Egypt has yet to breathe a sigh of relief following the signing of a $3bn rescue package with the International Monetary Fund (IMF).
According to the most recent data, inflation reached nearly 20% in November, while the Egyptian pound (EGP) continued to fall against the US dollar (USD). Meanwhile, signs of an economic slowdown are emerging.
Is Egypt’s recession looming? Read on as we examine Egypt’s recession history, factors that contributed to the current economy’s problems and the latest economic recession.
What is a recession?
A recession is a period of reduced economic activity. While there is no universal definition of when a country is in an economic downturn, the general rule is when the gross domestic product (GDP) falls for at least two consecutive quarters. This is also referred to as a technical recession.
The IMF has more details about the recession. According to the Fund, a recession occurs when a country’s GDP falls by at least 2%. In severe recessions, output could fall by nearly 5%.
A recessionary economy has rising unemployment but falling inflation as overall demand for goods and services tumbles. During periods of slowing activity, exports and imports fall. Industrial production and investment fall much more sharply than GDP, while consumption declines only mildly.
There are numerous factors that can cause an economy to enter a recession, such as an aggressive rate hike to combat high inflation. When a central bank raises its policy rate, it raises borrowing costs for businesses and individuals, which reduces spending and slows economic activity.
The Covid-19 pandemic in 2020, which brought economic activity to a halt due to lockdowns, also caused recessions in several countries.
Is Egypt in a recession?
According to Macrotrends, Egypt’s economic growth fell by more than 2% several times between 1962 and 2022. The sharpest decline of 6.59% occurred in 1965, when economic growth slowed to 4.9% from 11.5% in 1964.
Based on data compiled by data aggregator Trading Economics, Egypt’s annual economic growth rate reached an all-time high of 13.77% in the third quarter of 2011. The economy hit a record low of -3.80% in the first quarter of 2011 when it was rocked by pro-democracy protests.
Taking a closer look at recent data, Egypt’s economy grew steadily between January 2019 to the first quarter of 2020 with quarterly growth of between 4.3% to 5.4%.
Stable global economic growth, lower oil prices and a benign inflation rate in developed economies supported growth in Egypt’s economy in the period, according to a report from the Central Bank of Egypt (CBE).
Egypt’s economy contracted by 3.1% in the quarter ending July 2020 and 1.3% in the following quarter as Covid-19 restrictions slowed activities, particularly tourism.
The economy rebounded in the following quarters, hitting 7.2% by July 2021 and 8.3% in July 2022.
Growth started to slow after July as the CBE aggressively increased interest rates to combat inflationary pressure that stemmed from rising commodity prices, partly triggered by Russia’s invasion of Ukraine and monetary tightening in developed countries.
The CBE has raised the policy rate by a total of 500 basis points (bps) since it started the tightening cycle March to combat inflation. The CBE’s policy rate stood at 13.25% by October from 9.25% in March 2022.
In the first quarter of fiscal year 2022/2023 (July/June), the country’s economy grew 4.4%, Reuters reported on 4 November. The Egyptian government has not confirmed or declared that the country’s economy is entering a technical recession.
Factors driving Egypt’s recession
Egypt’s economic crisis has been caused by several global shocks. Rising commodity prices, including wheat and sunflower– main staples in Egypt – has contributed to the red hot inflation.
Additionally, the CBE’s decision to adopt a flexible exchange rate caused the Egyptian pound to sharply depreciate, which increased import costs, reduced its foreign exchange reserves and widened the budget deficit.
On the brink of Egypt’s economic collapse, the country reached out to the IMF for aid. On 27 October, the IMF announced it agreed to provide a $3bn Extended Fund Facility (EFF) Arrangement.
Let’s look into key Egypt’s economic problems.
Inflation shows no signs of cooling
Inflation in November surged to an annual rate of 19.2%, the Egypt Statistics announced. This was higher than the 16.3% in October and 6.2% in November 2021.
In an inflation note in October, the Central Bank of Egypt noted higher prices of core food items, such as poultry, eggs and dairy, as well as higher prices of volatile food items, namely fresh vegetables.
On 27 October, Fitch Solutions forecast inflation in Egypt could remain in double digits throughout 2023. The firm increased its 2022 forecast for Egypt’s inflation to 13.6% and 14% if the government adjusted electricity tariffs in July 2023 and continued to increase administered prices.
Egyptian pound seen weakening
The Egyptian pound has continued to depreciate since the CBE devalued the official currency in March. According to Reuters’ report, the country devalued the pound by 14% after foreign investors pulled billions of dollars out of Egypt following Russia’s invasion of Ukraine.
The US dollar to Egyptian pound (USD/EGP) exchange rate rose nearly 16% to 18.17, reflecting a stronger USD on 21 March following the devaluation.
On 27 October, the USD/EGP surged 17.44% to 23.10% following the IMF and the Egyptian government’s deal on the $3bn loan.
As of 8 December, USD/EGP was trading around 24.60, gaining 57.08% year-to-date (YTD)
Egyptian economic forecast
Fitch Solutions has lowered growth forecast for Egypt for fiscal year 2022/2023 to 3%, the weakest rate since 2014:
“While part of the subdued growth is driven by slow activity between July 2022 and December 2022 due to the distortion in the market from import controls that brought manufacturing activity to a halt, additional problems derive from weak tourism activity and an increase in the cost of living that is weighing on consumption.”
These base effects were likely to impede recovery between January and June 2023, when the country was expected to address foreign currency shortages and remove import restrictions, it added.
Egypt’s economic forecast from the IMF projected the country’s economic growth to slow to 4.4% in 2023, from 6.6% in 2022.
Trading Economics predicted Egypt’s GDP to grow by 5.5% by the end of fourth quarter 2022. The service’s long-term Egypt economic forecast expected the country’s economy to grow by 6% in 2023, slowing 5.4% in 2024, as of 8 December.
Final thoughts about Egypt’s recession
Except for Trading Economics, Fitch Solutions and IMF projected Egypt’s economy to slow in 2023.
However, when looking at Egypt’s recession forecasts, it’s important to bear in mind that analysts’ forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research.
Always conduct your own due diligence. Remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and investment goals. And never trade money that you cannot afford to lose.
Is Egypt in a recession?
Egypt’s economy slowed to 4.4% in the first quarter of fiscal year 2022/2023. However, the Egyptian government has not declared that an Egyptian recession has begun.
Is Egypt’s economy improving?
The latest economic readings have not shown any significant improvement in Egypt’s economy. Inflation in November soared to an annual rate of above 19%, while gross domestic product (GDP) in the first quarter 2022/2023 slowed.
How long does a recession last?
Nobody knows for certain. A recession can range from a few months to years. The length of a recession is determined by a variety of factors, including internal and external market conditions, as well as government policies aimed at addressing the underlying cause of the economic downturn.
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