THE EGYPTIAN ECONOMY Reforms, Results and Remaining Challenges Vienna, April 26 th , 2018
THE EGYPTIAN
ECONOMYReforms, Results and Remaining Challenges
Vienna, April 26th, 2018
The Egyptian Economy
Key Elements of the Reform Program
Main Results
Challenges Ahead
Opportunities
….Prior to the Reform Program
A long-standing and ultimately unsustainable policy mix resulted in:
Low growth and investment;
Rising inflation;
Elevated general government debt;
Overvalued and scarce foreign exchange;
Widening current account deficit; and
Dwindling international reserves (three months of imports).
Egyptian Reforms
An ambitious comprehensive reform and adjustment program, supported
by an Extended Fund Facility (EFF) Arrangement with the IMF, aiming
at:
Improving the Welfare of All Egyptians
Through adopting simultaneous
Economic and structural reforms;
Administrative reforms; and
Legislative reforms.
Aiming at creating a supportive environment for private sector
development, inclusive growth and job creation .
Egyptian Reforms
Macroeconomic policies
Investment friendly environment
Labor market flexibility and efficiency
Education reform
Social protection
Macroeconomic Policies:
Freely floating the Egyptian pound and pursuing a tight monetary policy to
contain inflation pressures
Launching a three-year fiscal consolidation program to reduce persistently high
budget deficits;
Reforming inefficient energy subsidies, and
Supporting partnership with private sector.
Egyptian Reforms
• Investment Friendly Environment:
New Investment Act;
New Industrial Permits Act;
Bankruptcy Act;
New tax law; and
New civil servants law and administrative reform to address corruption & red
tape
Egyptian Reforms
• Labour Market Flexibility and Efficiency
Promoting SMEs;
Supporting the integration of the informal sector within the formal economy;
Providing training programs; and
Establishing incubators and linking them to research centers and
business/industry to create an integrated echo system
Egyptian Reforms
• Education Reform
New education system starting September 2018 that links market needs with
output of the educational process
• Social Protection
Strengthening social protection measures, and transformation from in-kind
support to cash support); aligned with the targeted cash transfer programs of
Takafol and Karama (Solidarity and Dignity) social program
Egyptian Reforms
Main Results
• Improving Real Sector Indicators
• Stabilizing Monetary and Fiscal Stance
• More Favorable External Balances
• Increased Confidence in the Egyptian Economy
Source: Ministry of Planning, Follow-up, and Administrative Reform
2,9
4,4 4,3 4,2
5,2 5,3
2013/14 2014/15 2015/16 2016/17 Q1-2017/18 Q2-2017/18
Economic Growth, Real (%)
Real Sector: Improving Economic Growth
0
1
2
3
4
5
6
Q1 Q2 (estimated)
2,81,9
1,51,6
0,91,80
Investment Final Consumption Net Exports
Q1 & Q2 2017/18
%
Source: Ministry of Planning, Follow-up, and Administrative Reform
• Investment: 36%
• Net Exports: 34%
• Final Consumption: 30%
5.2% 5.3%GDP
Growth rate
Real Sector: Growth Driven Mainly by Investment
Real Sector: Manufacturing Leading the Growth
Manufacturing(14.4%)
Extractions(12.5%)
Construction(9.5%)
14,4 12,5
9,5 9,27,6
6,1
3,7 3,7 3,4
02468
10121416
Economic Growth (1st Half 2017/18), Sectors Contributions%
13,4 12,9 12,8 12,411,3
0,0
5,0
10,0
15,0
2013/14 2014/15 2015/16 2016/17 2017/18
Unemployment Rate (%)%
Real Sector: Declining Unemployment Rates
(Q2)
40 %of new jobs opportunities created by wholesale and retail trade sector,
followed by transportation and storage sector with a share of about 29 %
as a result of
Improved transport activity in light of growing domestic trade and exports
Growth of marketing outlets, commercial centers, and logistic zones
Monetary Balances: Declining Inflation Rate
14,816,4
14,6 14,0
20,2
24,3
29,631,7 32,5 32,9
30,9 30,9
34,2 33,2 32,9 31,8
26,7
22,3
17,014,3
10
15
20
25
30
35
40
General Inflation Rate (Annual Basis)
%
Stable and Available Forex
Exchange Rate L.E /US$
18,537
18,029
17,79317,703
17,56
17
17,2
17,4
17,6
17,8
18
18,2
18,4
18,6
18,8
Jan., 2017 June December Jan., 2018 March. 13, 2018
(L.E/US$)
Monetary Balances
Source: Central Bank of Egypt (CBE)
Source: Central Bank of Egypt (CBE)
0
2
4
6
8
10
12
14
16
18
20
Jan. 6, 2016 March, 24 June, 23 November,
3
May. 25,
2017
July, 13 Feb. 15,
2018
9,2510,75
11,75
14,75
16,75
18,7517,75
Initial increase in interest rates to absorb excess liquidity and restrain
inflation, heading south after controlling inflation
Source: Ministry of Finance
Overall fiscal deficit as a percentage of GDP fell down to 4.2 % for the first half of
2017/18 compared to 5 % for the same period in the year earlier
6,45
4,2
2,21,1
0,30
2
4
6
8
10
12
2015/16 2016/17 2017/18
Overall Deficit Primer Deficit
Overall & Primary Deficit (% GDP)%
First Half
Fiscal Balances: Declining Deficit
External Balances: Shrinking Trade Gap
21,7
31,8
10,1
18,3
29,5
11,2
0
10
20
30
40
Trade Balance (Deficit) Imports Exports
2017/16 2018/17
US$ billion
Source: General Organization for Export and Import Control.
2017/18
((3 %
((5.3 %
2013/14
Fromto
((11 %
(-7.3 %)
(-15.7 %)
Exports
Imports
Trade Balance Deficit
Shrinking foreign trade gap due
to growth of exports and import
substitution
Change(%)(First Half)
((-2.1%
Key Sectors with a decline in imports
0
5
10
15
20
25
3028,9
20,216,7
14,8 13,5 13,7
Key Sectors with an increase in exports
0
5
10
15
20
25
3028.6
23.5
12
5.7 4
%%
Source: General Organization for Export and Import Control.
External Balances: Growing Non-Petroleum Exports
External Balances: Comforting Levels of Net International Reserves
Net international reserves (US$)
14,9
26,428,6
36 36,7 38,242,5
10
15
20
25
30
35
40
45
June, 2013 Jan., 2017 April July October Jan., 2018 February
(US$ billion))
US$ 42.5 billion
in Feb., 2018
Source: Central Bank of Egypt (CBE)
Increasing the number of months covered by merchandise exports from 3.1 months in
June, 2013 to 8 months in Feb., 2018.
0
1
2
3
4
5
6
7
8
9
10
Dec., 2015 May, 2016 July, 2016 Dec., 2016 June, 2017 Jan., 2018
Source: FITCH
Increased Confidence: Improving Sovereign Rating
B
(stable)B
(stable)
B
(stable)
B
(stable)
B
(stable)
B
(Positive)
• Floating Egyptian pound
• Applying VAT
• Reforming Subsidy System
• Applying Civil Service Law
Ra
rin
g i
mp
rov
emen
t d
irec
tio
n
41,842,8 43,3
46,7 45,947,4 47,3 47,2
48,6 48,947,4
48,4
50,7
48,349,9
30
35
40
45
50
55
PMI
points
Increased Confidence: Increasing PMI
Increased business community
confidence in the business environment
Remaining Challenges
- High youth unemployment (14-25 year olds) (at 24.1%);
- High inflation rate: despite the downward trend since September 2017, it
remains high @14.3% (annual basis);
- High Domestic Debt ratios (foreign debt to GDP 34%, domestic debt to GDP
98%)
- Inadequate competitiveness. Egypt ranked 100 of 137 countries in the Global
competitive index; and
- Tourism sector has not yet witnessed an upturn albeit currency devaluation
and political stability.
On Going Reforms
- Fiscal Consolidation, increasing the tax base, reforming administrative costs;
- Continued monetary reform, inflation targeting, financial inclusion;
- Closing gender and age gaps (programs targeting women and youth);
- Improving resource management, particularly water usage and carbon
emissions;
- Structural reforms, privatization, developmental sovereign wealth fund;
- Fighting corruption through continued digitalization and administrative
reforms.
Ongoing Reforms
Fiscal Consolidation:
we need to create fiscal space for the significant spending needs and priorities as
the chart illustrates:
Spending Priorities over the medium-
term
Upgrading infrastruct
ure
Building sustainable
social safety net
Investment in health and
education
tax policy reforms
- broadening the VAT base;
- increasing progressivity of the personal income tax;
- improving corporate income tax performance;
- simplifying the tax regime;
- streamlining the tariff structure.
improving revenue administration
- direct and indirect tax management;
- creating a large and medium taxpayers’ unit and
- rationalizing staff accordingly;
and building risk-assessment programs by segment
This could be achieved through
Ongoing Reforms
Monetary reforms:
• Modernizing the Monetary Policy Framework: Toward Inflation Targeting
(IT) in the medium term will have preserved macroeconomic stability over the
medium- term.
• In this context, attaining low and stable inflation and financial market are essentially
required.
•To this end, we need to develop adequate institutional, operational, and governance
structures that are primarily essential for successful implementation of IT.Some of these institutional
pre-requisites include:
strengthening the financial stability framework consistent with
independent monetary policy
enhancing flexibility of the exchange rate;
defining price stability as the primary objective of monetary
policy;
strengthening autonomy of the central bank; and
Ongoing Reforms
Structural reforms: • Improving in business climate to support Private Sector-led Growth and increase
financial inclusion. Raise productivity and growth, and better integrate Egypt with global
trade are the main targeted areas. Generating higher growth and employment requires a
concerted reorientation towards private sector and export-led growth.
• Under the backdrop of increasing the potential growth in manufacturing sector, it will
have a special attention over the medium- term of reforms.
a five-year program to divest minority shares in select
state-owned enterprises
Structural reforms main pillars
Access to land continues to be one of the main hurdles for
the private sector
better integration of women in the labor force
Strengthening competition and addressing corruption
are key to achieving greater
economic efficiency
Ongoing Reforms
Developing the current system for investment allocations:
Should be based on the government priorities; from which:
•SDS: Egypt Vision 2030 programs and priorities.
•Completing and finishing the current implemented projects based on the ratio of
achievement (70% , 40% , less than 40%, replacement, extension, new).
•Supporting the Mega projects.
•The direct effect on improving the likelihood of the citizens.
•The impact of the investment on growth rates and job creation.
•Encouraging the participation of private sector (PPP & CSR).
•Efficiency of achievements in the current projects.
•Targeting Development gaps within the governorates.
A new formula for allocating PFCF at the regional level:
• Population intensity
• The inhabited area
• HDI
• Poverty rate
• Unemployment
30
Favorable production environment with:
- Improving Macroeconomic Outlook and business environment;
- Accessible factors of production, particularly young low-cost
labor force;
- Well-capitalized, under-leveraged banking sector flush with
liquidity; and
- Underlying potential in a number of sectors, including:
petrochemicals, infrastructure, agribusiness and
pharmaceuticals.
Main Opportunities
31
Production can be addressed to the local market with Egypt’s
populous economy with inherent sizable demand;
Main Opportunities
32
Or exported given the particularly advantageous geographical
location at the confluence of global shipping routes, made all
the more important being the 3rd country globally with access
to trade zones.
Main Opportunities
Thank you