23/02/2024 – Renewed reform efforts helping to boost private sector activity and investment would help boost growth, which is currently slowing amid high domestic inflation, and would support the creation of more high-quality jobs, according to a new OECD report.
The first projects GDP growth to ease to 3.2% in fiscal year 2023/24, before increasing gradually to 5.1% by fiscal year 2025/26. Growth is expected to be driven by growing consumption, provided inflation subsides and despite the gradual withdrawal of fiscal support. Investment is set to remain weak as long as financing conditions remain tight in the context of the continuing fight against inflation. Export growth is expected to pick up if geopolitical tensions in the region recede.
Until recently, growth in Egypt in the wake of the COVID-19 pandemic and the surge in global food prices had held up better than in neighbouring countries. However, domestic inflation at record-high levels of 40.4% in September 2023 – compared to 15.3% a year earlier growth – had a negative impact on consumption, weakened the domestic currency and investment and has led to lower growth. Fiscal support including the expansion of targeted cash-transfer programmes has helped support those most in need. However, business activity has weakened due to rising interest rates in response to tighter monetary policy and limited access to foreign currency. Inflation has started to gradually decline to 31.2% in January 2024.
The government faces large financing needs in the near term. Although the initial 2023/24 budget aimed at increasing the primary budget surplus to 2.5% of GDP, the overall budget deficit will remain substantial at -7.5% due to high spending on interest payments. At the same time, international market funding has been limited since early 2022 when increased volatility on global financial markets led to strong capital outflows. Restoring investor confidence in public finances is essential to attract international capital and bring down debt service costs.
“Economic growth has held up remarkably well through the COVID-19 pandemic and subsequent shocks of higher food and energy prices. Bringing inflation under control is now a key near-term priority to spur consumption and strengthen growth. Monetary policy needs to remain restrictive until inflation comes back to target,” OECD Secretary-General Mathias Cormann said, presenting the Survey alongside Minister of Planning and Economic Development Dr. Hala El-Said. “A comprehensive consolidation strategy is needed to improve investor confidence in public finances and ease financing conditions. Stepping up structural reform efforts, building on previous reforms, to reinvigorate private sector activity and investment, by removing administrative barriers, ensuring a level-playing field between private and state-owned companies and stepping up the fight against corruption will help boost productivity and long-term growth.”
Public investment has expanded substantially since the early 2010s. The Survey underlines that efforts to limit new projects should be extended by reviewing the efficiency of ongoing public investment. The resulting spending cuts will create fiscal space to finance priority policies, including those in the health and education sectors. To enhance tax collection, the government should reduce costly tax exemptions such as in the value-added tax system, and strengthen tax compliance, including through simplified tax regimes for small and medium-sized enterprises.
Egypt has ample scope to increase private sector activity and productivity, according to the Survey. Reducing regulatory barriers, such as for market entry, and limiting the scope of state-owned enterprises would lower market distortions and strengthen fair competition. The announced divestment programme to reduce the state footprint in the business sector should be fully executed, specifying a clear timeline. The privatisation process will require greater transparency in the choice of firms to be sold, the sequencing of sales and the valuations of assets.
Reforms to unleash private sector activity should include efforts to create more flexible labour markets by reducing rigid employment protection and lowering labour taxation to encourage more and better quality job creation. High social security contribution rates should be reduced as they are a major driver of informality, leaving workers without social protection. Female employment is very low at 12.7% as women often leave the labour market due to household responsibilities. Better reconciling work and family lives by expanding childcare facilities would help raise women’s labour force participation.
Egypt is highly vulnerable to the impacts of climate change such as rising temperatures and water scarcity. Efforts to accelerate mitigation and adaption to global warming should be stepped-up. A gradual reduction in untargeted energy subsidies would contribute to reducing both emissions and the budget deficit. Private investment and development partners’ support should play a key role in promoting climate-related financing and accelerating the green transition by making better use of financing instruments including green bonds and concessional loans.
See an with key findings and charts (this link can be used in media articles).
