Egypt

Timid growth and renewed confidence

After more than a year of foreign currency shortages, growth should accelerate slightly in the 2024-2025 fiscal year, particularly in the second half. It will benefit from renewed confidence following a massive investment by a sovereign wealth fund from the United Arab Emirates to develop the coastal town of Ras El-Hekma, west of Alexandria, into a major tourist and economic hub. Payments were made in February (USD 10 billion) and May 2024 (USD 14 billion), thereby putting an end to the currency crisis. A further USD 11 billion, deposited by the Emirates with the Central Bank, were converted into pounds. The Emirates’ fund is expected to invest USD 150 billion in the project. This windfall was followed by the signing of a EUR 7.4 billion financing agreement with the EU, as well as the resumption and increase to EUR 8 billion of the IMF-funded program under the Extended Credit Facility (ECF), concluded in December 2022 for a period of 46 months. All these factors enabled the Central Bank of Egypt (CBE) to adopt a flexible exchange rate in March 2024, causing an initial depreciation of 38% in the Egyptian pound against the US dollar. The unification of the official and parallel foreign exchange markets has enabled import restrictions to be gradually lifted and barriers to currency outflows to be removed. At the same time, faced with high underlying inflation (33.7%), the ECB tightened its monetary policy, raising its key rate by 600 basis points to 27.25%. With inflation still high in 2024, driven mainly by food prices, a decline is expected in 2025 thanks to a stabilisation (it has already recovered since its initial devaluation) of the pound and monetary tightening, pointing to a possible rate cut. Private consumption (nearly 90% of GDP in 2022-2023) could benefit from this fall in inflation, as well as from a revival in expatriate remittances, boosted by the new exchange rate regime. Business could rely on wholesale and retail trade (14.8% of GDP in 2022-2023), agriculture (12.2% of GDP) and telecommunications (3.3% of GDP). Affected by the wars in Gaza and Ukraine, tourism in the broadest sense (8% of GDP) will depend on developments in these conflicts. Although a producer, Egypt is a net importer of natural gas and struggles to meet its domestic demand, which explains the repeated planned power cuts since summer 2023. However, it has agreed with Israel to increase gas deliveries from Israel's Tamar field, in order to ensure its domestic consumption and support its LNG exports, allowing foreign trade to make a slightly positive contribution to growth. Other exports (mainly agri-food, cotton and chemicals) are low value-added. They will benefit from the devaluation of the pound, but will depend on developments in the Red Sea conflict and available energy resources.

The Egyptian economy remains dominated by the public sector (25% of employment and 74% of investment) and the informal economy (estimated at 40% of GDP). Nevertheless, the government plans to reduce its footprint on the economy by capping public investment (8.6% of GDP in 2022-2023) at 1,000 billion Egyptian pounds (6% of GDP) for the 2024-2025 fiscal year. Progress in the reforms included in the IMF programme will support private sector activity. Among these reforms are the continuation of the privatisation programme and the elimination of advantages for public players.

Public and external accounts still fragile despite foreign currency inflows

Even if the comparison with the previous year is somewhat skewed by exceptional revenues, no doubt linked to Emirati investment, the public deficit will widen in 2024-2025. Admittedly, revenues (15.4% of GDP in 2022-2023) will be boosted by the implementation of tax reforms (broadening of the tax base, rationalisation of VAT exemptions). They will also benefit from privatisation revenues (estimated at 1% of GDP in 2024-2025). However, expenditure (21.5% of GDP in 2022-2023), particularly current expenditure on civil servants' salaries (4% of GDP), social spending and fuel and electricity subsidies, will continue to rise, despite the quadrupling of the price of subsidised bread. Nevertheless, the limitation of public investment could result in a primary surplus (i.e. excluding interest) of 3.5% of GDP. Accounting for half of projected expenditure and 70% of projected revenue in 2024-2025, interest payments on the debt will be the largest item of expenditure, mainly in the form of domestic interest. Despite its traditionally high cost and the increase in the CBE's key rate, the deficit will still have to be largely financed on the domestic market. Domestic commercial banks are the main holders of public debt, although foreign investors have reappeared. However, Egypt will be able to gradually turn to the international capital markets in 2025 once rates have begun to fall in the advanced markets. External debt accounts for 25.6% of public debt and is held mainly by multilateral creditors (IMF, World Bank).

Although still in deficit, the current account should improve in the 2024-2025 fiscal year. Despite the moderation in imports of consumer goods due to the devaluation of the pound, and the resumption of liquefied natural gas exports, the trade deficit (8% of GDP in 2022-2023) will remain high. A large proportion of imports is incompressible: Egypt is the world's number one importer of wheat, and its industrial production, particularly manufacturing, is 40% dependent on imported inputs. In addition, the implementation of the Ras El-Hekma investment agreement from 2025 will also boost imports. The balance of services surplus will depend on developments in the Red Sea and Gaza conflicts. In the event of a resolution, services will benefit from the rebound in tourism (3.5% of GDP in 2022-2023 before the conflicts) and Suez Canal traffic (2.2% of GDP in 2022-2023). The elimination of the parallel market premium will restore expatriate remittances through formal channels (5.6% of GDP in 2022-2023 after 7.4% in 20/21). The current account deficit will be financed by FDI (2.5% of GDP in 22/23, mainly from the Gulf), multilateral financing and sales of treasury bills to non-residents, before the return of international bond issues. Foreign exchange reserves stood at 7.5 months of imports in January 2024.

At the crossroads of regional geopolitical tensions

Internationally, Egypt continues to be at the heart of the region's conflicts, making it a partner of choice for its international partners, both bilateral and multilateral. First of all, its involvement in the Israel-Hamas war is inevitable due to its border with the Gaza Strip, punctuated by the Rafah border crossing, which is the gateway for international aid and the sole exit point for Gaza residents. Egypt could face a substantial influx of refugees, in a Sinai region where the fight against Islamist groups continues. In addition, Israel's takeover of the Philadelphia corridor (along the border on the Gaza side) and its military operations at Rafah are weakening aid deliveries. This is putting further strain on the Israeli-Egyptian relationship, which has been considered a vector of stability in the Middle East since the 1978 Camp David Accords, regarded by Egypt as the cornerstone of its foreign policy (including annual military aid from the United States). Added to this are attacks by Yemen's Houthi rebels in the Red Sea and Gulf of Aden, forcing the major shipping lines to opt for safer alternatives, resulting in a drop of over 60% in Suez Canal traffic. Last, tensions with Ethiopia have been rekindled since it unilaterally filled the Renaissance Dam (GERD) on the Blue Nile. Downstream, Egypt could see its water supply disrupted. The Egyptian authorities have to reconcile public opinion favourable to the Palestinians, the country's geostrategic and commercial interests, and their mistrust of the Muslim Brotherhood, a movement ousted from power in the 2013 coup and of which Hamas is a branch. This explains, on the one hand, a measured attitude and mediation efforts, but, on the other, the refusal to join the coalition that is fighting the Houthis or to accept (temporary) shelter for Gazans.

On the domestic front, in the absence of any real opposition, President Abdel Fattah al-Sissi won the December 2023 election by a landslide. The amendment of the Constitution in 2019 enabled him to begin his third and, in principle, final six-year term. In the face of persistent inflation and shortages of essential goods, protests intensified after his re-election. The authorities are endeavouring to contain the tensions heightened by the Israel-Hamas war, by force if necessary. The army's support seems to be a given.

Last updated: June 2024