Egypt’s annual growth is forecasted to ease to 3.3% in fiscal year (FY) 2015/16 (ending 30 June 2016) and to reach 4.4% in FY 2016/17, falling below the government’s target of 5%, according to the World Bank’s report “Global Economic Prospects June” .
The drop in the percentage from January’s projections is -0.4% for FY 2015/16 and -0.3% for FY 2016/17. This comes as tourism is contracting, business sentiment is soft, and businesses have faced a foreign currency shortage for much of the year.
The report noted that economic activity in Egypt was supported by strengthening domestic demand, but net exports were weak due in part to restrictions on dollar deposits in banks.
To support the economy, the Central Bank of Egypt (CBE) devalued the Egyptian pound in March and announced that it would adopt a more flexible exchange rate policy.
According to the report, the CBE will need to continue efforts to rein in inflation against the backdrop of stabilising oil prices, subsidy reductions, and devaluation in the first quarter of 2016.
The report highlighted the risks of the growth outlook for the Middle East and North Africa: a further slide in oil prices, escalation of conflict, and further negative effects of security challenges and social unrest in countries not entrenched in war.
Some estimates indicate that direct and indirect losses of the war in Syria and the advance of Islamic State had been a cumulative $35bn in Egypt, Iraq, Jordan, Lebanon, Syria, and Turkey as of mid-2014.
In Egypt, which does not grapple with widespread domestic conflict, a worsening domestic security or political stability could sap domestic sentiment and investor confidence and undermine economic activity.
A series of high-profile terrorist attacks in Egypt and Tunisia in 2015 highlighted the destructive effect of these incidents for the tourism industry.
The report concludes that high inflation remains a challenge in Egypt. Fiscal and current account deficits are significant and are worsening, despite the extended period of low-priced oil imports.
Despite some positive security developments, the potential for conflict-related spill over effects in the region remains high. Fighting has resulted in significant loss of human and physical capital not only in countries actively engaged in conflict but in neighbouring countries.