How deep are Egypt's economic problems after the depreciation of its currency?

Egypt's currency has depreciated in recent years. (Photo by Adobe)

Egypt is struggling with the cost of servicing its external debt. Ahmad Abdel—Rahman, who is based in Egypt, explains.

The Egyptian economy has been under severe pressure over the past year because of the depreciation of the pound, the scarcity of foreign currency and soaring inflation. 

Some of the reasons for this bleak economic situation go back decades, such as the failure of industrial development and export policies that left a persistent trade deficit. Pricing the local currency above its real value, weak property rights and institutions, and the dominance of the state and the army have also impeded investment and competition. Support programmes have also been draining the state budget for a long time, although it is now being reduced.

Weak foreign investment outside the oil and gas sector has also led to a dependence mainly on tourism revenues, remittances from Egyptians working abroad, and Suez Canal transit fees.

Egyptian President Abdel Fattah El-Sisi often blames the country's economic problems on the turmoil that followed the January 2011 revolution and the rapid population growth. According to World Bank (WB) estimates, population growth increased year-on-year in 2021 by 1.7 per cent. Since 2020, the authorities have spoken of the economic shocks caused by external problems, including the COVID-19 pandemic and the war in Ukraine.

However, there are political mistakes that have led to this economic situation, including spending a lot to support the local currency, relying on volatile foreign portfolio investments, and not implementing structural reforms.

How bad has the situation become?

The economy is growing steadily, but the impact of this growth, which is expected to range between four and five per cent in the current year 2023, has not kept pace with the population increase in Egypt. Large numbers of Egyptians say their standard of living has deteriorated.

Since March 2022, the value of the Egyptian pound has fallen about 50 per cent against the dollar. An acute shortage of dollars reduced imports and the accumulation of goods at ports, which had a negative impact on the local industry.

Annual inflation rose to 25.8 per cent in January, the highest level in five years, according to official data. Prices of many basic food commodities increased faster than before.

Official data reported that the poverty rate was around 30 per cent of the population before the COVID-19 pandemic. It is estimated that 60 per cent of Egypt's 110 million people are below or near the poverty line.

The unemployment rate has fallen to just over seven per cent, but the percentage of those able to participate in the labour market has also witnessed a steady decline from 2010 to 2020. Some parts of the public education system are in a state of collapse. Large numbers of graduates work abroad when it is possible.

What support can Egypt count on?

Western and Gulf states view Egypt under Sisi as a pillar of security in a volatile region. Because of the economic shock that the Russian war against Ukraine inflicted on Egypt, Cairo received billions of dollars in deposits and investments from its Gulf allies, including Saudi Arabia and the UAE.

However, the Gulf countries began to set harsh conditions for pumping in new funds despite the renewal of their current deposits in Egypt. Increasingly, they are seeking return-earning investments.

In March 2022, the government said it had begun talks on the latest financial package from the International Monetary Fund (IMF), and eventually confirmed a USD3 billion loan linked to reforms such as reducing the role of the state and military in the economy.

Is Egypt's debt sustainable?

Egypt's debt burden is on the rise, but it is difficult to say how much risk this debt represents. The government expects that by the end of the fiscal year in June, the debt will reach 93 per cent of GDP. This shows the high debt ratio over the past few years, which the government wants to reduce to 75 per cent by 2026.

Heavy indebtedness, combined with high interest rates and a weak currency, have increased the cost of servicing debt. Interest payments on debt are expected to swallow more than 45 per cent of total revenue in the fiscal year ending in June.

External debt payments and interest have lead to a large gap in external financing. The funding gap represents the difference between supply and demand for foreign currency financing. Egypt must make many repayments in coming months. For example, it must repay the IMF, which alone will cost USD11.4 billion over the next three years.