Also known as the “Land of the Pharaohs”, Egypt was one of the wealthiest kingdoms in ancient times and its rich history and culture continues to amaze the world even in this modern era. However, in modern times Egypt hasn’t been able to live up to its past glory and remains a lower middle-income country even though it has the largest economy in Africa by nominal Gross Domestic Product (GDP) but only the 38th in worldwide rankings as of 2023.
Of recent Egypt has been in the news as a result of the economic challenges it has been facing and the efforts being made to pull the country out of the woods. The reasons for these economic challenges are both foundational and as a result of the policies and actions of the Abdel Fattah El-Sisi presidency.
Foundational reasons for these economic challenges can be attributed to Egypt’s weak industrial base as a result of their failed industrial development policy, heavy bureaucracy in the civil service which discourages investments, a poor export policy which results in huge trade deficits, and overbearing state and military authorities that deters investors.
The reasons that can be attributed to the actions of the current Egyptian administration are a direct result of their huge borrowing spree to finance infrastructure development and more recently a consequence of the Israeli/Gaza war that is happening just outside their doorsteps.
There was also a mismatch in the type of loans being collected by the El-Sisi administration as the loans were short-term in nature yet they were being used to finance long-term projects like the $58 billion “New Administrative Capital” being built 30 miles east of Cairo, several road projects and an unnecessarily huge build-up of military hardware.
As a result of the war in Gaza, there has been a drastic reduction in the number of tourists visiting Egypt thereby impacting negatively on the hard currency inflows into the country while a large section of the economy that is dependent on tourism has been hampered. Also, the Suez Canal which Egypt depends on for a significant part of its foreign exchange revenue is now being avoided by ships as a result of the Israeli/Gaza conflict to avoid being cut in the crossfire thus resulting in substantial revenue losses to Egypt.
Having stretched itself in amassing these huge loans amidst declining sources of revenue to service them, the government had to resort to domestic lenders which led to a hike in interest rates and they were also forced to devalue their currency as part of the conditions to obtain an International Monetary Fund (IMF) loan to support their economic restructuring efforts.
Many argue that the government should have made efforts to make drastic cuts in the cost of government to reduce the deficit instead of resorting to local lenders to finance more deficits and removing subsidies. The resultant effect of the increased interest rates, subsidy removals, and devaluation of the local currency led to higher inflation rates, job losses, and increased poverty in the country.
However, in a sudden turn of events, in the last month, massive amounts of hard cash have found their way into the Egyptian economy with the IMF suddenly announcing that it had reached an agreement with Egypt to provide them with $8 billion in a bailout package even though what Egypt had been negotiating for years with them was just $3 billion. In another twist, the European Union (EU) announced an aid package in grants and loans of another approximately $8 billion to help support the recovery efforts of the Egyptian economy.
As if the capital inflows from the EU and the IMF were not enough, ADQ one of Abu Dhabi’s main sovereign wealth funds announced that it was making an unprecedented investment of $35 billion in Egypt to develop Ras al-Hekma peninsula which is east of Marsa Matruh along the Mediterranean to turn it into a new luxurious international tourist hub.
Even though development projects like this take several years to complete with the funds for the project disbursed slowly over time, the Abu Dhabi authorities have already transferred $15 billion to the Egyptian Central Bank while promising to transfer the remaining $20 billion over the next two months.
While it doesn’t make commercial sense for Abu Dhabi to pay so much upfront in cash for such a long-term project, the terms of the project are clearly a deliberate attempt to bail Egypt out of its economic crisis while there are also speculations that the international community might have reached a deal with Egypt to provide land to host Palestinian refugees from Gaza in the northern part of the Sinai peninsula and thus the funding from the EU and the increased support from the IMF to induce Egypt to provide the land.
Whatever the motives are for the sudden influx of funds into Egypt, it is certain that with an inflow of over $50 billion in hard currency into the Egyptian economy, most of the economic challenges bedeviling the country can now be addressed. For Egypt, there is certainly a very bright light at the end of the dark economic tunnel that they currently find themselves in.
Oshobi, a management consultant, development economist, and author, writes from Lagos, Nigeria