Egyptian Government Boosts Subsidies and Wages to Combat Inflation

The Egyptian government has made increasing subsidies and wage allocations a top priority in its financial statement and economic development plan, aiming to alleviate the impact of rising inflation on its citizens. The move comes as part of a series of long-awaited macroeconomic reforms initiated in March 2024, which included a currency devaluation and sharp interest rate hikes.

Egypt's recent economic reforms have been strengthened by a $35 billion investment deal secured with the United Arab Emirates (UAE). This influx of foreign investment has led to improved external risk metrics and increased market confidence in the country's economic prospects. However, the Egyptian economy is expected to face near-term challenges from high inflation and interest rates, with economic growth projected to slow to around 2.5-3% in the fiscal year 2023-24 before recovering to 3.5-4% in FY2024-25 as some pressures ease.

To further support its citizens, the Egyptian government has decided to raise the minimum wage paid by the private sector to 3,500 Egyptian pounds (approximately $113) per month, effective January 1, 2024. This marks the second time the government has increased the minimum wage, following a previous increase to 3,000 pounds in July 2023. The move is aimed at mitigating the impact of high inflation, which reached a record 38% in September 2023 before slowing to 35.6% in November.

In addition to increasing subsidies and wages, the Ministry of Finance is working on a new draft law for income taxes, a structural reform of the state's public finances, and extending tax exemptions for certain sectors. These initiatives are designed to encourage more investment, production, and exports, as well as provide financial and investment incentives for strategic sectors.

Why this matters: Egypt's efforts to combat inflation and support its citizens through increased subsidies and wages highlight the government's commitment to maintaining social stability and promoting economic growth. The success of these measures will be crucial in determining the country's ability to navigate the challenges posed by high inflation and interest rates, while attracting foreign investment and fostering sustainable development.

Egyptian President Abdel Fattah al Sisi emphasized the importance of the recent financing from the UAE and the International Monetary Fund (IMF) in enabling the country to move towards a flexible exchange rate determined by market forces. He stated, "With new financing from the UAE and IMF, a move to a flexible exchange rate would be possible." The Egyptian central bank has affirmed its commitment to letting the exchange rate be determined by market forces, except in cases of excessive volatility, and has expressed confidence in its sufficient liquidity to transition to such a system.

Key Takeaways

• Egypt to increase subsidies, wages to combat high inflation.
• $35B UAE investment deal improves Egypt's economic prospects.
• Egypt to raise minimum wage to $113/month in Jan 2024.
• Egypt plans tax reforms to encourage investment and exports.
• Egypt to move towards flexible exchange rate with IMF, UAE support.