# **INTRODUCTION**

The Arab Republic of Egypt is the most populous country in North Africa and the Arab World, with a population of approximately 95 million inhabitants. It is rich in natural resources, with the oil and gas sector making up approximately 15 percent of the country’s gross domestic product (GDP). Its population has been rapidly increasing in recent years—at a pace of 2.6 percent since 2006—and due to the fact that the majority of the country is desert lands, the population density has also been increasing, as most of the population is settled along the Nile.

Egypt experienced a period of robust growth from 2005 to 2009, averaging an annual rate of 4.2 percent in real GDP per capita. The global financial crisis, and the political turmoil experienced in the wake of the Arab Spring in 2011, led to a slowdown of the economic activity and an average growth in real GDP per capita (in 2011 PPP) of 0.66 percent between FY10 and FY13. This rate has picked up since then, reaching 2.18 percent in FY15 and 2.26 percent in FY16.

Economic growth in the past few years has had limited success in lifting the population out of poverty. According to official figures, 27.8 percent of the Egyptian population was considered poor in 2015.<sup>3</sup> Moreover, important disparities in welfare across regions is an enduring feature: in Metropolitan Egypt about 15 percent of the population was considered poor, whereas in rural areas of Upper Egypt this share was almost four times higher. In terms of consumption inequality measured using the Household Income, Expenditure, and Consumption Survey (HIECS), Egypt is among the countries with lowest levels (as measured by the Gini index). It is notable, however, that a slight uptick has been found in the periods 2012 and 2013–15, with the Gini index being 30.8.<sup>4</sup> The Government of Egypt (GoE) has introduced several flagship economic reforms aimed at correcting macroeconomic imbalances, addressing foreign exchange shortages, and improving the competitiveness of the economy. The package of reforms includes the devaluation of the Egyptian pound in March 2016, the adoption of a floating exchange rate in November 2016, and the implementation of the Civil Service Law. The government has also implemented a fiscal consolidation program, the highlights of which are the streamlining of energy subsidies and the adoption of a value-added tax (VAT) rate to replace the already existing goods and services tax (GST). On the business environment side, an industrial licensing law and a new investment law have been passed, and new insolvency and company laws are currently under discussion in the parliament. These reforms are aimed at improving the business environment to encourage private sector–led growth.

The reforms have had a positive effect on the fiscal accounts and external accounts. On the fiscal accounts side, Egypt’s overall deficit decreased in FY17 to 10.9 percent of GDP (preliminary figures) compared to 12.5 percent of GDP a year earlier. Similarly, the primary deficit decreased to 1.8 percent of GDP in

> 3 Official rates follow an adjusted cost‐of‐basic‐needs approach, producing household‐specific poverty lines based on the caloric requirements of the household members and region‐specific cost per calorie and Engel regressions. The average national poverty line is LE 5,788 per person per year and is equivalent to about US$4 per day in 2011 purchasing power parity (PPP). As a comparison, poverty rates based on the international poverty line of US$1.90/day at 2011 PPP was 1.35 percent.

> 4 Estimate refers to the consumption per capita distribution, while official figures use consumption at the household level. It is important to note that distributions estimated using household surveys are typically truncated, as surveys do not adequately cover rich households. For Egypt, “correcting” for this truncation using real estate housing prices (Van der Weid, Lakner, and Ianchovichina 2016) or regional information on wealth, national accounts, and taxes (Alvaredo et al. 2018) suggest the Gini may be higher.

2