After a dynamic start to the year, the Egyptian economy had shown signs of a loss of momentum in 2016. The dollars shortage and the measures taken by the central bank in response curbed imports of goods and in turn limited manufacturing activity. Growth in consumption, which is still the main driver of activity, was limited by the erosion of purchasing power resulting from the overall rise in prices. Household confidence worsened and reached a low point at the end of the year. Exports continued to suffer from the over-valuation of the Egyptian pound. Likewise, the drop in the number of tourists continues to hit the sector. In November 2016, the Egyptian authorities adopted a set of economic measures, including the liberalization of the foreign exchange market and the withdrawal of a number of subsidies enabling them to sign a loan agreement for USD 12bn under the Extended Credit Facility with the IMF. Despite IMF support, 2017 is likely to be characterized by a depressed economic environment. The transition from a fixed exchange rate regime to a floating exchange rate one in November 2016 is expected to help the country to respond to the dollars shortage which was squeezing the economy, but will consequently contribute to a sharp rise in inflation.  The leading sectors in 2016, namely construction and distribution, are likely to be hampered by the adverse effects of inflation on household consumption. Public spending will also undergo a noticeable cut, due to the authorities' limited room for maneuver. Tourism is likely to continue to contract, even with the resumption of flight between Russia and Egypt. Private investment is expected to find a second wind, after the devaluation of the Egyptian pound and Egypt's attractiveness could be strengthened accordingly.

The IMF program aid is expected to foster the consolidation of public finances, leading to a slight decline in public deficit in 2017, whereas the latter increased in 2016. Civil service wages, subsidies and debt servicing continue to be the main items of government spending and account for 75% of public spending. The moderation in the wage bill will continue thanks to weaker wage growth. The increase in fuel prices will help limit the effort on subsidies. Income should also increase slightly. The gradual recovery in the manufacturing sector expected after the devaluation of the Egyptian pound should help increase the share of direct tax in financing the budget. The introduction of VAT passed by parliament in August 2016 will, moreover, contribute to widening the tax base. Finally the increase in taxes on tobacco and alcohol could boost fiscal revenues by 0.8 points of GDP. The reduction in the public deficit should lead to a slower rise in the public debt, which is mainly domestic. The debt to GDP ratio was up by 5 points in 2016 because of the accumulated deficits. The liberalization of the exchange rate system is expected to favor the arrival of foreign capital on the market and help increase yields on Egyptian government bonds.  Finally, the agreement signed with the International Monetary Fund should send a positive signal to other international donors. Concurrently with IMF aid, Egypt will receive USD 1.5bn from the African Development Bank, as well as USD 3bn from the World Bank.

The current account deficit is expected to stabilize in 2017. Oil exports will remain constrained by the fall in oil prices and by weak performances in the sector, but total exports are expected to benefit from the Egyptian pound depreciation. The increase in export competitiveness will, however, only partially offset the drop in tourism income, which will continue to erode the balance of services. Imports, which were completely liberalized after the change in the foreign exchange regime, are expected to climb. Revenues from the Suez Canal are also projected to be held in check, echoing the slowdown in world trade. After growing by 2% in 2015/2016, flows of FDI are, however, expected to rise gradually.

Egypt's social climate could worsen in 2017. Although a section of the population remains in solidarity with the government, the risk of social unrest is growing, given the food shortages and the significant increase in inflation. The country continues, moreover, to face the threat of terrorism and is still endangered by more attacks targeting the Sinai and Cairo. The deterioration of the social and security environment could dampen the economic recovery and particularly the return of tourists and foreign investors. On this basis, a reform of the investment code and an improvement in the business climate will be necessary in 2017, if the country wants to benefit from the positive consequences of the devaluation and use foreign investment to support activity. 2016 remained characterized by a change in direction of Egyptian foreign policy and by worsening links with Saudi Arabia, reflected in the halt to Saudi aid and oil deliveries. This shift in Egyptian diplomatic relations is likely to benefit Russia and the United States with which President Sissi intends to establish privileged ties.