Economic Research Forum (ERF)

Making macroeconomic policy more job-friendly: the case of Egypt

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The Egyptian economy suffers from both several structural imbalances and recent cyclical developments, which have exacerbated the negative impact of the pandemic on the labour market. This column explains why deep structural reforms are needed to make it possible to create more and better jobs.

In a nutshell

Macroeconomic developments, which have made Egypt’s economy relatively less resilient, explain why, at the microeconomic level, the quantity and quality of jobs created after the pandemic have been rather modest.

The floating exchange rate regime introduced in October 2022 must be made more sustainable in the medium term to avoid overvaluation of the Egyptian pound and to reduce the burden on the real sector, which has to adjust to keep the currency stable.

More reforms are needed to foster and diversify domestic production, and to remove administrative and unjustified non-tariff measures that affect exports and therefore production and job creation.

As a result of the pandemic and its consequences, global gross domestic product (GDP) decreased by 3.6% in 2020 compared with 2019. Yet at the macroeconomic level, some countries in the Middle East and North Africa region, such as Egypt, have been more resilient than others. In fact, the country’s growth rate in fiscal year 2020 reached 3.6%.

Despite Egypt’s macroeconomic resilience, thanks to different stabilisation policies adopted between 2014 and 2016, most of its structural problems at both the macroeconomic and microeconomic levels have not been addressed. This has affected the ability of the economy to generate jobs and to have more sustainable economic growth (Amer et al, 2021).

At the macroeconomic level, five main challenges can be identified, three of which are structural in nature while the other two are cyclical.

First, economic growth is chiefly led by capital-intensive sectors such as petroleum, construction and telecommunications, each of which have had significant growth rates following the pandemic, at the expense of the non-oil manufacturing sector and tourism. The latter were strongly affected by the disruption in supply chains as well as the decrease in exports and investment. This explains why even after the recovery from the pandemic, newly created jobs were rather modest.

The second structural obstacle is the crowding-out effect associated with the increase in domestic credit provided by financial institutions to the government and the decrease for that in the private sector between 2010 and 2020. The increase in domestic credit provided to the government by the financial sector (from 64% in 2017 to 67% in 2020) was associated with a simultaneous decrease in credit to the private sector (21%, down from 24% over the same period). Such government credit was mainly used to finance the fiscal deficit and the domestic debt (due to expansionary fiscal policies).

Third, with the deteriorating investment climate (resulting from practices in the informal sector, corruption, tax administration, tax rates, and customs and trade regulations), domestic investment is far from reaching its potential contribution to growth and employment.

At the cyclical level, exports and investment have been volatile due to lower demand from Egypt’s main trade partners (mainly European and Arab countries) following the pandemic.

Moreover, external debt has been rising substantially with the decrease in foreign reserves, adding more pressure on Egypt’s foreign currency already affected by the decrease in tourism, exports and foreign direct investment (FDI). Indeed, the share of external debt in national income increased from 21.1% in 2016 to 37.2% in 2020. In addition, between 2019 and 2020, the share of short-term debt to foreign reserves increased from 20.7 to 30.7%, putting further pressure on Egypt’s foreign currency (already hit by the decrease in tourism, exports and FDI).

Such macroeconomic developments, which have made the economy relatively less resilient, explain why, at the microeconomic level, the quantity and quality of jobs created after the pandemic have been rather modest.

Policy implications

While different macro-stabilisation programmes have made the Egyptian economy resilient during the pandemic, they have not helped to address the deep-rooted causes of Egypt’s structural problems related to employment and inclusive growth. This suggests the need to shift the focus onto more structural policies rather than stabilisation policies. This includes a special focus on the following policies.

A consistent industrial policy

Reforms must be directed towards labour-intensive sectors in order to create more jobs (especially for women and young people) and thus stimulate the economy. What’s more, to increase both domestic and foreign investment, enhancing the business climate – along with facilitating access to finance, competition, land and energy, especially for small and medium-sized enterprises – should remain at the top of the reform agenda.

A fairer competition policy

There is a need to develop a transparent state ownership policy and governance framework to enable the private sector to make informed investment decisions and reduce uncertainty. It is also crucial to separate the commercial and non-commercial activities of state actors, and to require that state-owned enterprises recover fully the cost of commercial activities (Youssef and Zaki, 2022). In addition, there is an urgent need to separate the roles of state actors as regulators from operators to resolve potential conflicts of interest.

Creating fiscal space for financing universal and adequate social protection

Creating fiscal space for social protection is a key factor not only towards building universal, comprehensive and sustainable social protection systems but also ensuring adequate social protection benefits for all (especially vulnerable groups including migrants and refugees), in accordance with social security standards of the International Labour Organization (ILO), as well as the United Nations 2030 Agenda for Sustainable. Countries need to invest more and better in social protection, on the basis of principles of universality, adequacy, sustainability and solidarity.

A more pro-active social policy

While the social measures implemented in response to the pandemic can help to reduce its negative effects on vulnerable categories, social policies remain largely reactive not pro-active. More pro-active policies that provide workers with social security and help them being promoted to get out of vulnerability are necessary. In addition, it is desirable to adopt a more bottom-up approach where social partners and civil society organisations participate in both the design and implementation of different policies.

A more sustainable exchange rate policy

The Central Bank of Egypt announced the adoption of a free-floating exchange rate regime in October 2022 as one of the conditions of the recent International Monetary Fund (IMF) loan. This policy must be made more sustainable in the medium term to avoid overvaluation of the Egyptian pound and to reduce the burden on the real sector, which has to adjust to keep the currency stable. While this is necessary to improve the competitiveness of exports, more reforms are needed to foster and diversify domestic production, and to remove administrative and unjustified non-tariff measures that affect exports and therefore production and job creation (Youssef and Zaki, 2019).

Further reading

Amer, Mona, Irene Selwaness and Chahir Zaki (2021) ‘Patterns of economic growth and labor market vulnerability in Egypt’, in Regional Report on Jobs and Growth in North Africa 2020 edited by Ragui Assaad and Mohamed Ali Marouani, International Labour Organization and ERF.

Krafft, Caroline, Ragui Assaad and Mohamed Ali Marouani (2021) ‘The Impact of COVID-19 on Middle Eastern and North African Labor Markets: Glimmers of Progress but Persistent Problems for Vulnerable Workers a Year into the Pandemic’, ERF Policy Brief No. 57.

Said, M, and Chahir Zaki (2022) ‘Growth and employment through the COVID-19 pandemic: The case of Egypt’, in Second Report on Jobs and Growth in North Africa and Sudan (2021-2022) edited by Ragui Assaad and Mohamed Ali Marouani, International Labour Organization and ERF.

Youssef, Hoda, and Chahir Zaki (2019) ‘From Currency Depreciation to Trade Reform: How to Take Egyptian Exports to New Levels?’, Policy Research Working Paper No. 8809, World Bank.

Youssef, Jala, and Chahir Zaki (2022) ‘A Decade of Competition Policy in Arab Countries: A De jure and De facto Assessment’, International Journal of Economic Policy in Emerging Economies.

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  • Chahir Zaki
    Chahir Zaki
    Chaired Professor of Economics, University of Orléans

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