Will 2023 bring better economic conditions for Egypt
Egypt is facing several economic challenges in the coming months. Abdel Ahmad-Rahman explains what these are.
Egypt, like other countries, is facing many economic challenges that have increased in severity after the Russian invasion of Ukraine last February. As a consequence there is a shortage of supply of many of the basic necessities, such as oil, gas and wheat, and a rise in their prices.
Over the past year, Egyptians have suffered from the repercussions of the flotation of the Egyptian pound, its depreciation against international currencies, the scarcity of the dollar in the Egyptian market, and the cost of basic imports, All of these have negatively affected Egyptians' purchasing power. As a result, the Egyptian government was forced to negotiate again with the International Monetary Fund (IMF) to obtain a new loan of USD 3 billion over the next four years.
Under the agreement, the Egyptian government committed itself to a new floatation of the Egyptian pound at a time when the dollar shortage crisis in the market is intensifying. Expectations indicate that the new flotation in the current circumstances will lead to a new decline in the price of the pound against the US dollar, because the demand for the US currency by merchants, savers, and the government will rise to finance imports and protect savings from fluctuations in the Egyptian currency.
The Egyptian government hastened to reassure public opinion by stressing that the agreement aims to achieve financial stability, advance the process of comprehensive economic reform, and stimulate sustainable growth. However, many analysts doubt that this goal can be achieved as long as the pound is unstable and the attractiveness of the investment climate for private capital is weak.
These analysts argue that the expected loan payments and additional financing are modest, and therefore not at the level of the amount of funds necessary to achieve these goals. In addition, the volume of Egypt's external debt is close to USD 177 billion, while it did not exceed USD 140 billion in 2021. In addition, Egyptian public debt currently constitutes 89 percent of GDP, according to the German Foreign Trade Foundation for Investment and Trade.
This means that the Egyptian debt service, which annually exceeds USD 20 billion, and the import bill of basic commodities will rise dramatically, while the Central Bank of Egypt's (CBE) hard currency reserves will decline.
The main problem lies in the continued decline in the value of the Egyptian currency against the dollar. Moreover, despite the fact that there have been new loans, generous foreign financing, there is still a reluctance by long-term foreign investors to enter the Egyptian market. The more the government commits itself to adopting more flexibility in the exchange rate of the pound, the more its price will tend to decline against the dollar, which will increase the demand for it in a way that raises its price and exacerbates its shortage in the market.
Selling state assets
The country is facing an acute crisis as a result of increasing imports of commodities, primarily raw materials, food and medicine. Despite the government's attempt to sell more public sector institutions or shares in them to the private sector, the shortage continues, weakening confidence in the business climate and foreign investment.
The government is seeking to adopt an economic policy that will unleash the latent forces in the private sector and reduce the role of the state in the economy. This policy is based on selling more government institutions and paving the way for domestic and foreign investment in areas that were monopolized by the state.
The Egyptian parliament initially approved a law to allow this, establishing a fund affiliated with the Investment Authority that permits the sale of the assets of the Suez Canal. However, the law sparked widespread media controversy, which necessitated a press conference by Lieutenant General Osama Rabie, head of the Suez Canal Authority. During the press conference, Rabie stressed that the establishment of an investment fund affiliated with the authority does not mean in any way disposing of any of the canal's assets as it is owned by the Egyptian people, according to the text of the constitution.
Rabie explained that the fund to be established would be financed from the authority's budget surplus, and that it aims to develop the authority and its projects for the benefit of the Egyptian people. He also confirmed that no foreign party will be allowed to control any of the fund's projects, and that sovereignty over the canal will remain Egyptian, in reference to what was raised about the exploitation of the canal's assets.
Egypt needs an additional USD14 billion to give a new impetus to reforming the economy and fixing the deficit resulting from the shortage of foreign currency in the country. The number of loans taken out by Egypt threatens to flood the country with debts, especially since Egypt's hard currency imports do not meet its debt service requirements. A similar policy adopted by some other countries has led them to bankruptcy.
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