Will External Support Get Egypt Out of Its Economic Crisis?

The performance of foreign countries towards supporting the Egyptian economy is different from time to time (Al Jazeera)

The performance of foreign countries towards supporting the Egyptian economy varies from time to time, especially in those times when Egypt's political positions coincide with the supporting countries.

Perhaps the most prominent of these positions was in the early nineties of the twentieth century, where Egypt supported the position of the countries of the (US-European) coalition in its war on Iraq, which allowed Egypt to obtain significant support represented in reducing Egypt's external debt by 50%, as well as signing an agreement with the International Monetary Fund, which enabled it to get out of the external debt crisis.

In 2023 and before – specifically before the Al-Aqsa flood – America was threatening more than once to withhold part of its aid to Egypt because of the human rights file, and it is known that Egypt receives annual aid from America estimated at about one billion and 350 million dollars, including one billion dollars in military aid.

The largest form of external support for Egypt was the Gulf support that Cairo received in 2013 and 2014, estimated by the Egyptian Ministry of Finance at about 95.8 billion pounds (equivalent to 12.5 billion dollars, according to the average exchange rate for 2014 at 7.07 pounds to the dollar), and another amount in 2014 and 2015 of 25.4 billion pounds (equivalent to 3.3 billion dollars according to the average exchange rate for 2015 at 7.69 pounds to the dollar), and in 2016 and 2017 by 17.6 billion pounds (equivalent to one billion dollars). Approximately, according to the average exchange rate for 2017 at 17.7 pounds to the dollar).

Gulf support deals have been represented in various forms that combine cash and in-kind support, whether through oil deals or financing some development projects.

A review of the grants item included in the Egyptian budget revealed that the total grants Egypt received during the period from 2013 to 2022 amounted to EGP 160.6 billion, according to figures in various issues of the monthly financial report issued by the Ministry of Finance.

The support granted to the Egyptian economy was not limited to current or investment grants only, but also opened the door for external borrowing significantly for Egypt to obtain loans from international and regional institutions, as well as international financial markets, as well as deposits from the Gulf countries to support the foreign exchange reserves of the Central Bank of Egypt.

Central Bank of Egypt data shows that Egypt's external debt reached $ 46 billion in June 2014, while it jumped to $ 165 billion by the end of 2023, which means an increase in this debt by about $ 119 billion during the period.

Gulf deposits in the Central Bank of Egypt since 2013/2014 represent an important figure regarding foreign exchange in the country, as these deposits are close to $ 18 billion, and a large part of them remained without interest for a period of 5 years, and then began to pay interest later, but they are flexible in terms of postponing their payment, and giving Egypt opportunities to extend these deposits in the Central Bank, without returning to the Gulf countries.

U.S. support

Recently, U.S. Treasury Secretary Janet Yellen stated the United States' strong support for Egypt and its economic reform program, stressing the goal of strengthening the Egyptian economy and supporting inclusive and sustainable growth. The U.S. Treasury Department is ready to continue working closely with Egypt on bilateral and regional issues.

Yellen's statements come in light of the events in the Gaza Strip of Israeli aggression aimed at the genocide of the Palestinian people in Gaza, and there is a problem related to the Rafah crossing between Palestine and Egypt, and Egyptian Foreign Minister Sameh Shoukry has previously stated that the passage of aid to the Palestinian people in Gaza requires the approval of the Israeli side, which put the people of Gaza in a major humanitarian crisis related to the lack of food and medicine, and a large part of them were exposed to hunger or death, especially in light of the demolition of homes, schools, and hospitals.

The clear postulate in international relations is that nothing is free, and therefore observers fear that this position of support from the US Treasury for the Egyptian economy is characterized by political interests for the Egyptian role in the current crisis in Gaza.

Interestingly, the provision of economic support from America came from the Secretary of the Treasury, and that this support will extend to work with Egypt on bilateral and regional issues, and thus American support has acquired the image of conditional support for cooperation in the economic and political fields, as observers point out.

Yellen announced strong US support for Egypt and its economic reform program (Reuters)

Limits of support and the possibility of exiting the crisis

The political discourse in Egypt through its senior officials, about the economic crisis in general, and the financing of it in particular, is characterized by blaming external crises for the largest side, as the Egyptian economy went through the Corona pandemic, as well as the negative repercussions of the Russian war on Ukraine, and recently the negative repercussions of the Israeli aggression on Gaza, and Egyptian officials also focus on population increase as an important factor that destroys the fruits of development during the past ten years.

As for the US support, it is expected to be a contribution to accelerating the timing of the signing between Egypt and the International Monetary Fund, or contributing to increasing the value of the loan, and Bloomberg has published during the past few days a news that includes the existence of talks between Egypt and the IMF to increase the value of the loan to about $ 6 billion.

As for the Gulf support, it has been noted that there is a development in the form of support provided to the Egyptian economy, through owning shares of Egyptian public companies, not providing material or in-kind assistance, and the mechanism for providing shares of Egyptian companies' ownership is a policy followed by the Egyptian government, as the recently published strategic directions document included providing shares of public companies' ownership in exchange for debts.

In the case of international financial institutions (the International Bank and Fund), the commissions focus on the Egyptian government's acceptance of the devaluation of the pound, accelerating the privatization program of public companies, and on the ground the devaluation of the pound has already been devalued in the parallel (black) market, exceeding 50 pounds to the dollar.

As for the possibility of contributing support from the aforementioned parties in Egypt's exit from its economic crisis, it will be a temporary solution or palliatives, as happened before, as the Central Bank of Egypt data confirms that the deficit in net foreign assets in banks amounted to about $ 25 billion, in addition to Egypt's obligations to meet the burden of external debt from installments and interest, which was estimated at $ 29 billion for the year 2024, according to the estimates of the Central Bank of Egypt report.

If Egypt reaches an agreement with the IMF - especially on the devaluation of the Egyptian pound and raising the interest rate - this will ensure the improvement of the flow of foreign exchange to Egypt through two tracks, the first: the path of remittances of workers abroad, from which about $ 10 billion came out to the black market, as well as: hot money that could return in light of the devaluation of the pound and raising the interest rate, and it is worth noting that Egypt exited about $ 20 billion of hot money, after the Russian war on Ukraine, creating a foreign exchange crisis that Egypt continues to suffer.

Where is the problem?

The data of the Egyptian Ministry of Finance, through the monthly financial report December 2023, shows that the proportion of investment and net exports is about 25% of GDP, which means that GDP depends heavily on consumption, and that consumption includes a high percentage of imports of goods and services.

The data of the financial report also shows that there is a gap between investments and domestic savings as a percentage of GDP, which amounted in 2021/2022 to about 7%, and this gap is filled through debt.

On the other hand, we find that the trade balance deficit remains a chronic problem, reaching $ 31 billion at the end of the fiscal year 2022/2023.

Hence the importance of external support to the Egyptian economy so that it can bridge the structural gaps in the performance of its national economy, by reducing the financing gap to a minimum, increasing the contribution of production and export to output, and reducing the trade balance deficit.

But the important issue remains in external support, which is the price paid for obtaining such support, whether that price has a political or economic face.

Source : Al Jazeera