CAIRO (Reuters) – Egypt’s economic growth is expected to slow to 5.5% in the fiscal year that began this month, below the government’s target, and 5.8% the following year, a Reuters poll showed, as Cairo nears the end of an IMF-backed economic reform program.
The forecasts were similar to a Reuters survey of economists released three months ago but fiscal 2019/20 growth was seen lower than the government’s target of 6%.
Prime Minister Mostafa Madbouli said last week Egypt’s gross domestic product (GDP) grew 5.6% in the 2018/19 fiscal year, a bit higher than the 5.5% expected in the April Reuters poll.
Barring the oil industry, Egypt’s economy has struggled to attract foreign investors since the 2011 uprising that ended Hosni Mubarak’s 30-year rule.
Egypt’s non-oil private-sector activity contracted for the second consecutive month in June, according to the Emirates NBD Egypt Purchasing Managers’ Index (PMI). Private-sector activity has expanded in only five months over the last three years.
“Even as leading economic indicators point toward weak consumer spending and stress on local firms, rising investment and government spending are supporting higher economic growth,” said Nadene Johnson, an economist at NKC African Economics.
“Medium-term growth prospects remain promising thanks to the natural gas sector and higher investment, while consumption is expected to recover following the completion of inflationary reforms.”
FUEL SUBSIDY CUTS
Earlier this month, Egypt introduced its latest round of fuel subsidy cuts, raising prices by 16-30%, as it nears the end of the IMF program.
Scaling back fuel subsidies that have been a strain on the budget for decades was a key plank of the three-year, $12 billion reform package signed with the International Monetary Fund in 2016, as Egypt’s economy struggled to recover from the turmoil that followed the 2011 uprising.
Other reforms included a sharp devaluation of the Egyptian pound and the introduction of a value-added tax.
“Rising fuel and electricity prices in association with energy subsidy reforms will keep inflation elevated in the coming months,” Johnson said. She expects the Central Bank of Egypt (CBE) to cut rates by 100 basis points in the fourth quarter of 2019.
Median forecasts from the poll showed predicted 5.8% GDP growth in the fiscal year ending in June 2021 and 5.5% in the 2021/2022 fiscal year.
To fuel growth, “interest rates need to be cut by at least 300 basis points,” said Allen Sandeep, head of research at Naeem Brokerage.
“And hopefully, that would increase spending and investments, and also ease the tightness in liquidity which we are currently witnessing,” he said.
The new consensus sees Egypt’s urban consumer inflation at 13.0% in the 2019/20 fiscal year, down from the 14.2% predicted three months ago for the prior fiscal year.
Annual urban consumer price inflation plunged unexpectedly to 9.4% in June from 14.1% in May, before fuel prices were raised.
Analysts expect headline inflation to decelerate to 10.9% in the 2020/21 fiscal year and 9.0% in the 2021/2022 fiscal year.
Core inflation, which strips out volatile items such as food, fell to 6.4% in June from 7.8% in May.
Millions of Egyptians live below the poverty line and struggle to meet basic needs. They have faced rising costs since the pound was devalued in November 2016.
Angus Blair, chairman of business and economic forecasting think-tank Signet, said Egypt’s inflation has long been higher than global averages.
“There has been some success in bringing the inflation rate down,” he said.
“But concerns will remain around food price inflation pressures, particularly due to potential temperature changes affecting agricultural supplies within Egypt and globally.”
Polling by Md Manzer Hussain in BENGALURU; Reporting by Yousef Saba in CAIRO; Editing by Jonathan Cable