Egyptian economic outlook

Overview of the Economy
Egypt began to experience a modest economic recovery in 2004 following three years where the rate of growth averaged 3.3%. The direction of economic policy veered sharply in favour of liberalisation after a new cabinet was appointed in 2004. Structural reforms were accompanied by an economic recovery which was primarily export-driven. Reductions in taxes have drawn more firms and workers into the formal economy. The current account surplus is growing and the upswing is expected to continue as new facilities for exporting natural gas come on stream.

The country's private sector remains weak but is gaining ground. In recent years, the private sector percentage of overall Egyptian GDP has been growing at only about 1.5% per year, with about 40% of Egypt's state-owned firms having been privatised since 1994.

Significant reforms include a re-launch of the privatisation programme and the conclusion of an association agreement with the EU which provides for multi-year reductions in EU imports. In the financial sector, a law to promote the development of a mortgage market has been implemented and regulations to criminalise money laundering have been approved.

ECONOMIC OUTLOOK
Key Points
Stronger growth has not brought prosperity to the masses. Analysts estimate that only about 8 million Egyptians have disposable incomes that allow more than subsistence consumption.
FDI, much of it from the oil-rich Gulf, could reach US$6 billion in 2006, several times the level in 2004.

Prospects are subject to two downside risks. One is the possibility that political upheaval could slow investment, or reduce the government’s zeal for reform. Another is a global economic downturn that would hurt Egyptian exports.

The government intends to cut the deficit by more than 1% of GDP annually over the next four years, to 3%-4% of GDP. Some steps, such as a reduction in energy subsidies have already been introduced.

Privatisation has become a priority with special attention being devoted to the financial sector. Energy producers remain off limits.

Unemployment is a serious and persistent problem. The pool of job seekers grows by 1.2 million per year, and the economy must soon find ways to accommodate the 15.5 million youths who are now aged between 15-24 years.

Economic Prospects
The pace of growth accelerated in 2006. While the external sector remains an important engine of growth, the expansion has become more broad-based, with construction and services now increasing at a healthy rate. Employment is rising, but continued high unemployment points to the need to further boost private investment and growth. The balance of payments and external positions remain comfortable. International reserves increased to around US$26 billion in 2006.
Despite recent economic gains, poverty is widespread. Analysts estimate that only about 8 million have disposable incomes that allow more than subsistence consumption. The pool of job seekers grows by 1.2 million each year, and the country must somehow accommodate some 15.5 million youths who are now aged between 15-24 years.

FDI, much of it from the oil-rich Gulf, could reach US$6 billion in 2006, several times the level in 2004. Record tourism receipts and revenues from the Suez Canal allowed the government to build foreign reserves. Despite terrorist attacks, the number of visitors rose in 2006.

Spurred by a number of preferential trade agreements, non-oil exports are rising by around 20% per year. Officials have also slashed the country’s high tariffs and abolished a mass of rules that made the customs service a major source of corruption. Income and corporate taxes were halved, with the top rates capped at 20% – down from 40%. The consequences of these moves should be dramatic.

With public debt close to 70% of GDP, fiscal consolidation is a priority. A multiyear consolidation plan has been announced to reduce the deficit by more than 1% of GDP annually over the next four years, to 3%-4% of GDP. In July 2006, the first steps were taken by reducing energy subsidies.

Evaluation of Market Potential
Over the longer term, Egypt's macroeconomic prospects may be more favourable, provided that progress continues on such issues as privatisation and deregulation. Egypt's main challenge, however, is matching employment growth to the 1.2 million new job seekers coming into the labour market each year. Egypt's official unemployment rate was 11.9% in 2005 but unofficial estimates put it higher. To lower unemployment, Egypt needs faster growth and more foreign investment.

In 2005, the country began to see an influx of foreign retail outlets. Until then, most shopping centres were small, cluttered and dilapidated. The retail market is significantly underdeveloped but analysts see these developments as the start of a recovery in consumer demand. More hotels, malls and transport infrastructure are needed before Egypt can create the type of retail culture that is common in the Gulf.

The technocrats who have assumed power have greatly boosted the confidence of the business community. In addition, the tax cuts and reductions in tariffs should eventually have a positive effect on consumer spending. Another innovation by the government has been to publish its intentions and criteria for intervention for ten key sectors of the economy. The move is intended to help investors to judge what is happening. If Cairo can persist with all these reforms in the face of much bureaucratic resistance, the economy’s prospects should brighten considerably over the remainder of this decade.

Prospects are subject to two downside risks. One is the possibility that political upheaval could slow investment, or reduce the government’s zeal for reform. Another is a global economic downturn that would hurt Egyptian exports.