Egypt’s primary surplus puts it on track to sustainable debt strategy -World Bank
Egypt’s primary surplus heading into the pandemic helped cushion the blow to its public debt, despite higher debt levels that gripped much of the MENA region, according to the World Bank’s April 2021 MENA economic update (pdf). The primary surplus — a measure that strips out debt service payments — in FY2019-2020 reduced Egypt’s need for short-term borrowing, unlike economies including Morocco, Tunisia, Bahrain, and Oman, whose increased public spending on health measures left their budgets deeper in the red. The pandemic’s impact on our debt levels was only partially reflected in the report however, as Egypt’s fiscal year runs from July to June, it noted.
Egypt is currently running a small primary or initial budget surplus. The surplus is expected to close the ongoing fiscal year at 0.6% of GDP, but the draft budget is penciling in a rebound to 1.5% in FY2021-2022, returning to levels frequently achieved before the pandemic hit.
Egypt’s real GDP growth rate of 3.6% in FY2019-2020 was the highest in the region, and well above the MENA average of -3.8%, according to data from the World Bank Macro and Poverty Outlooks cited in the report. Iran and Djibouti were the only two other countries to join Egypt and eke out positive growth. Looking ahead, Egypt’s real output is forecast to expand by a slower 2.3% in FY2020-2021 and rebound to 4.5% in FY2021-2022.
Egypt’s debt levels will continue trending down despite a temporary pause to the government’s debt reduction strategy during the pandemic, as authorities sought to address the growing health and education spending needs, said the World Bank’s practice manager for macroeconomics in MENA Kevin Carey during a virtual event to launch the report on Friday, Ahram Online reports. Favorable forecasts for the country’s primary surplus will help achieve long-term debt targets and “put the country’s elevated debt levels on a downturn path,” Carey said. The government’s debt strategy, which was outlined a year before the pandemic hit, seeks to bring down debt to 80% of GDP by 2022, primarily through moving toward longer-term borrowing. According to Finance Ministry figures, debt-to-GDP stood at 86.1% at the end of the FY2019-2020, but the World Bank put the ratio a notch higher at 87.5%.
And Egypt is one of the MENA countries less vulnerable to a debt crisis. Many MENA countries entered the pandemic with already-high debt stocks, weak output growth, and weak governance especially when it comes to policy transparency. While some of that may apply to Egypt, the country was among only three others that grew during the peak of the pandemic’s effect on the global economy. “Increasing economic output remains the most sustainable way to reduce debt,” the bank says.
But public spending is largely what’s keeping us afloat: Purchasing managers’ index data for Egypt has remained largely in contraction territory, rising above the 50.0 mark that signals expansion in private sector activity only three times since it rebounded from a low in April 2020, the bank noted. The pandemic’s impact on tourism and textiles exports were also cited in the report as key macroeconomic threats to Egypt and other MENA oil importers.
Egypt and other MENA countries stand to reap the long-term benefits of ramping up vaccine rollout programs: The cost to benefit ratio of vaccinating 20% of a country’s population estimated at 78:1, the report said, citing a recent research paper pinning the cost of purchasing vaccines for developing countries against the long-term benefits. Effective vaccination campaigns would both help overcome a country’s immediate health needs and pave the way for a quicker recovery, as well as “reinforce the foundation of public health infrastructure,” the report added.
Other takeaways from the report:
- The regional post-pandemic rebound isn’t likely to allow the MENA region to return to the higher levels of economic activity seen in 2019, and is considerably below the World Bank’s pre-pandemic forecasts. Regional real output is set to grow 2.2% by the end of 2021 on the back of a rebound in oil prices, though the regional economy is estimated to have lost USD 227 bn due to covid-19.
- Overall MENA public debt is expected to increase to 54% of GDP by the end of 2021, up from 46% in 2019.
- Fiscal spending will need to prioritize public health and social welfare while the pandemic is still ongoing, but taking on debt to fund fiscal spending could be costly to MENA economies in the long run.
- Governance and debt transparency remains lacking in many countries, though it is key to effective fiscal spending and could help lower elevated borrowing costs.