In several of our previous content- including our end-of-year economy snapshot video– we refer to the positive performance of the Egyptian economy despite the difficult hurdles imposed by the COVID-19 pandemic that have negatively affected many economies around the world. Egypt has been one of the very few economies that have managed to maintain a positive economic growth rate in 2020. Perhaps a key reason was that the country was able to avoid a total lockdown that was inevitable in many other countries. In a chapter titled “How did Egypt soften the impact of Covid-19?” in the CEPR publication “Shaping Africa’s Post-Covid Recovery”, Jamal Haidar, assistant professor of economics at the American University in Cairo (AUC) School of Business and research associate at the Middle East Initiative in Harvard University, explores the policies that have probably succeeded in easing the economic burden of the pandemic, and studies evidence on how that probably reflected on firms.
International financial institutions and local policies contributed to a softened impact of the crisis
In the chapter focusing on Egypt, Haidar documents the economic context including the policies that the country implemented at the onset of the COVID-19 crisis to mitigate its economic effects.
Egypt’s successful implementation of the economic reform program from 2014 to 2020 had allowed it to meet the crisis on the right foot, with structural flexibility in the state budget and good fiscal space. The program also contributed to increased trust in financial institutions, and that has reflected in the positive credit ratings Egypt had received during the crisis.
Moreover, key international financial institutions have been instrumental in Egypt’s successful response to contain the economic hardships of the pandemic. The European Bank for Reconstruction and Development (EBRD) provided a $100 million loan to Banque Misr allowing for the latter to provide short-term financing to private Small and Medium Enterprises (SMEs) facing liquidity challenges due to the fall in economic activity and turnover.
Also, early on in the crisis, the International Monetary Fund (IMF) had provided support of $2.722 billion to Egypt as part of its Rapid Financing Instrument that served the purpose of helping governments meet their urgent Balance of Payments needs. This exceptional emergency support was also used for health and social protection spending.
The International Finance Institution (IFC) supported the private sector with a total of $400 million since March 2020, allocated to SMEs and the health sector. The IFC also worked with Egypt’s Financial Regulatory Authority to issue Egypt’s first green bonds in 2020.
In their turn, local institutions managed to transfer this external support to a number of effective policies that kept the real economy in balance. “The Ministry of Finance acted swiftly to allocate resources to the health sector, provide targeted support to the most severely impacted sectors, and expand social safety net programs to protect the most vulnerable,” Haidar tells Business Forward.
Fiscal policy came to work with a stimulus package of EGP 100 billion supporting both citizens and sectors harmed by the crisis, through monthly disbursements to irregular workers, expansion of the social protection program Takaful and Karama, and tax and non-tax incentives to productive sectors. The Ministry of Finance had also reduced the price of gas and electricity for industries to help lower their production costs. Other responses included reductions on tax arrears on investors in the affected sectors, as well as pumping funds to support the Export Development Fund, and paying dues to contractors and suppliers.
On the monetary policy front, “the Central Bank of Egypt (CBE) adopted a broad set of measures, including lowering the policy rate and postponing repayments of existing credit facilities,” explains Haidar. The CBE reduced interest rates from 10 to 8 percent for real estate mortgage, selected productive sectors and the tourism sector, and delayed credit dues for all individuals and firms of all sizes for six months with exemptions from late settlement penalties. After the six months, the CBE continued to guide banks into restructuring clients’ debts and providing other exemptions to help with business continuity and to ease financial distress off the private sector.
In a strong direction towards digitalization and financial inclusion, availability of Automated Teller Machines (ATMs) and Points of Sale (POS) systems were expanded, and cash withdrawals and local transfers and electronic payments were exempt from commissions and expenses. The CBE also worked on supporting financially stressed companies in the industrial and agricultural sectors through EGP 100 billion allocated to banks to provide loans at 8 percent interest.
Evidence that generally speaking firms did not financially suffer
Now that there is emerging research reflecting the effect of the COVID-19 crisis and the corresponding responses, we can observe how these policies have reflected on-ground.
In his chapter, Haidar looks at a World Bank survey of 3075 firms between December 2019 and July 2020 across 15 industries in Egypt including hospitality and tourism that shows that financial constraints were not among the highest concern for firms. Only 10 percent of surveyed firms regarded access to finance as a severe obstacle, before COVID-19 hit, with some differences between firms of different sizes in whether they regarded access to finance as a minor, moderate or severe obstacle.
After the outbreak of the pandemic, the perception was more or less equal across firms of different sizes that mostly regarded access to finance as a minor or moderate obstacle. When firms are broken down by region, Haidar writes that perceptions about access to finance improve post the pandemic in all regions except the Suez region where nearly 20 percent of firms surveyed considered access to finance as a very severe obstacle compared to less than 10 percent before the pandemic.
Haidar also writes that firms were more likely to benefit from overdraft facilities from banks post-pandemic, and medium-sized firms were as likely as large firms to apply for new loans or lines of credit, suggesting that firms did not suffer financial challenges due to COVID-19.
There is always room for research
Research on firms such as the one cited in the chapter, as well as macroeconomic indicators and outlooks are showing that Egypt has managed to cushion the shock of the pandemic-induced economic slowdown. Yet, for how long can the economy withhold the global and local slowdown of economic activity, specifically in key sectors such as tourism? “More analysis is needed to understand how firms can expand and create higher quality jobs in Egypt in the face of the pandemic in the days ahead,” concludes Haidar in this chapter.