After a noticeable slowdown during the fiscal year 2023-2024, which ended last June, the Central Bank of Egypt expects the economy to gradually recover, starting from the fiscal year 2024-2025. The bank indicated that the real GDP growth rate slowed to 2.2 percent during the first quarter of this year, compared to about 2.3 percent during the fourth quarter of last year. He attributed the reason to the decline in the public sector’s contribution to economic activity as a result of the impact of the Red Sea navigation crisis and the repercussions of the Gaza war on the services sector.
Even the rise in private sector economic activity was not enough to offset the decline, but early indicators for the second quarter (April-June) indicate that GDP growth has started to rise again.
Although the International Monetary Fund’s forecast for Egyptian economic growth has declined to 4.1 percent during the current fiscal year, these forecasts are close to the government’s target of achieving a growth rate of 4.2 percent, to gradually increase to 6.5 percent by 2030. The reasons for the decline in the Fund’s forecasts are due to several factors, most notably external factors, including: the continuation of geopolitical tensions in the Middle East, as well as the pace of tightening… which affects the economic slowdown. There are also internal reasons, most notably the government’s adoption of an austerity fiscal policy and a tight monetary policy to control the budget deficit and inflation, which reached 27.5 percent. There is no doubt that Egypt’s “economic strength”, classified as “A3” according to the international agency “Moody’s”, reflects its large and diversified economy with strong growth conditional on continuing to implement business environment reforms to stimulate investment and exports from the local and foreign private sector.
This is with reference to the fact that the “Ras Al-Hikma” deal, amounting to $35 billion (about 10 percent of GDP), provided “significant credit support,” and raised the Central Bank’s foreign exchange reserves to record levels of $46.12 billion, and supported the general budget by $10.6 billion, which contributed to achieving the largest primary surplus in its history, amounting to $17.1 billion, with the total deficit declining to $10.4 billion, by 3.57 percent of GDP. According to official data, the net foreign assets deficit in Egyptian banks turned into a surplus of $14.3 billion last May, for the first time in 28 months, after the total deficit worsened to about $28 billion in January.
In light of these developments, foreign investments, or what is known as “hot money,” have returned to flowing into Egypt again, benefiting from the decline in the value of the Egyptian pound and the rise in interest rates on treasury bills and bonds to 28 percent, the highest in the world, until the share of foreign investments in government debt instruments reached about $32.7 billion. With the continuation of borrowing to finance the budget deficit and pay foreign debt installments, the volume of these investments is expected to rise to $50 billion by the end of this year.
But this money comes in and out quickly, targeting quick profit, and perhaps its rapid and sudden exit entails risks that may affect the exchange rate and foreign exchange reserves, something that happened before in 2022 when it left Egypt in one go for about $20 billion. Therefore, experts warn of its risks, and advise against relying on it to finance development and achieve high growth rates, especially in the field of encouraging direct investment.. But it remains, in one way or another, an indicator that reflects positivity in the Egyptian economy.
* Lebanese writer specializing in economic affairs
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