​​Can Egypt unlock its economic potential?​ 

This is an excerpt from the longer focus article "How can Egypt unlock its economic potential?", published on 20th July, 2023. Some forecasts contained within may have been changed since publication. Access to the complete report, including extensive forecasts and near to long-term analysis, is available as part of a subscription to our CE Advance premium product or to our dedicated Middle East & North Africa Economics coverage.

Egyptian policymakers’ commitment (or lack of) to economic orthodoxy continues to provide cause for concern and, while we don’t share the view that sovereign default is a serious risk, the near-term economic outlook is challenging. Over a longer horizon, though, Egypt has enormous economic potential. We expect some progress in addressing the structural issues holding back growth, allowing the economy to achieve growth rates of around 5-6% over the next two decades.  

• The hits to Egypt’s economy from the COVID-19 pandemic and then the spillovers from the war in Ukraine exacerbated the country’s balance of payments strains. The currency has subsequently been devalued three times and the CBE announced in October that it had “adopted” a flexible exchange rate regime – since then, the pound has fallen by more than 40% against the dollar. 
• We had long argued that the currency looked overvalued and that such a move was needed. There has, of course, been some near-term economic pain from the currency falls. Inflation has surged to more than 35% and the CBE has raised interest rates by 1,000bp over the past twelve months or so. GDP growth slowed in the second half of 2022 and more timely activity data point to further weakness this year.  
• The falls in the pound appear to be having the desired effect on the current account position, but the lack of a meaningful shift to a flexible exchange rate has seen pressure for another devaluation build. We think that another devaluation will come by the end of the year.  
• Adopting a flexible exchange rate, as well as pushing ahead with the government’s latest privatisation drive, would go a long way to restoring investors’ confidence. In the meantime, we think that continued tight fiscal policy should help to alleviate concerns about a sovereign default. While all of this will weigh on activity in the near term, it will lay the foundations for stronger longer-term growth.  
• In principle, Egypt has enormous growth potential. The country’s working age population is set to rise at a rapid pace over the coming decades (See Chart 1). And the current low income level provides scope for ‘catch-up’ growth via rapid productivity gains. Wages are low and Egypt’s trade infrastructure is well developed, allowing for easier integration into global supply chains (See Chart 2). But achieving this will require a number of areas to be tackled, including the skills of the labour force, the business environment, and degree of competition. 

Chart 1: Working Age Population (% y/y Avg. 2023-50)

Sources: United Nations, Capital Economics

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Chart 2: Quality of Port Infrastructure (Scale, 1-7)

Sources: Refinitive, Capital Economics

• We do expect some progress towards tackling these, with the backing of the IMF. If successful, we think Egypt’s economy could be among the 25 largest in the world by 2050, and the largest in the Middle East – overtaking Saudi Arabia. 

From a report written for Capital Economics clients by James Swanston, Emerging Markets Economist, originally published on 20th July 2023.