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Creditors are standing on Egypt's doorstep

April 3, 2023 at 2:00 pm

People walk past a currency exchange shop displaying a giant US dollars banknote on November 3, 2016 in Cairo, Egypt [KHALED DESOUKI/AFP via Getty Images]

Egypt faces a predicament in trying to meet its debt obligations over the next few years amidst an increasing struggle with a shortage of US dollars, a collapse in the value of the Egyptian pound and a rapidly growing foreign debt. This puts the country at risk of falling into a debt crisis, and possibly defaulting on repayments.

Foreign currency reserves decreased to $34.352 billion at the end of February, with most being Gulf deposits worth around $28bn, accounting for about 82 per cent of the Central Bank of Egypt’s total reserves.

The country is experiencing rapid growth in foreign debt due to the government’s appetite for borrowing during President Abdel Fattah Al-Sisi’s rule. The amount owed was $162.9bn by the end of 2022, compared with $145.529bn at the end of 2021, a growth of 12 per cent according to government data. Given the loans that the Egyptian government has contracted during the first quarter of this year, Egypt’s foreign debt could reach the $180bn mark.

Moody’s credit rating agency estimates the value of the debt service burden due for repayment during the fiscal years 2024 and 2025 at around $70bn, divided between $26bn in short-term debts and $43.6bn in medium- and long-term obligations.

According to a report by London-based HSBC, Egypt’s repayment schedule is “difficult” to fulfil, with billions due to several international financing institutions, including the International Monetary Fund, the World Bank and Gulf countries.

Egypt is scheduled to repay $9.33bn in the first half of this year, and $8.32bn in the second half: a total of $17.65bn in 2023. The repayment bill increases to $10.9bn in the first half of 2024 and $13.3bn in the second half. In 2025, Egypt must repay $9.3bn in the first half of the year, and $5.8bn in the second half, compared with $6.6bn during the first half of 2026 and $10.2bn during the second half of the same year.

The Egyptian government says that it repaid capital and interest on debts worth $25.2bn during the period July 2020 to September 2021, including $19.93bn in capital repayments and $5.35bn in interest. In 2022 it repaid around $24bn, according to data from the Central Bank of Egypt, published by the official Egyptian news agency, MENA.

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Gulf deposits

Gulf countries are Egypt’s top creditors, owning 25.1 per cent of the country’s foreign debt. Data from the Egyptian Central Bank shows that the International Monetary Fund (IMF) owns about 15 per cent.

Gulf deposits from the UAE, Saudi Arabia, Kuwait and Qatar dominate Egypt’s total foreign exchange reserves, amounting to $27.961bn, equivalent to about 81.4 per cent of the country’s total cash reserves, most of which are long-, medium- and short-term deposits.

The UAE’s is the largest of the Gulf deposits, valued at $10.661bn, followed by the Saudi deposit at $10.3bn. According to official government data, the Kuwaiti deposit is worth $4bn, and Qatar’s is valued at $3bn.

Last month, the Egyptian Central Bank announced the extension of a $2bn Kuwaiti deposit until September 2023 and a portion of a $658.5 million UAE deposit until August 2027. Saudi Arabia also announced the extension of a $5bn financial deposit with the Egyptian Central Bank, without disclosing its due date, the official Saudi News Agency reported.

The Egyptian government does not usually announce the interest rates to be paid on such deposits or the penalties for late payments, given that Egypt’s loans from the IMF exceed its share in the fund, resulting in additional fees for interest rates.

Within only six years, Egypt’s total loans from the IMF amounted to more than $23bn, including a $12bn loan in 2016, as well as two loans in 2020, valued at $2.77bn to confront the repercussions of Covid-19, and a $5.2bn loan within the Credit Facility Programme. The year 2022 ended with a loan of $3bn.

Last March, the World Bank announced its approval of a new partnership framework with Egypt for the fiscal years 2023-2027, through which Egypt will receive funding of $7bn.

Egypt is classified among the weakest countries capable of repaying its debts, which now equal 95 per cent of its Gross Domestic Product (GDP), with the risk of not being able to meet its obligations in the current fiscal year rising to 43 per cent, according to Moody’s.

To avoid the risk of non-payment, an Egyptian expert (whose name was not mentioned) advised the government to stop or reduce foreign borrowing and instead use the loans obtained to finance foreign exchange-generating projects and projects that meet the needs of the domestic market for goods, thus reducing import costs, which exceed $80bn annually. Additionally, negotiations with Gulf sovereign funds could be carried out to inject cash liquidity into new projects and activities as an alternative to foreign borrowing.

The Chairman of the Planning and Budget Committee of the Egyptian House of Representatives, Fakhry El-Fekky, said that the country needs about $35bn to cover the current account deficit and repay interest and debt instalments during the fiscal year 2022/2023. Egypt’s fiscal year begins in early July and ends at the end of June the following year.

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Sale of assets

It seems that the Egyptian government does not possess a practical plan for repayment through increasing exports and limiting import bills, in addition to maximising its revenues from tourism, the Suez Canal, overseas labour remittances and direct foreign investment, as well as exporting educational, health, cultural services and more. According to economic expert and former doyen of Egyptian journalists Mamdouh Al-Wali, instead its approach focuses on relying on two means for repayment: deferring compensation, as has happened with the Gulf countries; and attracting hot money by selling treasury bills and bonds to foreigners in addition to issuing bonds in foreign markets.

In contrast with Egypt’s worsening situation, the UAE, Saudi Arabia and Qatar are accelerating their steps towards executing acquisitions of significant stakes in energy, transportation, health, education, telecommunications, banking, fertilisers and chemicals.

The Egyptian government plans to sell vital and sensitive assets within four years, including, as part of a plan for initial public offerings until the first quarter of 2024, 32 public companies covering 18 sectors and economic activities. They include companies owned by the Egyptian army, such as the National Petroleum Products Distribution and Safi Bottled Water; three banks; seven petroleum and chemical companies; four real estate development companies; three power stations; two insurance companies; and two shipping companies.

However, Al-Wali told me with strong emphasis that the companies offering stakes for sale represent profitable and consistently profitable assets, such as the container trading companies (in the north of the country) that have been profitable since the beginning of their operation until last year. This means that selling these stakes grants buyers a share of the profits of the state-owned companies, according to their ownership percentage. These profits used to go to the Ministry of Finance and contribute to increasing state revenues and reducing the chronic deficit gap in the Egyptian budget.

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