Country note: Egypt
In Short
By Stephen Bailey-Smith, Senior Economist at Global Evolution
We conducted a due diligence trip to Cairo in Sep 24. We arrived around 6 months after the end of a protracted currency crisis. The solution involved coordinated international support, especially from regional partners. The resumption of the Arab-Israeli conflict appears to have focused minds over the importance of Egypt to regional stability. Yet Egypt’s too important to fail status arguably contributes to the glacial pace of reforms. The government suggests there is now greater commitment to reducing the economic role of the state (and the army) and promoting the private sector to accelerate growth and resuscitating fragile public finances. Perhaps the litmus tests will be the success of the privatization and market pricing in fuel and energy. The other key test will be the commitment to more market-based policy in both FX and domestic interest rates. The huge depreciation and sharp increase in nominal interest rates in Mar 24 has gone someway to restore short-term currency confidence: ongoing high levels of dollarization suggest Egyptian are still to be convinced.
Politics: too important to fail
As the most populus country in the Middle East, Egypt has always been seen as too important for regional security to fall into economic chaos. With the Egyptian economy struggling under the weight of excessive public debt, the latest regional conflict between Israel and its neighbours, proved timely in so much as it focused the international community’s mind to come up with an economic package large enough to resuscitate the failing economy.
Although long in the making, the timing of the announcement of the UAE’s USD35.0bn purchase of land in Raz El Hekma in late Feb 24 was critical. In combination with a multilateral donor coordinated aid package and better monetary policy, the financial flows were sufficient to improve investor confidence.
In some ways, the unwavering international and especially the regional community’s commitment to keep Egypt afloat may explain the glacial pace of political and economic reform. While the government suggests this time it is different, and they will promote the private sector: proof is in the pudding. Importantly, the quid pro quo for state-sponsored but essentially private sector regional investment appears a more level playing field for foreign investor against local agents including the army, which still dominated much of Egypt’s economy.
Economic growth: rebalancing
Real GDP growth has averaged around 4.0% y/y over the last decade. After slowing in 2020 to 1.5% y/y, real GDP growth bounced to 6.7% y/y in 2021 before normalizing to 4.2% in 2022 and declining to 2.9% y/y in 2023. The slowdown was arguably the product of a poor policy response to COVID, which fostered a currency crisis and huge macroeconomic instability.
