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Egypt’s rising revenue, energy reforms to drive economic growth – NBK

Egypt’s rising revenue, energy reforms to drive economic growth – NBK
NBK expects the CBE to deliver a further rate cut of 300-400 bps in 2020
NBK
NBK
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Cairo – Mubasher: Egypt’s economy is expected to continue its growth trend, but at a slower pace, compared to the previous years, the National Bank of Kuwait (NBK) said in a report on Tuesday.

During the first quarter of fiscal year 2019/2020, the North African nation has posted economic growth at 5.6%, on the back of economic reforms backed by the International Monetary Fund (IMF), the report remarked.

Real gross domestic product (GDP) growth will remain robust at nearly 5.5% in FY19/20 and average about 5% for the coming few years, boosted by a hike in capital spending, more improvement in the tourism sector, and rising natural gas output, which will most likely make Egypt a net gas exporter in the coming period.

Inflation

Inflation rate is forecast to remain in the single digits by 2022 on the back of the ongoing strengthening of the Egyptian pound which rose by 10% against the US dollar since early 2019.

Last October, urban inflation registered 3.1% year-on-year, hitting the lowest level since October 2005, “driven by the state’s efforts to ensure an adequate food supply.”

The slowdown in inflation allowed the Central Bank of Egypt (CBE) to lower interest rates four times during the year by a cumulative 450 basis points (bps).

NBK expects the CBE to deliver a further rate cut of 300-400 bps in 2020, if inflation keeps its downward trend.

Debt servicing costs and budget deficit

Despite a rise in salaries and pensions in July, NBK projects the most populous Arab nation to post an average primary surplus of 2.5% of GDP over the coming few years, up from 1.5% in FY18/19 and 0.2% in FY17/18.

However, high debt servicing costs remain a major risk to the country’s positive outlook, contributing to widening the overall budget deficit, which could be partially offset by rising revenues and reforming energy subsidies.  

The overall budget deficit is expected to shrink further to 7.5% of GDP in FY19/20 and 6% in FY21/22, compared to 8.2% in FY18/19.

With lower budget financing needs, public debt is expected to fall to around 80% of GDP by FY21/22, but the structure of the debt will be tilted more toward external debt.”

During FY19/20, the Egyptian government seeks to issue around $7 billion worth of multi-currency denominated international bonds to tap into the record-low global interest rates.  

External current account

The economic reform programme has helped the country improve its external current account as the deficit fell to 2.7% in FY18/19 from 6.1% in FY16/17, with prospects to reach 2% by FY21/22, on the back of an increase in remittances, tourism income, and gas revenue.

Challenges and promising outlook

Egypt has managed to restore its macroeconomic stability, but still needs to adopt “a second-generation set of measures that focus on deep-rooted structural rigidities reflected mainly in the still dominant public sector.”

Developing the private sector, fighting poverty, and improving social safety nets are the main elements needed for the country to continue its progress.