Egypt's financial and economic conditions have improved in the past two years but structural economic challenges persist, International Credit Agency, Moody's, said in its annual Egypt credit report issued Tuesday.
The report cites improving budget deficit, rising FDI, and slowing inflation rates as indicators of a recovering economy, but points out that unreliable energy supplies and the double digit unemployment rate constrains growth.
Egypt took up a structural fiscal reform programme since the election of President Abdel-Fattah El-Sisi in June in 2014, cutting subsidies and introducing new taxes to clench a growing budget deficit.
The budget deficit hit 11.5 percent in the fiscal year ending 30 June 2015, a slight drop from the 12.8 percent reached a year earlier. But the government hopes to reduce the deficit much further to 8.9 percent by the end of the current fiscal year, a target seen by Moody's as dependent on revenue performance.
The international credit agency is hopeful the planned introduction of a value-added tax before the end of this year will improve budget financing.
The finance minister said that the value-added tax, which was approved by the economic ministers’ committee last week, would be implemented before the end of the current year, adding around LE30 billion to the state revenues.
Growth is estimated to reach 4.5 percent in the fiscal year 2014/15 and is targeted to amount to 5 percent, a target supported by Moody's expectations in the report.
The budget reform plan was accompanied by announcements of megaprojects through which El-Sisi hopes to accelerate growth in the economy.
Moody's commended the completion of the Suez Canal expansion project in a year, adding that over the medium term the project is seen to contribute to fiscal revenues and balance of payments and is hence credit positive.
Egypt's Foreign Direct Investments have risen to their highest level since the 2011 uprising squeezed Egypt's balance of payments.
But the report notes that despite the fruitfulness of the Egypt Economic Development conference held in March in Sharm El-Sheikh, fragile security position remains a challenge.
Adding to the challenges the report considered credit negative is the renewed intensification of political turmoil, instability in the banking system, rise in the government funding costs, and a deteriorating balance of payments position.
Egypt's unemployment rate remains in double digits despite falling slightly to 12.7 percent in the second quarter this year compared to a peak of 13.4 percent last year.
However, Moody's highlighted the discovery of the Zohr gas field, which adds 30 trillion cubic feet of natural gas, meeting Egypt's needs for over a decade.
