Egypt Economic Brief
24.03.2025• Inflation dropped to 12.8% in February, paving the way for interest rate cuts starting April. The CBE is expected to lower rates by 2-3% initially and by another 3-5% later in the year, easing financing costs and boosting investment.
• GDP growth is projected to accelerate to 4.0% in FY24/25, driven by a recovery in consumption. However, external risks, including limited exchange rate flexibility and widening current account deficits, pose challenges to sustained growth.
• The fiscal deficit is expected to widen to 7.9% of GDP in FY24/25 from 3.6% of GDP in FY23/24, following normalization of revenue streams. Spending control and tax revenue growth are supporting fiscal discipline.
• Foreign reserves inched up to $47.4bn in February, while commercial banks’ NFAs improved due to Eurobond issuances and EU funding. Egypt’s 5-year Eurobond yields remain stable at 8.6%, signaling improved external investor confidence despite geopolitical tensions.
We see the economy now transitioning to a higher growth phase after an exceptionally challenging four years. Inflation has dropped sharply since last year’s peak of nearly 36% to just under 13% in February, paving the way for monetary policy easing by the central bank potentially starting in April. This easing is critical to lower the cost of doing business, assist in the control of public spending and boost equity and FDI inflows. This in turn will support economic growth that we believe is improving on a recovery in consumption.
External sector dynamics are the key risk to Egypt’s fiscal sustainability and economic growth profile, especially if the currency is not left to float properly. The IMF noted that the exchange rate is still fluctuating within a limited range and that more effort is required for stakeholders to perceive it as truly flexible. The current account deficit has widened on the back of a pick-up in imports, higher energy costs, and a drop in Suez Canal receipts. FX flexibility is crucial to maintain strong levels of reserves and commercial banks’ net foreign assets (NFAs) that have so far been volatile and heavily reliant on FDI into the local currency debt. The IMF on March 11 completed its fourth review of the
Extended Fund Facility Arrangement (EFF), unlocking a further $1.2 billion in financing and bringing total withdrawals under the $8 billion EFF to $3.2 billion. The IMF also approved access to $1.3 billion under the Resilience and Sustainability Facility, but re-stressed the need for further structural reforms related to divestment, a more level playing field, governance and transparency.
Economic growth could reach 4.0% in FY24/25
Signs of improving growth are evident in both hard and soft data. GDP growth in Q1 FY24/25 (Jul-Sep 2024) rose to 3.5% y/y, comfortably above the previous quarter’s gain of 2.4%. (Chart 1.) Private consumption was the key growth driver, expanding by 12.8% on a strong pick-up in imports (34%). Government consumption and gross capital formation contracted by 15% on average. We expect growth to accelerate in Q2 towards the 3.5-4.0% range and reach 4.0% for the full year, a substantial rise on 2.4% in FY23/24. Indeed, survey data confirm better momentum continuing into this year, with the PMI activity gauge in expansion territory for two consecutive months in Jan-Feb, a first in more than four years. This was mainly driven by a recovery in local new order books boosted by cooling inflation. Firms also increased their input purchases at the sharpest rate in 3.5 years.
Current account deficit to remain large in FY24/25
The current account deficit will continue to widen as imports grow and Suez Canal revenues remain subdued. Latest figures show that deficit widened substantially to $6 billion in Q1 FY24/25 from $2.8 billion in Q1 FY23/24. This was mainly driven by a large increase in imports (to $23bn from $16bn a year ago) on the back of higher oil & gas imports (to $5.4bn from $2.9bn) and non-energy imports (+30% y/y to $17.7bn).
On the positive side, non-energy exports increased by 18% and remittances almost doubled to $8.3 billion in the same quarter. Meanwhile, in terms of services receipts, Suez Canal revenues plunged to $0.9 billion from $2.4 billion in the previous year as geopolitical tensions continued to discourage Red Sea trade flows. (Chart 2.)
With no clear sign of a pick-up in Suez Canal revenues, we expect the deficit to remain large at $15-20 billion in FY24/25 and inflated by high energy import costs. The pick-up in economic growth is also likely to spur import increases. We reiterate our view that it is critical to maintain a flexible exchange rate to limit the ballooning of the current account deficit.
Commercial bank NFAs continue to see strong volatility
Foreign reserve levels at the central bank continued their slow upward trend, rising by $129 million in February to $47.4 billion, a 34% y/y increase. Commercial bank NFAs continued to see volatility on the back of outflows and inflows of foreign portfolio investments into the LCY debt market. The negative balance (deficit) of commercial bank NFAs narrowed to $3.3 billion from $6.4 billion due to higher foreign assets ($25.2bn) and lower foreign liabilities ($28.5bn), with Egypt’s $2 billion Eurobond issuance and the EU’s dispensing of EUR1 billion from its EUR7.4 billion financing package the major contributors. (Chart 3.) The slowdown in the global EM debt sell-off also allowed commercial bank NFAs to recover.
Despite heightened regional geopolitical tensions, yields on Egyptian sovereign debt have remained compressed and largely unchanged since last July, with 5-yr Eurobonds at 8.6% and 5-yr CDS spreads (a measure of default risk) at 578 bps. Moreover, the government’s successful $2 billion Eurobond sale, the first issuance in almost two years, was well-priced at 8.62% for the 5-yr notes and 9.45% for the 8-year note given the stresses the sovereign has been under over the last two years. Also a sign of confidence was the fact that the issuance was around 5 times oversubscribed ($10bn). We expect the proceeds to be mostly used to plug part of the external financing gap which we estimate at $10bn over the next 2 years starting March 2025.
Inflation has normalized after sharp February fall
Inflation, largely as expected, dropped sharply in February to 12.8% y/y from 24% in January, on the back of a favorable base effect. On a monthly basis, inflation slowed to 1.4% m/m from 1.5% m/m in January. Looking ahead to the rest of the year and beyond, our inflation expectations take into account the resumption of subsidy cuts to fuel (possibly including natural gas) and electricity. For 2025 and 2026, we think inflation will average 15% and 12%, respectively. The current inflation target set by the central bank is 7% (+/- 2%) for Q4 2026, which in our opinion could be achieved based on current trends.
Monetary easing cycle should commence in April
The Central Bank of Egypt (CBE) kept policy rates unchanged at 27.75% (discount rate) during the first eight months of FY24/25. (Chart 4.) However, with inflation having plunged, we believe that the CBE is more comfortable about pulling the trigger on interest rate cuts, likely as soon as its next meeting in April. We think cuts of 2-3% are likely at the meeting followed by 3-5% in the second half of the calendar year. With the fall in inflation, real policy interest rates currently stand at 15% and will remain significantly high even after the CBE embarks on the easing cycle, possibly ending the year at around 8-9%.
Credit continues to grow even as inflation cools
Bank credit to private businesses expanded by 32% y/y on average for the Nov-Jan period (31% in the previous 3 months). (Chart 5.) Household credit growth was relatively unchanged at 23% versus 24% for the same period. In inflation-adjusted terms, corporate credit was up 8% y/y (4.6% for Aug-Oct). As for household credit, it also improved to -1% from -2.8% for the previous period. The increase in real credit comes in tandem with the pick-up in economic activity and better PMI levels. With inflation expected to cool further, credit activity will be mostly driven by genuine economic activity rather than reflecting firms’ catching up with price adjustments.
That said, we do not see a resumption of the corporate capex cycle occurring before 2027, when economic activity rises closer to potential output levels. We expect credit to grow by 25% in FY24/25 (year-end) in nominal terms, which, while lower than the 32% recorded in FY23/24, will at least be 9-10% in real terms, compared to the previous -2%.
Strong fiscal discipline keeping the deficit under control
The government has so far released fiscal accounts for the period July – Nov FY24/25. The figures continue to show the adoption of tighter fiscal discipline, with the fiscal deficit narrowing to 3.3% of GDP from 4.7% for the same period of the previous year. The reading for the primary fiscal balance (excluding interest payments) was +1.0% of GDP, improving on the previous year’s more modest surplus of 0.4% of GDP.
In terms of expenditures, at EGP1.38 trillion, annual increases were contained to about 10% y/y, which compares favorably to growth of 18% y/y in the previous year’s outlay of EGP1.26 trillion. Wage, interest payments, and subsidies – representing 85% of total spending – were up by 20% y/y, 2.4%, and 35%, respectively. Total revenues rose by 36% y/y to EGP828 billion, mainly driven by large increases in tax revenues (+38%), which comprise about 87% of total government revenues.
We expect the government to resume cutting fiscal subsidies, after a six-month pause, especially fuels. Based on our calculations, the Fuel Automatic Pricing Committee could increase prices by 15-20% at its April meeting and follow this up with another round of price increases in the 3rd quarter of a similar magnitude to bring the cost recovery ratio to around 100% by end-2025.
For the full FY24/25, we expect the fiscal deficit to widen significantly to 7.9% of GDP from 3.6% of GDP in FY23/24 (the latter inflated by one-off revenues linked to the Ras El Hekma deal). A positive upside to this outlook would be the possibility of having another revenue-boosting mega deal this year, a lower interest rate environment that would mainly affect the last quarter of the year, and a recovery in Suez Canal revenues.