Egypt’s Economic challenges
Long-standing economic challenges; Political instability, regional security issues, and the global economic slowdown have negatively affected the Egyptian economy, amplifying its long-standing structural problems.
* Fixed exchange rates: Keeping the Egyptian pound exchange rate fixed to the US dollar did not serve the economy well. Egypt’s external competitiveness was undermined, foreign reserves were depleted, and foreign exchange shortages negatively affected investment, leading to a decline in confidence and, occasionally, to food shortages.
* High government deficit and public debt: Weak revenue combined with poorly targeted subsidies and a growing public sector wage bill resulted in large deficits and high level of public debt, nearing 100 per cent of GDP.
* Low growth: Long-standing structural issues have been constraining growth and employment. Growth has not been inclusive and failed to generate enough jobs, especially for young people and women.
The key components of the economic reform include:
The new reform programme seeks to revive Egypt’s growth prospects by restoring stability and confidence in the economy, and implementing structural reforms that will create jobs.
* Maintaining a flexible exchange rate regime: This will help to improve Egypt’s external competitiveness, support exports and tourism, and attract foreign investment. This will also allow the Central Bank of Egypt to rebuild its international reserves. Monetary policy will focus on containing inflation and bringing it down to mid-single digits over the medium term.
* Strengthening government revenues: The value-added tax (VAT), which was adopted in August 2016, will help strengthen budget revenues. To protect the most vulnerable segments of society, the new VAT includes exemptions for most staple foods consumed by the poor.
* Implementing energy subsidy reforms: The energy subsidies are not well-targeted and benefit mostly the non-poor. They also skew production toward energy-intensive industries and away from labour-intensive and job-creating enterprises. Reforming these schemes would free up resources that can be spent on priority areas such as health, education, research and development, and social protection.
* Strengthening social protection programmes: About 1 per cent of GDP from fiscal savings will be directed to additional food subsidies and cash transfers to the elderly and poor families. Resources for social programmes such as school meals, subsidies for infant milk and children’s medicine, and vocational training for young people will also be preserved, and in the case of free school meals, greatly increased.
* Boosting growth through wide-ranging structural reforms: Reforms to improve the business climate-such as streamlining industrial licensing, and facilitating access to finance for small and medium-sized enterprises—are also a key component of this programme. These measures will boost job creation and help to address Egypt’s high unemployment, which is particularly acute for young people and women. Making more public nurseries available and improving the safety of public transportation will make it easier for Egyptian women to work outside the home.
Key features of the economic reform programme
* A flexible exchange rate regime to remove over valuation, rebuild reserves, and provide buffers for external shocks;
* Monetary tightening to contain inflation;
* Fiscal consolidation to ensure medium-term public debt sustainability;
* Strengthening social safety nets and increasing pro-poor spending to offset impact of the reforms on the vulnerable; and
* Structural reforms to promote inclusive growth, create jobs, increase and diversify exports, improve the business environment, and strengthen public finance management.
An opportunity for a better future, Egypt is a country with immense potential. It has a dynamic and young population, a large market size, a favourable geographic location, and access to important foreign markets. The opening of the parallel Suez Canal, large investments in the energy sector, and the discovery of a major gas field also bode well for Egypt’s growth potential.
