Egypt’s economic turnaround has been remarkable. A salvo of multi-billion-dollar investments and loans has warded off a looming crisis, restored foreign currency liquidity and given trade a much-needed boost. But with geopolitical tensions and supply chain disruptions lingering, is the recovery here to stay? John Basquill reports.
Egypt started 2024 on the brink of disaster.
Two years earlier, Russia’s invasion of Ukraine laid bare the country’s dependence on food and fuel imports. Egypt – historically the world’s largest importer of wheat, of which more than 80% was sourced from Russia or Ukraine – was forced to run down its foreign currency reserves to ensure ongoing access to crucial commodities.
By mid-2023, the government was grappling with rampant inflation and looming debts. Its draft budget for 2023/24 allocated 56% of public spending to servicing existing debt, of which around half would be paid by additional borrowing.
Crisis Group, which focuses on steering countries away from potential conflict, described Egypt’s situation in May 2023 as “a profound economic crisis that threatens to disrupt its domestic, economic and foreign policies”.
The situation deteriorated further still in October following the major escalation in the conflict between Israel and Hamas. With Egypt sharing a border with Gaza, the country’s tourism industry – previously worth more than 8% of GDP – took a substantial hit.
At the same time, Egypt was indirectly affected by attacks on commercial vessels by Yemen’s Iran-backed Houthi group, which was acting in retaliation against Israel’s aggression in Gaza.
Those attacks prompted the majority of shipping companies to avoid the Red Sea and Gulf of Aden entirely, re-routing vessels around Southern Africa’s Cape of Good Hope. This resulted in a drop in Suez Canal transit revenues of nearly 50%, further depriving Egypt of a vital source of foreign currency.
A report published in May by the UN Development Programme estimates the Gaza war’s impact on canal revenues and tourism could cause Egypt’s foreign currency reserves to decline by between US$3.7bn and US$13.7bn over the next year, depending on the intensity of the conflict.
Egypt handed a lifeline
As the prospect of sovereign default loomed, in the early months of 2024, Egypt’s fate changed.
ADQ, an Abu Dhabi sovereign wealth fund, announced in February it would invest US$35bn in the country – the largest foreign direct investment deal ever seen in the region, surpassing even a mammoth green hydrogen project in Mauritania agreed by another Abu Dhabi fund the previous year.
The bulk of the deal involves ADQ acquiring the development rights to Egypt’s ambitious Ras El-Hekma project.
The project’s vision is to establish a major new city on Egypt’s north coast, west of Alexandria, designed to be an attractive holiday destination, a free zone and a financial centre, with a strong emphasis on sustainability and cutting-edge technology. ADQ has also pledged to invest US$11bn in other projects across the country.
Andres Hernandez Cardona, an analyst at Belgian export credit agency Credendo, says: “Given the deal’s size and the rapid disbursement schedule against the estimated Egyptian external financial needs, the deal alone has substantially improved Egypt’s liquidity outlook.”
And just over a fortnight later, Egypt’s prospects improved further. On March 6, the country agreed an US$8bn loan programme with the International Monetary Fund (IMF), significantly expanding a US$3bn facility agreed in December 2022.
Renewal of the programme had appeared in doubt after Egypt was slow to introduce structural reforms previously agreed with the IMF, including a liberalised exchange rate system for the Egyptian pound, a sale of state-owned assets, a reduction in public spending and the creation of a level playing field for the private sector.
Egypt did float the pound in order to clinch the IMF deal, which caused a 40% drop in its value and brought the official exchange rate closer to black market rates, but the country has been slower to implement the other reforms demanded.
The IMF’s turnaround is largely rooted in addressing geopolitical tensions. When announcing the programme extension, it acknowledged that the conflicts in Ukraine, Gaza and the Red Sea “increased the complexity of macroeconomic challenges and called for decisive domestic policy action supported by a more robust external financing package”.
It also noted the Ras El-Hekma investment “has alleviated near-term balance of payment pressures and, if used judiciously, will help Egypt rebuild buffers to deal with future shocks”.
More was to come. A string of further financing facilities for Egypt soon followed, including a three-year US$6bn support programme from the World Bank Group and €7.4bn in grants and loans from the EU.
Bilal Bassiouni, head of risk forecasting at specialist intelligence advisory Pangea-Risk, says the remarkable influx of funding ultimately highlights Egypt’s geopolitical importance to the Middle East region.
“The war in Gaza, just across its borders, really amplified the position of Egypt as an integral part of the region’s stability – and Egypt defaulting or falling into an all-out economic crisis could spell risks for the entire region,” he tells GTR.
“What we saw in the lead up to March was a softening of the IMF’s position. Along with [the other investments], that meant Egypt went from being really stuck, to growing capitalisation to around US$50bn in the space of a few weeks.”
Banks open for business
As well as boosting Egyptian banks’ foreign currency liquidity, the country’s economic reforms are already having wider positive effects.
Its central bank revealed in July that funds transferred from Egyptians abroad have risen strongly since the devaluation of the pound, as the incentive to use black market rates weakens.
The impact was immediate: following the March 6 reforms, remittances increased by more than 25%, reaching US$2.2bn. The equivalent figure for May was 74% higher than for the same month last year, Central Bank of Egypt data shows.
Commerzbank’s Christiane Seyffart tells GTR that from a lender’s perspective, “attitudes towards the country have really changed” now the country has abundant dollar liquidity.
“If they can use this timeframe now to reform the economy, Egypt could really change for the better. Of course, there is a risk that as the situation is much better there is less pressure to change, but this is a huge chance to improve the fundamentals of the country,” says Seyffart, the bank’s head of country risk and portfolio management, credit risk, institutional clients.
As the prospect of an economic recovery continues to attract investment, trade is no exception. The International Finance Corporation announced in May it was committing US$150mn towards supporting economic development in Egypt, with a focus on trade and finance as well as healthcare.
The European Bank for Reconstruction and Development told Asharq Business in July it planned to provide facilities totalling US$705mn to several local banks, more than half of which is dedicated to financing intra-regional trade.
Kristina Holzhäuser, Commerzbank’s regional head for Africa and the Middle East, institutional clients and transaction banking sales, tells GTR: “This turnaround has been mirrored in the trade finance market as well.
“Over the last one or two years, there was certainly a slowdown in imports. In addition, the issue was the withdrawal of lines. Lines were very tight and we saw many banks withdraw from the market.”
Any available financing was in high demand, and lenders were predominantly focused on imports of crucial goods such as fuel, agricultural commodities and fertilisers.
“Since March, we’ve never seen such a quick turnaround in any market, in any situation, before,” she says. “Immediately, banks came back to the market, not just with trade finance lines but also with funding generally.
“From a risk appetite perspective, there had been more of a focus on tier-one banks and those with a strong Middle East background, but now I would say that many banks across the Egyptian market are active in trade finance again, and liquidity is strong.”
A new trade strategy
It is possible Egypt’s economic recovery could go hand-in-hand with a shift in trade strategy. Historically, the vast majority of the country’s exports have been to North Africa, the Middle East and Europe, but calls are growing to deepen trade ties with Sub-Saharan Africa.
Government data shows Egypt exported goods worth US$13.3bn to the Arab region in 2023, and US$13.1bn to the EU, compared to just US$4.2bn to member states of the Common Market for Eastern and Southern Africa.
But Egypt was one of eight countries to join a pilot preferential trade project under the African Continental Free Trade Area (AfCFTA) in October 2022 and has continued to seek to strengthen ties, including with a visit to Ghana by foreign affairs minister Badr Abdel-Aty in July this year.
The minister noted trade between the two countries had grown from US$78mn to US$270mn since 2020, and said AfCFTA could help double that figure again, Egypt Today reported.
“There is growing interest in Africa from an Egypt perspective,” says Commerzbank’s Holzhäuser. “Historically Egypt was very Middle East-oriented, and has strong trade and political ties to that region. Now, you can see a shift, where Egypt is competing more with Morocco to become a North African gateway into Africa.”
That trend could be boosted by European businesses nearshoring supply chains, reducing reliance on distant suppliers by establishing a greater presence in North Africa, she says – though adds that is “a longer-term trend and not an Egypt-specific one”.
Pangea-Risk’s Bassiouni points out these developments are still in their early stages, noting: “We’re not seeing the same level of change in practice, unlike Morocco, which is demonstrating that on a massive scale. The intention is there, but it will likely be challenged by other dominant players in the market and will take a long time to establish these flows.”
But according to Bassiouni, Egypt could also strengthen its position if some countries continue to pursue efforts to carry out trade transactions with alternative currencies.
“Trading outside of the dollar is definitely a growing phenomenon within trade,” he says. “It will form part of the AfCFTA, lots of countries are looking for solutions around this, and Egypt is a massive proponent on the continent at the moment.”
Notably, Egypt joined the expanded Brics group of nations in 2024 – along with Argentina, Ethiopia, Iran, Saudi Arabia and the UAE – which has de-dollarisation of trade among its stated aims. Were that trend to take hold over the longer term, it could soften Egypt’s reliance on generating substantial dollar revenues.
Cementing the recovery
In the more immediate term, attention is already turning to whether Egypt’s recovery is here to stay. Despite the influx of investment and liquidity, there are pressing domestic challenges to resolve.
A shortage of gas supply has resulted in rolling blackouts, a halt to LNG exports and difficulties in fertiliser production. Inflation has dropped each month since March, but still stood at 27.5% in June.
Food security remains a concern, prompting President Abdel Fattah El Sisi to launch an ambitious project to replace sizeable wheat, corn and sugar imports by reclaiming land, improving irrigation and modernising production methods.
And, vitally, Egypt needs to ensure it sticks to the terms of the IMF facility. Wrestling economic influence away from state-owned enterprises may not prove enticing for Sisi’s government, and it is possible state asset sales will fail to generate as much income as hoped – yet compliance with the IMF’s demand could prove vital in ensuring the stream of foreign investment continues to flow.
“One issue is confidence, that this time is different to the past, and recently we have seen that the funds entering the country are beginning to be efficiently used,” says Seyffart at Commerzbank.
“There is a good chance the country will follow this path for some time, but in the past, Egypt has been good at delivering on these programmes for the first year or two, but then it breaks up.”
Credendo’s Hernandez Cardona notes that in the short term, “the difficult socioeconomic situation will continue to weigh on the capacity of authorities to pursue IMF reforms, especially as the devaluation of the pound will exacerbate existing social grievances”.
Despite acknowledging a “slightly positive outlook” in terms of liquidity, the agency gives Egypt a medium to long-term political risk rating of 7 – its highest-risk score – and a short-term rating of 6.
Ordinarily, the financial buffer provided to Egypt might be expected to provide economic stability for several years, Bassiouni suggests. If tourism and remittance revenues continue to grow, and if a de-escalation of tensions in the Middle East means Suez Canal and tourism revenues recuperate, that could indeed prove the case.
“But this is not the first time Egypt has found itself on the brink and then finds a way out, and there are still long-term issues,” Bassiouni says, particularly if the war in Gaza and the attacks in the Red Sea continue.
“That’s a worst-case scenario,” he says. “But if that happens, we may see a reverse back into crisis – even within the next two years.”
