‘A fresh start’

Niveen Wahish , Sunday 3 Mar 2024

A multi-billion-dollar deal gives the government breathing space but much work needs to be done.

Ras Al-Hekma

 

A week ago, many were wondering how Egypt’s unprecedented hard currency crunch could be resolved. Commodity shortages are rampant and there seemed to be no stopping daily hikes in prices.

There appeared to be no way out, that is until the government announced over the weekend that it had concluded a $35 billion deal under which ADQ, the Abu Dhabi-based development and holding company, will develop 170 million square metres of prime coastal land on the North Coast at Ras Al-Hekma into — according to the ADQ press release — “a first-of-its-kind Mediterranean holiday destination, financial centre, and free zone equipped with world-class infrastructure”. As part of the deal, ADQ will convert $11 billion of hard currency deposited by the UAE with the Central Bank of Egypt into Egyptian pounds to be used for investment projects across Egypt. The project is also expected to attract some $150 billion in investments.

The deal provides enough foreign currency to overcome the dollar liquidity crisis and achieve monetary stability, helping control inflation, Prime Minister Mustafa Madbouli said. “It is a fresh start for the Egyptian economy.”

On Sunday, the cabinet agreed on the release of $1.3 billion worth of strategic goods, medicines, and fodder waiting in customs, and to schedule the gradual release of other goods, a statement said.

The dollar crunch has been causing shortages and feeding inflation which registered 33.7 per cent in December, down from 38 per cent in September. The fall, however, is expected to be reversed out when January figures are released.

Announcement of the deal had an immediate impact on the market. The dollar rate on the parallel market fell from close to LE60 per dollar to between LE45 and LE52. Gold prices fell by around nine per cent. Demand for gold had been on the rise as buyers attempted to hedge against market instability.

Before the announcement of the deal, the government had been waiting for the International Monetary Fund (IMF) to sign off on the first and second reviews of the $3 billion loan agreed in December 2022. In recent weeks IMF officials had indicated they would expand the size of the loan to support the Egyptian economy as it faces the repercussions of the war in Gaza.

The inflow of foreign currency should provide the CBE with sufficient liquidity to clear the FX backlog and clear the FX market in the coming days or weeks, reported multinational investment bank Goldman Sachs. The assessment was echoed by Morgan Stanley which sees the deal as clearing the way to adjusting the foreign exchange rate which they believe is the last key policy step to unlocking a bigger IMF loan.

Observers had previously noted that the CBE would not devalue unless it had enough funds to enable it to meet demand for dollars and prevent the rate from overshooting.

A managed devaluation appears more likely in the short term than a full floatation, allowing for a controlled adjustment in the exchange rate, Ali Metwally, economic consultant at IBIS Consultancy, told Al-Ahram Weekly.

Though inflationary pressures will persist through the first half of 2024 as a result of any currency devaluation and disruptions in the Red Sea, Metwally anticipates inflation will be restrained compared to the devaluations of 2022 and 2023. He believes food inflation is likely to remain high well into 2025, and that overall inflation will exceed the CBE’s target of seven per cent and persist into at least the second half 2025. He predicted the average inflation rate is likely to come in at 23 per cent in 2024 and 12 per cent in 2025.

Inflows from the deal will come in two tranches, according to a cabinet statement. The first involves $15 billion, of which $10 billion will be transferred from abroad. The remaining sum represents part of the UAE’s CBE deposits which it will exchange for pounds to be invested in other projects. A second payment of $20 billion will be due within two months, said Madbouli, comprising the remaining UAE deposit of $6 billion and $14 billion in external financing.

In the short term, these funds must be used to rebuild trust in the official monetary system, Sherif Fahmy, CEO of N Gage Group, told the Weekly. This will involve clearing goods waiting to be released and paying for goods that have already been released but for which payment has been deferred. The CBE should also build on the momentum created by the deal to meet dollar demand through the banking system and “hopefully” settle the value of the dollar at around LE40.

It is important to avoid mismanagement of the funds, any lack of transparency in allocation and to implement necessary economic reforms, says Metwally. “It is essential to ensure that the funds are strategically utilised to address immediate challenges while fostering sustainable long-term growth through continued reforms.”

Fahmy argues infrastructure projects must be paused, unless, as the cabinet has announced, they are 70 per cent complete. Otherwise, the money will run out in no time, especially if the war in Gaza, part of the cause of the crisis, persists and continues to depress income from the Suez Canal. The funds, says Fahmy, should be directed towards supporting manufacturing industries and small and medium enterprises (SMEs) which are the engine of growth, though many operate informally. And instead of imposing new taxes, the government should focus on broadening the tax base by implementing policies that encourage SMEs to formalise.

The deal, “along with an upsized IMF programme, should provide ample liquidity to cover Egypt’s financing gap over the next four years,” said Goldman Sachs.

Fitch Ratings estimated in January 2023 that Egypt’s external financing needs for fiscal years 2023 and 2024 would reach $19 billion and $22.5 billion respectively.

To cover the gaps, Fahmy says continued reform to encourage greater private sector participation in the economy and attract foreign direct investment is essential. The government should continue its state-asset sale programme which will increase hard currency revenue and broaden the footprint of the private sector. Renewed confidence in the economy will then encourage remittances to flow once again through the official banking system.

Deals similar to Ras Al-Hekma could follow in other locations. The prime minister noted such projects are viewed as a solution to the lack of hard currency. Egypt does not enjoy huge natural resources and the key to future prosperity is making the most of existing assets, said Madbouli.

* A version of this article appears in print in the 29 February, 2024 edition of Al-Ahram Weekly

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