Five years after the Arab Spring and despite continued security issues, Egypt has made tremendous progress in rebuilding its economy. Melodie Michel reports.


It’s already been five years since the overthrow of former President Hosni Mubarak, but a taxi ride around Tahrir Square still brings back images of the thousands of Egyptians who gathered there to demand change in January 2011, turning the public square into a symbol of the power of the people against government.

But the symbol that comes to mind when trying to describe Egypt’s current economic situation is that of the Pyramids of Giza: monuments that achieved posterity through years of careful construction and many unpleasant sacrifices, though in this case, one can only hope that the sacrifices will be more social and political than human.

From a political standpoint, it was only late last year that Egypt completed the third and final step of its transition to the post-Mubarak regime, with parliamentary elections that saw the majority of votes going to parties formed in the wake of the revolution: the Free Egyptians Party and Nation’s Future Party. While not free of controversy – turnout was particularly low, which critics took as an act of rebellion against the “undemocratic” exclusion of certain candidates – the election brought Egypt a degree of political stability not seen since the revolution.

“The political landscape is improving tremendously. The mix is quite healthy, and this is possibly one of the best parliaments that has been in place for some time, considering the transparency with which the election was done,” says Ashraf Aboualam, senior general manager FI and trade finance at Banque du Caire.


FX shortages

Now that a relatively stable government is in place, there is a lot of work to be done, and the most urgent task of all is to solve the country’s foreign exchange (FX) liquidity situation. At the end of 2015, the country’s US dollar reserves were estimated at around US$16.4bn, just enough to sustain roughly four months of imports – the minimum recommended by the IMF. The crisis has a number of causes: chronic trade deficit, huge revolution-related drop in foreign direct investment (FDI), and reduction in cash-squeezed Gulf countries’ support since oil prices started their downward tumble.

It is also a vicious circle, as the potential difficulty in repatriating profits is deterring foreign investment. “There are convertibility issues in the long term on the revenue side: on a large-scale electricity project you have a revenue of up to 30 years, which has to be converted back into US dollars to pay debt, so that is an issue,” explains Barry Lynch, managing director, onshore, at Mainstream Renewable Power.

Solving this requires significant policy changes – something that the central bank’s new governor, who started the role in January 2016, seems determined to achieve. Tarek Amer, a former central bank deputy governor who was also chairman of the National Bank of Egypt (NBE) from 2008 to 2013, certainly benefits from the support of the financial sector. Since his appointment, he has introduced a number of measures to tackle the liquidity problem, including removing caps on FX deposits and withdrawals for individuals and companies importing essential goods and easing restrictions for large exporters who had struggled to obtain manufacturing components.

“I appreciate the new governor, I think he’s very competent, and he’s consulting all the banks to assess any negative impact from the policies he is considering. If you come to Egypt, I invite you to visit supermarkets and malls: it feels as if you were in Germany or Switzerland. When you are importing almost half a billion dollars of luxury consumer goods, I believe we need some kind of regulation, which the government is currently trying to do. I don’t think we are a country whose economy can afford such luxuries, while there are factories that are standing in a queue because they can’t import the spare parts they need.

“In the last few weeks the central bank has issued some decrees, and now exporters will have much better capacity to import the raw materials they need for exportation,” adds Aboualam.

Just as this supplement was going to press, the central bank devalued the Egyptian pound, which went from 7.73 to 8.85 to the dollar, in order to reduce black market trading, discourage imports and boost exports. The depreciating pound should also be a boon for tourism, which has been hit since the terrorist attack that killed 224 passengers on a Russian airliner recently departed from Sharm el Sheikh Airport in November 2015.

Now Egypt is working to restore a perception of security, having hired global consultancy Control Risk to audit control measures at all of its airports – in Cairo this journalist had to go through no less than three X-ray checkpoints before boarding the plane. Recent events, though, including the gruesome torture and killing of Italian researcher Giulio Regeni, suspected to have been carried out by Egypt’s security forces, mean that it will take a lot more than an overhaul of airport security to make travellers feel safe in the country.

But the Egyptian tourism sector is used to disruptions, and according to the World Travel and Tourism Council, the sector’s total contribution to GDP (including wider effects from investment and induced income impacts) was E£255bn (US$28.7bn) in 2014 (12.8% of GDP) and was expected to grow by 2.9% to E£262.3bn (US$29.5bn, 12.7% of GDP) in 2015. The organisation also expects that proportion to rise by 4.7% a year to E£413.2bn (US$43.5bn) by 2025.


Attracting investment

Still, if the central bank governor is to hit his ambitious target of US$25bn of FX reserves by the end of 2016, the country needs to attract foreign investment – and a lot of it. Luckily, projects open for funding abound, starting with the expansion of the Suez Canal. The US$8bn project, launched with great fanfare (including a national holiday) last August, aims to allow two-way traffic in the major trade port, as well as deepening and widening the existing channel.

Despite initial concerns over the fact that the slowdown in global trade could hamper the expected returns of that expansion, the plan seems to be working: in early March, an alliance of Saudi Arabian and UAE companies reportedly submitted a request to the Economic Commission of the Suez Canal to establish a US$3bn industrial city in its surroundings.

Egypt has made infrastructure a priority sector for development, and is not afraid to ask for funding from far-away pastures: at the end of February, President Abdel Fattah Al-Sisi started an Asian tour to Japan, Kazakhstan and South Korea, and the charm offensive paid off. From Japan alone, Al-Sisi received three loans totaling US$460mn for the construction of a new passenger terminal in Borg Al-Arab Airport in Alexandria, the increase of energy efficiency and the building of a power plant in Hurghada at a cost of US$95mn.

There was also the promise of US$20bn worth of investment in projects involving Japanese companies, particularly in the energy sector and around developments in the Suez Canal area.
Coincidentally, the week after the announcement, Nissan’s Egyptian unit froze a plant expansion project in Cairo due to the lack of access to foreign currency, despite admitting that the central bank’s policies were on the right track to solve the problem. Still, this is exactly the opposite of what Egypt wants.

“There were two Asian visits from the president in the last three months to look at where investment can come from. The first time he was in Singapore, China and Indonesia. This time he was in Kazakhstan, Japan and South Korea. Companies from these countries already have factories in Egypt, but he wants them to expand their investments,” says Alaa Gouda, general manager and member of the board of directors at the Export Credit Guarantee Company of Egypt.


Rise of the power sector

One of the most promising sectors for economic development is power: Egypt has been suffering from dramatic power shortages for years, due to restricted capacity and population growth, but the number of electricity projects in the pipeline bodes well for a solution to the crisis.

The largest one is probably the €6bn deal signed by Siemens in June 2015 to supply gas and wind power plants meant to add 50% – or 16.4GW – to Egypt’s national grid. A token of its viability, the deal received broad support from local and international banks in one of the largest syndicated project finance transactions of 2015 (€4.1bn).

Two of the plants are to be constructed by a consortium of Siemens and Egypt-based conglomerate Orascom Construction, with a total generation capacity of 9.6GW. The agreement also includes the supply of 600 wind turbines for 12 wind farms in the Gulf of Suez, with a combined capacity of 2GW.

In fact, renewables is a growing focus area for the Egyptian government, which aims to generate 20% of its electricity needs from renewable sources by 2020. This represents the addition of 8GW of renewable energy to the grid, predicted to be split between 5.5GW of wind power, and 2.5GW of solar power. Mena investment bank EFG Hermes believes that this is creating a debt and equity investment opportunity of approximately US$6bn until 2018.

And renewable projects seem to be selling like hotcakes: in Egypt’s first renewable energy tender at the beginning 2015, the solar segment was oversubscribed, with 4,000MW of bids for 2,000MW worth of project capacity. Among (many) others, the New and Renewable Energy Authority (NREA) awarded a US$200mn project, which involves building two photovoltaic plants near Benban, to Italian firm Building Energy, and a further US$600mn worth of solar projects to Norway’s Scatec Energy.

“Egypt is great from a scale point of view and we’re currently proceeding with three large-scale projects there and looking for many more,” comments Lynch of Mainstream Renewable Power.

The country hopes to stop importing energy by 2020, and even to export some in the future – an ambition prompted by the discovery of an estimated 30 trillion cubic feet of gas at the Zohr field in 2015. Italian company Eni, which discovered the field, just completed the first production tests, and plans to build three wells this year, with production expected to start by the end of 2017.


Gateway to Africa

Egypt is also set to capitalise on its geographic location, at the crossroads between the Middle East and Africa. Gouda adds: “The government is selling Egypt as a gateway to Africa. I had a meeting with the chairman of LG a couple of months ago, and they’re already exporting TVs to Africa from Egypt. We are in a very favourable geographic position.”

That advantage is partly offset by the fact that Egypt’s two land borders (with Libya and Sudan) are facing significant security risks, but the country’s strong port capacity – soon to be boosted by the New Suez Canal – allows it to do most of its shipping by sea.

Egypt’s two-day “Africa 2016” forum, held in Sharm el Sheikh in February to discuss the country’s role as a key investor in the development of the African continent, as well as ways to enhance trade and investment between African countries, is symbolic of the Egypt’s desire to look south for long-term growth.

As part of the event, Egypt held a meeting with the Sudanese president and the Ethiopian prime minister to discuss efforts to combat terrorism and extremism, and which resulted in the creation of a joint finance fund to carry out development projects in the three countries.

After months of tensions related to a controversial dam hydropower plant being built along the Blue Nile River in Ethiopia, which Egypt worried could have negative downstream impacts, the agreement signalled the start of a new era in the Egypt-Africa relationship. “My country is committed to Africa and will spare no efforts to extend and strengthen ties and integration across all African countries in order to help it drive its economic and social development,” President Al-Sisi said as a welcome to the forum.