Chahir Zaki, Professor of Economics and Director of the French Section at Cairo University's Faculty of Economics and Political Science, visiting professor at Sciences Po Grenoble in 2023

Since 2016, the Egyptian government has focused focused on macroeconomic stabilization. In 2011, Egypt suffered from political political turmoil that led to a number of internal and external macroeconomic imbalances and external imbalances (rising budget and current account deficits, domestic and external debts, a widening gap between official and black market and black market exchange rates). These economic imbalances have foreign direct investment (FDI) and reduced international reserves to a reserves to a critical level, which in turn hampered economic growth. economic growth. A few years later, Egypt experienced two external shocks namely COVID-19 and the war in Ukraine, which also had a negative impact as a country.

IMF recurrent loans

As a result, and following the economic problems accumulated up to 2016, Egypt embarked on a stabilization program with the International Monetary Fund (IMF) and the World Bank to correct chronic imbalances and stimulate sustained economic growth; this included the signing of a three-year extendedfund facility agreement with the IMF, in November 2016, for an amount of $12 billion. This reform program mainly included the following measures: floating the currency, replacing the sales tax with a value-added tax (VAT), abolishing subsidies and freezing public hiring. This led to a high economic growth rate that reached 5.6% in 2019 (vs. 4.3% in 2016), the inflation rate decreased to 13.8% (vs. 23.3% in 2016), the unemployment rate reached 7.9% (vs. 12.7% in 2016), the overall budget deficit was 8% (vs. 12.5 in 2016) and international reserves increased to $44 billion (vs. $15 billion in 2016).

Yet, according to the Central Agency for Public Mobilization and Statistics (CAPMAS), poverty increased to 32.5% in 2018, from 27.8% in 2015, it then fell to 29.7% in 2020. In addition, the standard of living of the middle class has deteriorated, leading to greater inequality. Underemployment, as well as informal and precarious forms of employment, have also increased significantly. Finally, the private sector still faces a number of barriers to expansion, as will be demonstrated in the following sections.

In 2020, with the health crisis, and with FDI and tourism down, exports and investments volatile, due to a drop in demand from Egypt's main trading partners (mainly European and Arab countries), Egypt obtained another IMF loan under the "Stand-by Arrangement", amounting to 5.2 billion dollars. Finally, in the aftermath of the outbreak of war in Ukraine, expansionary fiscal policies and rising foreign debt, and foreign currency reserves, already affected by falling tourism, exports and FDI, came under further pressure in Egypt. Indeed, the share of foreign debt in national income rose from 21.1% in 2016 to 37.2% in 2020. This led the Egyptian Central Bank to announce several floats of the currency, from 15.7 pounds to the dollar in February 2022 to 30.5 pounds to the dollar in February 2023, and to conclude another loan with the IMF and other international financial institutions for 9 billion USD.

Thus, while recurrent IMF loans have enabled macroeconomic stabilization in the short term, they were unable to solve Egypt's long-term solve Egypt's long-term structural problems, such as boosting the private sector sector, improving export competitiveness and creating jobs. competitiveness and job creation.

Why can't the private sector develop?

There are several reasons why the private sector private sector has been unable to develop. Firstly, credit to the private sector, as a share of total as a share of total domestic credit, fell from 46% in 2004 to 18% in 2018, while the share of credit to the government rose from 26% to 50%, over the over the same period. This explains why the private sector's contribution private sector's contribution has declined with less investment.

A second explanation lies in the fact that certain investment climate variables have deteriorated, according to data from the World Bank's business survey. Indeed, the share of Egyptian companies identifying informal sector practices, corruption, tax administration, tax rates and customs and trade regulations as major constraints on business, increased between 2013 and 2020. This shows the urgency of reforming economic institutions (such as the time to start a business, export and import, enforce a contract, etc.) to increase private sector participation and create more jobs. This includes facilitating and simplifying business procedures.

Thirdly, the structure of the market also explains the low contribution of the private sector. Indices compiled by theEconomist Intelligence Unit (EIU) show that the index of freedom of competition has deteriorated since 2015 and remains below the MENA average. Similar similar trends can be observed for the index of the degree to which state ownership and control distort the business environment, deteriorated deteriorated since 2012 and has remained constant since then.

Towards "more" structural reforms

In this context, to generate more jobs, the private sector private sector needs a more dynamic and attractive business environment. business environment. Firstly, at the macroeconomic level, more far-reaching and structural reforms are needed to improve the investment climate, generate generate externalities and help companies improve their productivity. their productivity. This applies to competition policy, simplification of business simplification of business procedures and the application of the "one-stop shop" approach one-stop-shop approach (where investors can finalize all procedures application processing costs, processing delays and document reproduction). delays and document reproduction). To improve competition, it is is to develop a transparent public property policy and governance and governance framework, but also to limit legal exclusions and exemptions exemptions for state actors. In addition, it is important to strengthen the institutional mandate of the Egyptian Competition Authority. This help the private sector to increase its productivity.

Secondly, at the microeconomic level, to help SMEs to integrate into regional and global value chains via clusters will boost will boost their productivity and enable them to grow. grow. This means attracting more FDI into the manufacturing sector to increase technology transfer, particularly in high value-added sectors in high value-added, labor-intensive sectors. In order to develop such clusters, more advantages need to be provided to large companies companies that are linked to small and medium-sized enterprises. These advantages include access to financing, tax incentives, import duty exemptions and credits. and export credits.

Finally, a clearer industrial policy needs to be developed and better linked to trade policy. To determine the most important products on which Egypt should focus, both supply (measured by Egypt's supply (as measured by Egypt's capacity) and demand (as measured by global demand) must be taken into consideration to ensure that Egypt Egypt specializes in products that are in high demand (such as electronics electronics, electrical equipment and machinery). As a result, more manufacturing exports will lead to more demand, higher production and and therefore more jobs. It is important to note that this require a specific industrial strategy that focuses on particular labor-intensive sectors.