Coronavirus: How is Egypt navigating the economic fallout?

Updated 11:20 Paris

In the case of Egypt, new policies  were being implemented back at the start on 15 March, just when the country began to feel the pinch of the virus. These included cutting the Central Bank’s interest rates by three percentage points, exempting late payments, non-performing loans and ATM withdrawals from fines and fees for six months; instructing banks to provide credit limits for companies to finance working capital and salaries; and extend the exclusion period for some basic food commodities from their 100 percent cash cover for a year.

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In order to better understand the policies already implemented by the state and how to improve on future ones, one needs to visit the individual sectors most affected by the economic hit of the pandemic.

Tourism – hardest hit sector

Tourism was first in line on the firing range. The first official case of COVID-19 was reported on 14 February  during a Nile cruise. The confirmed case of an American tourist aboard the cruise led to others also being confirmed as COVID-19 positive. The first death linked to the virus was a German tourist who had already travelled from Luxor to Hurghada; a popular coastal destination for Europeans.

Such hot tourism destinations clearly became the starting ground for coronavirus in the country. In response, the sector itself “promptly shut down”.

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The difficulty with the tourism sector is its interconnectedness to other industries, such as hospitality, travel, food and tourist attractions. For Egypt, estimates of the hit its tourism sector will take– direct, indirect, or induced impact- during the first four months of shutdown until June is around $5.52bn (EGP 87bn).

The Suez Canal- main sources of foreign revenue

The Suez Canal—which represented 3.7 percent of public budget revenues last year—is also one of the country’s main sources of foreign inflows; it is a major employer, with 14,000 jobs, and a central point in the state’s development strategy, which has made a Suez Canal Special Economic Zone a central pillar of its investment promotion plans.

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Canal revenues however are, unsurprisingly, extremely sensitive to global trade and economic growth. During the 2008 crisis for instance, revenues fell by 22 percent, taking years to recover; it is reasonable to expect a similar figures during this crisis.

Manufacturing sector

The Egyptian manufacturing sector makes up 16.2% of the country’s GDP and about 12.4% of employment. It’s not clear how much this sector will be impacted. It really depends on the immediate need of the people and their exposure to global value chains.

In that case some will clearly fare better than others, for example medical supplies and food processing. Whereas, other industries considered non-essential, such as automotive, will “inevitably contract.” According to projections by the Egyptian Center for Economics Studies, the manufacturing sector could shrink by more than half for 2020.

The informal sector – difficult to assess

A sector particularly difficult to both assess—and address—and which will inevitably represent a very complicated part of the response, is the informal sector. Exceeding 50 percent of the national economy and employing two-thirds of all labour in Egypt, 44.8 percent of them work in the agricultural sector, 24.6 percent in the industrial sector—mainly small workshops and food factories—and 30.6 percent in construction, retail, and catering.

This breadth and diversity make informality a difficult issue to tackle but, in a way, can be an ally during crises. “During the 2011 lockdowns, what sustained the economy was the informal sector, and the demand from illicit construction, and the fact that people still moved around to purchase basic foodstuff”, says Mohamed Abdel Aziz Youssef, Chairman and CEO of Dcode Economic and Financial Consulting. Capable of supplying goods and services to the lowest economic quintiles of the economy and flaunting government restrictions and directives, the informal sector can often recover and resume operations faster than the formal sector does.

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But until that day happens, its workers will be impacted by the ongoing crisis. These are the people who are often working without any contracts, without healthcare or social insurance, and have no access to paid leave. The government promised those workers a small stipend of $32.60, which will almost certainly be insufficient. Compounded with that is a likely replica of what happened following the 2008 financial crisis until the end of 2011, whereby “1.6 million new employees joined the informal sector”. That spoke volumes about the government and private sector’s weakened ability to create jobs, but it also added to the growing competitiveness amongst the informal workers.

In short, the informal sector is headed in a “downward spiral of its own”, where it will be unable to abide by safety regulations prohibiting work. That also means these workers will be exposed to greater risks that could also drag out the crisis, “thereby pushing more formal enterprises to collapse”.

Small and Medium Enterprises (SMEs)

Small and medium enterprises, as sector-cutting across formal and informal businesses, are a particularly exposed sector. With limited reserves, they have significantly little runway to cover their expenses and salaries; for them, the crisis is measured in days, not months: the IFC suggests that a small business can survive, on average, ten days after a sudden loss of income.

It would appear that SMEs are excluded from the government’s EGP 100bn ($6.3 bn) stimulus for the private sector, which will benefit large firms; a few weeks later after it was announced, the Micro, Small and Medium Enterprise Development Agency (MSMEDA) launched an initiative for one-year SME loans to cover operational expenses, to help keep them afloat during the months of closure.

With the crisis dragging on, the implications across this sector are likely to be amplified. “Mitigation measures are very hard to maintain on the long term”, says Youssef. “The most difficult thing right about this crisis is that we don’t have a deadline. So we can’t overpromise and under deliver; if the government continues to issue financial support it will end with ballooning deficits, and implications can last the long term. It would lose the entire benefits of the economic reforms from 2016.”

Given the government has already put in motion an important set of mitigation policies, it must carry on with its supportive policies, and more importantly, “expand on sector-specific interventions, including informal workers.” Examples like this abound globally, for example in the UK where a “Coronavirus Business Interruption Loan Scheme”  was created to cover the first 12 months of interest payments and provide lenders with a guarantee of up to 80 percent on SME loans. The Nigerian government  also suggested a “one-year moratorium on all principal repayments” while South Africa said it would invest R2bn ($115m) to assist small businesses and informal convenience owners.

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Collaborating with businesses and “high net worth individuals (HNWI)” is an opportunity not worth missing. At the end of the day, companies can redirect productive capacity to produce the necessary goods and protective equipment, which could be supported by government contracts. In doing so, the continuity of business is guaranteed; HWNIs – via collaboration with institutions – can donate relief packages for the most affected groups of people.

This article is a mixed publication of  information and direct excerpts from The Tahrir Insitute for Middle East Policy