct Investment (FDI) in MENA, finds the recently launched World Bank report ‘MENA Economic Prospects and Developments 2008’.

Saudi Arabia, Egypt and the United Arab Emirates are now the three largest FDI recipients in the region, accounting for more than half of inward FDI flows.

FDI continued to flow in MENA at high levels, some $45 billion, down moderately from the record $52 billion recorded in 2006. In contrast with 2000-2004, when FDI flows were more evenly distributed, three countries attracted the bulk of flows from 2005 forward.

According to the report, Egypt and Morocco have enjoyed the strongest growth in tourism revenues over the last years, in part as investment in improved tourism infrastructure is increasingly in place (much tied to FDI from the Gulf countries), and economic growth in Europe gained firmer footing.

Egypt’s efforts to diversify the tourism base, appealing to residents of the GCC, as well as new markets in Central Europe and the former Soviet Union have paid handsome dividends.

During Egypt’s FY07, tourist arrivals burgeoned by 12.6 percent, with earnings up 14 percent to $8.2 billion (6.5 percent of GDP). The UAE invested €6 billion ($7.6 billion) in Egypt in 2006 in transport infrastructure, tourism, real estate and telecoms. Egypt also received €1.4 billion ($1.8 billion) from Kuwait, flowing mainly into public works, transport and tourism. Tourism revenues in the MENA region grew by 12 percent in 2007 to reach $29.2 billion. Tourism revenues form a significant portion of external receipts and account for a sizeable share of GDP for a number of countries in the MENA region. This is especially the case for countries including Morocco, Tunisia, Jordan, Lebanon and Egypt.

“2008 MENA Economic Developments and Prospects:  Regional Integration for Global Competitiveness” is the fourth report in a series of annual overviews of the region. MENA 2008 Economic Developments and Prospects, like its predecessors, reports key macroeconomic developments from the regional perspective as well as progress with structural reforms.

For the fifth year in a row, the MENA region experienced growth at a rate higher than 5 percent (5.7% for 2007), exceeding levels reached in the 1990s and early 2000s- according to the findings of the report. 

Egypt's Minister of Investment Mahmoud Mohieddin has conveyed that the value of foreign direct investment (FDI) amounted during the first half of this fiscal year to $ 7.8 billion. In comments delivered in Sharm el-Sheikh during a session on the investment opportunities in Egypt, Mohieddin said that Egypt has been able to lure some $21 billion in FDI since the start of the reform process in 2004 till the end of 2007.

According to him, investment grows by 40 percent annually on average. He mentioned that Egypt ranked first in luring FDI in Africa, which reached 8.5 percent of the GDP according to the United Nations Conference on Trade and Development (UNCTAD) statistics. The Egyptian minister said such growth in the FDI helped Egypt increase its foreign currency reserves.