The World Bank (WB) has revised its growth forecast for the Egyptian economy, now expecting a growth rate of 2.5% for FY2024/2025, a decrease of 0.7 percentage points from the earlier estimate of 4.2% made in June.

The bank estimates that Egypt’s economic growth will see an uptick in FY2025/2026, reaching 3.5%, according to their semi-annual MENA Economic Update - Growth in the Middle East and North Africa - highlighting ongoing economic challenges.

Egypt’s FY2024/2025 forecast was lowered “due to weak manufacturing activity, import restrictions, a downturn in gas extraction operations, and reduced shipping through the Suez Canal”.

The World Bank emphasized that its forecasts assume the regional conflict will not escalate further. Should tensions rise, the resulting “negative spillovers” could adversely impact business and consumer confidence, tourism, and overall financial stability, it added.

The Egyptian government’s own estimate is slightly more optimistic, projecting a growth rate of 4.0% for FY2024/2025. Despite the downward revisions, the economy is still expected to improve from last year’s estimated growth of 2.5%.

Regionally, the MENA area is projected to grow by 2.2% this year, down from the earlier forecast of 2.8%, with a projected 3.8% growth next year.

Fiscal Deficits

Egypt is expected to see an improved fiscal deficit in FY2024/2025 to hit 3.6% from 6% in FY2023/2024, the WB noted, adding “This improvement is primarily due to the one-off recording of the EGP equivalent of half of the fresh inflows from the Ras El-Hekma deal, amounting to $12 billion into fiscal revenues.”

“This exceptional revenue boost has outweighed the constrained fiscal space caused by high interest payments and low domestic tax revenue, which reflects ongoing challenges in consumption and economic activity, especially affecting value-added tax revenues,” according to the report.

For FY2025/2025, Egypt is estimated to see its fiscal deficit to significantly widen to 7%.

Egypt, Tunisia, Jordan, Morocco, and the West Bank and Gaza are forecast to post current account deficits this year, the WB report explained. It added that Egypt’s current account deficit “is set to widen to 5.3% of GDP in fiscal year [2024/2025], from a 1.2% deficit in [FY2023/2024].” It projected that the fiscal deficit will decline in FY2025/2026, dropping to 3.9%.

“The widening deficit is largely driven by an expanding trade deficit, resulting from a reduction in oil exports coupled with an increase in non-oil imports, as well as decreased revenue from reduced shipping through the Suez Canal,” it wrote.

Suez Canal Revenues

A key factor in the WB’s latest forecast is the anticipated decline in Suez Canal revenues, projected to fall to $4.8 billion this fiscal year, nearly half of the $8.8 billion recorded in FY2022/2023 – “a decline that represents 8% of Egypt’s projected reserves” - and represents a 27% drop from the expected $6.6 billion for FY2023/2024.

Escalating security risks in the Red Sea are driving shipping companies away from the canal, further complicating Egypt’s economic landscape.

The WB noted that “the uncertainty of the conflict looms large over portfolio investments, heightening investors’ apprehension across the region”.

Suez Canal revenues decreased from $9.4 billion in FY2022/2023 to $7.2 billion during FY2023/2024, according to Osama Rabie, chairperson of the Suez Canal Authority (SCA) in a recent panel.

Inflation

Inflation continues to decline, mainly due to the Central Bank of Egypt’s recent measures to float the local currency and unify the exchange rate, with the bank estimating that Egypt’s inflation will reach 17.2% in the coming fiscal year.

However, annual headline inflation rose to 26.4% in September, with potential increases expected in the coming months.

This report was released ahead of the World Bank and IMF Annual Meetings in Washington, D.C., scheduled for October 21-26, underscoring the significance of these discussions in light of the revised forecasts.