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Tuesday, 25 May 2021

Egypt’s post-covid growth will need increased private sector involvement –European Commission

Egypt needs to involve the non-oil private sector in its sustainable covid recovery plan, according to an economic brief by the European Commission. The removal of non-tariff barriers and the levelling of the playing field between public and private companies should activate the private sector’s potential for job creation and growth, the report suggests. “Strong population growth amid low participation rates calls for a redoubling of efforts to make Egypt’s post-COVID growth path more inclusive and sustainable, with the non-oil private sector at its core,” the report reads.

Egypt fared better during covid than its peers: Moderating inflation allowed for lower monetary policy rates. Foreign exchange reserves, meanwhile, were replenished to USD 40.3 bn at the end of April, thanks in part to the government’s FX-denominated Eurobond and green bond issuances last year, and exchange rates have remained fairly stable since early 2020. The fiscal deficit also enjoyed stability amid high uncertainty, the report says. While the initial stimulus deployed only amounted to 1.8% of GDP — comparatively less than in other countries — “an immediate policy response has helped the economy to withstand the worst repercussions and maintain a positive, albeit easing, growth profile.

That said, Structural reform plans were hampered by covid-19: While Egypt’s 2016 IMF-supported reform program left the country in a strong fiscal position as covid-19 took its toll on the global economy, the government had to shift its focus to stabilization, rather than building a more sustainable, inclusive economy, the report says. With Egypt still heavily dependent on the tourism and oil and gas sectors, bans on international travel and oil price slumps put pressure on Egypt’s current account. Since the government’s focus is geared towards macro stabilization, redoubled effort is needed to broaden and deepen the structural reform agenda of the renewed IMF program to achieve more sustainable and inclusive growth, the report suggests.

Worryingly, the non-oil private sector struggled most, the report says. Even prior to the covid-19 crisis, the purchasing managers’ index (PMI) had largely lingered just below the 50-point neutral threshold, in contrast to the general performance of the economy. April’s reading came in at 47.7, marking a fifth month of contractions for the country’s non-oil private sector. The share of private businesses in total domestic credit almost halved between 2010 and 2020, with the industrial and service sectors suffering most. This is because in times of uncertainty, banks find it safer to lend to the public sector. “While strong public sector involvement can dampen volatility in a crisis, it can also limit the breathing space of private sector activity,” the report notes.

But private sector employment potential is key to meeting the challenge of Egypt’s ever growing population. The most recent unemployment data puts Egypt’s jobless population at 7.2%, but does not track the distribution of labor force participation across the public vs private sector. As per the report, it can be assumed that job losses sustained during covid-19 were mostly in the private sector, which could further skew labor force dynamics and result in severe labor market mismatches in the future. Moreover, employment increased in sectors with low added value and declining productivity. “More dynamic private sector employment and a better alignment between the educational system and labour market needs will be indispensable to meet the challenge of absorbing the large number of new entrants into the labour market each year,” it states.

So what do we need to do to sustainably and inclusively move forward? Firstly, capitalize on global value chain disruptions that occurred during covid. Given Egypt’s strategic geographic location, Egypt could position itself as an attractive partner for international firms looking to strengthen links in the region, especially in the automotive, chemical and textile sectors.

Secondly, remove trade barriers such as import bans and registration requirements to improve our competitiveness. This also includes automating customs procedures — which the government has already initiated through the Customs Authority’s new National Single Window for Foreign Trade Facilitation — and streamlining customs services and storage royalties. Thirdly, leveling the playing field to nourish competition, which is already happening through the reform of competition policy legislation.

And finally, digitalize the economy, and fast. This will increase transparency, efficiency, social safety and healthcare services. The government has undertaken a number of recent efforts towards this goal, including reducing red tape for digital and SME lenders and implementing upgrades to Egypt’s network infrastructure.

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