This month it is all about the money. As March opened USD1 was trading at EGP30.89. As it ended USD1 bought you EGP47.25. The much-anticipated floatation of EGP was long overdue – indeed, we predicted it six months ago. The knock on impact on prices has been painful for many but there has still been a collective sigh of relief that the economy appears to be back on the right track. The government must now urgently implement programmes that will bring prices under control and keep inflation in line. The cash cushion created by February’s announcement of UAE investment in the country appears to have made the government more comfortable when it comes to making some tough decisions. There is still much to be done but finally work has started. We can’t claim Egypt’s financial crisis has ended – yet – but this is definitely the healthiest the coffers have been for quite some time. What remains to be seen is if these recent prudent policies will be maintained. Sisi is well known for his spending but now is not time to splurge.
Gaza. Egypt has been working with Cyprus to create an aid corridor in the Mediterranean but is still frustrated by the hundreds of aid trucks lined up on its border with Israel. Israel insists it must inspect the contents of every shipment but when they do it is done at a snail’s pace meaning that much needed supplies are stubbornly stopped from moving. US Secretary of State Antony Blinken met with Sisi in late March. The pair discussed a possible ceasefire in Gaza. Cairo’s relationship with Jerusalem remains strained. Truce talks continue in Cairo. Negotiators from Egypt, Qatar and the US have held several rounds of negotiations in recent weeks to reach a prisoner swap and ceasefire agreement between Israel and Hamas. So far, all attempts to reach a deal have failed and the fighting continues.
IMF. The International Monetary Fund (IMF) has now completed its 1st and 2nd reviews of Egypt’s Extended Fund Facility arrangement. This means the government is now cleared to receive USD820 million – but that came with a price. Sisi’s government had to dish out some tough love to fix macroeconomic imbalances in order to qualify. Top of the list was the unification of the exchange rate followed closely by the tightening of fiscal and monetary policies. Last, but not least, much work needed to be done to clear the foreign exchange backlog and further reduce fuel subsidies. All of these boxes have now been ticked and Sisi can move forward to address capital inflows, inflation and investment.
EU. An agreement has been reached with the European Union which will see Egypt benefiting from a EUR 7.4 billion loan in return for implementing stronger migration controls aimed at stopping refugees from crossing the Mediterranean illegally. What is lacking in the deal however are any humanitarian conditions for Egypt to comply with. Egypt’s record on human rights is often criticised. The EU’s failure to stipulate conditions could result in harsh treatment of refugees in a country already known for its cruelty making already dangerous crossings even more deadly. The loan brings Sisi in as a close ally of the EU. This was underlined in March with a visit to Cairo from Ursula von der Leyen along with the prime ministers of Italy, Poland, Austria, Cyprus and Greece. The EU may think they hold all the cards in this agreement but Sisi still has the upper hand. The cash from the EU is just one of many of Egypt’s recent multi-billion dollar disbursements and will do little to impact Sisi’s state of mind. We may see more spending at home but Sisi’s foreign policy will remain unchanged as will his support of systematic arrests, arbitrary detentions, and forcible refugee return campaigns. Human Rights Watch has strongly criticised the EU saying this agreement rewards tyranny and betrays EU values. The EU may think that improving the economic plight of Egyptians will encourage many to stay at home. Asylum applications submitted by Egyptians to European countries increased from 6,616 in 2021 to 26,512 in 2023. As the value of EGP continues to slide, many will continue to dream of hard currency salaries earned overseas and for many, that vision is worth risking everything for. We anticipate that Sisi will do something to stop the flow of Syrian and Sudanese refugees heading to Europe but we doubt he will do much to prevent his own people seeking their fortunes abroad. It will, after all, mean fewer mouths to feed back home.
WB. The World Bank has also got on-board the money train. It has committed USD 6 billion to be disbursed over the next three years. The funds are to be shared equally between the private and public sectors. The bank has said the new programmes will focus on “increasing opportunities for private sector participation in the economy” and “improving the efficiency and effectiveness of public resource management.”
Currency. Egypt’s currency floatation will boost international investment. Simultaneously, interest rates rose by 6%. The recent decisions have initially lowered the value of the EGP against the US dollar by 60%. The Monetary Policy Committee raised overnight deposit rates, lending rates, and the main operation rates to 27.25%, 28.25%, and 27.75%, respectively. The free floating EGP has all but wiped out the parallel foreign exchange market and that is good news. As USD flows freely we anticipate inflation will fall and the economy will stabilise in the short to medium term.
Budget. The draft budget for the coming financial year has received Cabinet approval and been forwarded to the House of Representatives. Total government expenditures in 2024/25 will reach EGP 6.4 trillion. What we see in this budget is a new level of financial responsibility. The government has outlined plans to lower the debt to GDP ratio to less than 80% by 2027. EGP 596 billion has been designated for citizen support services like food subsidies, petroleum subsidies and welfare programmes. After a rocky few years, Egypt’s economy now appears to be taking baby steps towards stability through strategic reforms and ambitious but achievable targets. This budget targets an ambitious 4% growth in GDP in the coming fiscal year. We think that is overly optimistic and anticipate a more realistic 3%.
Fuel. In response to the devaluation of EGP, the government has increased fuel prices citing higher importation costs. Despite political promises to curb inflation these hikes will inevitably trickle down to the consumer, increasing pressure on an already poor population. Inflation jumped to 35.7% in February up from 29.8% in January. We anticipate that when the numbers for March are announced another significant spike will also be seen. What we may also see however, is the restocking of shops as FX fuelled imports return to the market and make their way from the ports to the consumer but those prices too will be impacted by the cost of petrol.
Pricing. Beginning 2nd April, Egyptian consumers will benefit from a considerable decrease in prices of poultry and eggs. The government has announced a plan to slash prices by up to 30% in coming weeks. Prime Minister Madbouly has approved an initiative proposed by the Egyptian Poultry Association, a body that includes major private sector poultry producers, to cut prices by 10-15%. The initiative, effective tomorrow, sets the prices for a pack of 30 eggs at EGP 135 and 1 kilogram of chicken at EGP 85 at farms. Last week, Madbouly reached an agreement with private manufacturers and merchants to decrease food commodity prices by an initial 15% and then by 30% after Eid Al-Fitr. This news is being very well received but there are still calls for more to be done as people struggle under a cost-of-living crisis and crippling inflation.
Salaries. In February, Sisi ordered the doubling of the minimum wage to EGP6,000. At that time it was worth USD194. Today, that increase has been wiped out with workers taking home the equivalent of just USD126. This is an area he must urgently revisit if he wants to keep the economic recovery on track. People can’t spend what they don’t have, and to keep his country ticking over he must put more cash in people’s pockets.
Outlook. We have seen a strong shift in Egypt’s economic outlook since the late February announcement of the USD35 million investment by an Emirati trading company in Ras El Hekma but not only that … The government also received USD520 million last month as part of the USD 800 million sale of seven historic hotels to Talaat Moustafa Group’s Icon Investments who have acquired a 51% stake in the venues. Fitch Ratings thinks that the agreement will “significantly improve” Egypt’s external financing position and its FX liquidity.
Sinai. Egypt remains braced for a possible influx of refugees fleeing Gaza should Israel step up its military offensive in and around Rafah. Before the 7th October attack, Rafah had a population of 280,000 people. This number has now soared to more than 1 million. Egypt appears to be constructing a buffer zone along the border with Gaza. There are now growing rumours that Israel plans a major offensive into Rafah after Ramadan ends. If that happens there is a very real risk of a mass migration from Gaza into Egypt. So the question is; will Egypt do much to prevent Palestinians pushing onto Europe? We think not. Pitching tent cities in the Sinai may be the desired outcome for Israel and The West but the devil is always in the detail and the EU may live to regret not being more verbose in its loan agreements.
Red Sea. Houthi attacks on vessels in the Red Sea continue, causing an 80% drop in the volume of freight passing through the Red Sea since late November. These attacks show no signs of stopping. The US, EU and UK have deployed naval task forces to the region to escort and protect ships on their way to or from the Suez Canal but the impact is minimal. With a comprehensive ceasefire in Gaza nowhere on the horizon, and the Houthis making large political gains at home by promoting their support of Palestinians, we do not see any de-escalation of risk. This maritime security crisis will continue unchanged in the short-to-medium term.
Egypt has a long history of financial mismanagement and economic instability and it is yet too early to see if lessons have been learned. The recent influx of international cash leaves the country sitting pretty but can it remain there? And if it can, will there be a price to pay? The fighting in Gaza rages on and Egypt will do everything it can to stop it but the very real deal of having to open the Rafah crossing may be just days away. As the Eid celebrations at the end of the holy month begin will Israel see that as a signal to advance, forcing Egypt to open the Rafah crossing to more than a million Palestinians? Sisi is, once again, between a rock and a hard place.