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Abu Dhabi, UAEThursday 26 April 2018

Egypt optimism grow as Cairo ups economic outlook

Inflation also dropped sharply in December, the latest apparent indication of economic improvement

The headquarters of Egypt's Central Bank in downtown Cairo. Mohamed Abd El Ghany/Reuters
The headquarters of Egypt's Central Bank in downtown Cairo. Mohamed Abd El Ghany/Reuters

Egypt has revised up its economic growth forecast for fiscal 2017-18 that began in July to 5.3 to 5.5 per cent from 4.8 per cent previously, the planning minister said on Saturday.

Hala Al Saeed said gross domestic product was expected to have grown 5.2 to 5.3 per cent in the second quarter that ended in December, adding that the government was aiming for 6 per cent growth in 2018-19.

Egypt's economy has struggled since a 2011 uprising drove tourists and foreign investors away, two main sources of hard currency, but the government hopes IMF-backed policy changes it has embarked on over the past year will put it back on track.

Egypt is targeting a 20 per cent rise in total investment for 2018-19, up from 646 billion Egyptian pounds (Dh134.34bn) targeted for 2017-18, Ms Al Saeed said.

To draw investment and boost growth, Egypt passed a new investment law last year offering incentives to investors, while a decision to float the pound in late 2016 led to a devaluation that made Egyptian assets relatively cheap in dollar terms.

The news came as Egypt's tourism revenues jumped 123.5 per cent year-on-year to US$7.6bn in 2017, a government official said.

The number of tourists who visited Egypt in that time jumped 54 per cent to 8.3 million, added the official, who preferred to remain anonymous.

The tourism sector is one of the country's main sources of foreign currency but it has struggled since a 2011 uprising that led the then president to step down. The number is still well below the 14.7 million who visited Egypt in 2010 before the uprising.

The revised economic forecast came a day after Egypt reported inflation dropped sharply in December, the latest apparent indication of economic improvement after the 2016 currency float hit Egyptians hard.

Economists say, however, it may just be showing that spending power has yet to recover.

Prices climbed to record highs and the Egyptian pound lost half its value after the central bank floated it in November 2016 in a bid to secure a $12bn IMF loan to boost economic growth after years of turmoil.

With the pound at about 17.7 to the US dollar from a pegged 8.8 before the float, Egyptians have had to amend their spending habits to deal with their incomes and savings being slashed in half.

Urban consumer inflation eased to 21.9 per cent in December from 26 per cent the previous month, its lowest reading since the flotation, official data showed last week.

Core inflation, stripping out volatile items such as food, fell to 19.86 per cent from 25.53 per cent.

Since the float, Egyptian exports have found new markets, narrowing the country's trade deficit, and foreign reserves and foreign direct investment have surged to record highs.

But economists say the inflation drop is the result of a strong base effect, and not necessarily a meaningful economic recovery.

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"After November 2016, you were comparing to the high rates of the post-flotation period, but in December, you had a strong base effect," said the senior economist at Beltone Financial Alia Mamdouh.

Monthly headline inflation contracted for the first time in two years in December due to a decline in the prices of poultry, meat and some vegetables and beans, data showed.

"The reduction may signal that spending level has not fully recovered, especially because seasonal demand usually drives rates up," Ms Mamdouh said.

"We had expected a monthly rate of 0.5 to 0.7, but instead everything was flat except for food prices of which some went down."

Food producers said they wished to raise prices to maintain profitability, but are unable to because the market cannot absorb any more price hikes.

"We would like to raise the prices but the market isn't favourable to that right now," said Hani Berzi, the chairman of Edita Food Industries, one of the country's largest food producers.

Retailers have also had to reduce prices of some foods like poultry and meat to lure back shoppers driven away by hikes.

"People don't buy anymore," said Ismail Gamal, the owner of a poultry shop in Nasr City. "We're afraid we'll go out of business, if we don't reduce prices."

Economists say purchasing power could take three to four years to recover from the shock of the flotation.

"Segments of society have shifted from meat to cheese as a source of protein, this is what inflation did to consumers," said Noaman Khalid, a CI Capital Asset Management economist.

He said a complete economic cycle that includes business recovery and increased wages is necessary before purchasing power returns to pre-float levels and a healthy inflation rate is seen.

Egypt's central bank has raised key interest rates by 700 basis points since it floated the pound to battle soaring inflation. Economists expect it to start cutting the rates in their upcoming monetary policy meeting, set for February 15.