How big are Egypt’s economic challenges?

Egypt has agreed an expanded $8bn support programme with the International Monetary Fund on Wednesday, letting its currency depreciate sharply and announcing that it would allow the exchange rate to be determined by market forces in a bid for economic stability.

Ahead of the move, Egypt secured a $35bn investment deal with Emirati sovereign fund ADQ for the development of a peninsula on its Mediterranean coast and other projects, easing a long-running foreign currency crunch.

What caused Egypt’s economic woes?

Some causes date back decades, such as failed industrial development due to poor planning and heavy bureaucracy, 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.

A borrowing spree under President Abdel Fattah al-Sisi has left Egypt with heavy foreign debt. Foreign creditors have been shying away, pushing the Cairo government to borrow domestically even as interest rates surge, spawning bigger deficits.

This, and an expansion of the money supply, have fuelled currency depreciation and higher inflation.

Foreign investment outside the oil and gas sector has been paltry. Remittances in 2022-23 fell 30 per cent to $22bn as workers abroad backed away from transfers at the overvalued official exchange rate.

The Israel-Gaza crisis, on Egypt’s northeastern border, has brought risks to tourism and to Suez Canal revenues; receipts from the waterway dropped by about 50 per cent earlier this year.

Sisi often blames Egypt’s economic struggles on turmoil following a 2011 popular uprising, as well as annual population growth that the World Bank put at 1.7 per cent in 2021. Authorities have also pointed to external shocks, including the COVID-19 pandemic and war in Ukraine.

How bad did things get?

Over the past two years, an acute dollar shortage suppressed imports and caused a backlog at ports, with a knock-on effect on local industry. Prices for many staple foods rose much faster than headline inflation, which accelerated to a record 38% in September.

Economic growth has slowed, and many Egyptians say their standard of living has been eroded.

The pound as fallen by more than two-thirds against the dollar since March 2022 in a series of devaluations, with pressure on the currency building over the past year as the rate was held steady at just under 31 pounds to the dollar.

The repayment schedule on foreign debt is onerous, and rising interest rates and the weakening currency have increased debt servicing costs. Interest payments swallowed up more than 45 per cent of all revenue in the financial year that ended in June 2023.

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 106 million citizens are estimated to be below or close to the poverty line.

Unemployment has fallen to around 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.

Where did the money go?

Beyond regular outlays, Egypt has spent heavily on infrastructure under Sisi. This includes housing, new cities, and rapid road building. The most prominent mega-project is a $58bn new capital in the desert east of Cairo.

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 some five million families, though critics say the welfare is insufficient to protect living standards.

What’s the government’s plan? 

Under the latest IMF agreement, authorities are committing to exchange rate flexibility, as well as fiscal discipline in order to bring down inflation and the trade deficit.

The policy plan that led to the deal also includes structural reforms to encourage private-sector growth, partly by removing exemptions and privileges for the country’s powerful state-owned enterprises.

It also provides for “a new framework to slow down infrastructure spending including projects that have so far operated outside regular budget oversight”, the IMF said.

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.

Cairo received billions in deposits and investments from Gulf allies, including Saudi Arabia and the UAE, after the shock touched off by Russia’s invasion of Ukraine, and has won new expressions of solidarity since the outbreak of the Gaza crisis.

But Gulf Arab states have toughened conditions for injecting new money, increasingly seeking investments that provide a return.

Those investments and sales of state assets had occurred at modest levels until the ADQ deal to develop the Ras El Hekma peninsula, which the IMF acknowledged had alleviated near-term financing pressures.

The agreement has triggered speculation about further potential deals, including for a plot near the South Sinai resort of Sharm el-Sheikh.

Egypt has also tried to expand economic ties with countries including China and India, expressing hope that its recent accession to the BRICS club will draw increased investment flows.