Achieving lasting sustainability

Gamal Wagdy , Tuesday 16 Apr 2024

Temporary relief can become permanent pain if it is not properly managed, writes Gamal Wagdy

Still stronger than drugs


The recent announcement of Egypt’s landmark deal with the Abu Dhabi Sovereign Wealth Fund (ADQ) to purchase the development rights of Ras Al-Hekma on the North Coast has sparked widespread optimism and hope for the country’s economic recovery.

Some have hailed it as a turning point and a sign that Egypt’s economic policies are on the right track. This deal, alongside others being considered for similar pieces of land, signals a strategy to alleviate the country’s foreign-exchange shortage and tackle broader economic challenges. However, despite the initial euphoria, it is crucial to examine where the economy is heading after the deal.

The timing of the Ras Al-Hekma deal coincided with a period of acute economic distress in which the economy was teetering on the brink of collapse. The country faced a host of challenges simultaneously: a staggering foreign debt commitment reaching about $42 billion in 2024 alone; dropping remittances from expatriates; declining revenue from the Suez Canal; the banks struggling to meet importers’ demands for foreign exchange; a widening gap between the official and black-market exchange rates; a backlog of goods worth $6 to $8 billion parked in the ports awaiting clearance; and a significant deficit in the banking sector’s foreign-exchange position.

These challenges painted a bleak picture of the economy’s prospects, with limited avenues for recourse. Even borrowing from abroad became increasingly difficult due to the international credit-rating agencies downgrading Egypt’s rating, citing negative short and long-term economic outlooks.

In response to the crisis, Egypt pursued a multi-faceted bailout strategy. The Ras Al-Hekma deal, coupled with agreements with international organisations such as the International Monetary Fund (IMF), the European Union, and the World Bank, injected, or pledged to inject, much-needed liquidity into the economy.

The immediate impact of these measures was evident, and the initial influx of funds ($10 billion from the Ras Al-Hekma deal) prevented a default scenario and provided a temporary respite from the economic turmoil. It eased pressure on the currency and allowed for the clearance of goods stuck in the ports. It also enabled the devaluation of the Egyptian pound, paving the way for the resumption of expatriate remittances through the banking sector, and it facilitated the repatriation of profits from foreign investments.

The deal has kept the economy afloat and staved off a default. It has allowed the economy to breathe. However, for long-lived relief the proceeds of the deal must be utilised differently, and there must be a change in policies to address the underlying structural imbalances plaguing the economy.

Because the deal’s proceeds are coming at a time of unprecedented economic hardship, they have been and will be used in dealing with the backlog that has been accumulating over a long period of time. But the proceeds can only deal with the results, not the causes, of the crisis. The root cause of Egypt’s economic woes lies in its twin deficit: a fiscal deficit stemming from government spending exceeding revenue, and a current-account deficit resulting from imports exceeding exports. As long as these structural issues remain unaddressed, Egypt will continue to face challenges, regardless of temporary fixes.

Moreover, the influx of new loans, though providing short-term liquidity, exacerbates Egypt’s already substantial debt burden. Although loans from international institutions come on favourable terms, they add to the country’s long-term debt obligations, which raises concerns about debt sustainability and fiscal stability.

The resurgence of foreign portfolio investment driven by exorbitant interest rates poses risks of capital flight, as experienced during previous episodes of hot money outflows. As the Central Bank of Egypt (CBE) has raised key policy rates by six percentage points (600 basis points), there has been a corresponding increase in the rates paid on treasury bills. This has induced foreign portfolio investors to resume purchases of Egypt’s treasury bills after a long absence.

CBE results show that one-year treasury bills have been sold at an average yield of 32.3 per cent, and the total bids received for the bills amounted to LE254 billion ($5.15 billion). This will be translated into a hike in interest payments, which, in addition to repatriated profits and equity dividends from foreign direct investment, add to the foreign-exchange drain.

Worries about the future path of the economy do not only stem from the increased financial burden, but also from the country’s economic structure. The Egyptian economy has been experiencing a considerable decline in the manufacturing and agricultural sectors. This can be explained at least in part by a rapid increase in foreign-currency receipts from expatriate remittances, tourism, aid, and borrowing, all of which have contributed to the symptoms of the Dutch Disease.

The latter describes an economic phenomenon in which the rapid development of one sector of the economy triggers a decline in other sectors. A surge in foreign-currency receipts from tourism and other service sectors has led in the past and will likely lead in the future to symptoms similar to the Dutch Disease. With an increasing dependence on tourism, the economy is firmly establishing itself as a service-based one, and the initiation of the new project in Ras Al-Hekma represents a fundamental milestone in this direction.

This dependence on tourism revenues also makes the economy vulnerable to external shocks, such as changes in travel patterns or geopolitical events.

Although the service sector is the dominant one and contributes significantly to GDP and employment, its ability to drive economic development is limited. Egypt’s large and youthful population and significant labour force are most appropriate to support the expansion of manufacturing industries to become the leading sector in the economy. This refers to the sector that drives economic growth and development by stimulating expansion and innovation in other sectors of the economy. It is the sector that acts as a catalyst for broader economic activity and sets the pace for overall economic performance. It may not necessarily be the largest in terms of GDP, but it plays an instrumental role in steering economic development and growth.  

The establishment of a free zone in Ras Al-Hekma poses other risks. While free zones can stimulate growth and attract foreign investment, they also risk exacerbating economic disparities and distorting market dynamics. This is because the area becomes subject to different administrative and financial regulations than the rest of the country. While the specifics of transforming the area into a free zone remain undisclosed, it is imperative to note that varying regulations within the intended Ras Al-Hekma free zone can somehow detach the area from the rest of the country, and that depends on the specific terms and conditions of the transformation.    

While the Ras Al-Hekma deal and other short-term relief measures have undoubtedly provided Egypt’s economy with a vital lifeline, they are merely band-aids for the underlying structural distortions that have brought the country to this precarious situation. Achieving lasting sustainability and prosperity demands nothing short of the comprehensive repair of Egypt’s economy, in a way that tackles both immediate crises and enduring structural deficiencies.

It is important not to let the temporary respite from an imminent economic collapse overshadow the magnitude of the challenges still facing us. We must place the deal’s achievements in their proper context and recognise that there is still a long and tiring journey ahead.


The writer is a banking consultant.

* A version of this article appears in print in the 18 April, 2024 edition of Al-Ahram Weekly

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