Can Egypt’s Economic Overhaul Stave Off Crisis?

In Brief

Can Egypt’s Economic Overhaul Stave Off Crisis?

International lenders have pumped tens of billions of dollars into Egypt’s faltering economy amid the war in the Gaza Strip, but experts say the country’s economic crisis is not yet resolved.

In February 2024, Egypt won its largest-ever foreign investment: an influx of $35 billion from the United Arab Emirates (UAE). These funds laid the foundation for reforms that have unlocked tens of billions of dollars in additional commitments from international financial institutions and foreign governments. As a result, Egypt’s economy—which was facing a protracted foreign-currency shortage and soaring inflation even before the war in the Gaza Strip strained the situation further—appears to be on sounder footing. But experts caution that the Egyptian economic crisis is far from over.

How significant is the UAE investment?

More From Our Experts

ADQ, the UAE’s third-largest sovereign wealth fund, invested tens of billions of dollars in real estate projects along Egypt’s Mediterranean coast. Many analysts say that the infusion gave Cairo the foreign reserve cushion it needed to enact the costly economic reforms that presaged billions of dollars more in aid from international lenders.

What reforms did Egypt make?

More on:

Egypt

Economics

International Monetary Fund (IMF)

For years, Egypt has been propping up the value of its currency, the Egyptian pound, in a bid to reduce volatility in its economy. To do so, Cairo has to drain its foreign currency reserves to buy the pound on global markets at overvalued prices. This keeps the pound’s value higher than it would be without government intervention, which benefits Egyptians by boosting their purchasing power with a more valuable currency. But it also means that Egypt’s import-dependent economy has fewer reserves to spend on critical goods, such as oil and wheat.

In March 2024, Egypt let the pound “float” and raised interest rates by 6 percent—its largest-ever hike; both moves were conditions for receiving funding from the International Monetary Fund (IMF). In the hours after the measures were announced, the pound lost 40 percent of its value, falling to a record low.

The reforms come amid one of the worst economic crises in recent Egyptian history. Since taking power in 2013, President Abdel Fatah al-Sisi has spent tens of billions of dollars on megaprojects, including a new capital city; this spending has helped grow Egypt’s debt from 70 percent of its gross domestic product (GDP) in 2010 to 96 percent in 2023. Additionally, the Russian invasion of Ukraine has stoked inflation due to Egypt’s heavy reliance on wheat imported from the two countries. Some ten million Egyptians—about 10 percent of the country’s population—have fallen into poverty since 2010. Egypt’s dependence on revenue from remittances, tourism, and fees from trade passing through the Suez Canal make its economy particularly vulnerable to external shocks—such as the outbreak of the war in Gaza, which has weighed on all three of these revenue streams.

More From Our Experts
A woman holding a baby stares looks out at the Suez Canal as a cargo ship crosses.
A cargo ship crosses the Suez Canal in January 2024. Ahmed Gomaa/Xinhua/Getty Images

Still, the IMF says more should be done, particularly regarding the military’s outsize role in Egypt’s private sector. The military, which does not pay taxes, owns hundreds of businesses, including factories, gas stations, retail shops, tourism companies, and real estate developers. That level of state involvement crowds out the private sector, which cannot compete with the military’s government balance sheet or its ability to bypass government regulations.

How much foreign investment has Egypt gotten?

Egypt has won commitments of more than $50 billion in recent months, equal to 10 percent of the country’s GDP. Thanks to the interest rate hike and floating pound, the IMF offered Cairo an $8 billion loan package. The deal is more than twice the size of the previous program between the IMF and Egypt, which is the fund’s second-largest debtor.

More on:

Egypt

Economics

International Monetary Fund (IMF)

Egypt has also received financing from other multilateral institutions. Days after agreeing to the IMF deal, Egypt received $6 billion in loans, investments, and grants from the World Bank, and it signed an $8 billion “strategic partnership” with the European Union (EU) in areas including trade, energy, and security. The arrangement with the EU also includes two hundred million euros to manage migration, as a rising number of African migrants are passing through Egypt on their way to Libya and then Europe.

A map of Egypt with important data points such as population (110 million)

The reforms come as the United States and its partners are looking to ward off any additional sources of instability in the Middle East, such as fraying social cohesion in Egypt after years of economic distress. These concerns likely motivated the Emiratis, EU, IMF, and World Bank to mobilize funding to Cairo, CFR Senior Fellow Steven A. Cook says. 

How has the war in Gaza affected Egypt’s economy?

The Israel-Hamas war has weighed on Egypt’s already-flagging economy. Tourism, which represented 15 percent of Egyptian GDP in 2018, dipped after the October 7, 2023, Hamas attack on Israel. Economists project that revenue from tourism will fall between 10 and 30 percent this year, reducing Egypt’s supply of foreign currency. Egyptian officials, however, say tourism remains near record highs. Meanwhile, fees related to operation of the Suez Canal, which generated $10 billion for Egypt in 2022–23 (about 2 percent of GDP), halved after Houthi attacks in the Red Sea led major shippers to choose a longer route around the Horn of Africa.

Analysts say global lenders such as the IMF have become more sympathetic to Egypt since the war began. Indeed, Cairo’s progress on issues such as military control of state companies, a previous IMF sticking point, has been slow; as of December 2023, Egypt had sold just fourteen of the thirty-five state-owned companies that it agreed to divest in its 2022 arrangement with the IMF.

Some experts argue that Egypt’s position as a mediator between Israel and Hamas has made stabilizing its economy a global priority, despite its slow progress on IMF reforms. “Geopolitics has taken over,” Cook says.

Will these reforms resolve Egypt’s crisis?

Experts point out that shoring up Egypt’s economy—with the goal of ensuring regional stability—remains a central interest of both the United States and the EU. Still, many observers are skeptical that the reforms will last; Egypt has a long track record of announcing major economic changes and then backtracking.

Meanwhile, economists say that the military’s dominance of the economy continues to hold back development. President Sisi, a former general, came to power in a military coup just over a decade ago, and it would be challenging for him to reduce the army’s economic power without undermining his own. Neither the United States nor international institutions such as the IMF are exerting significant pressure on this front, so experts say Egypt has little incentive to proceed with privatization—and that it could thus remain trapped in a cycle of economic stagnation.

Creative Commons
Creative Commons: Some rights reserved.
Close
This work is licensed under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) License.
View License Detail
Close

Top Stories on CFR

 

NATO (North Atlantic Treaty Organization)

The war in Ukraine marks a new era of instability in Europe. Countering Russia’s efforts will require a stronger, more coordinated NATO.

China

After the rise of Chinese power during the 2010s and failed U.S. policies in the Indo-Pacific, the United States should renew the Pivot to Asia and place the region at the center of its grand strategy.*