“The economy has fared well in the face of elevated geopolitical risks, [but]… it is still in recovery mode and still navigating challenges,” this is how Ramona Moubarak, head of Middle East and North Africa (MENA) country risk at US analysts Fitch Solutions, summed up the state of the Egyptian economy over the past year. 

Almost 12 months ago, a dollar crunch carried over from last year was strangling the economy, a parallel exchange-rate market was flourishing with rates more than double the official rate, and many vital goods, including medicines, were in short supply because the lack of dollars was affecting imports. 

Suddenly, in February a major development deal, the Ras Al-Hekma project, was concluded, giving the economy the relief it needed. 

ADQ, the Abu Dhabi-based development and holding company agreed to a $35 billion joint venture with the government to develop 170 million square metres of prime coastal land. As part of the deal, ADQ converted $11 billion of hard currency deposited by the UAE with the Central Bank of Egypt (CBE) into Egyptian pounds to be used for investment projects across the country, thus relieving the CBE of having to repay that sum. 

The deal paved the way for a renewed agreement with the International Monetary Fund (IMF). Egypt had signed a $3 billion agreement with the IMF in December 2022, but due to what the IMF saw as the slow pace of reform, especially on the requirement to implement a free-floating exchange rate, it only disbursed one tranche and stalled on the rest. 

With the inflows from the Ras Al-Hekma project, the CBE had the funds to organise a devaluation and meet demand from the market. On 6 March, the pound went from around LE31 to LE49.5 to the dollar. Simultaneously, the CBE hiked interest rates by six per cent, raising the rate of main operations to 27.75 per cent.

Once the devaluation was out of the way, the IMF agreement was back on the scene, this time to an augmented sum of $8 billion to enable the economy to deal with the difficult external environment aggravated by the war on Gaza and the resulting tensions in the Red Sea. 

Some $15 billion was also promised from the World Bank and the EU. “With an agreement in place, the Egyptian economy reached the end of the tunnel and started exiting its two-year crisis,” Moubarak said.  

The funds allowed the authorities to unify the exchange rate and increase the availability of US dollars in the official market, she noted, adding that Egypt’s foreign-currency reserves reached a record high of $46.9 billion at the end of November and the net foreign asset position of the financial sector significantly improved, despite remaining vulnerable.  

The banking sector’s net foreign assets position narrowed by 10.8 per cent month-on-month to $9.21 billion in October, reversing a net foreign liability position of $27.2 billion a year earlier, Heba Moneir, financial analyst at investment bank HC Securities pointed out, adding that Egypt’s one-year Credit Default Swaps (CDS) also improved, dropping from 857 basis points on 1 January to 353 basis points currently. A CDS is a financial instrument that provides the buyer with protection against default and other risks. 

The actions taken by the government resonated with rating agencies. In March S&P and Moody’s both changed their outlook for Egypt to positive. And in November, Fitch Ratings upgraded Egypt’s long-term foreign-currency Issuer Default Rating from B- to B, with a stable outlook.

Investors too were eyeing Egypt differently. Charlie Robertson, head of macro-strategy at FIM Partners, wrote in an opinion piece in FDI Intelligence, a specialist division from FT Ltd. providing industry leading insight and analysis on cross border expansion, greenfield inward investment, and foreign direct investment, that — with Trump in the White House, 2025 will not be a record-breaking year for FDI flows to the Middle East and Africa. But a few local stories do stand out. One of those, he said, was Egypt. He said the Ras Al-Hekma deal alone is tipped to suck in $5 billion in investment annually for another 30 years. He also noted that “Egypt is also seeking more investment into banks, via privatisation, energy, and manufacturing.”

While the government actions were well received, they have yet to translate into a strong economic performance, according to Moubarak.

Economic growth averaged about 2.3 per cent in the first half of the 2024 calendar year, and while it likely accelerated in the second half Fitch Solutions believe it has remained subdued, she noted. 

“This has been mostly the result of elevated interest rates, which have remained at record highs, and price growth, which, while slowing, has masked a rise in the cost of living with increases in administered prices.”

As part of the agreement with the IMF, Egypt’s commitments include cutting subsidies on domestic fuel prices. Fuel prices have increased three times since March. 

Diesel, which was earlier off limits because it affects the prices of public transport, has increased by over 50 per cent since the beginning of the year. The 92-octane gasoline used by most private vehicles increased by 22 per cent during the same period.

Butane gas cylinders used for cooking increased in price by 100 per cent. Electricity prices were no exception to the price hikes, rising twice this year and reaching increases of up to 40 per cent.

The price of subsidised bread, which had remained stagnant for decades, also increased four-fold from LE0.05 to LE0.2 a loaf. Though still heavily discounted, the hike was tough on the poorest sections of the population, who depend on bread to complete their meals. 70 million people enjoy subsidised bread in Egypt every day.

The increases did not bode well for inflation. Though annual inflation rate readings seemed to be on a downward trend because they were being compared to the year before when inflation was higher, they were nevertheless on an upward streak month-on-month. 

Egypt’s annual inflation readings are on a downward due to the favourable base year effect. However, it’s still increasing month-on-month, impacted by the relatively limited resources, the increasing population including the refugees from neighbouring countries, and movement in the pound against other currencies affected by the global economy, said Moneir.

YEAR AHEAD: Higher prices will be one of the challenges for the economy in 2025. The cost of living will remain high, as the authorities will likely have to increase administered prices, Moubarak said. 

This is despite inflation being predicted to fall to about 14 to 15 per cent in February 2025 due to substantial base effects, Moubarak predicted. “Higher prices will continue to eat into household incomes, pressuring consumption and spending on non-essential goods,” she added.

One of the sticking points in Egypt’s agreement with the IMF is the exchange rate, an issue that earlier brought the 2022 agreement to a halt. It prompted Prime Minister Mustafa Madbouli to say in late November that people should not worry if they see the pound depreciating by up to five per cent, as this was natural given the strengthening of the dollar globally. 

Since the devaluation, the value of the pound appreciated slightly during the summer and then began depreciating again gradually, picking up pace over the past month and almost reaching LE51 per dollar on 19 December.

However, the recent weakening in the pound is not worrying as the authorities allowed the exchange rate to react to negative factors such as a strong US dollar and some portfolio outflows, Moubarak said. 

“The more flexible exchange rate will preserve the foreign-currency reserves and prevent large sell-offs [of treasury bills].”

She noted that a flexible exchange rate means that the currency appreciates when demand decreases, supply increases, or sentiment improves. “In the short term, we are expecting pressure on the currency to persist because of the strong US dollar and the uncertainty about what [US President-elect] Trump’s policy will look like,” she said.

 Nonetheless, Moubarak said they were expecting some strengthening of the pound when the war in Gaza likely ends in the first half of 2025, as this will increase Suez Canal receipts. Egypt lost about $500 million per month because of disruption to navigation in the Red Sea last year. The Suez Canal brought in revenues of around $9 billion in fiscal year 2022-23.

The fallout from the war on Gaza prompted the government to call on the IMF to ease the terms of implementation of the agreement. Ahead of the fourth review of the loan, President Abdel-Fattah Al-Sisi said Egypt must “review the situation [of its loan programme]” with the IMF if it means placing unbearable pressures on the public. 

The president underscored the need to take into account the challenges Egypt is facing as a result of regional and international crises that have severely impacted foreign-currency reserves and budget revenues. IMF Managing Director Kristalina Georgieva was quick to respond and visited Cairo early in November for talks with President Al-Sisi and Prime Minister Madbouli. 

It is not clear how the terms of the agreement will be eased, however. Some observers have predicted that it could involve a slight delay in the implementation of fuel subsidy cuts to put the brakes on inflation. At the time of going to press, the fourth review of the loan had not been approved although the IMF mission had concluded its visit on 20 November. 

According to Moubarak, the IMF has been stricter in terms of Egypt meeting its targets for each review to ensure the implementation of the reforms and put the economy on a sustained footing.

EXTERNAL FACTORS: External factors will continue to affect the Egyptian economy in 2025.

The policies of US President-elect Donald Trump could have an impact on the CBE’s monetary policy when he takes office in January. Over the past two years, the CBE has hiked interest rates by 19 per cent in a bid to fight inflation. After inflation hit a record high of 38 per cent in September 2023, it began to cool off, dropping to 25.5 per cent in November 2024. 

This could encourage the CBE to gradually cut interest rates, and Moneir said in an interview in November that she sees an easing of monetary policy rates to begin by 2025. “We forecast the interest rate cut to be slower, possibly extending until 2027 and 2028,” she said.

Keeping interest rates high also maintains the interest rate differential for the carry trade. Carry trade investors are attracted by Egypt’s high interest rates, as they convert their currency into Egyptian pounds to buy Egyptian treasury bills.

Observers have been betting on the US central bank, the Federal Reserve, cutting interest rates. Lower interest rates on the dollar would enable the CBE to cut rates on the pound as well without losing its attractive interest rate differential.  

The Federal Reserve cut rates three times this year, the latest on 18 December. It lowered rates by 25 basis points to a range of 4.25 per cent to 4.5 per cent but signalled a slower pace of cuts ahead.

“In the event that Trump goes ahead with his electoral promises and does not water them down as we currently expect, then the US dollar will be stronger and investors will be more risk averse towards emerging markets, including Egypt. This could weigh on the Egyptian pound and on portfolio investments into the country,” Moubarak said.

Trump has promised tax cuts and high tariffs on imports, which could cause US inflation to surge, meaning that the Federal Reserve could slow or halt its rate cuts.

On a positive note, Moubarak said that forecasts of an end to the war on Gaza in the first half of 2025 and, with it, an end to disruptions to Red Sea trade, will mean the gradual restoration of the Suez Canal receipts that Egypt has lost since early 2024. 

However, she said the key risk remains a spike in tensions between Iran and Israel. Under the Trump administration, Israel may feel more confident about striking more aggressively against Iran, she explained. 

In April, August, and October 2024, the exchanges between Israel and Iran spooked some investors and led them to temporarily exit the Egyptian debt market, she pointed out, adding that oil prices also increased because of the higher geopolitical risk premium. 

“Another more intense round of strikes will lead to more pressure on the Egyptian pound and the external position,” she said.

To ensure that Egypt is not exposed to another shock, the solution lies in boosting exports, experts say. Although the balance of payments registered a surplus of $9.7 billion during financial year 2023-24, the current account deficit widened to $20.8 billion, primarily due to the increase in the trade deficit by 27 per cent and the decline in Suez Canal transit receipts by 24.3 per cent.  

The trade deficit widened by $8.4 billion to record $39.6 billion compared to $31.2 billion earlier. The increased imports of natural gas to power Egypt’s electricity stations were also a factor affecting the trade deficit. 

Although there has been news of multiple renewable energy projects that can provide energy, the need to import natural gas will persist. Moubarak agreed that the widening of the hydrocarbon trade deficit was a challenge, pointing out that Egypt’s hydrocarbon exports have been falling due to falling gas production, while at the same time imports have been rising to compensate for lower production, reduce electricity cuts, and honour long-term liquefied natural gas (LNG) export contracts. 

CBE figures show that natural gas exports fell by $6.6 million to $605.3 million in fiscal year 2023-24 due to the decline in exported quantities to a quarter and global prices to nearly a third, compared to approximately $7.2 billion during the previous fiscal year, which witnessed a record rise in natural gas prices with the outbreak of the Russian-Ukrainian conflict.

* A version of this article appears in print in the 26 December, 2024 edition of Al-Ahram Weekly