Business & Economy

Private sector is crucial to Egypt’s recovery

Large investment projects are keeping the Egyptian economy moving, but a big switch from public to private sector economic activity is required to create employment for the nation’s youth.

After managing to sustain economic growth even at the height of the pandemic, Egyptian GDP looks set to continue increasing over the next three years. Big government projects have underpinned recent growth and although Cairo has promised a change of emphasis from the public to the private sector, the transition is likely to be a slow process.

The economy grew at an annualised rate of 7.7% in the three months to the end of June, boosting growth for fiscal year 2020-21. A Reuters poll of economists forecasts GDP growing 5.1% in the year to the end of June 2022, rising to 5.5% for both 2022-23 and 2023-24.

Inflation is rising but the annual rate still stood at 6.6% in September, the highest figure for 20 months but comfortably within the central bank’s target range of 5-9%.

According to the IMF, high liquidity levels in the banking system and strong reserve levels have helped Egypt recover from the pandemic. The government has also been supported by $8.5bn in IMF financial assistance in the early months of the crisis, with a further $2.8bn due by the end of this year.

Government announces move to New Administrative Capital

A monorail will connect Egypt’s New Administrative Capital with Cairo. (Photo by Tamer Adel Soliman / AFP)

In early November, President Abdel Fattah al-Sisi announced that the government would start moving administrative operations to the new capital that is being built 45km east of Cairo.

The long-term aim is to create homes for 6.5m people as well as play host to the government. The entire project carries a price tag of $45bn, although it will be developed in phases, with the private sector expected to finance and build most of the residential areas.

The New Administrative Capital project is designed to reduce congestion in what is one of the world’s biggest cities. It will be connected to Greater Cairo by a monorail. Whether Egypt’s economic reality keeps pace with its sprawling ambition remains to be seen.

Construction work on Egypt's new administrative capital.
Construction work on the business and finance district of Egypt’s New Administrative Capital megaproject, some 45 kilometres east of Cairo. (Photo by Khaled DESOUKI / AFP)

Jihad Azour, the IMF director of the Middle East and Central Asia Department, said in October: “I think what is very important for Egypt going forward is structural reforms that will allow Egypt to create jobs.”

Growth has also been maintained by limiting the range and duration of lockdown measures, with obvious effects on the Covid-19 fatality rate. The official Egyptian pandemic death toll stood at just under 20,000 by November but even Egyptian ministers have admitted that the real figure is at least 10 times higher than the official toll.

According to a World Bank report published in October, the actual death rate is about 13 times higher than official figures, which would give a current figure of around 260,000.

Much depends on how fast the vaccination programme is rolled out. The health ministry aims to ensure that 70% of the population have been double vaccinated by the end of this year but just 7% had received both doses by October.

Until the virus is brought more fully under control, tourism and other parts of the service sector will continue to struggle.

Tourism, which accounts for 15% of GDP, has undoubtedly been one of the hardest hit industries as a result of much lower visitor numbers. As a result, tourism revenue dropped from $9.9bn in 2019-20 to $4.9bn over the most recent fiscal year but has just begun to pick up.

Hotels had been obliged to run at 70% capacity since July but were allowed to operate as normal from mid-October.

It has long been recognised that a big switch from public to private sector economic activity is required to create employment for the more than 1m young people who enter the job market every year.

“Those jobs can only be created by the private sector. And for this to happen we need to increase productivity and also we need to increase access to market, access to talent, access to finance, we need to increase investment,” noted Azour.

At the start of November, minister of finance Mohamed Maait said that the government had set a target of boosting the private sector’s share of GDP to 50% within three years.

However, it is difficult to assess the real size of the private sector because a huge part of economic activity takes place in the informal economy – about 50% according to many estimates.

Gas production soars

The dramatic turnaround in Egypt’s gas fortunes is continuing to turn an economic weakness into a strength. Rising domestic consumption, buoyed by subsidies, combined with falling output on some fields, had seen Egyptian liquefied natural gas (LNG) exports decline and LNG import projects sanctioned.

However, improved terms of upstream investment resulted in the discovery of new reserves, including Eni’s massive Zohr field in 2016. As a result, LNG imports have been halted and in the early part of 2021 output in Zohr rose to over 7bn cu ft/day.

Gas processing plant lit up at night.
The gas processing plant for the Zohr gas field in El-Gamil, Egypt. (Photo: Dulaaz / Shutterstock)

Meanwhile the government has wound down power subsidies, resulting in higher power and gas prices, thereby depressing demand.

As a result, Egypt has been able to boost its own exports, including through the resumption of production at Egypt’s Idku LNG plant.

An extension to the Arab Gas Pipeline, which was built to export Egyptian gas to Jordan and Syria, will allow the country to sell up to 65m cu ft/day to Lebanon to supply a 450 MW power plant by early next year. The spur pipeline has been built but additional infrastructure and checks still need to be completed.

Tapping solar potential

The government has confirmed its target of ensuring that 42% of electricity is produced from renewable energy projects by 2030, just as it was announced that the Egyptian resort town of Sharm El-Sheikh will host the United Nations Climate Change Conference (Cop27) in 2022.

Cairo is also keen to highlight the fact that Africa’s biggest solar project is planned at Benban in Egypt, although proposed generating capacity of 1.8 GW will actually be spread over 32 plots of land, each of which will be developed by different investors.

All, however, will be able to take advantage of the same transmission link to the national grid and long-term power purchase agreements with Egyptian Electricity Transmission Company.

Solar panels in front of the pyramids.
Solar panels near the pyramids in Giza. (Photo: Egd / Shutterstock)

British development-focused operator Globeleq has bought a 66 MW plant at Benban that has already been built by Italian companies SECI Energia and Enerray, plus Saudi Arabia’s Desert Technologies.

The country already has 1,650 MW of solar generating capacity but much more rapid development is needed to achieve the 42% target.

Solar photovoltaic (PV) construction and operation and maintenance (O&M) costs are falling sharply at the same time as PV panels are becoming more efficient, resulting in big falls in the levelised cost of energy (LCOE).

However, the Egyptian grid needs to be upgraded and energy storage added in the longer term if it is to make the most of its huge solar potential.

Expanding water production

While most international interest in the Egyptian water sector has focused on Cairo’s opposition to the construction of the Grand Ethiopian Renaissance Dam on the Nile, less attention has been paid to the launch of 17 tenders for new desalination plants, which are designed to provide 2.8m cu m/day of drinking water, boosting national desalination capacity by 300% within five years.

While the government has generally agreed to wind down the level of subsidies in other parts of the economy, it will continue to subsidise water production. It is expected that power will be supplied to the energy-hungry water plants by solar projects. One bidder, KarmSolar, hopes to develop integrated power and water projects.

Sweeping digitisation plans

The government has also embarked on a big digitisation programme to allow more payments to be made by government agencies, private sector companies and individuals, with most taxes and invoices to be handled by electronic platforms.

In October, an initial public offering was launched for a 16.1% share in the state-controlled digital payment company, e-finance for Digital and Financial Investments, for sale to both public and institutional investors.

Ernst & Young and Microsoft have both worked with the government to unify tax procedures as part of the Digital Egypt project, while the cabinet’s Information and Decision Support Centre is working to create a cashless economy as part of Egypt’s Vision 2030.

Pandemic restrictions have certainly helped speed up the transition, with the number of active debit and credit cards in the country growing by almost 60% in the year to August 2020, while Egyptian banks have now issued 7m prepaid cards, called Meeza, free of charge.

In November, the central bank approved regulations to ease electronic mobile payments and create a new network to allow customers to manage all electronic payments, including topping up prepayment cards and electronic wallets, through a single platform that will be launched by the end of this year.

The central bank announced that it would issue licences for operators to offer contactless payments through mobile phones.

The process is also supported by growing access to digital technology. The national mobile penetration rate reached 98% in April 2021, although this does not mean that 98% of Egyptians have mobile phones as some people have two or three handsets, often to separate business from personal life.

In addition, most people do not have smartphones. Nevertheless, falling smartphone prices are leading  to a rapid uptake in penetration rates, which should support the government’s digital rollout.

Source: https://african.business/

 

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