Egypt must weigh up finance woes with key role in conflict

Pexels/Irwan Zahuri

Egypt is facing foreign currency shortages, further currency devaluation and rampant inflation.

What’s more GCC states, which have historically come to the country’s rescue, are less willing to write cheques to the country’s central bank without the prospect of receiving assets or investments in return. 

Yet the war in Gaza could provide a way out for the Egyptian economy, if the government in Cairo is able to trade its regional position and influence for help in overcoming its financial difficulties. 

• China injects $956m into Egypt’s central bank
• Gaza conflict puts pressure on neighbours’ economies
• Qatar to invest $1.5bn in Egypt’s industrial sector

There’s no doubt about the seriousness of the economic and financial challenges that Egypt is facing. 

Over the past six weeks, the country has been downgraded by all three of the major international credit rating agencies.

Moody’s led the way, on October 5, downgrading to Caa, a level that implies a very high likelihood that the government will default on its debts. It now rates Egypt at the same level that it rates Iraq, Nigeria and Bolivia. 

On October 20, S&P followed with a downgrade to B-, a rating one notch higher than Moody’s, but still at the lowest end of the rating scale.

On November 3, Fitch completed the picture with its own downgrade to B-.

Explaining their rating actions, all three agencies told similar stories: high levels of government debt repayments over the next few months, limited access to external re-financing, and slow progress on economic reforms that have been agreed with the International Monetary Fund (IMF) and which aim to put the Egyptian economy on a more stable footing. 

Egypt’s decision to bring its presidential elections forward, from early 2024 to December this year, is seen as a move to confirm President Abdel Fattah Al-Sisi’s third term in office before difficult decisions are taken on the exchange rate and other matters that touch on everyday life. 

Over the 12 months to January 2023, the Egyptian pound lost half its value on international markets, and now trades at around 30 to the dollar.

The unofficial rate is currently around 40 to the dollar, and it is to that level that the pound is expected to fall whenever the next devaluation is engineered. 

The impact on food prices will be immediate and hardship will be felt in particular during Ramadan – which will begin around 10 March next year – since about one third of Egypt’s total food import bill is incurred in the weeks before and during the holy month. 

Overhanging the vexed question of the exchange rate, is the need to find foreign currency to service debt (although the vast majority of interest is due in local currency) and to fund imports.

The shortage of foreign currency has been a significant problem for private sector companies in Egypt over the past few months. 

Economic challenges, even crises, are hardly a new phenomenon in Egypt. Generally, immediate needs are covered by the GCC states depositing billions of dollars into the country’s central bank, while IMF facilities, accompanied by a few half-hearted reform measures, address longer term challenges. 

Financial support from the GCC states has become more conditional in recent years: rather than cash deposits, GCC governments are keen to receive something in return, for example by investing in projects or taking advantage of sales of government assets. Abu Dhabi’s sovereign wealth fund ADQ recently bought minority stakes in three oil and petrochemical companies. 

At the end of October, it was China’s Commercial Development Bank that deposited $956 million into the Central Bank of Egypt – not a GCC government.

As for the IMF, in December 2022, Egypt signed an arrangement to receive $3 billion over 46 months, but this is far from sufficient to meet the government’s needs. The IMF facility is supposed to act as a catalyst for the investment of much larger amounts from regional and international lenders. 

But now Egypt finds itself a key player in the Israel-Hamas war that, despite being contained within a small geographic area, is likely to become one of the consequential conflicts to have been fought in the region for many years. 

Though not participating in the fighting, Egypt has a crucial role to play: how many refugees will Egypt be willing to accept, what role will it play in the governance of Gaza after the war is over, and how will it manage the border crossing at Rafah, Gaza’s only outlet to the world that is not policed by Israel?

After Egypt put its weight behind the coalition fighting Iraq in the first Gulf war, in 1991, the country was rewarded with debt relief and international investment, which led to several years of strong growth and relative prosperity.

Let’s hope that Egypt can play its cards now with the same agility that it did then. 

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems