Global Arab Network | Enviable growth – Egypt contemplating a new stimulus package

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Enviable growth – Egypt contemplating a new stimulus package

Monday, 01 November 2010 20:38

Egyptian Minister of Economic Development Osman Mohamed Osman told the state’s official news agency on October 19 that Cairo was contemplating a new stimulus package – Egypt’s fourth since 2008 – to boost domestic demand and ensure GDP growth is sustained in coming months.

Five days before Osman’s statement, the Ministry of Planning announced a downward revision in GDP growth figures, from 5.9% to 5.4% for the April-June quarter and from 5.3% to 5.1% for the 2009-10 fiscal year as a whole. This followed sobering reports of a slide from 70th to 81st place in the World Economic Forum’s 2010-11 Global Competitive Index report and a surge in annual core inflation from 8.2% in August to 10.97% in September, reports Global Arab Network according to OBG.

However, while Egypt’s growth figures seem far from the growth registered in 2004-05 to 2007-08, when it averaged 7%, the new, revised levels indicate that Egypt’s economy is recovering, and indeed is outstripping most of its peers.

At the height of the worldwide financial crisis, in 2008-09, Egypt’s growth rate slipped to 4.7%. Other countries fared worse. Egypt’s diverse economy, large domestic market, and lack of financial leveraging insulated it from the worst effects of the downturn, while its institutions were never imperiled. Egypt’s slowdown was due to exogenous and temporary – rather than structural – factors: above all, by a decline in Suez Canal revenue, tourism, and foreign investment.

The three stimulus packages enacted since 2008, which together injected LE34.2bn (€4.3bn) into the Egyptian economy, allowed it to do just that. And now that the worst of the crisis has passed, the sectors responsible for its downturn are starting to recover. Revenue from the Suez Canal declined slightly from $4.7bn in 2008-09 to $4.5bn in 2009-10, but that figure is deceptive: revenue actually increased by 12.5% over the first half of 2010. Beltone Financial, the Cairo-based investment bank, predicts that revenues will reach $4.9bn by the end of the current fiscal year.

Tourism, too, has staged a comeback. Whereas revenues from the sector declined by 2.1% to $10.8bn in 2009, Tourism Minister Zoheir Garranah expects them to surge more than 17% this year as the world emerges from crisis. “If things go as planned as far as future reservations are concerned,” he told local media in October, receipts could reach somewhere between $12.6bn and $13bn. Investment banks EFG-Hermes and CI Capital are more cautious, but still predict handsome receipts: $12.2bn and $12bn, respectively – which would indicate growth of 13% in the first case and 11% in the latter.

Foreign direct investment (FDI) appears to be following a similar pattern. According to the Egyptian Ministry of Investment, FDI dropped 16% from $8.1bn in 2008-09 to $6.8bn in 2009-10. Former investment minister Mahmoud Mohieldin, who in September became managing director at the World Bank, predicts that it will rebound to at least $8bn in 2010-11. Astrit Sulstarova of the United Nations Conference on Trade and Development’s Investment Division is similarly bullish. Egypt signed 101 international investment agreements last year, he points out – one of the highest numbers in the world. And it has continued to sign more this year. For example, just this week, it signed 22 agreements with companies in Guangdong province, China with a total value of $400m. Barring further setbacks, FDI inflow to Egypt should eventually return to its pre-crisis peak of $13bn a year, Sulstarova says.

Boosted by these trends, as well as by domestic consumption, Egypt’s GDP expanded by 5.6% in the third quarter of 2010, according to cabinet spokesman Magdy Rady. The government expects that upward trajectory to continue; it forecasts growth of 6% for the fiscal year ending in June 2011. Beltone Financial, which is currently revising its growth estimates for 2010-11, finds that figure plausible. But it cautions that Egypt is unlikely to see a return to pre-crisis levels of growth before next year’s elections, as investors wait to see how things shake out.

Even so, Egypt’s growth is the envy of its region – and elsewhere. It should outpace all the Gulf States but Qatar, which is posting double-digit growth, as well as most of Africa, whose countries are expected to grow by an average of 5% in the coming year. And it will surely outperform the global average of 3.5%.

The main thing holding Egypt back from faster growth is infrastructure. Spending on roads, rails, and ports – not to mention education and health – has not kept pace with population growth. However, the government is “aggressively seeking” private partners to finance and provide human resources for such efforts, according to Trade and Industry Minister Rachid Mohamed Rachid, who has predicted infrastructure projects worth some LE50bn ($8.8bn) over the next 18 months. While partners may be tough to find before the election, this is the kind of stimulus that is really needed.

Global Arab Network

This article is published in partnership with Oxford Business Group

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Last Updated on Monday, 01 November 2010 20:46

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