Taking a pounding: Egypt's economy hit by regional tension

Foreign currency income from the Suez Canal has dropped by 40% in a major blow to Egypt's finances.

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Ships are steering clear of the Suez Canal for fear of Houthi attacks in the Red Sea, which is hitting Egypt's currency.

Taking a pounding: Egypt's economy hit by regional tension

Marcelle Nasr

last update on 02 Feb 2024

Egypt’s currency is under increasing pressure, as the wider impact on international markets caused by geopolitical turmoil in the Middle East adds to problems at home from its own financial and economic crisis.

The rush to the dollar as the war in Gaza persists has hit both the Egyptian pound’s exchange rate on global markets and its dollar income from the Suez Canal as ships steer clear of the Red Sea amid Houthi attacks on vessels there.

Unofficial exchange rates on the black market are also rising as the country struggles under a debt mountain.

Such conditions amount to a deterrent for foreign investment in Egypt. Some firms in Egypt are already considering exiting the country and its markets.

The timing is terrible, not least because Egypt still faces the prospect of having to support refugees from Gaza. Calls for a humanitarian route into Sinai have not gone away.

Suez slowdown

Two of Egypt’s major revenue streams are tourism and transit fees from the Suez Canal, but foreign currency income from the latter has dropped by 40% — a major blow to the nation’s finances.

Remittances home have also fallen, as Egyptians living abroad keep hold of their money, while those still in Egypt are witnessing growing unemployment.

This has added to concern that Cairo may struggle to meet its financial obligations.

Foreign currency income from the Suez Canal has dropped by 40% in a major blow to Egypt's finances.

Economic expert Dr Khaled El-Shafie pointed to the central bank estimates that value Egypt's outstanding debt at $32.8bn and $6.7bn in short-term loans due in 2024, bringing the total to $39.5bn.

"Egypt needs a substantial effort to reorganise and repay these loans efficiently, using a mechanism that avoids negative impacts on its economy," he told Al Majalla.

Currency impact

It is already grappling with inflation, budget deficits, dwindling currency reserves, a drop in the pound, and a widening gap in the dual exchange rates on the official and unofficial markets.

The black-market price of a dollar rose to 57 Egyptian Pounds (£) after the start of the Gaza war, up from £40 before 7 October.

EPA — Waiting for dollars outside one of the money exchange shops in Cairo

Moody's, the international credit rating agency, cut its outlook on Egypt to 'negative' from 'stable' on concern about dollar scarcity, exchange rates, and the rise in foreign debt levels. The government has tried to secure more time to pay its debts, extending interest payment maturities.

Meanwhile, Egypt's exclusion from the emerging market government bond index brings further financial complications, not least as a deterrent to foreign investors.

In response, the government has sought new sources of foreign currency income, including selling real estate to foreign buyers and monetising refugee residency options.

Loan conditions

There are ongoing efforts and negotiations with officials from the International Monetary Fund (IMF) to secure the release of two delayed loan tranches of $350mn each.

The IMF agreed to a $3bn bailout in December 2022 but refused to forward the latest two instalments in 2023 for fear of the money not being repaid. As part of the conditions for the loan, the IMF has insisted that Cairo reduce its costly subsidies, such as on bread and state-owned companies.

The IMF agreed to a $3bn bailout in December 2022 but refused to forward two big instalments in 2023 for fear of not being repaid.

It also wants a round of privatisation, yet politicians worry that at a time of high inflation such changes would cause a public outcry among Egypt's population of 112 million.

Speculation over closing the gap between official and unofficial exchange rates has also circulated, although any further devaluation could have damaging and unpopular effects, adding to inflation and dollar scarcity.

Changes at the IMF to make it more flexible and give wider members more of a say have also influenced the debate, but such changes are not imminent.

Relying on the IMF

Whatever happens, the IMF's support is crucial for Egypt's debt sustainability, yet the Ministry of Finance defends the country's efforts so far.

It cites the privatisation programme's positive impact on meeting its financing needs, attracting investment inflows, and reducing Egypt's reliance on external financing.

Shutterstock — The IMF agreed to a $3bn bailout in December 2022, yet politicians worry that its loan conditions may cause a public outcry

There is even talk of the IMF increasing its loan to Egypt from $3bn to $6bn, but the currency market turmoil is a major source of uncertainty.

Efforts to obtain a concessional financing loan and manage government debt are underway, aiming to put debt-to-GDP ratios on a downward trajectory, but the talks do not move as fast as the currency markets.

Economist Dr Fakhry El-Feki expressed concerns about the impact of the currency conditions on the nation's finances, emphasising the "negative effects on dollar proceeds entering the state's treasury".

Speaking to Al Majalla, El-Feki warned against "exchange rate flexibility" to close the gap between official and unofficial prices for the dollar, citing "potential inflation and social instability risks".

The sheer size of Egypt's debt burden means that restructuring efforts will be a major challenge and one that has been complicated by wider geopolitical problems in the Middle East and beyond.

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