Egypt began to experience a modest economic recovery in mid-2003 following three years where the rate of growth averaged 3 percent, the IMF indicated in a recent press release. The economic performance between 2000-03 reflected difficulties related to September 11 and the Iraq war, uncertainties about the direction of macroeconomic policies, especially exchange rate policy, and slow progress in structural reforms. During this period real GDP growth remained considerably below the minimum required to absorb labor force growth and reduce poverty, it added.
The disruption from the Iraq war was short-lived. Since mid-2003, export performance has benefited from the upswing in global economic growth and the depreciation of the Egyptian pound. In real effective terms, the pound has depreciated by close to 40 percent since 2000, greatly improving Egypt's external competitiveness.
Real GDP growth could reach 4 percent in 2003/04, driven by the export sector, particularly manufacturing exports and tourism. The current account surplus is expected to double to over 4 percent of GDP in 2003/04, although the capital account has weakened because of subdued foreign borrowing and higher outflows through the banking system. This has led to a stable level of foreign reserves at about US$14-$15 billion (eight months of imports).
Inflationary pressures began to emerge in 2003, reflecting the large exchange rate depreciation and lax liquidity conditions in the second half of the year. The wholesale price index increased by 14 percent, up from 6½ percent in 2002. Year-end CPI inflation was 5½ percent. With the exception of a short-lived hike in interest rates early in the year, interest rates have been low in real terms.
A surge in central bank credit to the government in the second half of 2003 is being sterilized with the aim of keeping broad money growth at about 10 percent in 2003/04. Credit to the private sector is projected to decline in real terms, reflecting banks' cautious approach to new lending.
The deficit of the consolidated general government will be contained below 2.5 percent of GDP in 2003/04, but public debt will continue to rise, in part because of off-budget outlays. Net public sector debt is projected to reach nearly 70 percent of GDP in June 2004 compared with 47 percent of GDP in 2000.
Higher domestic debt accounts for the bulk of this increase, largely reflecting domestic financing of the public sector borrowing requirement in the order of 7 percent of GDP per annum. The authorities aim to reduce the deficit by about 1 percent of GDP in 2004/05.
In late January 2003, the authorities abandoned the currency band and allowed the pound to float. Following a nominal depreciation of about 30 percent in the initial months, banks gradually adopted a less flexible approach to rate setting, and foreign exchange shortages worsened, putting pressure on the parallel market.
The parallel market premium stabilized in late 2003 and has been declining somewhat in recent months. The authorities plan to unify the exchange rate in 2004 and have been working to establish a self-regulatory interbank market convention to facilitate the development of spot and forward markets for foreign exchange.
The pace of structural reforms in recent years has been slow. The authorities have recently taken steps to bring some tariffs into World Trade Organization compliance, but overall protection remains high. In the financial sector, the authorities have introduced some measures to facilitate the recovery of collateral through the courts and improve the management of public banks. There has been limited progress in privatizing state enterprises and state banks, but the government is contemplating launching an ambitious privatization program. Plans for restructuring the entire portfolio of state enterprise debts to banks are under discussion and could be finalized in 2004/05. (menareport.com)
© 2004 Mena Report (www.menareport.com)
