Egypt’s geopolitical importance helps its case for financial support

Cairo is eyeing a $6bn IMF loan to help deal with its economic crisis, as it plays a key role in mediating the region’s political turmoil while also helping millions of refugees

AFP

European Commission President Ursula von der Leyen (R) welcomes Egypt's Prime Minister Mostafa Madbouly as part of the EU's forum on the Global Gateway investment initiative at the EU headquarters in Brussels on October 25, 2023.

Egypt’s geopolitical importance helps its case for financial support

Marcelle Nasr

last update on 06 Jan 2024

Egypt’s national finances were swept up in the global economic repercussions of the various geopolitical crises in 2023, and inflation inflicted additional pressure.

The year, global rating agencies quickly downgraded their outlooks for the Egyptian national economy and some state-run banks. And the priorities of the International Monetary Fund (IMF) covering its agreements with the Egyptian government changed.

Nonetheless, there was also growing recognition internationally of the importance of supporting Egypt due to its essential role in addressing the crises faced in the region, especially the war in Gaza.

The country’s role in helping prevent the conflict from escalating has taken on global importance and significant influence, even as some regional powers are uncooperative toward Cairo or keen to marginalise it.

The international community, including the United States and the European Union, has relied on Cairo to put forward initiatives over the Gaza conflict and to ease broader tensions. Analysts believe that the renewed international readiness to help Egypt with its current economic crisis comes amid concern at growing regional instability, not only with conflict in Gaza but also in Libya and Sudan.

New loan

And so, the country is thought to have increased the amount it seeks in the new IMF loan to $6bn. That is more than the $3bn the government was initially chasing and comes as a sign of confidence in its status as a stable partner in the region and its diplomatic role in moves toward peace.

Since the outbreak of the war in Gaza, Egypt's precarious relationship with the IMF has been juxtaposed with the seriousness of the situation in the Sinai. The country is already home to around 9 million refugees.

The European Commission recently signalled its support for more aid and investment for Egypt. The bloc seeks to help its North African neighbours strengthen their economies and reduce migration over the Mediterranean.

Since the outbreak of the war in Gaza, Egypt's precarious relationship with the IMF has been juxtaposed with the seriousness of the situation in the Sinai. The country is already home to around 9 million refugees.

While an IMF loan of the size speculated about will not address all of Egypt's economic and financial problems, it will help. The money could be used to establish revenue-generating projects and restructure its existing foreign debt burden at $165bn as of June 2023.

Any fresh funds will help avoid a credit crunch over a looming increase in external debt service payments over the next two years. That will allow Egypt more room to deal with a stifling economic crisis.

Reuters — An Egyptian seller carries bread in front of a mosque and a café, in one of the narrow alleys in the Gamaleya district in Old Cairo, December 4, 2023.

Foreign currency has been scarce, and political options to rebalance the economy without exacerbating social risks have been limited, including calls from the IMF for further currency devaluations.

2023: A year of financial pressure

During 2023, Egypt's finances took a hit from a scarcity of dollars as its own currency, the pound, weakened sharply against its US counterpart. The trend came in a year that featured soaring inflation globally, as broader geopolitical turmoil set the pace on global financial markets.

The IMF's reluctance to grant the second and third tranches of an agreed loan led to the action on the country's credit outlook. The two tranches were frozen three times because the government did not abide by the agreed conditions.

The IMF is waiting for the government to raise its dollar income from proceeds from privatisations, cut expenditure via austerity measures, and reduce some imports.

The mood changed as the regional geopolitics darkened with the war in Gaza, and IMF and EU officials were more accommodating.

Kristalina Georgieva, the IMF's managing director, also signalled recently that Egypt could prioritise controlling inflation over another devaluation of its currency, as she also seemed open to a bigger loan.

Default less likely

And so, the chances of Egypt defaulting on the repayment of international obligations during the coming year are lower thanks to the upbeat mood over IMF negotiations.

International credit rating agencies hope to turn their outlooks from negative to stable or perhaps positive in early 2024 which could make raising capital from international investors easier.

International credit rating agencies hope to turn their outlooks from negative to stable or perhaps positive in early 2024. That could make raising capital from international investors easier, limiting how turbulence on international finances feeds through to everyday life after 2023, marked by a cost-of-living crisis for many Egyptians.

Economist and financial markets expert Dr Taher Morsi told Al Majalla that the current conditions amount to "an opportunity for the Egyptian state to get rid of the burden of foreign debt", which he described as the country's "biggest problem", adding: "(Its) effects, as we see, are reflected in the scarcity of dollar liquidity, and the consequent crises in the provision of production and other requirements of the economy."

Morsi also said that the Egyptian economy could face a severe debt crisis in 2024 with the rise in debt and its cost. Still, he pointed out that the Egyptian economy has many success elements that can change the outlook entirely if well managed.

He also pointed out that 2024 looks difficult for the whole world, not just Egypt, driven by a continued trend for a stronger dollar during uncertain times at the expense of developing countries and emerging economies.

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