Debts and EGP devaluation: How can Egypt make it through the bottleneck?

Up until the turn of the year, Egypt’s economy had been on a steady growth path, being one of a handful of the world’s emerging markets to achieve positive growth in the pandemic year (2020/2021), at 3.3 percent. On the back of a sustained boom in its IT and construction sectors, as well as a total of $8.2 billion in IMF loans, Egypt sustained economic growth well into 2021, with the vital tourism sector also showing signs of recovery.

Venturing into 2022 with high hopes, the Egyptian economy was soon to find itself amidst a debacle: a growing global supply chain crisis topped up by being cut off from 80 percent of its wheat exports due to the Russian aggression on Ukraine – both countries are also significant sources of tourism for Egypt, accounting to nearly a third of foreign tourists before the Covid-19 pandemic. Consequently, and most significantly, “Egypt’s Central Bank raised key policy rates by 100 basis points and devalued the Egyptian pound by nearly 17 percent on Monday, March 21, leaving many panicked with flashbacks to 2016 when the bank floated the pound and its price plunged by 48 [percent],” wrote Devon Murray for the American University in Cairo.

To the rescue, Gulf Arab states once again showed up for Egypt, channeling up to $22 billion in central bank deposits, investment deals, and takeover of stakes agreements. Talks about a potential new IMF deal surfaced but were never confirmed in a full official capacity. At the end of May, Moody’s Investors Services affirmed Egypt’s long-term foreign and local currency issuer ratings at B2, yet downgraded its future outlook to negative from stable, implying concerns over the country’s forecasted ability to meet external debt service payments.

Last week, an unnamed central bank official was quoted by Egypt’s state news agency MENA as saying that, during the first five months of 2022, Egypt paid $10 billion towards servicing foreign debt, and $14 billion to foreign investment funds that departed the market, for a total of $24 billion, showcasing the severity of the burden of debt repayments on the economy, reports Reuters. In May, Egypt’s headline consumer price inflation rate hit 15.3 percent,

Can Egypt sustain growth and repay its debts?

Despite the precarious situation, the World Bank predicts Egypt’s economy will have grown at just above 6 percent in the fiscal year ending in June 2022, “mainly reflecting the solid performance during the first half of the fiscal year,” explains Sara Alnashar, the World Bank (WB)’s Senior Economist.

“However, with the repercussions of the war in Ukraine, waning global demand, and the phase-out of the favorable base effects, we expect that Egypt’s growth will decline to 4.8 percent in FY23 [fiscal year ending June 2023]; below the pre-pandemic average.”

This projected growth will be led by the same resilient sectors that carried the economy through the Covid-19 crisis, namely agriculture, construction, and communications. However, a major factor that also helped sustain Egypt through the Covid-19 crisis, private consumption, is expected to take a hit due to the “exchange rate depreciation, soaring international commodity prices, and structural challenges,” adds Alnashar.

Debt, which has reached 92 percent of the country’s GDP, constitutes a major concern for observers and economists, but the World Bank also acknowledged Egypt’s efforts to reduce the debt-to-GDP ratio since 2016/2017, affirming that a significant portion of Egypt’s foreign debt “remains predominantly medium- to long-term and on relatively favorable terms”.

“Nevertheless, government debt remains elevated; the rise in the foreign-currency-denominated portion (constituting 27 percent of total government debt by end of June 21) entails some risks considering the pressures on external accounts from the successive exogenous shocks like Covid-19 and the war in Ukraine,” elaborates Alnashar.

Cautioning that the government debt “continuing to increase in 2021/2022, mainly due to the effect of the exchange rate depreciation,” Alnashar underscores the importance of Egypt’s medium-term debt strategy which “confirms Egypt’s commitment to fiscal consolidation and debt-reduction over the medium-term. This could create the space to increase spending on human capital development, social protection and investment.”

EGP depreciation and exports

In 2016, the steep devaluation of the EGP was billed as a means to achieve higher exports due to the currency’s supposed increased competitiveness. Though exports have been on an upward trend ever since, the increase failed to meet the government’s oversized ambitions, which had set out to increase exports in Egypt to $100 billion by the mid-decade. Its exports in 2021 stood at $45 billion.

“Egyptian exports did not increase with currency liberalization as the industry depends on imported components and raw materials,” said Maha Saleh, foreign trade expert and Government Affairs and Public Policy Director at NGage Consulting, to Business Forward in a 2021 editorial.

Hoda Youssef, Senior Economist from the World Bank agrees that devaluation alone isn’t going to significantly boost exports, laying out recommendations to achieve such aspirations: “Alleviating non-tariff barriers, like high trade costs at the country’s borders, will have economy-wide implications through their effect on the price and quantity of traded products,” she claims.

Non-tariff barriers “which include lengthy procedures, heavy documentation requirements and costly clearance process for imported and exported goods, among others, are going to impose high fixed costs on firms, affecting their ability to export.”

She cautions against using non-tariff barriers for protective measures. “While non-tariff measures are meant to address legitimate objectives, they are often used as a protection mechanism for domestic production or to curtail imports, which puts Egypt in a weak position especially when compared to other lower middle-income countries,” adds Youssef.

“Infrastructure constraints represent additional challenges, including those related to limited or inefficient storage, cooling and testing facilities. In some cases, export bans are imposed on certain products that are considered as strategic goods,” she further highlights.

Higher exports could be a path Egypt needs to achieve stability in its foreign currency situation, but significant exports are often carried out by the private sector, which, in Egypt’s non-oil sector, has been contracting for nearly 18 months.

“To be able to sustain this [exporting] process, the private sector should be the main champion of that, to transfer the necessary skills and knowhow and maintain the quality of the suppliers,” explained Saleh from NGage Consulting.

“Moreover, there is a need to gear production towards higher value-added and technology-intensive products, which developing countries are increasingly exporting,” explains Youssef from the World Bank. “This requires a higher degree of competition in domestic markets, and a conducive enabling environment for firms to upgrade their technological capabilities as well as their production processes and products.”

Stay tuned for more stories on how Egypt’s economy can make it through the bottleneck…

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