Monday, 2 March 2015

Egypt’s new growth strategy

Egypt’s new strategy of less government spending, more investment and higher growth is a little ambitious

The economy of Egypt has slowed down considerably since the 2011 revolution. Annual real GDP growth, the standard measure of economic activity, has averaged 2.1% in 2011-14 compared to 5.6% between 2004 and 2010.

Almost half of that growth differential was due to a slowdown in investment. It is hardly surprising that investors have been spooked by the political and legal uncertainty which have followed the revolution. In the chart below, the contribution of investment to real GDP growth over 2011-14 is reduced to a barely visible grey strip below zero. The other half of the growth differential was equally split between private consumption and net exports as the overall environment proved detrimental to consumer sentiment and competitiveness.

Faced with this, the government’s strategy was to increase public spending to shore up the economy. As a result, the government’s contribution to annual real GDP growth has increased a little in 2011-14 relative to 2004-10 unlike all the other components.

But this strategy is now reaching its limits. The government’s budget deficit in the fiscal year 2013/14 was 13.8% of GDP. Excluding grants from the Gulf, the deficit was a massive 17.6% of GDP. This is very large and not sustainable for two reasons. First, because domestic banks—which have lent out large sums to the government in recent years—will eventually run out of liquidity. And second, because Egypt’s Gulf backers are showing reluctance to continue writing blank cheques and are seeking a change in the direction of economic policy.

The Egyptian government is therefore moving to a new strategy, which is based on replacing government spending with investment. In its latest survey of the Egyptian economy (which is published for the first time after a five-year pause), the International Monetary Fund (IMF) predicts annual real GDP growth will average 4.5% over 2015-19 despite a significant tightening in government spending. This is because the IMF expects investments to grow at annual rate of 6.1% over the same period, which is high but still lags the 2004-10 rate.

To achieve this, the government has been designing and promoting large infrastructure projects. These include the Suez Canal Regional Development project as well as preliminary plans to build a large number of housing facilities and construct roads. The authorities also aim to attract foreign investment and the forthcoming economic conference on 13-15 March is one platform to advertise the new strategy.

The new strategy is sound in theory but has its risks. After all, the factors which have inhibited investment post-2011 are still largely in place. Egypt needs to attract enough investments not only to counteract the substantial cut in government spending, but also to raise growth from its current levels. This might be a little ambitious given its prevailing circumstances. 

1 comment:

  1. روح يا شيخ , ربنا يطمنك :)