About the author
Network Manager | Global Network Management
Hugo has responsibility for the Americas Region. He joined the company in 2012 in the Advisory team, assisting Institutional buy-side clients to evaluate, select, and monitor their asset servicing providers. Currently, Hugo supports the ongoing monitoring and risk analysis of agent bank networks in line with AFME standards, for Global Custodian clients – which requires annual in-market due diligence reviews, meeting with the banks and local Financial Market Infrastructures. He also has responsibility for the ongoing development of Thomas Murray’s digital asset products and services.
Egypt, never one of the world’s wealthiest countries, is staggering towards the end of 2023 under the accumulated burden of years’ worth of debt and a (related) crushing liquidity crisis.
Some of the country’s economic woes are beyond its control, like Israel’s war in Palestine, and some have their roots in recent history.
President Abdelfattah al-Sissi came to power in 2013, riding the wave that swept President Husni Mubarak from office in 2011 after 30 long years of cronyism and corruption. Although Sissi is expected to comfortably win this month’s election, he has failed to deliver on the promise of the popular uprising that first brought him to the presidency. Egypt’s economy fared better than expected during the coronavirus pandemic, but unemployment and poverty remain at shockingly high levels.
This looks likely to continue so long as Sissi’s government remains heavily reliant on debt to finance its infrastructure projects, which are mostly led by military-owned companies. Private companies have struggled to maintain a presence in the Egyptian market as Sissi essentially buys the army’s loyalty with government contracts.
Compounding this foreign investment drought is the war in Ukraine, which has laid bare the vulnerabilities inherent in Egypt’s dependence on fuel and food imports – as well as driving Russian investors from the market.
The main causes of Egypt’s current liquidity crisis are likewise interconnected.
Egypt has accumulated a significant amount of debt, particularly from the International Monetary Fund (IMF). However, these loans, along with billions of dollars in cash from Abu Dhabi and Riyadh, are temporary solutions.
The Central Bank of Egypt (CBE) recorded an external debt of US$164.bn in June 2023, much of it owed to the IMF. Egypt will soon have to pay US$29.23bn to service this: US$14.59bn in the first half of 2024 and US$14.63bn in the second half.
The IMF attached strings to its US$3bn loan programme in 2022, promising that it would include, “policies to unleash private sector growth including by reducing the state footprint, adopting a more robust competition framework, enhancing transparency, and ensuring improved trade facilitation.”
How strict the IMF will be about enforcing this in light of the Gaza conflict remains to be seen. In early December 2023, it conceded that combatting record levels of consumer-price growth must be the government’s ‘first focus.’ Although the IMF has previously demanded that Egypt devalue the pound, this latest statement seems to tacitly allow Cairo more wriggle room on implementing yet another currency devaluation.
A plummeting pound
Egyptian living standards are in decline, as shoppers watch the value of the Egyptian pound shrink – it has lost almost half its value against the US dollar during a run of aggressive devaluations since March 2022. Many people are restricting their diets as the prices of vegetables, dairy products, and bread continue to climb, and/or turning to the black market (where the US dollar is the preferred form of currency).
Dependence on imports
The war in Ukraine has exposed Egypt’s longstanding dependence on fuel and food imports, which have become too expensive for the country to afford. This has led to the currency’s devaluation and an inflation spike that is hitting the middle and working classes especially hard.
Egypt is the world’s largest importer of wheat, so has always been in need of foreign cash reserves. But now the CBE’s coffers are running low, despite the devaluations of the Egyptian pound that were designed to stop the haemorrhaging of foreign currency.
Foreign currency liquidity
Foreign currency liquidity has been dwindling since mid-2021, as Egypt’s debt servicing in foreign currency outstripped its incoming supply:
- The pandemic slowed global trade, reducing traffic in the Suez Canal. Although the Suez Canal Authority reported an all-time annual revenue record of US$8bn in 2021, US$8bn is exactly what the Sissi government spent on a “mega-upgrade” of the canal in 2015 – work that critics described as “unnecessary.”
- The war between Israel and Hamas has further set back the recovery of Egypt’s tourism industry.
- Remittances from expatriate Egyptians dropped 38% year-on-year in the first half of 2023. Egyptians abroad fear that the pound is not done falling yet, so (like Lebanese expats) are either hanging on to their money or using the black market to repatriate funds.
- The war in Ukraine has driven Russian investors from foreign markets, especially emerging economies, and Egypt is no exception. In the days following Russia’s first attack on Ukraine, it was estimated that US$3bn was removed from Egyptian banks.
- In something approaching a vicious cycle, the government is short of the foreign cash it needs to clear billions of dollars’ worth of imports backed up at its ports – another reason why investors are leaving or staying away.
The IMF and Egypt’s Gulf partners are keen to see Cairo make structural reforms, including slowing down government-run infrastructure projects and reducing the holdings of military-owned companies. This will help the economy, but displease Sissi’s supporters – perhaps creating more domestic instability and further dissuading foreign investors.
Relief in sight?
On their own, none of the following will rescue the economy – but they might be enough to see Sissi and his government through another crisis.
Help on the way from the UAE and Saudi Arabia (and Turkey)
From the conversations I had in Egypt in late 2023, it was clear that rescue was more likely to come from Saudi Arabia and the United Arab Emirates than Turkey. In October 2023, there were whispers that Egypt is close to securing new deposits from the UAE and Saudi Arabia worth US$5bn.
The burden may not fall entirely to the Gulf states, however. A debt-swap deal with China was reached in October 2023, and Turkey has entered the Egyptian market as the famously frosty relationship between Sissi and Turkish President Recep Tayyip Erdoğan begins to thaw.
Progress has been made in the year since Egyptian and Turkish business delegations met for the first time in nine years. Egypt removed the need for Turkish citizens to acquire an Egyptian entry visa in April 2023, and Turkish companies operating in Egypt have access to new markets because they are permitted tariff-free trading with third-party countries.
Turkish investments in Egypt, where labour and production costs are much lower, totalled US$2.5bn in 2022 and could hit US$3bn by the end of this year.
But the lack of foreign currency is still a barrier. Turkish companies producing goods for the Egyptian market often complain of delayed or non-payment, a situation for which the Turkish and Egyptian central banks are trying to find a fix.
Egypt benefits from anxieties over Israel-Gaza conflict
The IMF’s managing director, Kristalina Georgieva, told Reuters in November that the IMF was “seriously considering” augmenting Egypt’s US$3bn loan programme as new economic difficulties arise from Israel’s war in Gaza.
Egypt’s debtors among oil-rich Gulf states also appear to have found new reserves of goodwill for their struggling neighbour as the ripples from Gaza spread across North Africa and the Middle East.
Four countries – the UAE, Kuwait, Saudi Arabia and Qatar – already have US$29.9bn on deposit with the CBE and another US$16bn on loan in other forms of credit.
There are now rumours that they are looking at offering Egypt a financial rescue package, comprised of US$5bn in cash deposits and support for the pound should it be further devalued.
Further down the road, there are indications that the EU may accelerate an investment plan worth some US$10bn. And the results of Egypt’s recent changes to its laws on investment – designed to allow 100% foreign ownership of investment projects and guaranteeing the right to remit income earned in Egypt and to repatriate capital – remain to be seen.
Thomas Murray's Risk Committee is made up of analysts, experts in financial market infrastructures (FMIs) and network managers. The committee meets regularly to assess the health and stability of capital markets, custodian banks, transfer agents, fund platforms and market infrastructures around the world, and assign risk grades and/or scores based on its findings.