Egypt’s fiscal reform measures were critical in stabilising the economy/Bloomberg
In mid-2016, Egypt’s economy was teetering on the edge as investors shunned the country and entrepreneurs scoured the black market for greenback. An unsustainable policy mix left Egypt facing low growth, rising public debt and a mounting balance of payments problem with severe shortages of foreign exchange as well as an overvalued exchange rate.
According to the World Bank, the government’s strong ownership of the Extended Fund Facility (EFF) with the International Monetary Fund (IMF) and decisive upfront policy actions were essential in establishing credibility and restoring confidence.
Now Egypt is being hailed by investors as one of the region’s fastest-growing economies, favoured by international investors who seek high yields in an increasingly uncertain global environment. Egypt’s economic reform programme implemented a significant policy adjustment that was anchored by the liberalisation of the foreign exchange market and fiscal consolidation to ensure public debt sustainability, said the IMF.
The government’s fiscal reform measures were critical in stabilising the economy—growth has accelerated, and current account and fiscal deficits have narrowed. Similarly, Egypt’s foreign currency reserves have risen while public debt, inflation and unemployment have significantly declined.
According to EY’s Economic Report 2019, the IMF bailout programme came with stringent conditions and to secure the deal, Egypt was forced to float its currency, introduce new taxes and slash energy subsidies—all of which sent inflation galloping above 30 per cent for most of 2017, a high that had not been seen in a generation.
While the process required sacrifices in the short-term, the reforms were critical to stabilise the economy and lay the foundation for strong and sustainable growth to improve living standards for Egyptians.
PwC stressed that the economic reforms would help achieve more sustainable, inclusive and private sector-led growth which will help create jobs for youths while ensuring adequate resources are available for social protection.
Reaping the benefit
The critical macroeconomic reforms which were introduced to unlock billions in IMF funds successfully corrected the country’s large external and domestic imbalances. Cairo emerged from a three-year IMF programme in July 2019, which provided a $12 billion loan as the country endorsed sweeping and widely unpopular economic measures.
The Washington-based fund stated that the completion of the review paved the way for the last $2 billion instalment, bringing total disbursements to $12 billion—the full amount approved in 2016 to aid the authorities’ economic reform programme.
The country has since attracted tens of billions of dollars into its debt market and the central bank’s foreign reserves have surged to more than $44 billion. The Egyptian economy is being supported by the government's ongoing efforts to improve the business operating environment,” said S&P.
In June 2019, the finance ministry announced the implementation of the 2019/2020 fiscal year budget with a total of EGP 1.6 trillion in expenditures, an increase of EGP 150 billion compared to the previous year's budget.
The Ministry of Finance said that the government earmarked around EGP 149 billion for product subsidy programmes. The government allocated around EGP 52.9 billion towards petroleum products, EGP 35 billion less compared to the previous year.
Egypt’s fiscal discipline caught the attention of the three main rating agencies—Fitch Ratings, Moody’s and S&P—who could not help but upgrade the country’s sovereign ratings as well as their outlooks, citing the country’s strong economic growth prospects following fiscal reforms.
The IMF commended Egypt for achieving the 2018/2019 primary surplus target of two per cent of GDP which helped to anchor a further decline in the public-debt-to-GDP ratio. The fund added that it will be important to maintain primary surpluses at this level over the medium term to keep public debt on a downward trajectory.
The success of the government’s structural reforms enabled the modernisation of the economy which includes steps to support exports and reduce non-tariff barriers. Egypt also managed to streamline and enhance the industrial land allocation process as well as support SMEs and strengthen public procurement.
Fitch Ratings expects growth to continue to around 5.5 per cent this year, with inflation to averaging eight per cent in 2020-2021, down from 14.4 per cent in 2018, following a strengthened macroeconomic performance last year. Egypt’s real GDP growth reached to 5.6 per cent in 2019, with inflation dropping to single digits.
Despite last year’s uprisings fuelled by allegations of graft and misuse of public funds, the government is still making efforts to improve transparency and accountability of state-owned companies and eradicate corruption.
These reforms are vital for private investment—an essential factor to inclusive growth. Excessive tax evasion is fueled by corruption and comes in many shapes and forms across the different economic sectors in Egypt.
According to PwC, both external auditors and tax inspectors can facilitate tax evasion in exchange for ‘under the-table’ monetary compensation. Similarly, in a survey by the World Bank, 68 per cent of Egyptian companies said that corruption acts as a major constraint on their activities.
One-fifth of companies surveyed by the World Bank expected to pay a bribe to obtain an operating licence with 27.9 per cent reporting being asked for a bribe to obtain a construction permit, 25 per cent for a water connection and 13 per cent expecting to bring gifts when meeting tax officials.
However, despite high levels of corruption, Egypt manages to sustain robust growth, with improving fiscal outturns and stabilising external accounts. The country’s macroeconomic situation has evidently improved since 2016, supported by the government’s commitment towards the reform programme as well as decisive upfront policy actions.
Hit the ground running
As part of structural reforms, Egypt launched the Sovereign Fund of Egypt, the country’s first sovereign wealth fund to bolster private investment. Modelled after sovereign wealth funds of its Arabian Gulf allies, Egypt’s new investment arm seeks to generate additional wealth from under-utilised state assets.
According to the International Forum of Sovereign Wealth Funds (IFSWF), the Sovereign Fund of Egypt was created by Law No. 177/2018 and its mandate is to contribute to the sustainable economic development of Egypt by managing the country’s assets to maximise their value for future generations.
Partnering with the private sector, the fund will seek to attract domestic and foreign investment as well as build on economic reforms which began in 2016 with the flotation of the Egyptian pound. Bloomberg has reported that the sovereign wealth fund is looking to oil-rich Gulf allies to drum up foreign investment, the country presses on with the next phase of its planned economic reform.
In November 2019, Egypt and the UAE agreed to set up a $20 billion joint investment platform to invest in a range of sectors and assets. The investment platform managed by the Sovereign Fund of Egypt and the Abu Dhabi Development Holding Company.
Ayman Soliman, CEO of the Sovereign Fund of Egypt, said that after launching a $20 billion investment platform with the UAE, it is now setting its sights on Saudi Arabia, Kuwait and Oman as partners.
The sovereign wealth fund, established in 2018 with a paid-up capital of EGP 5 billion ($310 million) and EGP 200 billion ($54.4 billion) in authorised capital, in part of the government efforts to revive the nation’s economy. While Egypt will wholly own the Sovereign Fund of Egypt, the private sector is allowed to acquire stakes of over 50 per cent in sub-funds and affiliated companies.
Private sector investors will also be able to invest in various financial instruments, stocks, bonds as well as other securities inside and outside Egypt. According to PwC, Egypt’s new sovereign wealth fund is being touted by the government as the latest component of its economic revival.
The fund is aimed at helping the state better utilise its assets and attract foreign investments that have so far been overshadowed by an infusion of overseas cash into the local debt market.
Tapping under-utilised state assets
Egypt also plans to raise up to EGP 100 billion ($5.7 billion) by selling minority stakes in at least 20 state-owned enterprises on the stock market. The country’s public sector has long been criticised as bloated and inefficient; officials have struggled to push the firms toward profitability.
The current programme marks a first step towards attempting to strike a balance between efficiency, profitability and raising revenue for the government.
The government plans to offer minority stakes in Alexandria Mineral Oils Company, Eastern Tobacco, Alexandria Container, Cargo Handling, Abu Qir Fertilisers and Heliopolis Housing. The second phase of the listings was postponed last year due to unfavourable market conditions.
Similarly, the Governor of the central bank said that state-owned lender, Banque du Caire, will offer a stake of its shares, ranging between 30 and 40 per cent, which is expected to garner between $300 million and $400 million.
The Ministry of Finance said that the initial public offering (IPO) is focused in areas such as petroleum services, chemicals, shipping, maritime and real estate to help boost state finances.
In Q1 2019, the government appointed several consultancy firms to manage the sale of stakes in 23 companies. In the first phase of the IPOs, the government offered investors the chance to acquire a majority stake in state-held Heliopolis Housing in July 2018.
There has been a lot of activity on the Egyptian Exchange (EGX) in the last nine months. Cairo for Investment and Real Estate Development (CIRA) announced its intention to offer up to 37.8 per cent of the company’s outstanding share capital, representing 207 million ordinary shares currently owned by Social Impact Capital.
Egypt’s Fawry for Banking & Payment Technology Services—the first company to make its trading debut on the EGX in 2019, raised around EGP 360 million ($22 million) in an oversubscribed private placement ahead of its IPO. Fawry’s listing in August 2019 was the first by a private owned firm since Sarwa Capital’s IPO in October 2018 as high-interest rates attract investors to fixed income assets over equities.
Similarly, the country’s newly established sovereign wealth fund plans to acquire a stake of up to 30 per cent in power plants co-built by Siemens with international investors taking the rest. The move is part of Egypt’s drive to spur greater foreign participation in the Middle East’s fastest-growing economy.
Citizenship by investment
Egypt is leaving no stone unturned in boosting its finances and luring foreign investors who fled during the 2011 unrest. In December 2019, the Egyptian Cabinet approved the country’s citizenship by investment law, offering of citizenship to foreigners who would have acquired property or invest in the country.
This follows the promise that was floated in 2018 as the government seeks to diversify its sources of revenue. Under the new law, foreigners could become citizens either by purchasing a state-owned property worth at least $500,000, investing at least $400,000 with an ownership stake of no less than 40 per cent of the project capital or depositing cash ranging from $250,000 to $1 million into a local account.
Those investing $750,000 could withdraw the funds in local currency after five years, while a $1 million investment allows a withdrawal after three years, both without interest. However, a $250,000 deposit is non-refundable and goes directly into state coffers.
However, Egypt places restrictions on foreign investment projects and forbids foreign ownership of agricultural land and property in the Sinai Peninsula.
A bitter pill to swallow
In a recent report, the World Bank, said, “despite the authorities’ success in stabilising the macro-fiscal environment, strengthening confidence in the economy, the adopted measures came with adverse socioeconomic effects.”
The highest impact came from the increase in inflation rates fuelled by the large currency depreciation, which triggered a sharp increase in the cost of living. Majority middle-class Egyptians were hit hard by the 2016 currency devaluation and subsidy cuts that sent prices soaring with almost a third of the population now living in poverty.
Under the $12 billion IMF bailout programme, Egypt hiked fuel prices as much as 50 per cent with another scheduled for next year and increased electricity rates by around 25 per cent—measures that made it even harder for the middle class to make ends meet.
PwC stated that although the elimination of most fuel subsidies was a move that was said to be regressive, it encouraged energy efficiency, helped protect the budget from unexpected changes in oil prices and free up fiscal space for social spending.
The recently closed IMF bailout programme’s economic reforms have started to pay off for Egypt’s longsuffering population. Fitch Ratings suggested that Egypt’s economic reforms have helped strengthen growth, reduce unemployment, increase foreign exchange reserves, and put public debt on a downward path.”
S&P Global stated that the stable outlook for Egypt balances its expectation that current account deficits will remain as a smaller percentage of GDP and that growth prospects will remain strong, against risks of fiscal slippages and an increase in the already-large stock of relatively short-dated government debt issued at high interest rates.
Egypt's economy is expected to grow 5.5 per cent annually over the next three years and it will be driven by more investments in a ‘robust’ pipeline of projects as well as an increase in natural gas production and a rebound in tourism.
The government recently finalised the details of a new oil and gas contract to attract more foreign investments than the $10 billion already coming into the energy industry in 2019. With the completion of the IMF programme, Egyptian officials successfully averted an economic collapse and set the country on a more sustainable path.
Economic growth accelerated to 5.6 per cent in the fiscal year that ended in June 2019, the highest level since 2010. Debt and the budget deficit, though still hefty, have been on a downward trend. The deepening and broadening of effective reforms are critical to underpin the positive outlook for growth and unemployment.