Egypt’s economy is on a path to recovery

Alamy/Claudia Wiens

It is five months since Egypt embarked on a significant shift in economic direction and the early signs are positive.

The policies themselves were always going to result in some near-term pain as the currency fell sharply, inflation stayed high – the headline rate was still an annualised 25.7 percent in July – and fiscal and monetary policy have tightened.

But there are indications that the benefits of the return to orthodoxy are being felt, although spillovers from the Israel-Hamas conflict remain a major challenge.

The markets like what they see. Premia on Egyptian credit default swaps – insurance against non-payment – have increased in the past week reflecting the wider sell-off in emerging markets. But they are way below the highs seen before March.

We can deduce that investors now view the implied probability of a sovereign default by Egypt as very low.

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Egypt’s sovereign dollar denominated bonds have also tightened, reflecting increased confidence, albeit they have also been affected by this week’s market turbulence and are still trading at a sizeable spread against US Treasuries.

Domestically, like almost all emerging markets, the Cairo stock exchange has fallen this month. However, year-to-date the EGX30, the main benchmark, is up by over 15 percent, behind Morocco in the region in performance. 

The country’s economy was not in great shape prior to the start of 2024. GDP growth had eased from 3.8 percent year-on-year in the financial year 2022-23 to just 2.3 percent in the second quarter of 2023-24. Outside of the pandemic that was the weakest since 2013. 

The policy shift has now laid the foundations for stronger medium term growth.

It appears that the Egyptian pound is allowed to move far more freely, although it does not float entirely, improving external competitiveness. This has been shown in the past few days in the context of the broader emerging market sell-off.

The pound has weakened against the dollar, whereas previously the central bank would likely have intervened. 

All else being equal, a weaker currency means that imported goods and services are now more expensive in local currency terms. This should incentivise a shift in domestic demand away from imports and towards local goods and services. 

Other economic benefits are starting to materialise. The manufacturing output index increased by 2 percent on a seasonally adjusted basis between February and May. There are signs that export-orientated sectors like textiles and auto production are growing.

The Purchasing Mangers Index (PMI – an indicator of buying raw materials for manufacturing) survey’s headline reading rose to 49.9 in June. While that's still below the 50 mark that, in theory at least, separates economic expansion from contraction, it marked the highest reading on the survey since November 2020. 

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Fiscally, the government moved to reduce the bread subsidy in June, which increased the price from 5 piasters per piece to 20 – a 300 percent increase. So bread still remains heavily subsidised, as does petrol. 

But the Automatic Fuel Pricing Commitee met in late July and raised prices across the board for fuel at the pump by an average of 12 percent. It is likely that when the Committee next meets in October it will act again. This has been highlighted by the IMF as one of the areas in which authorities need to enact fiscal reforms. 

The country is still afflicted by load-shedding electricity blackouts, although it seems that they have subsided now after an influx of imported liquefied natural gas. There is a need for a more permanent fix to the energy problem, which means higher prices for consumers.

On the tourism front, Egypt welcomed a record 14.9 million visitors in 2023 and there is room for that to grow. While a measure of value rather than volume, tourism receipts were equal to 3.4 percent of GDP in the four quarters to third quarter of 2023-24.

That's still below their pre-pandemic highs and well below the double digits prior to the Arab Spring. The arrival figures are strong but the spending per visitor has hardly changed and if anything is below levels in 2018-19.

Figures from the Suez Canal Authority showed that freight capacity held steady at just over 180 million tonnes in 2023 but has been increasing rapidly in the past decade. The state privatisation drive has led to higher investment into port and logistics firms and there also plans to widen the Suez Canal to increase operational capacity.

Looking at potential limits to growth in the near term, the spillovers from the Israel-Hamas conflict threaten to hinder export-orientated manufacturing and tourism. Attacks by the Houthis in Yemen on ships in the Red Sea have pushed traffic in the Suez Canal to 50 percent below its normal levels.

Meanwhile, the heightened security concerns created by the conflict are likely to deter tourists. The longer that it drags on, the longer it will take for these sectors to aid Egypt’s economic recovery and unlock faster rates of economic growth.

James Swanston is Middle East and North Africa economist at London-based Capital Economics