I have said it before: “I am not an economist.” My interests revolve around the power, reach, and prospects of the intersection of people, data, and innovation, which continue to transform lives and livelihoods and impact society. However, as an academic, observer, and, more importantly, as an Egyptian, I have always wanted to see Egypt become an economic power to reckon with, benefiting from the ample and diverse natural, geographic, and other resources the country is gifted with and the unlimited yet untapped potential of its most important asset: the massive young population––its invaluable productivity engine for an export-driven economy.
During the last few years, Egypt’s economy has experienced a series of significant challenges as a result of partially some homemade and, in some instances, lack of or misalignment of policy directions coupled with geopolitical tensions that have disrupted economies around the world––including Egypt––causing macroeconomic instability, affecting global trade, and impacting value chains. As a consequence of this blend of misfortunes, Egypt endured tough economic times that witnessed several rounds of currency devaluation starting on 3 November 2016, a staggering inflation rate, a constrained private sector, and a limited investment appetite, to mention a few. During the last few weeks of 2023 and the beginning of 2024, the discrepancy between the value of the US dollar to the Egyptian Pound in the bank versus the parallel market due to speculation was constantly growing, taking the hedging effect to more than EGP70 to the US dollar.
Early in 2024, several questions about the state of the economy came to mind, such as: How did Egypt’s economy reach this point? What needs to be done? What needs to change? Where can the breakthrough come from? What is causing this hyperinflation and the shortage of some key goods? Why is the size of foreign direct investments (FDIs) modest? Were external factors the sole reason for Egypt’s current economic position? Were there other elements in play? The answer to these questions would be essential to understanding the reasons that have put pressure on the economy for the last several years.
During these difficult times, it was impossible to predict where the economy was going, and if any projections were made, they reflected a sour mix of unclear and negative outlooks. Some even talked about the potential collapse of the Egyptian Pound. Then suddenly, everything changed––a breakthrough popped up. To be more accurate and realistic, a sequence of developments happened that provided Egypt with a unique opening to get the economy back on track. It was as if the economy was hit by a fallen star. It is fair to say that there was a stark difference in the mood of the first few weeks of 2024 compared to the period starting 23 February. What a difference a few days can make in an economy that is home to 110+ million Egyptians.
For 25 days, a sequence of announcements and pledges to support Egypt’s economy–although at a cost–has turned the perception from gloomy to promising, with ample opportunities to explore. What triggered this sudden transformation? What are the possible short–and long-term implications? How will the market react? Here is what happened and how I think these interesting developments should unfold.
On Friday, 23 February, the government of Egypt, without prior heads-up except for a few posts on social media–that most people questioned their credibility–announced a $150 billion investment in a mega development project in Ras El-Hekma, a fascinating area on the Mediterranean coast—an investment deal dubbed in different media outlets as the biggest in Egypt’s history. The volume and timing could not have been more crucial, given the state of the economy. The agreement–known as the Ras El-Hekma project–was signed between the government of Egypt, represented by the New Urban Communities Authority, and the government of the United Arab Emirates (UAE), represented by the Abu Dhabi-based Development Holding Company (ADQ). The agreement is primarily for the development rights of an area of more than 170 million square meters. Work on the project will start in 2025, and phase one is expected to be completed in 5 years.
The publicly available information indicates that the deal consists of $35 billion to be disbursed over 60 days following the initial deal announcement––of which $24 billion is in fresh external financing, which provides the much-needed FX liquidity to meet Egypt’s needs in the short term as well as help clear the FX backlog that was pilling up–which was estimated in February to be around $16+ billion in priority and non-priority payments in addition to around $5+ billion in the oil and gas sector–and help restore liquidity in the FX market for the foreseeable future, easing a major constraint on economic activity that has been persistent for a few years. The remaining $11 billion will be in the form of a debt swap coming from the UAE’s deposit at the Central Bank of Egypt (CBE), which will be converted into investments in real estate and other projects across the country to support economic development and growth. As for the remaining balance of $115 billion, these are investments associated with the project in the Ras El-Hekma area. Upon completion, the project is expected to create over 1 million employment opportunities and attract an additional 8 million tourists annually, yielding, as projected, more than $7 billion in FX revenue from tourism per year. According to media reports, the government will retain a 35% stake in the project.
How long has this deal been in the making? Was it an inflection point? Can it be an anchor for other mega deals or further investments coming to Egypt–other than those secured through International Financial Institutions (IFIs)? How will the project and its served community connect, help develop, and scale the impact to other communities across Egypt?
On Wednesday, 6 March, the CBE raised interest rates by 600 bps (6%) to 27.25%–the 6th highest interest rate in the world–and devalued the Egyptian pound by 38% to around EGP48 to the US dollar, reflecting a compounded loss of about 68% of the Egyptian Pound’s value since 2022. Also, on Wednesday, 6 March, the government of Egypt and the International Monetary Fund (IMF) announced a staff-level agreement to increase Egypt’s current $3 billion extended fund facility to $8 billion.
As a result of these back-to-back announcements, speculation and hedging demands for FX in the parallel market started to subside sharply. The gap between the official exchange rate and the Egyptian Pound’s non-deliverable forward contracts narrowed sharply after the devaluation, signaling an expectation of a more stable currency in the market. Accordingly, Egypt’s short-term FX situation turned positive, with implications for the country’s sovereign credit ratings. The gradual FX inflows should pick up from both internal and external sources and might encourage many to go for de-dollarisation and opt for the current returns on the Egyptian-denominated assets. These developments have helped address some of the short-to-medium-term issues; however, the long-term uncertainties persist pending further policy directions.
With this trilogy of events: (a) the investment deal with the UAE, (b) the devaluation of the Egyptian Pound, and (c) the enhanced IMF agreement among other support schemes, there is a clear opportunity for Egypt’s economy to recover allowing for economic stability and a possible path for growth and prosperity. These announcements transformed the narrative to become more positive about the economic outlook in the short term with an important caveat: How to build on this opportunity? How to capitalize on this momentum? Where to start?
The state of the economy is about perception, confidence, and trust as much as it is about policies, decisions, and tools. These developments–without a shadow of a doubt–saved the Egyptian Pound from a further meltdown and provided a path forward to the troubled economy. However, it is important to clarify that nothing happened yet. The devaluation is just one piece of a large jigsaw puzzle, with many other pieces that need to be assembled to revive the economy. Egypt is still where it was before 23 February, but it is presented with an opening that could be instrumental in shaping the outlook of its economy. The next weeks and months will be telling. They should witness an accelerated transformation in taking the appropriate timely decisions and priority actions to navigate internal and external challenges as well as gradually deal with the several chronic diseases the economy has been suffering from for decades.
On Sunday, 17 March, the European Union and the Government of Egypt announced the decision to promote their cooperation to a more strategic level, paving the way for further collaboration in a wide spectrum of common interests and priority areas, including economic stability, investment and trade, migration and mobility, security and law enforcement, political relations, education and research development, digitalization, water and food security, energy, and green transition. As a result, the European Union announced a €7.4 billion aid package to ease Egypt’s economic pressures. It includes €5 billion in concessional loans, €1.8 billion in investments, and €600 million in grants during the next three years. The package is aimed at macro-level financial assistance and will probably help address the short-to-medium-term debt repayment needs as well as manage migration to mitigate the risks caused by different regional conflicts surrounding Egypt from the west, south, and east. Based on the information available publicly, it is not clear how much of this €7.4 billion is in fresh funds.
On Monday, 18 March, the World Bank announced a $6 billion financing package over the next three years–yet to be approved by the board, which is expected by the end of June 2024. The plan is that 50% of the funding will be allocated to support the government in its economic and structural reforms, social protection programs, and green economy transition; the other 50% is targeting the support of the private sector through the International Finance Corporation (IFC), which is part of the World Bank Country Partnership Framework with Egypt (2023-2027).
There is no doubt that pledges of such magnitude have been in the making for some time. The timing of their accelerated announcement was carefully crafted. These things do not happen overnight or fall from the sky. However, does it matter? Absolutely not. What really matters is how the government will leverage the opportunity. How to strategically turn the challenges faced, including those associated with geopolitics, into opportunities? For starters, there is a need to acknowledge that some of the policies that were implemented in the past were partially the root causes of the problems and should be changed; there cannot be a repeat of the mistakes of the past, there cannot be an encore; other prudent policies need to be expeditiously introduced. Timing is of the essence.
As a consequence of these developments over the past 10+ weeks and the optics they created, S&P Global Ratings, Moody’s, and most recently, Fitch upgraded Egypt’s economic outlook to positive amid game-changing economic policy measures taken by the CBE to address the country’s macroeconomic imbalances and the projected inflow of FDIs to reach around $30 billion before the end of 2024.
During a 25-day timeline–23 February to 18 March 2024–the government of Egypt has received pledges of more than $50 billion in investments and loans in a global bailout–including a substantial amount in fresh funds. However, the bailout will never fix the long-term debt problem. Since the Egyptian Pound’s devaluation on 6 March to date, a staggering $16 billion+ in carry trade, including treasury bills, have been trading at their widest discount ever relative to other emerging-market debt. International investors, encouraged by high yields and a cheaper currency, demonstrated a strong appetite and are once again piling into Egypt’s local bonds at a record pace. Naturally, investors were waiting for an inflection point to get involved in volumes. However, we need to be careful; we were there before, and we know what happened.
For the people, they are yet to see tangible improvements. Prices are still rising, and many goods are not available. The adjustment in the minimum wage is essential, but is it enough? It is important to understand that nothing will be fixed overnight. It will take some time to adjust the economy. This is a journey, not a destination. With a country the size of Egypt, I am always reminded that when driving a small car, a U-turn is much easier and simpler than driving a trailer; it takes more time and rationally calculated measures, just like turning around a challenged economy and redirecting it to a more sustainable path.
During the adjustment period, many irregularities will occur. This will include a shortage in the supply of some goods until the complete cycle of the supply chain is back on track, and prices will remain high for imported goods until the backlog in ports and warehouses that were priced at the high exchange rates are all cleared out–most of this is already completed. As for the local products, it is expected that prices will keep going up due to the shortage of some raw materials. However, after the adjustment period is over, inflation could subside, although I do not expect much on that front. We have learned this lesson before: once prices go up, they never go down. They might stabilize, but that is as far as they go.
Depending on who you talk to, people are optimistic, but rightly so; they are cautiously optimistic. Here are a few random questions people ponder: Where to go from here? What are the priorities that the government will set? How will the government address the issue of inflation? Will the government slow down its privatization plan? Will the selling of assets continue? This is purely transactional, and the government should opt more for policy effectiveness; it would be more rewarding and sustainable. Will the government allow the Egyptian Pound to strengthen unduly? I really doubt that the government will allow the Egyptian Pound to appreciate more than its true value calculated based on supply and demand; otherwise, this will directly affect the competitiveness of the private sector, leading to accumulating once again external imbalances.
Speaking of the private sector, some of the raised questions include: What caused the private sector to shrink? Why is the volume and type of exports below par? What to do to entice a level-playing business environment that is dynamic and competitive? It is imperative that the government focuses on revitalizing the private sector’s role and providing an environment conducive to growth and prosperity. There is an urgent need to remove the regulatory barriers and impediments that hinder the exponential growth of the private sector in Egypt, including reducing the weight of state-owned enterprises (SOEs) in the economy to allow more opportunities for the private sector to grow, innovate, create more quality job opportunities and invest in digital business to boost productivity. There is a need to lower the import tariffs, shorten commercial justice, support export and trade promotion, and facilitate integration into the global value chains. Moreover, government-led investments should be more geared towards the game-changing sectors that create jobs and support exports, such as manufacturing, agriculture, tourism, and information and communication technology. The government should aim to increase the volume and value-added exports–a major differentiator–as opposed to focusing on decreasing imports to narrow the trade deficit.
According to the government, it is determined to overcome the economic challenges and take the necessary steps to unleash the long-term prospects. The government has announced a slowing down in project spending and a plan to pursue a consolidated strategy aiming at reducing public debt. These are steps in the right direction; however, more fundamental changes in the economy’s management and governance are essential to guarantee its long-term success and sustainability. Moving forward, revitalizing economic development and growth will only be achieved through a comprehensive structural reform, bringing more and better alignment between different government entities. This would require moving away from a silo-inspired government structure endorsing a vertical approach to decision-making to one that is driven by a horizontally based collaborative approach.
The government needs a clear vision and strategy for structural reform with well-thought-out steps to transform the fortunes of the economy and redirect it on a path to development, growth, and prosperity while realistically and transparently managing expectations. The objectives should include transitioning to a flexible exchange rate determined by market dynamics, aligning and tightening the monetary policies and enhancing fiscal consolidation and sustainability, managing inflation, addressing the budget deficit, continuing the privatization program, slowing down public infrastructure spending, attracting FDIs rather than relying on IFIs, debt, and selling assets, as a main source to finance developmental projects, increasing social programs spending to protect the vulnerable segments in society, and fostering an enabling environment that supports the private sector to drive economic growth.
In my humble non-economist opinion, Egypt’s challenges are not primarily economic–the fundamentals are very much there–but rather managerial. What is needed is a reset and full-steam transition to a government-enabled, private-sector-led economy.
About the author: Sherif Kamel is a Professor of Management and Dean of the School of Business at The American University in Cairo.
17 May 2024
Issue #40
Excellent article as usual