Moving from crisis to hope: Egypt’s economy in 2025

After dramatic action from the central bank, an $8bn IMF loan and a $35bn development deal, Cairo aims to bounce back in the new year, but faces both familiar and new problems first

Eduardo Ramon

Moving from crisis to hope: Egypt’s economy in 2025

Marcelle Nasr

last update on 04 Jan 2025

For Egyptians, 2024 may be remembered for soaring prices and of trying to adapt to the difficult financial and monetary headwinds stoked by the domestic impact of regional and global instability and conflict.

National revenue was hit hard by a dramatic drop in income from the loss of shipping passage through the Suez Canal, which fell by more than 70%, a decline primarily attributed to Houthi attacks on Western vessels in the Red Sea in support of Gaza.

It forced the government to borrow more, and a package of reform measures was announced by the Central Bank of Egypt in March. Public and external debt was sky-high, and a parallel currency market became fertile ground for speculators and traders.

Remittances from Egyptians abroad leaked into the black market, further devaluing the Egyptian pound and driving up the costs of imported goods, raw materials, and production inputs, leading inflation to hit unprecedented levels, far beyond target range.

It affected Egypt’s credit rating, which was downgraded by all major international rating agencies, which limited the government’s ability to borrow on foreign markets to meet its need for foreign currency. Meanwhile, rising debt repayment obligations and interest costs further deepened the foreign currency gap.

Intervention and investment

The historic action from the central bank—including a currency float and a 600-basis-point interest rate hike—came during talks over a huge investment deal, with the sovereign wealth fund of the United Arab Emirates (UAE) looking to develop Ras El-Hikma, a village on the Egypt’s Mediterranean coast, into a new mega-resort.

The Ras El-Hikma deal secured Cairo foreign direct investment (FDI) worth $35bn and marked a critical turning point, the positive effects of which slowly emerged throughout the remainder of 2024. This inspired confidence and helped stabilise the Egyptian pound, averting a potentially devastating economic collapse.

Thanks to these developments, Egypt could agree better terms on an increased loan from the International Monetary Fund (IMF) of $8bn, up from an original $3bn. This helped to restore financial stability, as the central bank’s currency float and rate hike came into effect. The Egyptian pound (E£) depreciated in value, the price of a dollar reaching E£46 from E£30.

Economists predict that the IMF will continue to push for further economic reforms, particularly over state ownership of industries, but the Egyptian government shows no interest in pursuing any further currency devaluations, focusing instead on enhancing exchange rate flexibility.

Remittances from Egyptians abroad leaked into the black market, further devaluing the Egyptian pound and driving up the costs of imported goods

The price of a dollar exceeded E£51 after the central bank implemented a limited demand-supply mechanism. Experts think the dollar is being used in Egypt as a secure store of value, like gold and other 'safe haven' investments. Demand for dollars could yet drive the pound to new lows, if concerns over a currency collapse persist.

Linked to all this is an ongoing refugee crisis in Egypt. Huge numbers of Syrians and Sudanese have arrived in recent years, fleeing war in their respective countries, and this has brought Cairo new economic challenges and political complications.

Moving into 2025, there are concerns that some new arrivals may harbour sympathies for the Muslim Brotherhood, the sworn enemy of Egypt's current government.

Prospects for 2025

The year 2025 carries both hopes and challenges for Egyptians. It demands concerted efforts to boost growth and reduce inflation, but the IMF and World Bank think Cairo could succeed in dampening price increases this year, down to a more manageable 21%, according to the IMF's World Economic Outlook report.

Reuters — Egyptian Prime Minister Mostafa Madbouly and Director of the IMF Kristalina Georgieva in a joint press conference on November 3, 2024.

According to the state statistics agency CAPMAS, annual consumer prices in urban areas rose 25.5% in November 2024, and 26.5% in October. Over the summer, it hovered around 26%, with food prices 29% higher than in 2023, according to Reuters.

Banking commentator Mohamed Abdel Aal said Egypt's foreign currency reserves reached their highest level in November 2024, at $46.9bn, thanks to the Ras El-Hikma deal. "The net foreign assets deficit in the banking sector turned into a surplus of $14.3bn by May 2024, the first surplus in 28 months, reflecting significant improvements in the sector's performance," he said.

The IMF and World Bank think Cairo could succeed in dampening price increases this year, down to a more manageable 21%

Predicting growth in Egypt's foreign currency reserves, he noted a reduction in Egypt's external debt, which fell to $152.9bn by June 2024, from $160.6bn in March 2024 and $168bn in December 2023.

"The dollar exchange rate fluctuated within a narrow range throughout the year, supported by higher interest rates on the pound and increased foreign indirect investment in government debt instruments, such as treasury bills and bonds."

FDI and remittances

Foreign direct investment (FDI) reached $23.7bn during the first nine months of the fiscal year ending in June 2024, compared to $7.9bn during the same period the previous year, according to Abdel Aal.

Furthermore, as the black market for currency waned, remittances from Egyptians living abroad rose by 68.4% year-on-year in October 2024, gradually becoming a key source of foreign currency once more.

AFP — The Central Bank of Egypt in the New Administrative Capital, August 1, 2023.

Mohamed Reda, chief executive of Solid Capital Group for Africa and the Gulf, called 2024 "structurally challenging for Egypt's economy" due to regional crises. "The unrestrained rise of the dollar in the parallel market, exceeding E£70, and the IMF's strict conditions for disbursing loan tranches significantly impacted the economy."

However, by March 2024, the IMF money and a further financial package of loans, grants, and investments from the European Commission began to alleviate the strain.

"The central bank adopted a stringent monetary policy, raising interest rates by 200 basis points initially and later by 600 basis points to control inflation and stabilise the currency," he said. "This brought relative monetary stability, coinciding with the Ras El-Hikma deal, which bolstered Egypt's financial capacity."

Loans, prices, and subsidies

By the end of 2024, Egypt secured the fourth tranche of its IMF loan, worth $1.2bn, following a rigorous review of its economic reform programme, which mandates unrestricted imports and dollar availability for importers, increasing the demand for dollars. As such, the price of a dollar rose from E$48 to almost E£52.

Reda said the central bank "aims to maintain the current interest rate levels that prevailed from March to December 2024, but the Egyptian stock exchange—particularly the EGX 30 index—experienced a decline in performance due to rising interest rates, as the markets didn't achieve the anticipated gains prior to the latest rate hike."

As Cairo began to cut its subsidies on energy, fuel, goods, and services, inflation rose. The government has now said it will completely remove energy subsidies by 2025, a move Reda described as "economically necessary", and while acknowledging its challenging impacts, he is optimistic.

He predicts that 2025 will be a year of partial economic recovery, marked by new deals in five investment zones, and points to "exchange rate stability and declining inflation rates, projected to reach 20% by early 2025" as positive factors.

The government has now said it will completely remove energy subsidies by 2025, a move described as "economically necessary"

"High interest rates in 2024 constrained investment due to increased financing costs, but as rates decline, investment activity is likely to rebound, particularly in the stock market and various economic sectors."

He recommended extending subsidy cuts over two additional years and predicts restored Red Sea shipping security, which should bring back Suez Canal traffic (and revenues) to previous levels. "This improvement is expected to coincide with gradual interest rate reductions, stimulating investment and attracting more capital to the stock market and broader economy," said Reda.

The pound in 2025

The Egyptian pound is expected to face some familiar challenges in 2025, battered by geopolitical tensions and inflationary pressures, but government privatisation initiatives, enhanced private sector involvement, increased direct investment, and higher remittances could provide support.

Mohamed el-Shahed/AFP — An Egyptian elderly man in the village of al-Nehaya, one of the poorest in Egypt, where poverty rates are up to 45%.

Analysts project a trading range of E£50-52 to the dollar in the first half of the year, and E£49-52 in the second half, as financial obligations ease and FDI grows, potentially from Saudi Arabia and Qatar. If its debt continues to decline and foreign reserves continue to rise, the credit rating agencies may upgrade Egypt in the coming months.

Despite the central bank's austerity and optimism over recovery forecasts, structural challenges remain, not least the need to develop the stock market, enhance manufacturing, and increase revenues relative to expenditure.

Economist Dr Hanan Ramses thinks 2025 "won't be an ideal year economically, given ongoing global economic conflicts and crises", noting US President-elect Donald Trump's threats to impose protectionist tariffs on imports, and the wider threat of a trade war with China, which could lead to further disruptions and price hikes.

Clouds on the horizon

Analysts expect the Egyptian government to continue selling state-owned assets and withdrawing from economic activity to reduce debt, noting that rising external debt poses a significant risk to the economy, increasing pressure on the pound and reducing purchasing power a global prices rise, eroding wages and living standards.

They believe that the shift toward cash subsidies, which the government plans to implement in 2025, could spark significant controversy due to its anticipated impact on low-income groups, especially given that poverty rates in Egypt are currently at 40-45%.

Analysts, who warn that the continuation of such policies without any tangible sense of their intended effects could exacerbate problems, also recommend postponing major national projects that rely on external borrowing, while focusing on leveraging grants, aid, and bilateral projects with donor nations.

There are calls to strengthen ties with the African Development Bank and the New Development Bank being set up by the BRICS bloc of nations as alternatives to traditional dependency on the World Bank and IMF, which can seem to follow Western political agendas rather than being motivated by purely economic concerns.

As it enters 2025, the challenges for Cairo are myriad, but thankfully, so too are its options. The fate of Egypt's economy is still within Egyptian hands, but there are perils everywhere. All eyes will now be on those all-important indicators.

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