Egypt’s foreign debt increased to $145.5 billion at the end of December 2021, with an alarming $8 billion increase in just three months, figures released by the Central Bank of Egypt (CBE) last week showed.

Fears of even higher jumps in the debt on the back of the repercussions of the war on Ukraine that started in February pushed the government last week to form a committee headed by the minister of planning to look into means of curbing foreign borrowing.

The figure does not include the $500 million Samurai bonds Egypt issued last month. There are also talks to get new funding from the International Monetary Fund (IMF), with the value and timing yet to be announced.

Egypt is not alone in increasing its debt, as the condition of the world economy will likely push global sovereign borrowing to hover around $10.4 trillion in 2022, 30 per cent higher than its pre-pandemic levels, according to a report issued by S&P Global Ratings.

The ratings agency noted that Egypt is set to overtake Turkey as the largest issuer of sovereign debt in the economies of emerging Europe, the Middle East, and Africa (EMEA), with $73 billion worth of bond sales by the end of the year.

However, Egypt’s creditworthiness, and thus the cost it will pay to borrow, is good. Both S&P and Fitch Ratings affirmed Egypt’s credit ratings had a stable outlook last week.

“The stable outlook reflects our expectation that the Egyptian authorities’ policy response, alongside significant external support, should prevent a material deterioration in external and fiscal positions due to rising commodity prices,” an S&P Global note stated.

The UAE injected almost $1.8 billion in investments into a number of listed companies in Egypt last week. Qatar said at the end of March that it would support Egypt with $5 billion, and Saudi Arabia deposited $5 billion at the CBE and said its Wealth Fund would invest some $10 billion in Egypt.

Both the IMF loan and the Gulf Cooperation Council (GCC) support will help Egypt to bridge the gap between its foreign-currency resources and needs.

According to broker Prime Securities, an IMF loan would help to narrow the funding gap by a range of $2 to $3 billion. The latest GCC investment inflows should boost foreign direct investments (FDIs) in 2022-2023 to end the year at $10 billion.

But the increase in foreign debt nevertheless burdens the budget with high interest rate payments that will eat almost 45 per cent of total revenues in the new 2022-23 budget.

The inflated foreign debt figure comes as Egypt’s sources of foreign currency are showing weakness that is here to stay, a fact which prompted the CBE to devalue the pound by 10 per cent against the dollar in March.

Egypt’s external funding needs during the six-month period ending in June 2022, according to estimates by Prime Securities, are expected to reach $21.3 billion. “The rapid escalation of geopolitical tensions in Eastern Europe, coupled with the drastic shift in global monetary conditions, threaten the country’s ability to access funds to finance its external needs,” it said.

Overall, Egypt’s balance of payments, which reflects the country’s trade, financial, and service transactions with the rest of the world and thus gives an idea of the status of foreign currency resources, ran a $325 million deficit in the second quarter of 2021-22 ending in December versus a $311 million surplus in the first quarter.

These are the most recently available official figures, and they do not cover the quarter the Ukraine war erupted.

Commenting on the figures, Mona Bedeir, chief economist at Prime Securities, said that while the current account deficit part of the balance of payments, which shows the balance of trade and services, had been set to ease to a lower level during the second half of the year to reach $14.2 billion on the back of a recovery in tourism and liquefied natural gas (LNG) exports compared to a year before, “this seems unlikely to happen now.”

She expects the current account deficit to widen in the new fiscal year to $16.7 billion.

While an expected revival in LNG exports due to a surge in prices would help the country face the higher cost of imported fuel products, the non-hydrocarbon trade deficit will remain a source of weakness, Bedeir said.

“It will also be subject to further deterioration despite the CBE’s measures to curb imports, due to higher import bills and the risk of long-lasting global supply disruptions that affect global commodities, especially food imports,” she wrote in a note.

In addition to efforts to limit imports, the government is trying to narrow the current account deficit by looking for new tourism markets and increasing Suez Canal tolls.

In the first half of 2021-22, tourism revenues jumped to $5.8 billion up from $1.8 billion the year before, as the sector was recovering from the pandemic. “However, this was preceding the war in Ukraine, which means that the data for the year to date will show deterioration in the tourism revenues, as expected,” noted investment bank Al-Ahly Pharos.

Egypt’s deputy tourism minister said last week that the country was eyeing markets in   Western Europe and the Gulf to offset the loss of Russian and Ukrainian tourists, which it had been hoped would return this year.

Russian and Ukrainian tourists accounted for around 30 per cent of foreign visitors to Egypt until 2015 when a terrorist attack grounded a Russian flight killing all those on board. A ban was imposed on Russian flights for almost five years before being lifted in November 2021.

On Suez Canal revenues, the Suez Canal Authority (SCA) hiked toll fees by 10 to 20 per cent last month, depending on the type of ship and cargo.

Suez Canal income recorded a 17 per cent surge to $3.4 billion in the second half of 2021-22, marking the rebound of global trade during the second half of 2021 after the pandemic.

On a negative note, net portfolio investments, representing foreigners’ purchases of Egyptian government securities, reversed to a deficit of $2.5 billion in the six months ending in December and from an inflow of $10.2 billion in the comparable half the year before, reflecting the global tightening and the perceived risks surrounding emerging markets in the second half of 2021.

The fourth quarter alone saw the flight of $6 billion in the light of the absence of any international bond issuance during October to December 2021.

The outflow figure is expected to get higher, as during the two weeks following the outbreak of the war in Ukraine, officials told Bloomberg that a whopping $15 billion had fled the country.

As expected, the country’s net foreign reserves mirrored these losses, declining last month for the first time since the outbreak of Covid-19 in the first quarter of 2022. The reserves settled at nearly $37.1 billion at the end of March, compared to $41 billion at the end of the previous February.

The CBE noted that it had used some of these reserves to cover outflows and to ensure the availability of imported strategic goods and repay external debt obligations on time.

Another worrisome indicator is Egypt’s net foreign assets (NFAs), which in February declined by LE60 billion to minus LE50.3 billion, marking the fifth consecutive month of decline. NFAs represent banking system assets owned by non-residents.

According to Reuters, they reflect changes in import or export flows, foreign portfolio outflows, the repayment of foreign debt, changes in the flow of worker remittances, or a slowdown in tourism.

*A version of this article appears in print in the 28 April, 2022 edition of Al-Ahram Weekly.