Reporting from Cairo, Egypt
Over the past two years, Egypt has been facing bleak economic prospects that have been worsening day by day. The features of its economic crisis began to take shape and worsen clearly after the outbreak of the Russian-Ukrainian war in February 2022, but the flight of hot money from the country thwarted all government tricks to cover up the difficult situation.
The repercussions of the Ukrainian war and the global monetary tightening policy have led to an outflow of foreign indirect investments from emerging markets in the face of uncertainty. The exit of a large part of hot money from local debt instruments in Egypt contributed to use of part of its foreign exchange reserves to finance these outflows.
Since then, the Egyptian pound has been devalued against the US dollar several times in an attempt to mend the perforated garment, but to no avail. The Egyptian economy suffers from structural problems that the government is slow to reform, which has made everyone lose confidence and hope in the possibility of overcoming the crisis.
Origins of the crisis
Over the past 10 years, Egypt has received the largest amount in its history of loans, aid, grants, and donations from Gulf states and international institutions, but they have all failed to put the economy on the right track.
According to many observers and specialists inside and outside the country, the government has squandered those resources and distributed them unwisely. The successive governments, since the arrival of President Abdel Fattah El-Sisi to power, have poured hundreds of billions of dollars into huge projects with little or no profitability, not to mention that they completely lack the dollar returns that can be used to pay off the interest on loans. Some of these projects are not needed by Egypt at all or have no priority at all.
At the same time, the state, with its various institutions, has crowded out the private sector in all areas, which has harmed the latter’s ability to employ, expand production, and increase export capacity. Even its share of bank loans has fallen to its lowest level in decades.
The government has defended itself by saying that it is necessary to create these projects to attract foreign investment and maintain employment levels. However, foreign investment has not arrived at the desired level, and what has come, has focused only on buying assets in the tourism and real estate sectors or in profitable strategic government companies.
Lenders’ reluctance
In light of this situation, many have refrained from helping Egypt in its crisis except to a limited extent, in the hope that it will reset its economic compass in a way that restores confidence in it.
At the beginning of the crisis, the Gulf states have reluctantly tried to provide urgent assistance by buying stakes in strategic companies and depositing several billion dollars in the Central Bank of Egypt as deposits, until Cairo sorted out its affairs and carried out the necessary economic reforms.
The International Monetary Fund also entered negotiations with the government early last year to lend Egypt $3 billion. Cairo received the first tranche of it, but Egypt’s procrastination in the required reforms failed the reviews of the following tranches, so the fund stopped disbursing it.
The Gulf states have also refrained from providing assistance, even to the point of refusing to buy strategic assets that would provide Cairo with any dollars to help pay off its debts or finance its needs of essential imported goods.
In light of the crisis, the US dollar has more than doubled against the Egyptian pound in the parallel market, goods have accumulated in ports, remittances from Egyptian workers abroad have declined, the dues of oil and gas companies operating in Egypt have accumulated, and the transfer of foreign companies’ profits has been disrupted.
Over time, the crisis has put more and more pressure on Egypt, especially with the entry of 2024, in which Egypt’s external debt obligations amount to more than $30 billion. The country’s ranking has also declined in many important economic indicators.
In January, JPMorgan decided to exclude Egypt from its emerging market government bond index, which means higher insurance costs for issuing Egyptian bonds in international markets, and therefore an increase in the interest burden on new issuances.
Successive rescue packages
However, surprisingly and amazingly, rescue packages started to come one after another for Egypt, which was on the brink of disaster. In February, the Egyptian government signed a deal with the Abu Dhabi Sovereign Fund (ADQ) to develop the Ras Al Hikma area on the Mediterranean coast for $24 billion, which Cairo will receive in cash, in addition to converting deposits of the UAE at the Central Bank of Egypt worth $10 billion into an Egyptian pound, an amount that Abu Dhabi will reinvest in Egypt.
The deal, which observers described as a political rather than an economic deal, was a lifeline for the economy and the political system in Egypt. The deal prevented, without exaggeration, the worst possible scenarios for the country and the Egyptians.
Afterwards, Cairo’s negotiations with the IMF accelerated and the government began to gradually release the goods accumulated in the ports. At the same time, a new devaluation of the currency was announced, bringing the value of the US dollar to around 50 pounds instead of 31 pounds (the rate now is under 50 pounds for dollar).
Two weeks ago, Egypt and the IMF signed a financing agreement that increases the value of what Egypt was going to get from $3 billion, as we mentioned, to $8 billion. It also gives Egypt the right to apply for a $1.2 billion loan from the Environmental Sustainability Fund.
Last week, Cairo signed a partnership agreement with the European Union, in the presence of several European leaders, under which Egypt will receive 7.4 billion euros, distributed between 5 billion euros in concessional loans, 1.8 billion euros in additional investments, and 600 million euros in grants.
A few days ago, the World Bank announced its intention to provide Egypt with $6 billion over 3 years to support the Egyptian economy, including $3 billion in financial support for government programs and $3 billion to support the private sector.
Emirati Interest
What prompted all these parties, who have been hesitant for a long time, to provide massive financial support to Egypt at this time?
Observers have considered the value of the Ras Al Hikma development deal with the United Arab Emirates to be of great importance. This is because it provides the Egyptian government with a tool it needs to close the dollar gap and balance the real price of the pound with the dollar exchange rate in the parallel market before the devaluation of the pound.
From an economic perspective, this is absolutely correct. However, the size of the deal, its timing, and the speed of its financial value delivery surprised the International Monetary Fund (IMF) and international financial markets.
This raises questions about what prompted Abu Dhabi to pay this huge amount in cash and immediately, which is unusual for long-term projects that will not bear fruit for many years.
It is clear that building political influence in different countries in the region is one of the goals of the Gulf state.
Ebtesam Al-Ketbi, President of the Emirates Policy Center, a think tank based in Abu Dhabi and close to the decision-making process there, stated that the exacerbation of economic challenges in Egypt is not in the UAE’s interest.
She told Bloomberg that the UAE’s goal in supporting Egypt is to ensure stability in Egypt and avoid the return of Islamist groups such as the Muslim Brotherhood, which thrive in times of turmoil.
Ziad Bahaa El-Din, former Deputy Prime Minister of Egypt and former Chairman of the Investment Authority, stated that the deal between Egypt and the UAE shows the latter’s desire to participate in the economic rescue package put in place by the international community for geopolitical reasons, and to maintain the stability of Egypt and the region.
While the financial lifeline from the UAE is important, an informed source ruled out that the deal would change Cairo’s positions on issues where its views differ from those of the UAE, such as the situation in Libya and Sudan.
IMF changes position
The International Monetary Fund (IMF), which had been stalling the Egyptian government for a year in disbursing the agreed-upon loan tranches, after having disbursed the first tranche, citing Cairo’s failure to implement the required economic reforms, changed its position after the Ras Al Khaimah deal.
The IMF suddenly returned to a path of cooperation with Egypt without any commitment to implementing any of its previous and strict conditions. Moreover, the IMF even increased the loan it intends to grant to Egypt, even though it has only received promises to proceed with the pace of privatization.
According to many people I have spoken to, the IMF’s return to supporting Egypt and its retreat from its tough stance on the economic reforms required from Cairo reflects an implicit international agreement to prevent an economic catastrophe in the largest Arab country in terms of population.
According to them, the turbulent regional situation cannot tolerate any disturbances in Egypt, especially with the ongoing real war on its borders waged by Israel on the Gaza Strip for months.
The war has exacerbated Egypt’s economic problems, given the decline in revenues of tourism and navigation in the Suez Canal due to the Houthi threats to ships passing through the Red Sea.
In the south, the war that has been going on for nearly a year between the Sudanese army and the Rapid Support Forces has caused millions of Sudanese to flee to Egypt, putting additional pressure on all the facilities and resources of a state experiencing its worst economic crisis in decades.
Considering the popular discontent with the economic situation, these displaced people have doubled the state of resentment and anger against the government, which is facing criticism for its leniency in allowing them to enter in such numbers that the economic situation cannot bear. The criticism is increasing towards the benefits that have been approved for these displaced people, equalizing them with Egyptians in government education and health facilities. This is a behavior that does not agree with a country that was facing great difficulty in arranging the country’s external obligations even at the minimum level.
Rising discontent over poor economic conditions, the chaos of Sudanese refugees, and the bad situation in Gaza required a quick calming of the Egyptian people’s souls that could not have been achieved without pumping oxygen into the lungs of the economy.
From this perspective, we can understand the IMF’s recent backtracking on its stance on some global economic issues, which appears to be driven by political decisions from the Fund’s major shareholders.
Illegal Immigration
The decision of the IMF is in line with the position adopted by the European Union, which found in Egypt a serious partner in preventing illegal immigration that EU countries have been suffering from for about a decade.
Egypt does not blackmail anyone with the issue of illegal immigration and does not pressure the European Union on this matter, unlike other countries. Egypt has been combating this phenomenon since around 2015. However, political or economic instability in Cairo simply means a new wave of uncontrolled flows of migrants fleeing Africa, due to wars or natural disasters.
The deterioration of the situation in Sudan is a potential cause for new waves. Therefore, helping Cairo economically prevents the deterioration of its ability to host these people, who will remain a burden on the Egyptian economy despite any aid, until the war in their country ends.
Therefore, it is clear that the change in the wind direction in the past few weeks has not only prevented an economic catastrophe in Egypt, but it has also prevented geopolitical catastrophes in the region. If the urgent rescue packages had not been available, the region would have witnessed a free fall that no one could have prevented if the situation in Egypt had deteriorated further.