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IF Insights: Crises-ridden Egypt economy undertakes its much-needed course correction

IFM_Egypt Economy
Egypt has a significant international debt as a result of President Abdel Fattah el-Sisi's borrowing binge

Egypt has recently announced that it will allow market forces to determine the exchange rate to achieve economic stability, and it also agreed to an enlarged USD 8 billion support programme with the International Monetary Fund. Egypt’s currency depreciated dramatically.

Before the move, Egypt eased a protracted foreign exchange crisis by securing a USD 35 billion investment deal with the Emirati sovereign fund ADQ for the development of a peninsula on its Mediterranean coast and other projects.

Understanding Egypt’s Turmoil

Some of the causes date back decades, including export strategies that led to a persistent trade deficit and failed industrial development brought on by a lacklustre infrastructure and a lot of red tape.

An overbearing state and military, weak institutions and property rights, and an overvalued currency, these factors have discouraged investment and competition.

Egypt has a significant international debt as a result of President Abdel Fattah el-Sisi’s borrowing binge. Reluctant foreign creditors have forced the Cairo administration to borrow money domestically even as interest rates rise, leading to larger deficits.

This has led to increased inflation and currency depreciation, along with an increase in the money supply.

Outside of the oil and gas industry, foreign investment has been extremely low. Due to reluctance on the part of foreign workers to send money at the inflated official exchange rate, remittances in 2022–2023 plummeted 30% to USD 22 billion.

The conflict in the Gaza Strip, which borders Egypt on the northeast, has put both tourism and the Suez Canal in jeopardy. Earlier this year, revenue from the waterway fell by around 50%.

Abdel Fattah el-Sisi frequently attributes Egypt’s economic woes to unrest that followed a popular uprising in 2011 and yearly population growth that the World Bank projects will reach 1.7% in 2021. Authorities have also mentioned outside shocks, such as the conflict in Ukraine and the COVID-19 pandemic.

A severe dollar scarcity during the previous two years inhibited imports and created a backlog at ports, which negatively impacted regional business. Many staple food prices increased far more quickly than headline inflation, which reached a record 38% in September 2023.

Many Egyptians claim their standard of living has declined as a result of the country’s slower economic growth.

In a series of devaluations that began in March 2022, the value of the pound has dropped by more than two-thirds compared to the dollar. Pressure on the currency has increased over the past year as the rate has remained stable at slightly under 31 pounds to the dollar.

The repayment schedule for foreign debt is burdensome, and the cost of debt servicing has gone up due to rising interest rates and the declining value of the currency. In the fiscal year that concluded in June 2023, interest payments consumed over 45% of total revenue.

Before COVID-19, official data estimated that roughly 30% of people lived in poverty; however, analysts claim that percentage has subsequently increased. According to estimates, up to 60% of Egypt’s 106 million people live in poverty or very near it.

While the unemployment rate has decreased to about 7%, the labour force participation rate also decreased over the 2010–2020 period. The public school system is collapsing in some places. Many graduates who have the chance to do so look for employment overseas.

Tracing Egypt’s Expenditures

Under President Abdel Fattah el-Sisi’s watch, Egypt has made significant investments in infrastructure on top of regular spending. This covers developing new cities, housing, and fast roads. A USD 58 billion new capital located in the desert east of Cairo is the most notable megaproject.

According to the Stockholm International Peace Research Institute (SIPRI), Egypt is now the third-largest importer of weapons worldwide after a ten-year increase in imports.

Spending on social programmes for the impoverished has increased, according to officials, including a cash handout programme that serves about five million families. However, detractors claim the benefit is not enough to maintain living standards.

Authorities are committed to maintaining fiscal restraint and exchange rate flexibility to reduce inflation and the trade imbalance, as per the most recent IMF agreement.

The policy plan that paved the way for the agreement also calls for structural changes to promote the expansion of the private sector, in part by eliminating exemptions and advantages for the nation’s dominant state-owned businesses.

Furthermore, according to the IMF, it offers “a new framework to cut down infrastructure spending including projects that have so far operated beyond normal budget scrutiny.”

What Assistance Can Egypt Obtain?

In general, Western and Gulf powers see Egypt under Abdel Fattah el-Sisi as the cornerstone of security in a turbulent area.

Following the shock of Russia’s invasion of Ukraine, Cairo got billions in deposits and investments from Gulf friends, such as Saudi Arabia and the United Arab Emirates, and has gained fresh demonstrations of support since the start of the Gaza issue.

However, Gulf Arab nations have tightened restrictions on fresh capital inflows and are looking more and more for profitable ventures.

The IMF agreed that the ADQ agreement to develop the Ras El Hekma peninsula relieved short-term funding concerns, but such investments and sales of state assets had been limited.

The arrangement has led to conjecture regarding more possible deals, one of which is for a site close to the South Sinai resort of Sharm el-Sheikh.

Egypt has also made an effort to deepen its diplomatic connections with nations like China and India, hoping that its recent BRICS membership could attract more foreign investment.

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