ECONOMIC IMPACT OF COVID-19: POWERFUL SHOCK TO POST-REFORM EGYPT - Maquetación
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EUROMESCO SPOT-ON Nº17 - JUNE 2020
ECONOMIC IMPACT OF COVID-19:
POWERFUL SHOCK TO POST-REFORM
EGYPT
Hussein Suleiman1
For all governments dealing with the global Socio-economic Risks of Falling
Pandemic COVID-19, there is a difficult short- Demand
term trade-off between public health and Domestic supply chains have consequently
economic considerations. Arguably, the been in place for most of sectors, with no
Egyptian authorities have given a higher closure of factories, roads, or businesses, or
weight to the latter than other governments, restrictions on labor movement, at least during
including in the MENA region. The daytime. However, it is the falling demand, both
government has only imposed rather mild domestic and global, that is expected to bring
restrictive procedures, including suspending down economic growth in Egypt, from 5.6% in
international flights, some recreational and 2019, to only 2%, according to the IMF’s
hospitality activities, and few public licensing latest projections in April 2020. The real estate
services, closing educational institutions, and sector, is likely to be particularly affected by a
ordering an evening curfew. Thus, most of falling demand, caused by rising uncertainty
economic activities have been running and liquidity fears. Falling real estate demand
normally for the daytime, including crowded will in turn cause a slowdown in the
markets and public transport. In addition, and construction sector, which is currently
despite the continuous rise of the number of employing more than 3 million Egyptians, and
new infected cases in April and May, the was responsible for creating more than 50%
government has also announced that it will of all new jobs in the last couple of years.
ease the already limited restrictions starting Sluggish global demand is also likely to hit
from June, in a plan to “co-exist with the virus”. several sectors in Egypt, mainly services
1 Economic Researcher. Al-Ahram Center for Political and Strategic Studies.
A project co-funded by the European
Union and the European Institute of
EUROMESCO 1 the Mediterranean (IEMed)exports. Amongst them, tourism is suffering workers might unwillingly drop out of the
the most, as the sector has halted almost workforce altogether. This is a trend that
completely for the last couple of months, since started during the last couple of years, amid
international flights were suspended. The the implementation of the economic reform
sector’s revenues peaked last fiscal year at program from 2016 to 2019, when
12.6 billion dollars, and contributed with 10% unemployment fell only as a result of declining
of total employment. Suez Canal revenues as labor force participation rate, since hundreds
well, which amounted to 5.7 billion dollars in of thousands of females dropped out of the
the last fiscal year, are expected to fall due to workforce, due to lack of adequate job
sluggish global trade, and also since oil prices opportunities.
fell steeply, which made longer shipping routes Job losses and less wages, combined with
less costly for vessels than the canal’s less remittances to households from relatives
passage fees. This has pushed the Canal’s working abroad, could push hundreds of
authority to announce cutting passage fees in thousands of vulnerable Egyptians below the
May and June by up to 75% for some poverty line, adding to the socioeconomic
destinations and cargos, with the hope of hardships caused by the recently completed
attracting more traffic. Lower oil prices will also economic reform program. Poverty increased
affect the oil exporting gulf countries, where during the program’s period from 27.8% in
millions of Egyptians work and contribute with 2015 to 32.5% in 2018, the largest increase
the majority of remittances to Egypt. recorded in Egypt in a comparable time frame,
Consequently, remittances are expected to with extreme poverty rising as well from 5.3%
decline from the 25.2 billion dollars mark of to 6.2%. Currently, the most vulnerable group
the last fiscal year, as workers abroad suffer to the COVID-19 economic spillovers in Egypt
from layoffs or wage cuts. is informal workers. They are estimated to
These sources together, tourism, Suez Canal, constitute 50% at the very least of all non-
and remittances, are as large as 15% of the agricultural workers, and are spread across
Egyptian GDP, and are important sources of sectors, in both formal and informal
employment, household income, foreign enterprises, and are predominantly living hand
currency, and government revenues. Thus, the to mouth, with no savings or safety nets.
global shock to these three sources alone, will Among the repercussions as well will be falling
extend to other sectors, and will most likely be government revenues, by up to 50%
the main channel of the crisis effect on the according to official estimates, which could
Egyptian economy in large. limit the government’s ability and willingness
The repercussions will include rising to increase its spending in order to minimize
unemployment, from 8.6% in 2019, to 10.3% the damage of the global slowdown, on both
in 2020, according to the latest IMF the household and business sectors. In
projections. In addition, more jobs could be lost addition, as the main three mentioned-above
than reflected in the unemployment figures, as sources of foreign currency to the Egyptian
A project co-funded by the European
Union and the European Institute of
the Mediterranean (IEMed)
EUROMESCO 2economy suffer, combined with foreign capital In addition, the central bank has been
outflow, the Egyptian pound might depreciate implementing supporting measures. It has
against foreign currencies, leading to higher reduced the policy rate by 300 base points,
cost of exports, and rising inflation, which and reduced the preferential interest rates on
means that the household real income could loans to tourism, industry, SMEs, and social
decline even further. There are already housing. The bank has also announced that it
indicators that the Egyptian international will provide short term loans for small
reserves are facing significant pressure, as businesses facing liquidity shortages, and
they fell from 45.5 billion dollars in February, conditional debt relief measures for individuals
to 37 billion dollars by the end of April. Thus, if facing default risk. Moreover, the central bank
this global crisis extends for several months has launched a 20-billion-pound stock
more, Egypt might face hardships honoring its purchase program to support the stock
rising foreign debt obligations and covering its market. Furthermore, the Egyptian government
balance of payments deficit, with depleted and central bank have recently requested an
international reserves and falling foreign emergency financial assistance of 2.8 billion
currency inflow. US dollars from the International Monetary
Fund, which was approved in May, to address
Economic Policy Response with balance of payments needs, and support the
Plummeting Resources most affected sectors and vulnerable groups
The Egyptian authorities have announced of people.
several measures to contain the economic The majority of these measures by the
implications of the COVID-19 pandemic. The government and the central bank were
government dedicated 100 billion Egyptian announced during the early days of the
pounds (EUR 5.8 billion), roughly 1.8% of pandemic. Thus, it is likely that as the global
GDP, as a stimulus package. Half of this economic slowdown extends, there will be a
package will be allocated to the tourism sector need for additional measures and larger
alone, since it is the most affected sector, and stimulus packages. However, with the
is a significant one for employment and expected sharp fall of public revenues,
income in the Egyptian economy. 8 billion mentioned above, the government might be
pounds of the package are allocated to the reluctant to expand the measures, as this will
healthcare system, to cover medical supplies require increasing the fiscal deficit, which was
and bonuses for the staff. The package also brought down during the reform program
includes raising pensions by 14%, expanding years, with a high socioeconomic cost.
cash transfers programs, lowering energy Additional packages would most likely be
costs for the industrial sector, providing tax needed for social transfer programs to the
relief and export subsidies for businesses, and poor and vulnerable groups, rather than for
granting irregular workers a 500-pound cash subsidies and support for businesses. Existing
support for 3 months. transfer programs to contain the implications
A project co-funded by the European
Union and the European Institute of
the Mediterranean (IEMed)
EUROMESCO 3of the economic reform program, were already sector, having experienced how significant it is
inadequate to address the surge in poverty for both the human and economic
during the last couple of years, before the considerations.
pandemic. It is also expected that the Moreover, the pandemic has also highlighted
announced grants for irregular workers will not the potentials of the digital transformation in
be very effective. The grant amount is roughly Egypt, as more businesses and public services
equal to the extreme poverty line of 2018, were forced to rely on digital platforms and
which has most likely increased with inflation technologies to operate during the last couple
since then. In addition, it will be challenging to of months, including a complete shift to
identify and reach millions of targeted workers, digitalization in education, with its various
spread across the country. levels. This has also exposed the inadequate
quality and coverage of the digital and
Opportunities, Recommendations, telecommunication infrastructure in Egypt. The
and Challenges most populated country in the Middle East
However, there could be a silver lining to the scores amongst the lowest in the region in
pandemic and its economic implications, in telecommunication infrastructure, within the
allowing the government to build and develop UN E-Government Development Index, which
a database for informal workers and is reflected in one of the lowest internet
businesses, as they apply to receive the penetration rates in the region as well, with
emergency grants. This could be a step less than 50% of the population using the
towards incorporating them into permanent internet. The pandemic could thus push the
formal social safety nets, to protect them in government to scale up its investments in
future crises, and support their growth and telecommunication infrastructure and
formalization, in order to enhance their digitalization of its services, and encourage the
productivity and living conditions. private sector to both take part in this
Furthermore, the pandemic is highlighting the investment, and to utilize digital technologies
dire condition of the healthcare sector in more to operate and do business.
Egypt, and how underfunded and short-staffed However, prior to these measures aimed at
it is, with public health expenditure at merely capturing long term opportunities, the Egyptian
1.2% of GDP in 2019/2020. The pandemic authorities have to focus on addressing the
has pushed the government to temporarily immediate challenges posed by the pandemic.
increase spending on the sector by 11%, On top of them is the daily rise of the number
including permanent wage increases for junior of new infected cases, as the authorities stick
staff. This crisis could be a turning point by a low level of restrictive measures, to avoid
towards prioritizing public health expenditure an economic meltdown. In Egypt, as in most
in Egypt, even after the pandemic ends. Both developing and least developed countries, this
the public and the government would be more short-term ‘human risk/economic costs’
willing to dedicate further resources to the tradeoff is far more dangerous than in
A project co-funded by the European
Union and the European Institute of
the Mediterranean (IEMed)
EUROMESCO 4developed countries; on the one hand, the mass scale to the public, such as masks,
healthcare sector is too weak to handle a gloves, and sanitizers, to enable more people
surge in infected cases and deaths, while on to work with less risk of infection, while
the other, the economy and living conditions scaling up the daily testing capacity to be
are too fragile to withstand necessary able to enforce more targeted lockdown and
lockdown measures. quarantine measures with less damage to
Thus, a delicate balance is required to the economy. And to finance the required
manage this pandemic, and its measures, the government should be open
socioeconomic implications. The to running a fiscal deficit as high as
government should not address this necessary, and should actively seek
situation as a typical economic recession, suspension of external debt payments to
but as a multi-dimensional crisis instead. It donor countries and institutions, in order to
should prioritize keeping the majority of utilize the available scarce resources
strategic economic sectors and activities domestically, with a priority to providing more
functioning, with as minimum number of support to micro and small enterprises, and
workers on site as possible. The government far more social transfers to the poor and
alongside the private sector should also vulnerable groups, to avoid human suffering
work to provide preventive equipment on a possibly worse than that of the pandemic.
This publication was produced with the financial support of the European Union in the framework of the ENI/2019/412-960
grant agreement. Its contents are the sole responsibility of the author/partner and do not necessarily reflect the views of
the European Union or the European Institute of the Mediterranean.
A project co-funded by the European
Union and the European Institute of
the Mediterranean (IEMed)
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