Tom Everill | 29 March 2024

Summary

• Egypt's severe economic crisis is marked by soaring inflation, a weakening currency, and rising foreign debt. 

• Trade deficits, geopolitical tensions, and sectoral impacts worsen poverty and stifle growth. 

• Relief might stem from international support and an IMF deal, leveraging Egypt's strategic significance. 

Egypt is currently facing its most dire economic crisis since the Arab Spring and 2011’s revolution marked by soaring inflation (around 30% annually), a weak Egyptian Pound, capital flight, and dwindling foreign reserves. This comes as newly reelected President Abdel Fattah El-Sisi and his government push on with multi-billion-dollar megaprojects, including the construction of a new USD 58 billion administrative capital around 28 miles southeast of Cairo.  

The North African nation’s economic turmoil is in part due to failed industrial development, resulting from poor planning and heavy bureaucracy. Egypt’s undiversified export markets paired with a strong dependence on imports for products like wheat and machinery has led to a consistent trade deficit. According to the Stockholm International Peace Research Institute, it has also become the world’s third largest arms importer in recent years, adding to its financial burden. Furthermore, El-Sisi's borrowing spree to finance domestic projects and fill fiscal gaps has burdened the country with high levels of foreign debt; as such, foreign creditors have begun to shy away, forcing Cairo to borrow off of domestic markets with rising interest rates. These issues are compounded by geopolitical tensions in the Middle East. In January, Suez traffic fell approximately 50% following ongoing attacks on Red Sea shipping from Houthi militants in Yemen, of which it brought Egypt USD 9.4 billion in 2022-23. Tourism has also fallen in the wake of Hamas’ 7th October attacks on Israel, amid security concerns. 

These factors have exacerbated poverty and stunted economic growth, which will likely worsen in the coming months. Although Cairo claims that some of its spending has been directed towards social programmes aimed at poverty alleviation, critics say that this has not been effective and living standards are continuing to erode. While core inflation fell slightly in Q4 2023, it is climbing again, rising from 29% to 35.1% between January and February of this year. The country’s US dollar shortage is suppressing imports by causing a backlog at ports, creating a knock-on effect on local industry. Moreover, the Central Bank of Egypt has devalued its currency numerous times of late, in an attempt to increase competitiveness, a move resulting in the Egyptian Pound losing ⅔ of its value against USD since March 2022. This weak currency, in addition to rising interest rates, has resulted in crippling debt repayments. In the financial year ending June 2023, 45% of Egypt’s public revenue went towards interest payments on foreign debt, and in January, credit rating agency Moody’s downgraded its outlook on Egypt’s sovereign debt from stable to negative. 

However, surging Egyptian bond prices may indicate light at the end of the tunnel for the struggling economy. Egypt may be saved from its economic woes, in part by allies due to its geostrategic significance and in part by the International Monetary Fund. Given Egypt’s strategic position bordering the Gaza Strip and Sudan, and its control of the Suez Canal, the United States and Gulf allies are interested in its stability. In September, the Biden Administration greenlighted USD 235 million in military aid to Egypt (out of USD 1.3 billion annually), which, by law, is contingent on the El-Sisi regime’s respect for human rights, including the release of political prisoners. While no such requirement has been met, the administration forced the aid through by executive order. Likewise, a USD 35 billion investment by the United Arab Emirates has reassured investors that Egypt can remain liquid in the short term. Earlier this month, Cairo struck a deal with the IMF to more than double its backstop to USD 8 billion. This deal was contingent on Egypt floating its currency, exercising more fiscal discipline and agreeing to a framework to slow infrastructure spending and boost private sector growth. Goldman Sachs believes that this increased backstop, plus the UAE’s large investment, will be sufficient to plug the country’s financing holes for at least the coming four years. 

Forecast

• Short-term: The Egyptian Pound will likely remain weak; bond prices will likely continue to rise. Egypt should reduce public spending in line with IMF deal conditions. Security will remain a priority.  

• Medium-term: The US and Gulf allies will continue to support the Egyptian economy to prevent further regional instability. A cheap Egyptian Pound should increase exports, thus reducing the trade deficit.  

       (Not financial advice)