The World Bank issued a report, entitled “Egypt Economic Monitor”, predicting that GDP growth will register 5% by fiscal year (FY) 2016/2016, while the budget deficit will record 10% of GDP. The report also discusses foreign reserves, inflation and the challenges that will face the economic recovery.
Here, Daily News Egypt discusses the indicators and future performance predicted by the World Bank in comparison to the goals set by the government for the near future.
World Bank indicators vs government goals
The report highlighted that the gross domestic production’s (GDP) growth will reach 4.3% in FY 2014/2015. It added that growth can reach 5% by FY 2016/2017, explaining that key sectors, such as tourism and manufacturing, are expected to witness a “strong recovery”.
Earlier this month, the cabinet announced its approval for the FY 2015/2016 budget, targeting a 5% growth during the new fiscal year, compared to 4.2% registered during the FY 2014/2015.
“The lower international oil prices provide an upside factor by lowering the cost of production and increasing energy supply,” the report said. “Beyond FY15, oil and gas extractives may also improve as outstanding arrears are paid and new exploration contracts may be agreed.”
The budget draft also set the target for deficit at 9.9% of GDP, around EGP 281bn, compared to the 10.8% recorded this fiscal year.
The World Bank’s report noted, however, that a 10% of GDP budget deficit can be expected by FY 2016/2017. The bank’s prediction assumes that the government will follow through with its gradual rationalisation of subsidies, the implantation of the value added tax and the introduction of a new mining law.
Regarding the budget deficit, the report added that it also took into account the government’s plan to increase social spending and meet the pledges it made on constitutional spending.
The report said: “Egypt’s output gap will continue to narrow and may disappear by FY16”.
It mentioned, however, that the slow recovery of the Eurozone, which is the main trade partner, may affect Egypt’s recovery.
International foreign reserves
International foreign reserves are expected to reach $17bn-$18bn by the end of FY 2014/2015. At the end of April, foreign reserves recorded $20.5bn after Egypt obtained deposits worth $6bn from Saudi Arabia, the UAE and Kuwait. At the end of May, the figure dropped by $1bn to reach $19.5bn.
During the first half of FY 2014/2015, Egypt paid a sizable $6bn to repay Qatari deposit and its debts to foreign oil companies.
In April, the Central Bank of Egypt (CBE) announced that Egypt’s total external debt decreased to $40.2bn at the end of February, compared to $50bn last year.
“The foreign exchange reserves will exceed $20bn after the recent Arab deposits,” CBE Governor Hisham Ramez said earlier. “The CBE will pay the final instalment of Qatari deposits, which amounted to $1bn during the month of October.
The bank predicted inflation to remain around 10% through FY 2016/2017.
“This assumes a proactive stance by the CBE in curbing inflationary pressures, a subdued international commodity price path, and sustained improvements in internal supply infrastructure and policies that ease supply,” the report said.
The average for annual urban headline inflation was 10.6% during the first eight months of FY 2014/2015, the report mentioned. This was “fueled by higher energy prices and excises on alcoholic beverages, tobacco, and cigarettes, with the latter witnessing two successive tax hikes since July 2014”.
The report pointed out that the amelioration of security conditions and the implantation of the reform is fundamental to improve and sustain the economic recovery.
“Notwithstanding the Egyptian government’s ambitious fiscal consolidation plan, the budget deficit and debt aggregates will remain high and unsustainable,” the report said. “There is significant uncertainty regarding the financing of the announced mega-projects, and the potential contingent liabilities that may arise.”
In the policy implementation and slippage, the bank’s report mentioned that the lack of exact timing remain a concern.
Prior to the Economic Summit held in March, Minister of Finance Hany Kadry Dimian announced that income tax will be unified at 22.5%. The cabinet has not officially announced the approval of that decision, and it was not referred to the presidency for approval. Capital gains tax and wealth tax were also announced by the Ministry of Financ, but was suspended prior to implementation.