Egypt has seen some good economic news in 2015: overall economic growth measured at 4.2 percent for the fiscal year ending in June 2015, the strongest performance in five years. Other indicators, such as tourist arrivals, foreign reserves and unemployment showed positive movement in the early part of the year.
Although data for the second half of the year is still patchy, the trends look far less promising, with early indicators suggesting slowing economic growth and a rising cost of living for Egyptians.
The Ministry of Planning kept analysts waiting until December to announce a 4.2 percent growth in GDP during the 2014/15 fiscal year, which ended in June. This was the strongest performance since the 2011 revolution — after revising down earlier calculations that put growth for the quarters ending in September and December 2014 at 6.8 and 4.3 percent, respectively. Much of this growth was driven by government spending, and by a strong performance in the tourism sector in the first half of the year.
Data for the current fiscal year has not yet been released, but the Purchasing Managers’ Index, a monthly survey of private sector businesses, may give a hint of what’s ahead. Businesses participating in the survey reported an expansion of business activity in August and September, followed by a sharp contraction in October and November.
When it comes to foreign reserves, Egypt is actually slightly better off going into December than it was at the same time last year. Much of this is due to US$6 billion deposited in April at the Central Bank by Egypt’s allies in the Arab Gulf. Egypt also issued US$1.5 billion in dollar denominated bonds in June. The recent approval of loans of US$500 million from the African Development Bank and US$1 billion from the World Bank should boost reserves again in December.
However, banks and businesses have suffered from a severe shortage of dollars, making it difficult to import needed goods and equipment. Currency control measures, aimed at crushing the black market and restricting transfers abroad, have added to the pain.
The pound’s official exchange rate fell from LE7.14 to the dollar at the beginning of January to LE7.73 as of December 24 — a decline of more than 8 percent. With banks now allowed to tack on an additional ten piasters when they sell dollars, the official price for consumers is now LE7.83.
The year was marked by episodes of devaluation in January and February, and again in late June and early July, and mid-October. That trend was reversed on November 11, when former Central Bank Governor Hesham Ramez formally stepped down, and the caretaker governor strengthened the pound by 20 piasters.
However, most of the criticism leveled at the Central Bank about the exchange rate has emphasized that the pound has fallen too little, rather than too much — toward the end of his tenure, Ramez was sharply criticized for holding the pound steady to the dollar while foreign reserves dwindled. According to research by investment bank Pharos Holding, most businesses are budgeting for the exchange rate to eventually settle at LE8.5-LE9 to the dollar.
One reason the Central Bank may have been reluctant to allow the pound to depreciate rapidly is inflation, which has remained high. Since Egypt is highly dependent on imports for both basic and luxury commodities, weakening the pound’s global purchasing power threatens to drive inflation even higher.
In early 2015, annual inflation was pushed up by an increase in fuel prices following subsidy cuts in July 2014. That underlying factor should have expired in July 2015, and indeed, inflation eased up in July and August. However, food prices, especially fresh fruits and vegetables, shot up in late summer and early autumn, driving up the overall cost of living in September, October and November. Food price increases have a particularly strong effect on lower income families, who spend a greater percentage of their money on food than do their wealthier counterparts.
Official unemployment rates dipped at the beginning of 2015, although they still remain far above pre-2011 levels. Officials credited the decline in joblessness to improved economic activity, and to a large mobilization of workers for massive infrastructure projects like the Suez Canal expansion project.
By the third quarter, which ended in September, unemployment crept up again. The Purchasing Managers’ Index suggests that unemployment could continue to rise through the end of the year: in November, businesses reported reducing staffing levels at the sharpest rate since the index was launched in 2012.
Tourism data makes one thing clear: Egypt’s tourism industry is highly sensitive to political events and the global economy. In 2013, tourism bottomed out in the wake of the overthrow of former President Mohamed Morsi in July and the dispersal of the Rabea al-Adeweya sit-in, which left several hundred dead in August. In 2014, the industry showed a modest recovery early in the year, but was hit badly by the collapse of the Russian ruble in November.
Things started out promisingly in 2015 as well, with modest but consistent year-on-year growth through July. Official figures for the most recent months have not yet been released, but the downward trend that began in September seems likely to continue. In addition to rising instability in the region as a whole, Egypt has witnessed two deadly attacks on tourists: in September, the Egyptian military accidentally killed eight tourists and four guides and drivers in the Western Desert, and in October a Russian airliner crashed in the Sinai Peninsula, killing all 224 people on board.
Egypt’s foreign debt grew rapidly in 2015, and will grow larger once the recent World Bank and African Development Bank loans are factored in. However, the overwhelming majority of government debt is domestic, most of that in the form of treasury bonds and bills. With government spending consistently outpacing government revenue, this debt is both needed to cover the fiscal deficit and a major contributor to it: 28 percent of this year’s budget was allocated to cover interest payments. According to the Central Bank, Egypt’s total domestic debt was equivalent to 88 percent of GDP as of June 2015, down from 90.9 percent in June 2014. External debt was an additional 15 percent of GDP in June 2015, but fell to 12.6 percent in September.