Egypt is targeting 5.4 per cent real GDP growth in fiscal year (FY) 2021-22, Minister of Finance Mohamed Maait told the House of Representatives, the lower house of Egypt's parliament, as he delivered the government's fiscal statement for the 2021-22 draft budget earlier this week. MPs will discuss the draft budget of LE1.8 trillion before its final approval. It targets GDP growth like that seen before the outbreak of the Covid-19 pandemic. Although the latter slowed down economic growth, it did not bring it to a complete halt as was the case in some other countries. Growth in Egypt declined from the pre-pandemic rate of 5.6 per cent, as the Covid-19 crisis caused a year-on-year contraction during the three months from April to June 2020, the fourth quarter of fiscal year 2019-2020, explained Sara Al-Nashar, an economist at the World Bank. But growth remained positive at 3.6 per cent during FY 2019-20, as the full fiscal year average pace of growth was buoyed by the relatively higher economic performance earlier during the same year before the pandemic hit. In the first and second quarters of FY 2020-21 (July to September 2020 and October to December 2020), economic activity slowly resumed with the lifting of the night-time curfew and easing of social-distancing measures. Growth in Egypt came in at 0.7 per cent and two per cent in these first two quarters. The relatively contained economic contraction at the outset of the pandemic and the resumption of economic activity since early in FY 2020-21 were mainly driven by resilient private consumption, Al-Nashar said. She added that consumption had also been partially supported by sizeable remittances from abroad as well as expanded social protection. Another favourable factor was the steep decline in inflation rates, supporting households' purchasing power. The monetary easing and credit-forbearance measures introduced by the Central Bank of Egypt (CBE) in the form of delayed personal loan repayments also helped to support private consumption. On the supply side, there had been resilient activities, she added, such as information and communication technologies, wholesale and retail trade, and agriculture. These had compensated for the contraction in other sectors more exposed to the crisis, such as tourism, manufacturing, oil and gas extractives, and the Suez Canal. Going forward, Al-Nashar said Egypt's growth forecasts, like the global outlook, hinged in large part on the containment of the pandemic and the restoration of economic activity, both domestically and abroad. Under the scenario that the Covid-19 vaccine is gradually rolled out during 2021 and through 2022, growth is expected to remain subdued. The international financial institutions have forecast a GDP growth rate of around 2.5 per cent for the current fiscal year. However, higher rates are expected for the coming fiscal year, benefiting from some favourable base effects. The pre-pandemic growth momentum of 5.5-5.6 per cent may be reached by 2022-2023, Al-Nashar said. The gradually rising growth projections over the medium term are expected to be supported by relatively resilient private consumption, the continuation of key public investment projects, and the containment of imports, especially of hydrocarbons. Imports were down by around 14 per cent in January, according to a monthly bulletin issued by the Central Agency for Public Mobilisation and Statistics (CAPMAS). Part of this was attributed to an almost 10 per cent drop in the imports of petroleum products. Maait told parliament that the draft budget included an unprecedented increase in public investment allocations, reaching around LE358 billion and up almost 28 per cent on the allocations in the current budget. Restrained growth was not the only fallout from the pandemic, however, and it also led to higher public debt. Preliminary official figures for the government debt-to-GDP ratio indicate that both domestic and foreign portions of government debt could temporarily rise in the current fiscal year before resuming their downward trend, Al-Nashar said. She said that the government had successfully brought down the total government debt-to-GDP ratio to 87.5 per cent in FY 2019-20 from 108 per cent three years earlier, as reported by the Ministry of Finance. Egypt's public debt is projected to exceed 90 per cent of GDP by the end of the current fiscal year. Al-Nashar said that the expected temporary setback to debt-reduction efforts was needed to cover the uptick in domestic financing requirements and to address the immediate pressures on the external accounts caused by Covid-19 impacts on key foreign income activities such as tourism and Suez Canal revenues, merchandise exports, notably hydrocarbons, and foreign direct investments. "As the Covid-19 crisis gradually abates, fiscal consolidation is expected to pick up pace once again, and both the domestic and external government debt-to-GDP ratios are forecast to decline over the medium-term," Al-Nashar said. A temporary fiscal expansion in the form of an uptick in the government debt-to-GDP ratio may be warranted in order to act as a mitigation measure and provide the necessary financing at a time of crisis, especially with the adverse impacts of the pandemic on Egypt's domestic revenues, notably from taxes, during FY 2019-20, she explained. The Covid-19 pandemic has caused the most severe global health and economic crisis in at least seven decades. Despite positive developments with regard to vaccines, there continues to be some uncertainty with regard to the containment of the pandemic. In Egypt, the temporary increase in the debt-to-GDP ratio is expected to put upward pressures on interest payments, which could pose additional challenges for deficit-reduction efforts, Al-Nashar said. But she said that the current interest rates, which stand at 400 basis points lower than their pre-pandemic levels thanks to the CBE's significant monetary expansion at the outset of the crisis, are expected to contain the interest payments made by the government. Moreover, Egypt has been gradually extending the maturity structure of its government debt, which is expected to reduce interest-rate and refinancing risks. *A version of this article appears in print in the 28 April, 2021 edition of Al-Ahram Weekly
