Egypt’s economic woes

Egypt is a troubled country. An over-reliance on commodity imports and tourism has decimated its financial outlook with the pandemic and the Russia-Ukraine war affecting both. The IMF and foreign direct investment are a possible light at the end of the tunnel


Egypt has desperately been looking up for white smoke. In better times, the country is often a political and economic powerhouse in the Middle East and North Africa (MENA) region. This year, however, the tides have shifted. Egypt has sunk into a deep economic crisis that is not only putting the country on edge but has also diminished its influence in MENA.

Openly and loudly, there are no echoes of the 2011 Arab Spring. Thanks to President Abdel Fattah El Sisi’s iron fist rule, his boisterous tendency of chest thumping and repeated rhetoric that his government has the wherewithal to pull the country out of the current economic crisis, Egyptians have remained largely subdued amid widespread suffering, widening inequality and deepening poverty.

“President El Sisi is an autocrat who wants all the power but does not want to take responsibility for the economic mess,” says Timothy Kaldas, Policy Fellow at the US-based Tahrir Institute for Middle East Policy. He adds that Egypt’s economic fundamentals have been weak for quite some time due to mismanagement. Though the impacts of Russia’s invasion of Ukraine on the country’s economic plunge cannot be downplayed, they have only served to expose the underlying rot. “Egypt needs significant change in how the economy is run and a dramatic reduction in the predatory political interventions,” he notes.

The need to change the management of the economy is already having casualties, the biggest so far being Tarek Amer. The former Central Bank of Egypt governor unceremoniously resigned in August, causing pandemonium in the monetary sphere. Despite being widely praised for sound monetary policies, Amer had endured a torrid year. Most of his interventions geared towards arresting the deteriorating economic woes, including policy tightening, largely came to naught. Amer, who was appointed as a presidential advisor, was replaced by Hassan Abdalla in an acting capacity. Though the reasons behind Amer’s resignation remain unclear, Kaldas believes his replacement was aimed at offering a signal to the International Monetary Fund (IMF) and the international market actors that Egypt’s government is prepared to move away from the surreptitious manipulation of the Egyptian pound that Amer oversaw during his tenure. “For years Amer insisted that the Egyptian pound was freely floating while everyone knew it wasn’t,” he avers.

Destructive dependencies
By all accounts, MENA’s most populous nation is going through a tough period. Notably, the government maintains the crisis has not ravaged the economy substantially. Its data show that in the 2021–22 fiscal year, gross domestic product (GDP) expanded by 6.2 percent and is projected to grow at 5.5 percent in the 2022–23 financial year (see Fig 1). The IMF forecasts a lower growth of 4.8 percent after reducing its projection from an earlier forecast of five percent. GDP for Egypt is measured by fiscal year from July to June.

The numbers, however, do not tell the story of Egypt’s economic malaise. The country, which in 2020 was among the few that escaped recession due to the pandemic, has emerged as one of the biggest casualties of the conflict in Russia and Ukraine. As a net importer of both fuel and food commodities and with huge dependence on tourists from Eastern Europe, the country has been forced to bear the brunt of the conflict.

Overall, Egypt imports 62 percent of its wheat needs. Of these, 82 percent come from both Russia and Ukraine. In 2021, Eastern Europe contributed the largest chunk of tourists to Egypt, accounting for half of the eight million tourists who visited the country according to government data. Rising crude prices due to the invasion have also hit Egypt hard. With an average of 120 million barrels of crude imports annually, the import bill has more than doubled to $15bn. The surge has wiped benefits accrued from exports of natural gas and liquefied natural gas, thus failing to close the wide balance of the payment gap. The country raked in $8bn for the 2021–22 fiscal year from gas exports.

“Egypt’s economy is one of the most vulnerable to the war in Ukraine given its position as a net commodity importer. This has left the country more at risk of the large swings in commodity prices and has exacerbated strains in the balance of payments that were already present following the pandemic,” explains James Swanston, MENA Economist at the UK-based Capital Economics.

Egypt’s economy is one of the most vulnerable to the war in Ukraine given its position as a net commodity importer

Disruptions occasioned by what is shaping up as President Vladimir Putin’s ‘forever war’ is having devastating impacts on Egypt. Apart from instigating a food crisis, the country has witnessed a surge in inflation, a local currency in free fall, widening trade and budget deficits, dwindling foreign reserves, worsening burden of public debt, rising poverty and weakening private sector competitiveness, among other challenges.

In August, annual inflation stood at 15.3 percent compared to six percent in the same month last year. Following a 50 percent devaluation of the Egyptian pound in 2016, officials have maintained a tight grip on the local currency. However, since March, the Egyptian pound has depreciated by about 20 percent. “Egypt has long needed to adopt a more flexible and weaker exchange rate regime to absorb external strains and avoid rebuilding external imbalances,” explains Swanston.

A population in poverty
Apart from ripple effects emanating from a weakening currency, poverty is on the rise. Roughly a third of Egypt’s 104 million population live in poverty. The country’s plight is worsened by debt, a huge chunk of which Kaldas contends has been accumulated by borrowing to finance unnecessary vanity projects as well as excessive arms imports. “The government needs to be much more prudent about its spending priorities and subject any new project to a credible and well-studied cost benefit analysis that shows such spending is worthwhile,” he notes.

With foreign debt currently standing at $157.8bn, Egypt is spending nearly half of all state revenue to service debt. The problem is worsened by the low tax to GDP ratio while the weaker currency is also pushing up the cost of servicing the debt that is denominated in foreign currency. Capital economists estimate the decline in the value of the local currency has pushed up the debt-to-GDP ratio by three to four percent of GDP. Further weakening of the pound will only add to the upwards pressure.

The economic woes have been exacerbated by a largely struggling private sector. Purchasing Manager Index (PMI) surveys show that Egypt’s non-oil and gas private sector has been in contraction for 63 of the past 72 months, well before the pandemic. In September 2022, the S&P Global Egypt PMI stood at 47.6, unchanged from August’s seven-month high. Still, it was the 22nd consecutive month of contraction in the non-oil private sector.

A weak private sector is the last thing Egypt needs, not when the country is witnessing an unprecedented surge in birth rate. In February 2020, the country’s population crossed the 100 million mark. Since then, Egypt has been adding a million people to its population every 240 days on average. The government, including President El Sisi, has admitted the growing population is fast becoming a burden on the national economy. Measures are being put in place to cut the growth including support for family planning. Being a largely Islamic nation, some of these measures are facing opposition.

Finding a way out
For Egypt, coming out of the current economic malady is a matter of urgency. Going by events witnessed a decade ago, the current state of forbearance can easily mutate to an uprising. For that reason, the government is pursuing and implementing strategies to get the country out of the crisis. Top on the list is pursuit of an IMF bailout. Egypt is optimistic the IMF will soon approve a financing package of about $5bn to $6bn. The optimism has been heightened by an assurance by IMF Managing Director Kristalina Georgieva in early October that a deal was imminent.

Egypt is optimistic the IMF will soon approve a financing package of about $5bn to $6bn

Egypt would have hoped for more considering the package covers roughly 10 percent of its financing needs in the coming year. However, previous financing packages mean that Egypt has already borrowed from the IMF to the tune of 223 percent of its quota. IMF sets an upper limit of borrowing at 435 percent of a country’s quota. In the current situation, any amount would be welcome. Apart from providing some respite to the country’s financing needs, an IMF deal would greatly help restore investor confidence and affirm the backing of policymaking.

Besides, it would restore the country’s creditworthiness and allay fears of near-term default particularly after rating agency Moody’s cut its outlook on Egypt’s credit rating to negative in May.

Another strategy the government is implementing to get the economy out of a hole is privatisation. The country hopes to raise $10bn by disposing of stakes in government-owned companies annually over the next four years. Investment by MENA partners has kick-started the programme. In August, Saudi Arabia’s Public Investment Fund committed $1.3bn to acquire stakes in four state-owned companies.

Over the next four year period, Egypt is also keen to attract significant foreign direct investment (FDI) inflows with a target of drawing $10bn annually. With net FDIs increasing by 183 percent in the first quarter of 2022 to reach $4.1bn compared to $1.4bn in the same period of 2021, the country believes that FDIs can be an essential driver of economic recovery.