The clocks have changed in Egypt and summer has officially begun but what is also becoming apparent is that Egypt is not only on a new time, it is entering a new economic era. The average Egyptian continues to struggle with an ever-increasing cost of living but we are seeing some surprisingly mature financial choices finally beginning to be made by President Sisi and his Ministers. They are being rolled out like baby steps but it is creating optimism that this too shall pass and better, brighter days will dawn. Whilst eyes still look east to the on-going conflict in Gaza, there is nonetheless a lighter mood in the Egyptian air than we have seen in months. Cairo still must worry about potential refugees, international allegiances, diplomatic positioning, negotiation tactics and peace-making options of course, but with things running more smoothly at home Sisi now has some extra head space to devote to it all.
Gaza. While Egyptians enjoyed a national holiday in celebration of Sinai Liberation Day, Israel claimed that four of the remaining six Hamas battalions are situated in Rafah on Egypt’s border, amongst the one million-plus Palestinians displaced by the fighting. All signs point to Israel launching a full scale assault on the city and that worries Egypt. On 26th April, Sisi issued a statement saying, “we completely reject the forced eviction of Palestinians from their land to Sinai or anywhere to prevent the liquidation of the Palestinian struggle and protect Egypt’s national security.” Last week, Palestinian ambassador to Egypt Diab al-Louh said that as many as 100,000 Palestinians have already crossed into Egypt since October. Indeed, the skies over Cairo are disturbed daily by the sound of helicopters flying the wounded and injured to hospitals in the capital and that is a number that Sisi will be keen to cap. Egypt, working closely with Qatar, has been trying to mediate a ceasefire in Gaza for months. On 29th April, during the latest round of talks in Cairo, Israel offered Hamas a 40-day ceasefire and the release of “potentially thousands” of Palestinian prisoners in return for freeing Israeli hostages. Conflicting statements regards the deal have been made so far by Hamas officials. Israeli PM Netanyahu has also made clear that the offer only constitutes a temporary ceasefire, and that Israeli forces will eventually enter Rafah.
IMF. The Managing Director of the International Monetary Fund, Kristalina Georgieva, met with Prime Minister Madbouli as the pair attended of the opening session of the special meeting of the World Economic Forum in Riyadh in late April. A state information statement said that “the IMF supports Egypt in its structural reform measures aimed at improving the Egyptian economy, praising the positive impact of the steps taken on the Egyptian economy.” So far, Egypt has met seven out of the 15 commitments pledged under the recent USD8 billion Extended Fund Facility loan programme with the IMF but more work in this area must be done. Despite this we can already see the foundations being laid. The IMF anticipates Egypt will secure USD639 million by 1st July from continued asset sales.
Numbers. The latest round of devaluation has seen the currency stabilise. Today, USD1 will get you EGP47.90. Interest rates remain at 27.25%. But the impact the currency float has had on the economy is mind blowing. In April, the IMF projected Egypt’s inflation will remain high over the short term, reaching a peak of 32.5%. They were wrong. That rate has already been smashed. Inflation currently sits at 33.9% at the time of writing but with prices creeping up daily that rate could yet rise further.
Bread. To prove our point, the government has been forced to launch an enforcement drive to ensure bakeries comply with state-mandated price controls on bread. Officers have been deployed to inspect bakeries making non-subsidised bread. Known locally as ‘tourist bread’, a loaf that sold for EGP2 last week now sells for EGP2.50. The crackdown comes as authorities try to ensure that the price drop for flour trickles down to the consumer. A government directive now states that tourist bread must weigh 80g and that the price is capped at EGP1.50.
Budget. Egypt’s budget for the upcoming 2024/25 financial year has been sealed and it complies with promises made to the IMF. It is based on an oil price of USD82 per barrel. Here are some of the key takeaways. EGP 40.5 billion has been allocated to fund various economic stimulus programmes. Egypt targets a real GDP growth of 4%. The budget deficit is estimated at EGP 1.2 trillion (7.3% of GDP). It expects that tax revenues will grow by 32.1% – if this is achieved it will be the highest in almost seven years. It also aims to bring inflation down to 18.1% which seems much more realistic than the previous target set for the Central Bank of 7% by the last quarter of this year. The Minister of International Cooperation, Rania Al-Mashat, has said that Egypt will also receive USD400 million from the UK over the next two years to help with its budget. The Finance Minister, Mohamed Maait, too had news; his Ministry has reached an agreement with Japan which will see the Asian nation issue USD230 million to Cairo for budget support. Egypt’s outlook is looking better by the day.
Debt. Egypt’s coffers are looking the best they have in quite some time but there is still a massive burden of debt to deal with. While the government aims to cut its debt to GDP ratio to under 80% by 2027 it is now frantically trying to extend the average debt maturity to alleviate the immediate debt service burden while work continues to get the economy back on track. But it is also trying a brand new approach too. For the first time ever, the Unified General Finance Law is to be amended to impose a maximum limit on how much debt the government can carry, a limit that will decrease annually. There are some exemptions for natural emergencies and disasters, of course, but we feel this is an extremely positive piece of financial self-policing that has been needed for a long time. It will go a long way towards instilling confidence in current lenders who will then hopefully renegotiate existing agreements and encourage future investors of stability and growth.
Electricity. After suspending load shedding for the whole month of Ramadan, power cuts resumed with a vengeance after the celebrations. Previously, to let people plan, there had been a scheduled system … that was followed sporadically. This time around however it is like living in a lottery with the outages lasting as long as two hours at a time and occurring sometimes several times per day. Businesses are complaining with some reporting electricity in their offices, but nil supply to their internet providers – taking them offline for almost half of each working day. Accomplishing the most simple of tasks can now take days. Putting a bank card in an ATM is like playing Russian roulette as people gamble if their cards will be returned and their cash dispensed. The government has announced they will cease the cuts through the Coptic Easter celebrations but as temperatures rise right across the country that will bring little comfort to those looking past these short holidays and into the hot summer months. As air conditioners go on, consumption rockets. We anticipate the black outs will continue for a while.
Investment. The China Textile and Garment Council has been having high level meetings in Egypt to discuss its interest in building a brand new textile manufacturing city in the country. The council represents 20 of China’s largest textile companies. If accepted, the investments are worth around USD300 million. The textile industry is already well established in the country and we will see the world’s largest textile factory officially opened in August (trial operations will begin in June). Located in the northern city of El-Mahallah it will have an estimated production capacity of 30 tonnes per day. Egypt was already well positioned on the global textile landscape. It looks like that is about to get even better.
Houthi forces continue to target ships in the Red Sea. The Rubymar, a Belize-flagged, UK-owned bulk carrier, went down after being struck by a Houthi fired ballistic missile. Houthi attacks are on-going although they have become less frequent. Unsurprisingly, the Planning Ministry has announced that revenue from the Suez Canal has dropped by 50% as shipping continues to be disrupted by regional events and insecurity in the Red Sea. Traffic has dropped by a whopping 66 overall, with container tonnage alone falling by 82% (UNCTAD). The canal is normally a major source of hard currency for Egypt. In the financial year 2022/23 it earned USD9.4 billion in transit fees. Fees were raised by 5% in January to mitigate the impact but it has had little effect as vessels reroute to avoid risk. More shipping companies are choosing to navigate around Africa rather than through it. Transit via the Cape of Good Hope has increased by 67% since the attacks began. This is already having an impact on global financial markets as higher insurance costs, increased fuel consumption, added salaries and extra time all adds up and will contribute to inflation increases in countries far from the conflict. The trip around the continent adds 14 days to transit time and this additional cost is trickling down to consumers around the globe.
April was an unusually positive month for Egypt even while, all around it, a kind of chaos continued. Egypt has been actively involved in finding a solution to the war in Gaza but it has been quieter in its role than some expected. Sisi had not taken his usual strong man stance. He has participated of course but he had no choice but to set his focus primarily on domestic matters – specifically the economic crisis. For now though, he has successfully done that and the wolf is no longer at the door. We anticipate that he will now be free to give more attention, and lend much more clout, to regional efforts to bring peace and restore some stability to the Middle East. With his immediate financial woes being taken care of he will now return to the world stage. He has every motivation to perform well there. He does not want a war on his border. He cannot afford to lose investment and income because of it. He is adamant Palestinians deserve a homeland and he will absolutely hold out on his position to refuse refugee status as hard as Israel may push him to change his mind. Expect him to take bigger strides to rein in Israel while he will also put pressure on the USA to help end the fighting. He will not sacrifice long-term stability on his borders nor will he risk a mass influx of people. Sisi will now get back to the spot he is most comfortable in; the world stage.