Cairo - Mubasher: MubasherTrade Research believes the diminishing purchasing power for Egyptian households will put a lid on the “hoped” economic growth rate of 4%, according to a recent report.
A 0.97% contribution of final consumption to growth in the first quarter of fiscal year 2016-2017, that was prior to flotation, raises some questions concerning expected GDP growth for the whole year.
“We find that Egypt’s economy has to significantly decrease trade deficit in order to achieve a 4% growth rate that we find a bit optimistic,” the research firm stated.
Given Imports pattern during flotation-quarter MubasherTrade expects economic growth may hit around 3.5% to 3.8% in FY2016/17, and finds that 4%, in such a tremendous fiscal year, is some kind of “great expectations”.
Egypt’s macroeconomic scene has witnessed dramatic changes during the past couple of years, and FY2016/17, in particular, has witnessed the main bulk of changes. Subsidy cuts, fiscal reforms, currency flotation, and loans from international organizations are just to name a few. Yet, economic growth still faces considerable challenges some of which are caused by the short-run impact of the reforms themselves.
Economic growth in Egypt has been mainly driven by final consumption and more particularly household consumption. Capital formation historically has been modest, while net exports have been “biting” away growth figures as Egypt is a net importer with widening importing pattern.
The recent economic changes have hit the main growth driver hard, leading to lower contribution of final consumption in the GDP growth rate. Household purchasing power has faded due to inflationary wave – not to say Tsunami – following the flotation as well as the implementation of Value Added Tax (VAT) and decreasing fuel subsidies.
While no detailed information was announced for the second quarter of FY-2016-2017, data for Q1-FY2016/17 show a decline in final consumption contribution in GDP growth to 0.97%, while investment expenditure amounted to 2.5% out of the total 3.4%.
“We find the increasing contribution of investment expenditure as a healthy sign, yet we raise concerns regarding a less powerful final consumption and its impact on growth at least in the short run,” the report noted.
A significantly narrower trade deficit may impact growth figures positively. Given no further deterioration in final consumption’s contribution and given the same percentage of investment contribution to GDP growth, Egypt has to narrow its trade deficit YoY by at least 5.5% in real terms to achieve a growth of 4%.
