As Egypt enjoys a surge in foreign investment, most recently receiving a second tranche of $14 billion from the UAE, economists are warning that without rigorous reforms, the country’s economic woes are far from over.
In recent months, the Arab region's most populous country has amassed billions in foreign investments and aid.
The country secured $35 billion from the UAE to develop the coastal city of Ras El Hekma in a landmark deal this year. Additionally, Egypt has received commitments for $8 billion each from the International Monetary Fund and the EU over four years, and $6 billion from the World Bank.
Furthermore, after raising interest rates and floating its currency in March, Egypt has seen an influx of $18 billion in “hot money” from foreign investors in its coffers, Mohamed Ragab, a financial markets analyst, told The National.
Hot money refers to short-term investments that flow into a country, often in the form of treasury bills or other high-yield debt instruments.
“This type of investment is highly liquid and can quickly flow out of a country if economic conditions change. In 2020, over $20 billion in hot money departed Egypt within a very short period of time, worsening economic instability brought on by the Covid-19 pandemic,” said Mr Ragab.
However, in light of increased reassurance in the country’s financial markets, a knock-on benefit of the UAE deal, hot money has returned en masse.
This contrasts with foreign direct investment, which involves longer-term investments in physical assets such as factories or real estate.
Egypt's T-bill auctions since January have also been a significant source of funds, with the government collecting about 2.47 trillion Egyptian pounds ($658.66 billion) from the sales of various tenors of T-bills, according to the latest data from the Central Bank of Egypt.
This substantial sum highlights the government's reliance on debt instruments to finance its spending and plug budget gaps.
While this influx of funds has helped clear import backlogs and slightly reduce inflation, economists Medhat Nafei and Moustafa Badra argue that achieving long-term stability requires stricter reforms.
“While the cash will solve short-term needs like increasing government purchasing power and lowering inflation, longer-term indicators like GDP [gross domestic product], unemployment, and exports must be addressed,” Mr Nafei said on El Hekaya, a popular talk show.
He called for a national committee to be formed to monitor and implement the reforms requested by the IMF before its approval of its latest loan to Egypt, the country’s fourth since 2016.
The reforms include reduced public spending, a tight monetary policy and the reduction of the state and military's overbearing role in the economy.
The committee would ideally ensure that the implemented reforms “benefit the country’s economy and not just ensure that the fund is paid back its loan”.
“We mustn't repeat past mistakes, either after December 2022 when the government couldn't implement rigorous enough reforms to meet the IMF's requests, or in 2016 when a small window was opened but not used correctly,” Mr Nafei added.
Gaza war impact
Mr Badra noted that Egypt's traditional foreign currency sources such as tourism, Suez Canal revenue and remittances have declined, a fact that has been exacerbated by the Gaza war.
The conflict could cost Egypt between $3.7 billion and $13.7 billion in lost tourism and canal income through mid-2025, according to estimates in a recent report by the UN Development Programme.
In January, canal revenue plunged 46 per cent year-on-year.
“We mustn't get too optimistic by focusing on economic achievements while forgetting the political situation around us,” Mr Badra cautioned.
Economists stress the need for extensive reforms, especially by reducing the state's role in the economy and boosting private sector participation.
There are concerns the government has resumed selling debt to plug budget gaps, rather than enacting transformative changes.
A recently launched agricultural initiative by the government was noted for excluding the private sector.
However, some positive signs have emerged, with Fitch Ratings upgrading its outlook of Egypt’s four largest banks to positive following its revision of the country's outlook to “positive” in early May.
But the rating agency warned Egypt remains highly indebted, with government debt forecast to hit 93 per cent of GDP in June.
As work begins on Ras El Hekma, with land transfer to be finalised “within days”, according to cabinet spokesman Mohamed El Homsani, the government has an opportunity to leverage the project to expand employment in construction, tourism, services and manufacturing, analysts said.
The project is set to break ground early next year.
With its currency stabilising and foreign reserves rebuilding, Egypt has bought some breathing room, but analysts stress that the hard work of building a more resilient, sustainable economy must now begin in earnest.
