The economy grew by 3.1 per cent in the first nine months of 2016-2017 compared to the same period the previous year, according to the Central Bank of Egypt (CBE). This is good news not because the rate is particularly high, which is not the case, but because the period includes the four months that followed the devaluation of the Egyptian pound which hit different sectors of the economy badly. The devaluation which took place last November increased the costs of production, pushed inflation up eating up real incomes, and led to a decline in local demand. The Ministry of Planning has not yet released detailed results for the third quarter (January to March 2017) alone, but Minister of Planning Hala Al-Said said in a recent press conference that growth this quarter was 4.3 per cent compared to 3.6 per cent in the same quarter last year. According to the CBE figures, private consumption increased by 4.4 per cent in the nine-month period. This is lower than the 5.5 per cent achieved during the same period in 2015-2016. One of the most remarkable indicators revealed by the CBE was the 4.7 per cent growth realised by the non-petroleum manufacturing sector after it shrank by 0.1 per cent in the same period of 2016. “The fact that we are comparing the figures for these nine months to the very negative results of the corresponding period a year ago is the reason behind the improvement in growth rates,” commented Noeman Khaled, an economic analyst at CI Asset Management. “The CBE decision in 2015 to put a cap on the amount of dollars that could be deposited in banks harmed the industrial sector until it was cancelled in 2016. That's why when we compare fiscal year 2017 results to those of this exceptional period they tend to be high.” Khaled believes one of the significant causes of growth in the industrial sector, after local demand was hit by the lower currency, was focusing on export markets rather than domestic ones. “Businesses tried to find alternative demand in the global market,” Khaled added. Exports for the non-industrial sector increased at the end of the first nine months of 2017 to reach $5.5 billion, with limited growth of exports compared to the first quarter preceding the devaluation. Wholesale and retail trade stayed resilient after the devaluation, rising by 4.7 per cent from July to March compared to 4.9 per cent in the same period the previous year and regardless of the effect of the decline in the value of the local currency on real incomes. The extraction sector contracted during the nine months of 2016-2017 by one per cent. While the petroleum sector shrank during this period by 6.9 per cent, the gas sector rose by a significant 4.6 per cent. “While the oil sector became more attractive to foreign investors after Egypt's plan to repay arrears owed to foreign prospectors, the main focus now is on the gas sector,” Khaled said. Petroleum Minister Tarek Al-Molla told Reuters this month that investment by foreign oil firms in Egypt had risen to $8.1 billion in 2016-2017 from $6.6 billion a year earlier. Egypt's outstanding arrears to foreign oil companies shrank to $2.3 billion compared to more than $6 billion in 2014. Foreign direct investment (FDI) in the oil sector increased by 22 per cent during the period, 1.5 times higher than overall FDI. “FDI will continue to be supported by investment in the energy sector. With regard to non-hydrocarbon sectors, I think that foreign investment should increase in the medium term, but the macroeconomic situation is still a source of concern for investors, notably given the high level of fiscal deficits,” Pascal Devaux, senior economist at bank BNP Paribas covering the MENA region, told Al-Ahram Weekly. Tourism is a sector that benefited from the devaluation, as it contracted by only 6.7 per cent compared to shrinking by 22.5 per cent in the same period of 2016. The fall of the value of the local currency supported the competitiveness of this sector. The real-estate sector also benefited as assets became cheaper. “I think that foreign buyers who want to benefit from the devaluation have contributed to the growth in real-estate activity,” the BNP Paribas economist told the Weekly. The real-estate sector grew by 4.3 per cent during the nine-month period compared to only four per cent a year ago. “The growth of the real-estate sector is almost structural in Egypt, given the demographic growth and its role as an asset,” Devaux said. But Khaled stated that this growth was contrary to expectations. “People were hedging against the currency devaluation by investing in real estate, which is why growth rates in this sector were bolstered by the November decision,” he said. While the share of investment in the real-estate sector counted for 14.1 per cent of the total in the third quarter of 2017, some analysts found this alarming. “If this strong appetite was motivated by hedging against currency volatility, this could put this sector at risk when the currency becomes more stable,” Khaled said. Regardless of the negative impacts of the devaluation, BNP Paribas expects that Egypt's GDP is on a path of strong growth. “The rate will increase in 2016-2017 to four per cent and reach 4.5 per cent in the following year,” Devaux said. If Egypt's growth reaches four per cent, this will be the highest since the 2011 revolution, when the foreign reserves of the country began to deteriorate from their highest point of $36 billion. Egypt's reserves currently stand at $36.1 billion, thanks to portfolio investments motivated by CBE decisions to increase interest rates last November. In its recent report on the local economy, the international ratings agency Moody's presented a positive view, saying that “macroeconomic stability has been broadly maintained despite the negative inflationary shock resulting from the credit-positive foreign exchange regime liberalisation on 3 November 2016.” The short-term impact of the devaluation has been negative because of the consequences of increasing import prices. However, things will likely turn positive with the increase in exports and gradual import-substitution policies, according to Devaux. “The easing in the currency crisis has had a positive impact on the activity of non-oil industries, as the shortages of hard currency were a strong constraint on activity,” Devaux said. However, Khaled pointed out that Egypt had no clear plan to stimulate its industrial sector, and that this would limit the benefits of current reforms. “Countries like South Korea had a similar experience of devaluation, but they benefited from it because they had a strong exports sector,” he said. The writer is a freelance journalist.
