Egypt adopted long-awaited macroeconomic reforms. It was the A-List of this country’s growth recovery, but that’s not the full ABC

The A-List: Unwinding crisis-like environment

“The first day of the rest of your life” could represent what Egypt’s economic policy experienced after tectonic moves, which were announced from November 2016. A floating exchange rate and the announcement of a progressive unwinding of subsidies (particularly to gasoline prices) have been presented as remedies to crisis-time symptoms: poor foreign reserve levels and structurally high fiscal deficits driven by an overconsumption of cheap and subsidized foreign currency imported goods.

The resulting depreciation of the Egyptian Pound (-50%) nurtured import substitution through import prices increase. The fundamental credibility of the plan easily qualified Egypt for an IMF funding, while private funding skyrocketed, ending crisis-times of poor reserve levels. Moreover, the country unwound some of its capital controls and regained its top destination position for capital investment (USD 36.6bn in 2016) in the Middle East and Africa.

Still on this A-List, Egypt declared its willingness to repay its debt to foreign oil companies in May 2017. The country repaid USD 3bn (2.2bn in June 2017, and 0.85bn in May 2018) and will have to repay USD 1.5bn next year.

Balance growth further

Higher foreign exchange reserves (9 months of imports now, compared to about 3 months in September 2016) is one key achievement, albeit not meaning a full job. The target of a complete rebalancing has been partially achieved, as the current account deficit declined from -6% of the GDP in 2016 to -3% in 2018.

The pillar measure consisting of progressively cutting existing oil price subsidies is underway. Doing it in a period of subdued oil prices was easier, but in a context of higher prices like today, it becomes more sensitive as households’ purchasing power is impacted. It will nevertheless give the right incentive to lower demand for imported commodities.

More exchange rate flexibility should support competitiveness. Indeed it benefited to key Egyptian export sectors (tourism, Suez Canal) alongside favorable cyclical conditions visible at a global level. Regarding the manufacturing sector, the positive impact does not deal with higher exports, but with a higher domestic content in domestic sales, as imports of intermediate goods are deterred by low exchange rates.

Comprehensive growth-enhancing reforms are needed

Product market regulation has not particularly improved. Egypt is still lagging in terms of business climate, including difficulty to pay taxes, enforce contracts, and barriers to trade across borders (including the impact of past capital controls on current transactions). These bottlenecks hide positive aspects, like the ease of dealing with construction permits and the relatively good access to electricity and credit. However, the cost in resolving bankruptcies is higher than the regional average.

Reforming poor business climate items is not a precondition for genuine growth acceleration, as the A-list already had a positive outcome (+5.2% of growth in 2018 after +4.2% in 2017). However, these reforms are needed in order to sustain longer-run high growth rates. As the country aims at developing its manufacturing sector, more trade openness would be particularly fruitful. We have calculated that exports gains stemming from the future African Continental Free Trade Area should imply +10bn of additional exports over the next decade.