Egypt’s Economy Is Improving, But Its People Don’t Feel It

Egypt’s finance minister is presiding over the Middle East’s fastest-growing economy, earning accolades from investors and international financial institutions alike. He’s got one big problem: improved macro-economic indicators are failing to translate into higher incomes and living standards for the Egyptian people.

Two weeks after small protests dealt Egyptian markets an out-sized hit, sending the stock index down 10 percent in three days, Mohamed Maait sat with Bloomberg to discuss the task of navigating a dual-track recovery. Here’s what he had to say about some of the biggest issues on his plate, from rising poverty to the public sector’s role in the economy and relations with the International Monetary Fund (IMF), Egypt is emerging from a three-year program with the IMF, which provided a $12 billion loan as it enacted sweeping and sometimes unpopular economic measures. Asked whether Egypt is still pursuing a non-financial IMF agreement, Maait demurred, saying it’s committed to its own reform agenda, with or without an IMF program.
“It’s a continuous relationship whether under Article IV or whether post-program monitoring or whether a program. We are still in the consideration of the future arrangement,” he said. While an IMF pact might comfort investors, they want to see “Egypt’s economy is moving in a healthy direction -- with a limited budget deficit, with GDP growth continuing to grow and with the level of debt at a reasonable level, and debt service reasonable.”
That’s a change from June, when Maait told Bloomberg he hoped to replace the expiring deal with a non-financial agreement. “Hopefully by October we will get it done,” he said then.
Last month’s scattered protests roiled stocks and highlighted lingering investor concern over unrest in a country that saw street protests from 2011 to 2013. Security forces arrested some 2,000 people in response, according to rights groups. Maait downplayed the prospect of any further turmoil.
“We are a government of Egypt, of the Egyptian people,” he said. “When we see there is something, we listen.”
While Egypt’s 5.6 percent economic expansion is the swiftest in the region, it needs sustainable growth rates of as high as 8 percent to create jobs for the 2.5 million people entering the workforce every year, Maait said. Most Egyptians were hit hard by the 2016 currency devaluation and subsidy cuts that sent prices soaring; almost a third of the population now lives in poverty.
“We did economic reform which had a negative impact on the population because economic reform was very hard,” Maait said. “I personally believe that spending on social programs is one dimension, but the more important is to create jobs.”
Both the World Bank and IMF have expressed concern with the size of Egypt’s public sector, and some analysts say it’s “crowding out” private sector development by deterring investment and stifling competition. According to a World Bank report in April, the public sector received 69 percent of total domestic credit, compared with 23 percent to the private sector and just 8 percent to households.
“We understand that Egypt over the last seven years or so was not attractive to the private sector,” Maait said. He cited previous shortages of electricity, gas and hard currency as having been deterrents. “So how can we meet the needs of our people? Can we say, ‘Sorry we cannot offer you because the private sector didn’t come?’ No, we can’t do it. So we stepped in.”
Maait said he hoped to reverse the trend so the private sector accounts for 70 percent of GDP within the next five to seven years, and that he’d be willing to offer more incentives to achieve it. He said the government is aware it can’t alone create the necessary jobs, while infrastructure and security improvements now make Egypt attractive for private investors. “It is time for us to say, ‘We are happy for you to come and take a leading role,” he said.
Interest rates hikes enacted to curb inflation left Egypt with one of the world’s highest real interest rates, currently around 5.7 percent, and made its debt a favorite for foreign investors chasing yields. But they also meant the government paid more for local borrowing.
The past two months have seen the central bank cut the benchmark 250 basis points to 13.25 percent -- steps that Maait said he’s content with.
“Part of our economic reform is that the target is inflation,” which was down to 7.5 percent in August, he said. The rate cuts also help debt-servicing, giving “better space in my budget to invest more in the most important aspects, like health and education.”