Speaking at the annual conference of the Institute of International Finance (IIF) a few weeks ago, Rami Aboulnaga – deputy governor of Egypt’s central bank – was upfront about the roots of the economic emergency. “At the end of the day it was a crisis of confidence and lack of trust,” he said.
Egypt has struggled with debt and deficits for years. The Peterson Institute for International Economics (PIIE) counts eight economic crises since Egypt adopted a state-led economic model after the 1952 revolution. Past crises have often been compounded by exogenous shocks, as was the case on this occasion. The pandemic, the war in Ukraine, the war in Gaza. All these have helped fuel inflation, dent tourism and lower trade revenue.
But, as Aboulnaga acknowledged, there was also an absence of trust in policymakers to make the right decisions. The authorities’ insistence on pegging the currency to the US dollar at unsustainable levels, for instance, was a core factor in creating the latest economic emergency.
On this occasion, Egypt’s salvation came largely in the form of the United Arab Emirates, which in early 2024 announced a $35 billion deal with the Egyptian government. The majority of those funds came in exchange for development rights to a stretch of Egypt’s Mediterranean coast – Ras El Hekma. It is striking that Egypt – once the richest and most culturally significant of the Arab countries – was rescued by a petro-state roughly the size of Maine.
A few weeks after the UAE deal, a new IMF agreement was reached that provided Egypt with another $8 billion. For investors, the mood was something close to euphoric. Confidence improved dramatically. Foreign capital poured back into short-dated Egyptian treasury bills. The deal provided what Aboulnaga called, “quick wins reflected in the balance of payments.”
Fixing FX
One of the concessions that made the UAE and IMF support possible was Egypt’s devaluation of the pound. Aboulnaga said the gap between the black market and official exchange rates had reached unprecedented levels. “It becomes a lot more difficult to manage the situation when you have little trust in the system,” he said. Egyptians working abroad stopped remitting money – a key source of foreign currency. Investors stopped investing. Banks were unable to meet FX demand.
When Egypt’s policymakers removed support in March ahead for the IMF deal, the pound fell from E£0.3 to E£0.5 overnight. In a stroke, the country’s chronic FX shortage disappeared. But this is not Egypt’s first devaluation. Investors have seen this story play out again and again. A build-up of pressure – external and internal – ends up forcing a currency devaluation.
In 1979, sluggish reforms as part of a transition to more open economic policy combined with inflation and budget deficits saw the pound devalue by over 40%. In the late 80s and 90s, it was a drop in oil prices and tourism revenue combined with problematically high public spending. Between 1989 and 1991, the pound was devalued in stages by a cumulative 66%. In 2016, there was a 45% devaluation in concert with other reforms designed to boost growth.
We've worked tirelessly to ensure that inflation is on a downward trajectory... We also made sure that expectations going forward are accurate
The question is, what does Egypt need to do to convince long-term investors that this time will be different? “The best predictor of future behaviour is past behaviour,” says Pieter du Preez, senior economist for Oxford Economics Africa. “And for Egypt, we have been here before.”
Some eight months after the devaluation and the currency is still very much under the spotlight. True to their word, Egyptian authorities have largely let the market determine the pound’s value. Looking at the currency’s movements over the last few months, it is no longer the smooth line of the managed era. The pound has remained around E£0.49 to the dollar showing the government's willingness to let markets dictate its trajectory. That is already a good sign for long-term investment.
Analysts and investors say the central bank and the finance ministry deserve a great deal of credit. Central bank governor Hassan Abdalla and new finance minister Ahmed Kouchouk are perhaps the only officials singled out for praise by both the domestic and international business community.
“We've worked tirelessly to ensure that inflation is on a downward trajectory,” Aboulnaga said. Rate tightening, communication and unification of the exchange rates have had their effect. “We also made sure that expectations going forward are accurate, and this is very hard to tackle, especially when you're emerging from a period of high inflation, and inflation that was high, we're starting to see more confidence in starting to see people bring back dollars.”
Fiscal fortitude
So far, the authorities have passed the test on FX. A second key indicator that investors are looking at is government spending, especially in large infrastructure projects. Egypt has a history of mega-projects – not all of which make obvious economic sense. The terms under which the IMF agreed to provide $8 billion include not just a flexible exchange rate, but also a slowdown in infrastructure spending to reduce inflation and ensure debt sustainability.
However, the country’s new administrative capital (NAC) is set to cost an eye-watering $60 billion – and many observers suspect the price tag will end up being even higher. Projects like these are the ones that investors worry represent an outflow of limited funds for very uncertain returns. “Fiscal financing and government spending is also crucial to watch,” says du Preez. “Will the government withhold spending on these large infrastructure projects?”
Part of the reason that investors worry about mega project spending is that it is vital that Egypt works hard to reduce its debt profile. In July 2023, the finance ministry announced it expected the country’s debt-to-GDP ratio to reach 97% during the summer. Interest payments as a percentage of total government revenue have – during some quarters – passed 100%. That is unprecedented for most countries – even among emerging markets. “Typically, our alarm bells start ringing if that figure goes above 20%. So getting that down to a more consistent level will be important,” says du Preez.
Aboulnaga says that adopting a tighter fiscal stance has been a “cornerstone” of Egypt’s ability to instil new confidence in investors. There is no point in tightening monetary policy only to have fiscal spending move in the opposite direction. A lack of fiscal discipline can “completely debilitate and cripple your transmission [of monetary policy],” he said. “Then the efforts will have to be much more severe and the decisions a lot more aggressive. Today, we're seeing much more discipline on that front, and that's helping us [enact] monetary policy in a much more effective way.”
Has Egypt shown sufficient restraint on public spending? For now. In early 2024, it reduced its allocated investment funding by 15% for that fiscal year, and said it would prioritise projects that are over 70% complete. But the authorities will face real scrutiny going forward.
Walk versus talk
For their part, Egyptian authorities continue to emphasise that reform is real. Aboulnaga says the priorities are employing the right policies, bringing back stability and addressing structural issues. All this is music to investors' ears. The massive Ras El Hekma deal is significant not only for its size, but the fact that it signals the UAE’s commitment to mobilising foreign direct investment (FDI). Egypt cannot afford to rely on capital flows, which increase its vulnerability to exogenous shocks in a world with no shortage of such events. Egypt cannot control the war in Gaza or the conflict in Ukraine. But it can make sure its financial buffers consist more of FDI and competitive exports – rather than hot money flows.
When analysts look to the future, however, the picture is one of uncertainty. “I would caution that we're only in the first year of the IMF programme,” says du Preez. “The question is: what happens after the programme is gone?” In late October, BMI analysts noted that President Abdel Fattah el-Sisi had already signalled the need to renegotiate the IMF programme – ostensibly due to economic pressure as a result of geopolitical volatility. On the one hand, it is reasonable for Egypt’s government to want to protect its most vulnerable citizens from financial hardship. On the other, investors know from bitter experience that Egypt can show signs of progress for a while, only for reform efforts to stagnate.
I would caution that we're only in the first year of the IMF programme. The question is: what happens after the programme is gone?
Aboulnaga says that Egypt’s mindset is changing. Rather than trying to restrict and suppress demand, the country will create new sources of demand by supporting the private sector and encouraging FDI.
“That's a clear paradigm shift in the thinking in Egypt at all levels,” he told IIF attendees. Instead of relying on policies that will provide short-term relief, Egypt knows it needs to think more about medium and long-term sustainability if it wants to truly restore investor confidence.
“We cannot do that by just preaching and promising,” said Aboulnaga. “We do that by actual actions on the ground.”