World economies

Published March 27, 2017

Egypt

EGYPT’S economy is gradually improving with annual rates of GDP growth reaching 4.3pc in 2015-16. Nevertheless, large spatial disparities exist in terms of education and health outcomes.

Official data indicate that 28pc of the population lives below the poverty line with poverty as high as 60pc in rural upper Egypt.

Inflation has accelerated on the back of the flotation of the Egyptian pound, the scrapping of several subsidies on regulated goods and introduction of a new value-added tax.

The government continues to push reform programme policies forward, aiming to encourage investment to revive the economy.

The reform measures undertaken by the government and the Central Bank of Egypt in 2016 have yielded positive effects. The economy managed to grow at 4.3pc in 2015-16, up from an average of only 2pc during 2010-11 and 2013-14.

The Egyptian economy witnessed several economic fluctuations in 2016, leading the government to take several extreme economic measures. The unemployment rate hit 12.8pc compared to 9pc in 2010.

External debt rose to nearly $60bn up from $35bn in 2010. The gross debt to GDP stood at 100pc. The exports fell to $20bn against imports of $57bn compared to $24bn and $49bn.

During the same period, foreign exchange reserves dropped to $24bn from $38bn. Tourism revenues plummeted $3.4bn from $11bn. The Egyptian pound depreciated from 5.8 to 19 in 2016. Egypt’s economy started the 2017 in much the same way as it had finished 2016.

In January 2017, inflation skyrocketed to the highest level since 1989 as the decision to free float the pound in November and the implementation of the IMF’s conditions under a $12bn rescue plan are reverberating across the economy.

According to the IMF, economic growth in 2016-17 will come in at a relatively weak 2.5pc before accelerating to 4pc in 2017-18. By contrast, the government sees growth targets of 5.2pc and 5pc achievable in respective years as tough economic reforms have restored investor confidence, with dollars coming steadily into the country and international reserves rising to a multi-year high.

Egypt’s fiscal deficit remains relatively large and a key source of imbalance for the economy. According to the IMF, Moody’s and the World Bank, the government’s main focus has to be on reducing the high fiscal deficits through significant monetary and financial policy changes, such as adopting a more flexible exchange rate, introducing the VAT, removing fuel subsides, and containing inflation, which, in turn, will encourage investments and exports.

According to the planning ministry, the reforms being implemented are expected to see fiscal and monetary policy tightened significantly in 2017.

The ministry wants to cut its budget deficit to 9.5pc of GDP in the year to June 2018, down from 12.2pc the previous year. It hopes to cut public debt to 94pc of GDP in the year to June 2018.

Libya

LIBYA is a country rich in oil and gas resources, but shaken by its political tensions and a decline in security. The civil war and the chaotic political transition have weighed heavily on its economic growth.

Libya has lost $68bn since 2013 due to falling oil production owing to political deadlock. Libya has become a state without a functioning political or social structure over the past six-years since the downfall of Gaddafi.

Before the 2010 chaos, the country was a stable trading platform and used to export 1.6mbpd of oil, which had dropped to 0.2mbpd now. Today there is no central government to harness the oil supply.

Libya is only exporting one-sixth of its oil potential. The country needs humanitarian aid and specific programmes to address the destruction of its different services.

According to the World Bank, the civil war is disrupting the country’s main source of income through oil production. Oil has long been the key driver of the Libyan economy, but in 2016 its production is estimated to have declined for the fourth consecutive year to the lowest level on record, plummeting revenues and pushing fiscal and current account deficits to record highs.

The non-hydrocarbon sectors remains weak due to disruptions in the supply chains of both domestic and foreign inputs, as well as lack of financing. GDP growth averaged negative 0.8pc in the six years to 2016 against positive 4pc in five years to 2010.

According to some economists, GDP shrunk by an estimated 8.3pc in 2016 while GDP per-capita fell by almost two-thirds, since Gaddafi’s removal, to $4,458. The shortages in the supply of food and black marketing led to increased inflation to an estimated 20pc during 2016.

Revenues from the hydrocarbon sector plummeted in 2016 as a whole with the total revenues estimated around LYD8bn, just sufficient to cover the projected subsidy outlays for 2016.

Libya had substantial financial reserves, but these have been dwindling.

Overall, the budget deficit remained high, at 69pc of GDP, which was financed mainly through borrowing from the Central Bank of Libya and to a lesser extent from commercial banks. In addition, deficit financing is also being met through foreign reserves which are rapidly being depleted.

These have halved from $107.6bn in 2013 to an estimated $43bn by end-2016. The central government was a net lender but domestic debt has since quickly increased to reach a high 110pc of GDP in 2016.

The economic and social outlook for 2017 onwards suggest that the oil production will progressively improve to around 1mbpd by 2017 end. On this basis, GDP is projected to increase 14pc.

However, the twin deficits will stay, as revenues from oil will not be sufficient to cover the budget expenditures and consumption driven imports. This should keep the budget deficit at about 35pc of GDP in 2017.

Published in Dawn, Business & Finance weekly, March 27th, 2017

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