Exclusive: Mahmoud Mohieldin breaks down where Egypt’s economy stands and the way forward

When Egypt’s economic reform journey took off in 2016, officials focused on measures and policies that aim to stabilize macroeconomic indicators, and effectively prioritized fiscal and monetary reform policies. On the back of a rebounding tourism sector and heavy government spending on big infrastructure projects, the country’s economy made leaps forward in terms of its GDP, foreign reserves, and ability to withstand market shocks.

That’s why when the COVID-19 pandemic hit, Egypt was in a substantially better situation to address the economic fallout caused by pandemic-related shutdowns and restrictions.

But Egypt is not making it through the pandemic unscathed; its vital tourism sector continues to suffer heavy losses, and its external debt levels have risen to unprecedented levels as the government pursued an $8 billion loan package from the International Monetary Fund in order to maintain the stability of its economy and avoid losing the achievements of its reform program thus far.

Macroeconomic reform, however, isn’t always good news for everyone. Since 2016, poverty levels increased to 29.7 percent in 2020 as per CAPMAS , due to the rise in prices of basic goods and services, including gas and electricity. Almost two years after the pandemic, Egypt now stands at a crossroad, with a pressing need to make its reform efforts more inclusive of those most economically-vulnerable, and also needs to pave the way for the private sector to claim its essential role in driving economic growth. Economic growth was largely led by consumption and public investment in infrastructure, not the private sector. How can Egypt address those critical dilemmas?

On December 13, a number of prominent policymakers, business leaders, academics, and economic experts, got together to mark the fourth annual event of Business Forward AUC, aiming to answer this crucial question. The event’s keynote speaker, prolific economist, IMF executive director, and Egypt’s former investment minister, Mahmoud Mohieldin, had much to share in his pursuit to answer this question in a special session moderated by Dina Abdelfattah, interim chair of the Department of Economics at the AUC School of Business.


Inflation front and center in 2022

One critical issue predicted to face not just Egypt, but the world economy, in 2022 is inflation.

“The talk of the day, the talk of the week, and perhaps even the talk of the next year is going to be inflation and how we are handling it,” affirmed Mohieldin. “There is a tricky balance between growth and inflation. If you’re tightening inflation fast and hard, you may compromise recovery.. You may end up compromising recovery and also not solving the problem of inflation.”

Egypt, on the other hand, is projected to have its inflation levels to be within the target of its central bank for the coming year, which is 7 percent plus or minus two, explained Mohieldin. This is feasible due to the fiscal balance that has been improving since the reform journey took off in 2016. In order to maintain this upward swing and keep inflation within target, it is important to maintain ‘control of budget deficit, maintaining primary surplus, improving the capacity of the tax department and public revenue, and enhancing growth.’

Inflation in Egypt in 2022 projected to be within target

Economic growth in Egypt for 2022 is projected to reach 5.4%, which follows Egypt’s ability to be one of a handful of countries to achieve positive growth in 2020. “Egypt was among the very, very few countries that managed to have positive growth last year and continue to do so this year,” said Mohieldin. “For the current fiscal year, Egypt’s growth is projected to be 5.4%.”

Investments and GDP

Though Egypt had become over the last few years Africa’s biggest investment destination, a worrying indicator is that its total investment to GDP ratio remains relatively modest. This indicator is crucial when determining how a country’s investment levels are faring.

In the 1980s, the total investments to the GDP ratio was well above 30 percent, fluctuating over the years since then, reaching a low point of below 10 percent in the years following the 2011 revolution, and recently beginning its rebounding journey, approaching 20 percent in 2020. Granted, it’s a good achievement, however, it needs to be further boosted, commented Mohieldin.

Egypt is Africa’s current biggest investment destination

One issue he noted is how Egypt’s private sector is being crowded out by public investments in different sectors, which is seen as discouraging of private investments which are important for sustainable growth.

“Investments mean public and private, not just private and not just public, and of course Foreign Direct Investments. This question here is not about crowding in or crowding out […]. The better question is, does Egypt have the adequate critical total investment as a percentage of GDP? No, not yet.”

Mohieldin believes that it’s important to have a more pragmatic approach to the issue of crowding out the private sector and formulate strategies that make both kinds of investments work together rather than against each other. What’s important to consider here is what sectors are better well-suited for what type of investments. It has to be a case-by-case approach.

“There is a role for public direct investment to mobilize private investment in some particular sectors,” says said Mohieldin. “The question here is sector-specific, firm-specific, location-specific. It’s not really across the board.”

Public investments, he argues, play an essential role in attracting private investments, particularly in ‘a period of high uncertainty like the one we have today.’

Stock market and Egypt’s 2030 vision

Egypt’s stock market, compared to peer and regional markets, is performing quite poorly. That may have to do with the disproportionate share of informality in Egypt’s economy. Recently, an effort to state-owned enterprises in the stock market has been announced but is yet to become a reality.

“We need to be encouraging more public listing, and by public listing, I don’t mean is just more from the country’s public sector IPOs, but basically from more private sector, especially the family-owned companies with a track record,” argued Mohieldin. “I may upset some people but the issue here is that the stock market should act as a mirror of the economy, to be fully representative of it. So far, it’s not.”

Egypt’s stock market doesn’t yet mirror its economy

“We have many sectors almost absent from the stock market, so we need to encourage more public listing from different areas, especially the corporatized agriculture, [the] food and [the] manufacturing sectors, especially in governorates [other than Cairo],” explained Mohieldin.

Furthermore, Mohieldin believes that as far as the Egypt 2030 framework is concerned, the business sector, particularly businesses listed in the stock market, plays a very important role.

“Businesses and stock markets don’t work based on history but on the present with a forward-looking approach,” said Mohieldin. “So we really need to encourage more listings, and also need to see substantive incentives for businesses to do that, beyond tax incentives.”

Speaking of Sustainable Development Goals and Egypt’s 2030 vision, the biggest potential milestone in reaching those goals could be the project of Hayah Karima.

Localization of SDGs – Hayah Karima
One of the most significant public investment projects announced by the Egyptian administration in recent years is the ‘Hayah Karima’ (Decent Life) project, a megaproject that aims at drastically improving quality of life in Egypt’s poorer villages, with its total beneficiaries being 55 million Egyptians – more than half of Egypt’s population.

“My biggest bet for being optimistic is the most important project being undertaken in Egypt, Hayah Karima,” said Mohieldin. “I know our country has had many initiatives to invest in infrastructure, health, new cities and dealing with slums. But this one project is really the hope for Egypt.”

More than just a poverty alleviating project, Hayah Karima is going to be instrumental in improving Egypt’s business environment and making way for a new generation of self-made entrepreneurs.

“When you do these kinds of investments affecting 60 percent of the population in 20 governorates, just imagine the dynamics of such investments. You’ll be unleashing huge potential. How many Mahmoud Elaraby can come out from this? How many people will benefit from such huge investments? In the short, these investments will accelerate our achievement of the 2030 agenda, but in the long term, it will be going to be helping generations of Egyptians with creativity and mentoring that they desperately need .”

Stay tuned to more exclusive coverage from the Business Forward annual event…

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