Syria
Over the past three years, Syria has recovered from a half decade of weak growth, notwithstanding an unsettled regional environment and a sharp drop in oil production. The economic recovery has gained momentum, benefiting from inflows from Iraqi refugees and abundant liquidity in the Gulf region. The economy proved quite resilient in the face of the unsettling political developments. Economic activity picked up steam buoyed by private investment and supported by the oil boom in the Gulf region. However, growth was accompanied by a rise in inflation, reflecting, in part, an expansionary monetary policy.
The Syrian economy did remarkably well in 2006. Despite an unsettled regional environment, the economic recovery that started in 2004 remained on track. Non-oil GDP grew at a brisk pace (tentatively estimated at 6-7 per cent), job creation picked up steam driving unemployment below 10 per cent, private investment gathered momentum, and exports made strong gains, particularly in some Arab markets. The surge in the volume of investment approvals hints at brightening investment prospects with companies jockeying to position themselves in the fledgling market.
The non-oil budget balance improved significantly by about 2½ per cent of GDP, offsetting some of the pronounced fall in oil revenues. However, this improvement was mainly due to transfers from public enterprises. Similarly, the non-oil current account balance improved, contributing to maintaining external balance despite the sharp fall in net oil exports. Public and external debts remain moderate, and official foreign reserves cover close to two years of imports. The recovery seems poised to continue despite the still volatile regional environment.
GDP: The non-oil GDP growth momentum is expected to be sustained by robust investment expansion and good export performance, reflecting greater access to regional Arab markets and the benefits from the concerted policy to promote tourism. This, together with the windfall from higher oil prices and an increase in Foreign Direct Investment, will maintain a comfortable balance of payments. Together with a modest increase in oil revenues, this fiscal tightening should narrow the overall budget deficit to 3¼ per cent of GDP and limit the inflationary and crowding out impact of its domestic financing. With the recent measures to tighten credit policy, these developments should help in reining in inflation, if supported by an appropriately restrained wage policy.
Over the medium term Syria faces daunting economic challenges. The decline of oil reserves poses a threat to fiscal and external sustainability, and the associated fall in oil revenues will make it harder to preserve, much less expand living standards. A bulge in labour market entrants will strain an already precarious unemployment situation and increase pressure to protect redundant labor in an overstaffed public sector. These challenges are further compounded by political uncertainties and a volatile regional environment.
Oil prices: The surge in international oil prices has provided a short-term windfall but will aggravate the medium-term outlook when Syria becomes a net oil importer around the year 2010 based on current oil price projections. Exports have made strong gains, particularly in some Arab markets, reflecting higher demand and improved access under the Great Arab Free Trade Area. Despite a sharp drop in oil proceeds (10 percentage points of GDP over the last three years) and the large demand shock associated with the Iraqi refugees, inflationary pressures have been contained, owing to the economy's supply responsiveness and a sustained, timely and sizeable fiscal adjustment. Public debt is still at a relatively moderate level, and the international reserves cover remains comfortable.
According to the IMF latest report on Syrian economic outlook, the near-term outlook for growth and inflation is favourable. The reforms implemented in recent months, continued stimulus to aggregate demand from the Iraqi presence, and favourable growth prospects both globally and in the region are expected to support consumption and non-oil exports, and to encourage higher private investment. In 2007, these factors would help sustain growth at about the same pace as in 2006, although deterioration in weather conditions, which recently hit the cereal and cotton crops, may dampen growth somewhat.
Fiscal policy aims to reduce the overall budget deficit to five per cent of GDP in 2007 (from 5.7 per cent in 2006), notwithstanding an expected further decline in oil revenues of about ¾ percentage points of GDP. This would require a reduction in the non-oil budget deficit of some 1½ per cent of GDP, which the authorities plan to achieve through a further rationalisation of capital spending. Credit policy is expected to support the recent trend decline in inflation. The authorities intend to continue using the exchange rate as a nominal anchor, while allowing some limited flexibility. Significant progress has been made on the structural front over the last two years, but the reform agenda remains substantial.
Egypt
Over the last two years, Egypt has accelerated reforms aimed at tackling impediments to higher growth and employment creation. Implementation of a broad range of reforms aimed at modernizing government and boosting private sector activity, and a favourable external environment, have contributed to macroeconomic stability. Significant progress in the structural reform program of the government has taken Egypt further along the road to a market economy. The privatisation program is gaining momentum. Regulatory and supervisory standards in the capital markets, insurance industry, and the banking sector are being strengthened. The restructuring of state-owned banks is progressing, including the sale of joint venture banks, and restructuring and settlement of nonperforming loans.
Market: The country has quickly become a dynamic market economy, led by the private sector and well integrated into the global economy. It has chalked up excellent real GDP growth rates – 6.8 per cent in 2005/06 – with over 6.6 per cent predicted for the next few years. This performance has been accompanied by record foreign direct investment (FDI) – more than $6 billion – and improvement in most economic and social indicators. The only macroeconomic indicators that need to be substantially improved concern the budget deficit, which was 9.3 per cent of GDP in 2005/06, and the level of public debt, which is more than 100 per cent of GDP.
The government does not want to break the current virtuous circle of growth by drastically cutting government spending, especially basic food and energy subsidies for consumers. This might increase poverty at a time when more than 10 per cent of the workforce is unemployed and pockets of great poverty exist all over the country, especially in Upper Egypt Although commerce and finance have been greatly liberalised, the political situation has hardened as the authorities have rejected demands to allow new political.
The Economist Intelligence Unit expects economic growth to peak in fiscal year 2007/08. Real GDP growth will then gradually slow from 2008/09, to around 5.3 per cent in 2009/10. Robust growth should deliver steady, albeit unspectacular, employment growth. The current account will remain in surplus, as strong overall invisible surpluses, driven by tourism and Suez Canal receipts, will offset Egypt's large trade deficit. The Egyptian pound will appreciate in 2007 because of high interest rates and strong capital inflows, but will weaken from 2008, as the Central Bank intervenes in the foreign-exchange market to maintain export competitiveness.
Reforms: The government will, however, continue to press ahead with its programme of economic reform, based on an assessment that strong and sustainable economic growth to raise living standards and generate new jobs is the best way to undercut the appeal of the Islamists. Some privatisations and significant investment in the country's infrastructure are expected in 2007-08. The government officially launched its new five-year plan (running until 2010/11) on July 1. The plan targets real economic growth of eight per cent a year, which we believe is probably optimistic given underlying structural obstacles to growth, such as a relatively inflexible labour market.
Strong investment growth will lift real GDP growth, which is estimated to have reached seven in 2006-07, rising further, to 7.2 per cent, in 2007/08 on the back of buoyant domestic demand and strong export expansion. The current-account surplus widened in 2006, but we expect it to narrow as a proportion of GDP over the outlook period, as the trade deficit widens. Nominal GDP during the first quarter of FY 2007/08 was EGP 170.5 billion and is expected to reach EGP 183 billion by the year’s fourth quarter.
Investment: Total investments climbed 42 per cent of which 7.2 per cent was contributed by the private sector. Unemployment is thought to have declined from 11.6 per cent in March 2006 to nine per cent in March 2007. Egypt hopes to increase annual economic growth to 9 per cent by the end of its new five-year plan beginning this July. The plan aims for growth of 7.2 per cent in the first year, to be followed by an average annual growth of 8 per cent through 2012. The government is relying upon the private sector to provide 68 to 70 per cent of its targeted EGP 1,295 billion investment which will be required to inspire sufficient growth.
Last year in FY2006/07, the private sector invested EGP 100 billion in the Egyptian economy, exceeding expected levels by EGP25 billion. This year, private investment is expected to rise to EGP115 billion. Public investments were also above expectations by approximately EGP5 billion in FY2006/07, totalling EGP25.5 billion. The government ultimately hopes to achieve its goals through support of export sectors. As a move toward its goal, the government has recently increased an export development subsidy from EGP 400 million to EGP 2 billion.