Egypt’s economy to slow down sharply in 2011

Egypt’s economy is projected to sharply slow down this year as the most populous Arab nation grapples with the repercussions of a public uprising that ousted President Hosni Mubarak, a French bank has said.
The country’s GDP, the third largest in the Arab world after Saudi Arabia and the UAE, swelled by nearly 5.2 per cent in real terms in 2010 but growth is forecast to slacken to only about two per cent this year, Credit Agricole said.
The tourism sector, a major hard currency source for Egypt, is expected to be the main victim of the post-revolution effects as its contribution to GDP could plummet to around two per cent during fiscal year 2010-2011 from 5.3 per cent during the previous fiscal year, the bank said in a two-page section on Egypt, authored by John Sfakianakis, chief economist at Banque Saudi Fransi.
“The economic impact of the crisis will continue to be felt strongly in the coming two to three quarters.
The political crisis has had a direct negative economic impact in terms of disruption, fall in output, decline in consumption and confidence. Private consumption accounts for around 70 per cent of GDP and gross private fixed capital formation around 20 per cent,” the study said.
It said tourism is expected to pick up only gradually, and only once the political situation normalizes in the wider region.
It noted that unlike the Luxor attacks in Egypt in the late 1990s when year-on-year tourist receipts plunged by around 27 per cent, regional uncertainty could have a lasting negative impact.
“It is realistic to assume that tourism receipts could fall from 5.3 per cent of GDP
in FY09/10 (July-June) to about two per cent of GDP in fiscal 2010-2011 – quite a strong impact on both economic growth and the balance of payments,” it said.
“In addition, rates have gone up (1Y T-bill: from 10.6 per cent in January to almost 13.0 per cent in April), increasing the cost of financing….with ample downside risks and given prevailing conditions we expect GDP growth to slow sharply from 5.2 per cent in 2010 to about two per cent in 2011, before it reaccelerates to about four per cent in 2012.”
Turning to finances, the study said lower tax revenues, higher wages and subsidies, and higher cost of domestic debt will widen the fiscal deficit from 8.1 per cent of GDP in FY10/11 to about 10 per cent of GDP in FY11/12.
Higher financing requirements, in addition to inflation, will likely keep interest rates under pressure in coming quarters, it said.
“We believe the government’s priority will be growth-oriented, and pressure to maintain the cost of financing at current levels will remain elevated. Nevertheless, inflation will remain a thorny issue especially as it is forecast to reach about 12 per cent this FY and to modestly decline to 11.3% in FY11/12.”
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