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 programme.
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 towards 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.”
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 programme.
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.
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.
Annual urban consumer price inflation plunged unexpectedly to 9.4% in June from 14.1% in May, before fuel prices were raised.
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.