Egypt’s ailing economy and its impact on the lives of the country’s citizens have been consistently making headlines. With a population exceeding 105 million, the nation has faced significant challenges in the past year due to the Russian-Ukrainian conflict. This led to a steep depreciation of the Egyptian pound, a shortage of foreign currency and soaring inflation rates, all of which greatly impacted the living standards of Egyptians.
In an effort to address these issues, Egypt entered into a deal with the International Monetary Fund in December of last year. The agreement secured a $3 billion loan, contingent upon the implementation of a series of reforms and conditions. However, Egypt faced difficulties in meeting all the required conditions, causing a delay in the initial program review by the IMF. This review was crucial for the release of the second tranche of the loan, valued at approximately $347 million, originally scheduled for March.
IMF Deputy Managing Director Antoinette Sayeh, during her recent visit to Egypt, emphasized that the program review would be based on the government’s progress. The successful completion of the required steps and demonstrable progress would instill confidence and enable the program to move forward.
The reforms primarily focus on two key conditions: introducing real flexibility in the Egyptian currency and privatizing state assets. Despite the government’s commitment to currency liberalization, the Egyptian pound has remained stagnant against the dollar for some time. Although Egypt previously implemented currency liberalization three times between March 2022 and January of this year, the Egyptian pound’s value declined by approximately 25 percent during the first quarter of 2023 and by about 50 percent since the start of the Russian-Ukrainian crisis in March of the previous year.
The privatization of government-owned companies, another important reform, has encountered obstacles. Egypt was expected to generate $2 billion in revenue from the sale of shares in these companies, a crucial aspect of meeting the financing goals outlined in the IMF program for the fiscal year 2023, which ends in June. However, by the end of June, the government had only managed to accumulate a small sum, raising concerns about the future of the IMF agreement.
On February 9, Egyptian Prime Minister Mostafa Madbouly announced plans to sell shares in 32 companies by the end of March 2024. This strategy aligns with Egypt’s active pursuit of attracting investments and increasing foreign currency reserves by offering government-owned enterprises for privatization. The aim is twofold: to encourage investments and broaden the ownership base while simultaneously strengthening the stock exchange and enhancing the liquidity of listed stocks, fostering a dynamic trading environment.
A hard mission
The Egyptian government faces the challenging task of collecting the necessary funds to repay its foreign debts while also providing cash liquidity, financing infrastructure projects, and supporting the local currency. By December 2022, Egypt’s foreign loans had skyrocketed to $162.9 billion from less than $40 billion in 2015, with a borrowing increase of $8 billion in the last quarter of 2022 alone.
This situation would have been less daunting if Egypt had been experiencing robust economic growth. Unfortunately, the decline in growth rates coincided with a significant outflow of hot money, estimated at around $22 billion. This development raised concerns among investors about the government’s ability to fulfill its financial obligations, especially considering that a considerable portion of the borrowed funds is allocated to long-term projects that may not generate the urgently needed foreign currency in a timely manner.
The IMF has called on the Egyptian government to “reduce the pace of large national projects that put pressure on the exchange rate and transition to a flexible exchange rate regime.” Moody’s, in a recent report, highlighted that Egypt’s substantial external debt obligations have become an increasingly challenging issue. In the current fiscal year 2022-2023 (between July 2022 and June 2023), Egypt’s total obligations amounted to approximately $20.2 billion, of which $8.7 billion were due in the first half ending in December 2022.
According to data from the Central Bank, the payments due include $2.49 billion in short-term debt in June, $3.86 billion in the second half of 2023 as short-term loans, and $11.38 billion in long-term debt. Additionally, there are obligations to less flexible lenders such as the IMF, with $2.95 billion due by the end of 2023, and foreign bondholders who are owed $1.58 billion.
Analysts suggest that Egypt’s focus should be on reducing the debt ratio over the medium term. They emphasize that maintaining primary surpluses exceeding 2-1/2 percent of GDP is the path to achieving this goal. Additional revenue generation and expenditure cuts are necessary to accomplish this. In late May, the Egyptian Parliament passed a bill aimed at raising fees to prevent further government borrowing.
Egypt is currently under significant pressure to liberalize its currency exchange rate due to concerns raised by international banks. The disparity between the official exchange rate of the Egyptian pound and its value in the parallel market, as well as differences observed in future contracts, have become focal points for these banks. Moreover, potential investors are reluctant to commit their funds without assurance that the pound will not face further devaluation, which could result in financial losses.
The Gulf countries, particularly Saudi Arabia, the UAE and Qatar, are emblematic of this situation. In 2022, when Egypt experienced a crisis, these nations demonstrated their willingness to support Egypt by depositing $13 billion into the country’s central bank. However, they are now awaiting clearer indications of the stability of the Egyptian pound, tangible evidence of substantial economic reforms, and confirmation that Egypt is adhering to the conditions outlined by the International Monetary Fund (IMF) before considering large-scale investments.
Conversely, Egypt aims to accumulate a significant reserve of foreign currency prior to liberalizing its exchange rate. This strategy seeks to ensure an adequate supply of dollars to meet market demand, prevent further drastic depreciation of the pound, and address the alarming levels of inflation, which have reached their highest point in decades. In May, inflation figures rose to record levels, with a 32.7 percent increase compared to April’s 30.6 percent, primarily driven by the government’s decision to raise diesel prices.
By increasing diesel prices, the Egyptian government hopes to generate over half a billion dollars annually for the treasury. It is worth noting that this is the first time that diesel prices have been raised since July 2022. In light of these developments, the IMF advises the Central Bank of Egypt to remain prepared to address the mounting inflationary pressures.
Although Egypt faces significant challenges, escaping this precarious situation is not an insurmountable task. The solution lies in implementing comprehensive reforms and expediting measures to rescue the Egyptian economy from further decline.
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