The concept of "too big to fail" applies not only to systemic banks but also to geopolitics, and Egypt is a case in point. In the space of a few weeks, more than $50 billion has been released to support the country's economic and financial crisis. Egypt "did its bit" with some historic decisions on 6 March: a surprise 600 basis point increase in the benchmark interest rate to 27.25%, followed by a devaluation of the Egyptian pound from 30.85 to 50.09 - i.e. almost 40% - and the decision to adopt a flexible exchange rate regime, as the IMF had been demanding for several quarters.
By going beyond expectations with these measures, Egypt obtained a doubling of its program from the IMF to $8 billion. Shortly before, at the end of February, Egypt signed a historic agreement with the United Arab Emirates: A $35 billion investment by the Abu Dhabi sovereign wealth fund in a coastal development project in the Ras El-Hekma region. This is enough to replenish Egypt's cash-strapped foreign currency coffers. And that's not all: a $20 billion package has been announced, with contributions from the IMF, the European Union, the UK and Japan. Saudi Arabia is also in talks to invest in Egypt and, in a rare move, Moody's has revised the country's outlook from negative to positive - without going to neutral.
Egypt had been hit hard by the Covid, and its foreign currency inflows from both tourism and traffic through the Suez Canal had dried up. Tourism picked up again in 2023, with almost 15 million visitors, a record since 2011. Since then, the trend has slowed with the instability in the region. There has also been a decline in traffic through the Suez Canal and a rise in the price of oil and grain, which Egypt imports. A drop in foreign currency inflows and soaring inflation, which reached over 35% in February, have further complicated the situation.
Over the past two weeks, the dramatic trajectory that the country had embarked on has been reversed. Egypt's risk premium has fallen from 10.5% at the end of January to 5.5% at the beginning of March, the return on Egyptian debt in 2024 is close to 20%, private remittances from the Emirates to Egypt are starting to pick up and the country is aiming to rejoin the JP Morgan Emerging Markets indices, from which it was removed at the end of January due to the foreign currency liquidity crisis. Since the devaluation, the Egyptian pound has also started to move towards the parallel rate.
Is Egypt out of the woods? Apart from the need to repay these loans, inflation will be a test. Since the beginning of 2022, it has exceeded the central bank's upper target (9%), despite the 19% hikes in interest rates. While Egypt has undoubtedly got out of a rut, many challenges remain, such as controlling inflation, truly floating the exchange rate, making progress on privatisation, slowing down infrastructure projects and fiscal consolidation.
