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Egypt walks the path to recovery

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Egypt's structural reforms key for sustainable development

editor's pickTuesday 06, November 2018

The Egyptian economic situation has continued to improve during 2018 as a result of its ambitious and politically difficult economic reform programme. While the process required sacrifices in the short-term, the reforms were critical to stabilise the economy and lay the foundation for strong as well as the sustainable growth that will improve living standards for all Egyptians.

Egypt’s growth has continued to accelerate during 2017/18, rising to 5.2 per cent in H1 2018 from 4.2 per cent in 2016/17. The current account deficit has also declined sharply, reflecting the recovery in tourism and strong growth in remittances, while improved investor confidence has continued to support portfolio inflows. In addition, gross international reserves rose to $44 billion by end-April, equal to seven months of imports.

The annual headline inflation declined from 33 per cent in mid-2017 to around 13 per cent in April 2018, anchored by the well-calibrated monetary policy of the Central Bank Egypt (CBE).

Christine Lagarde, the International Monetary Fund (IMF)’s Managing Director, praised Egypt's economy under a three-year reform plan and stressed the importance of structural reforms to achieve more sustainable development.

In a statement, Lagarde said that Egypt’s economic reforms will help achieve more sustainable, inclusive and private-sector led growth which will help create jobs for youths while ensuring adequate resources are available for social protection.

Egypt has implemented tough reforms under a $12 billion loan IMF programme agreed in late 2016 that involved deep cuts to energy subsidies, new taxes, and a floated currency in a bid to draw back investors. Fuel prices were hiked with as much as 50 per cent and electricity rates increased by about 25 per cent, measures that made it harder for ordinary Egyptians to make ends meet, with another fuel price rise scheduled for next year. Additionally, consumer prices soared as the authorities floated Egypt's currency and adopted a value-added tax (VAT).

In June 2018, the Executive Board of the IMF completed the third review of the economic reform programme supported by an arrangement under the extended fund facility (EFF). The completion of the review allowed the authorities to draw $ 2.02 billion, bringing total the to $ 8.06 billion of the $12 billion loan.

The Fund urged Egypt to maintain a tight monetary policy as a new round of subsidy cuts rekindled inflation worries, saying Egypt was beginning to reap the benefits of the reforms and estimates the economy will grow 5.2 per cent this year.

The Egyptian government is moving forward with structural reforms to modernise the economy and tap the potential of the country’s growing population. This includes steps to support exports and reduce non-tariff barriers, streamline as well as enhance industrial land allocation process and support SMEs, and strengthen public procurement.

Moreover, the Government is improving the transparency and accountability of parastatals as well as eradicating corruption, reforms which are vital to lure private investment which is essential to raise growth and make it more inclusive. The authorities’ reform programme has helped accelerate growth, reduce inflation and unemployment as well as narrow external and fiscal deficits.

Egypt's commitment to economic reforms has also charmed lenders, among them African Development Bank (AFDB) and China Development Bank. AFDB is currently taking all needed procedures to disburse the third and last tranche of its $1.5 billion loan to Egypt. The AFDB and the Egyptian authorities are discussing prospects of cooperation in supporting the private sector and infrastructure in Sinai, a move that contributes to luring investors.

The AFDB mission voiced the bank’s readiness to offer the support needed to help push forward the economic and social development in Egypt.

Sovereign wealth fund

As part of structural reforms, the Egyptian government plans to launch its first sovereign wealth fund by the end of the year and will begin a roadshow in Q1 2019 to support private investment. Modelled after sovereign wealth funds in Saudi Arabia, Kuwait, Oman and the UAE, Egypt’s new investment arm will seek to generate additional wealth from under-utilised state assets. Partnering with the private sector, the Egyptian fund will seek to attract domestic and foreign investment as well as build on economic reforms started in 2016 with the flotation of the currency.

The EGP 200 billion Egyptian Fund, is the latest government measure aimed at reviving growth and investment that faltered in the wake of the 2011 uprising. The sovereign wealth fund will start with paid-in capital of EGP 5 billion, 20 per cent of which will be injected by the Government when it is set up.

The economic revival vehicle will partner with the private sector to invest in a wide range of assets, including land and buildings, as well as stakes in state-owned companies at market value. While the Government will wholly own the Egypt Fund, the private sector will be allowed to buy stakes of over 50 per cent in sub-funds and affiliated companies. Also, the fund will be able to invest in various financial instruments, stocks, bonds as well as other securities inside and outside Egypt.

Majority stake offerings in parastatals

Egypt also plans to raise up to EGP 100 billion ($5.7 billion) by selling minority stakes in at least 20 state-owned enterprises on the stock market. The country’s public sector has long been criticised as bloated and inefficient, officials have struggled to push the firms toward profitability. The current programme marks a first step toward attempting to strike a balance between efficiency, profitability and raising revenue for the Government.

This year, the Government will offer minority stakes in Alexandria Mineral Oils Company, Eastern Tobacco, Alexandria Container as well as Cargo Handling, Abu Qir Fertilisers and Heliopolis Housing. The Egyptian ministry of finance said that the initial public offering (IPO) is focused in areas such as petroleum services, chemicals, shipping as well as maritime and real estate to help boost state finances. The second portion of the 23 companies is expected to go on offer in Q1 2019, although officials have yet to decide on which firms or the sizes of stakes to be sold.

In July, Egypt offered investors the chance to take a majority stake in state-held Heliopolis Housing. Additional stakes in five other companies will be sold by the end of the year. But investors will only be able to take a majority holding in the firm and the Government will retain a roughly 40 per cent share in the property developer.

There has been a lot of activity on the Egyptian Exchange (EGX) in the last three months. Cairo for Investment and Real Estate Development (CIRA) announced its intention to offer up 37.8 per cent of the company’s outstanding share capital, representing 207 million ordinary shares currently owned by Social Impact Capital. Additionally, Sarwa Capital announced that it was offering 40 per cent of its capital in October, to collect about $120 million through increasing capital and partial exit of the main shareholder.

Citizenship by Investment

The Egyptian government is leaving no stone unturned boosting its finances and draw back foreign. The lawmakers recently passed the Citizenship by Investment law allowing the offering of citizenship to foreigners who deposit at least EGP 7 million ($392,000) in foreign currency, then hand it over to the treasury after five years. It is not immediately clear what economic benefits a foreigner would obtain by acquiring citizenship as Egypt places few restrictions on foreign investment projects, although it does forbid foreign ownership of agricultural land and property in the Sinai Peninsula. However, the parliament’s defence and national security committee stated foreigners who acquire citizenship would enjoy no political rights until after five years of citizenship and would need 10 years to be eligible for election or appointment to a representative body.

TAGS : egypt, reform, monetary policy, swf, imf

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