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How deep are Egypt's economic troubles?

March 3, 2023 at 4:21 pm

An employee counts banknotes at currency exchange shop in Cairo [KHALED DESOUKI/AFP/Getty Images]

Egypt’s economy has come under severe pressure over the past year, with the Egyptian pound tumbling, foreign currency drying up and inflation soaring.

What caused Egypt’s economic woes? 

Some of the causes date back decades, such as failed industrial development and export policies that created a persistent trade deficit.

An over-valued currency, weak property rights and institutions, and an overbearing state and military have deterred investment and competition. Subsidies – though now reduced – have long drained the budget.

Foreign investment, outside the oil and gas sector, has been paltry, leaving receipts from remittances, Suez Canal transit fees and tourism to play a crucial role.

President Abdel Fattah Al-Sisi often blames turmoil following a 2011 uprising and rapid population growth — the World Bank put annual population growth at 1.7 per cent in 2021 — for the country’s economic struggles. Since 2020, authorities have pointed to external shocks, including the COVID-19 pandemic and the war in Ukraine.

READ: Egypt Sisi announces state pay, pension rises after petrol price hike

But analysts also cite policy missteps, including costly defence of the Egyptian pound, a dependence on fickle foreign portfolio investments and a failure to carry out structural reforms.

How bad have things become? 

The economy has been growing steadily, but the impact of that growth – forecast at 4 per cent to 5 per cent this year – is blunted by the population surge. Many Egyptians say their standard of living has been eroded.

Since March 2022, Egypt’s pound has depreciated by nearly 50 per cent against the dollar. An acute dollar shortage has suppressed imports and caused a backlog of goods at ports, with a knock-on effect on local industry.

Annual headline inflation surged to 25.8 per cent in January, the highest level for five years, according to official data. Prices for many staple foods have risen much faster.

Official data classified about 30 per cent of the population as poor before COVID-19 struck, and analysts say numbers have risen since then. As many as 60 per cent of Egypt’s 104 million citizens are estimated to be below, or close to, the poverty line.

Unemployment has fallen to just over 7 per cent, but labour market participation also dropped steadily in the decade to 2020. Parts of the public education system are in a state of collapse. Many graduates, with the opportunity to do so, seek work abroad.

What support can Egypt draw on?

Both Western and Gulf states have broadly viewed Egypt under Sisi as a lynchpin of security in a volatile region.

As the fallout from the Ukraine war delivered Egypt its latest economic shock, Cairo received billions in deposits and investments from Gulf allies, including Saudi Arabia and the United Arab Emirates.

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But although Gulf States have also rolled over existing deposits, they have toughened conditions for injecting new money, increasingly seeking investments that provide a return.

In March 2022, the government said it had begun talks for its latest financial package from the IMF, eventually confirming a $3 billion loan linked to reforms that include reducing the footprint of the state and the military in the economy.

Is Egypt’s debt sustainable? 

Egypt’s debt burden has been climbing, though analysts differ over how much of a risk this presents.

The government forecasts that, by the end of the financial year in June, debt will stand at 93 per cent of GDP, a measure that has risen over the past few years and which it wants to reduce to 75 per cent by 2026.

A heavy debt burden, rising interest rates and a weakening currency have raised the cost of servicing debt. Interest payments on debt are forecast to swallow more than 45 per cent of all revenue in the financial year that ends in June.

Substantial principle and interest payments on foreign debt contribute to a large external financing gap – the difference between supply of and demand for foreign currency financing. Egypt must repay the IMF alone $11.4 billion over the next three years.

How has the money been spent? 

Beyond outlays on regular costs, including public salaries and services, Egypt has spent heavily on infrastructure under Sisi.

This includes housing, a number of new cities, and rapid road building. The most prominent mega-project is a new capital in the desert, east of Cairo, which one official said the State was trying to pay the $58 billion cost of, through land sales and investments.

Egypt’s arms imports also surged over the past decade, making it the third-largest importer globally, according to the Stockholm International Peace Research Institute.

Officials say they have upped spending on social programmes for the poor, including a cash handout scheme that covers five million families, though critics say the welfare is insufficient to protect living standards.

READ: Thousands of factory workers go on strike in Egypt protesting poor pay amid soaring food costs

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.