EU's $1bn loan to Egypt 'drop in the bucket' amid its mounting financial needs

Arab nation's substantial debt obligations and regional instability pose uncertainties for its economic future, analysts say

A poster of Egyptian President Abdel Fattah El Sisi in Al Warraq River Nile island in Giza, Egypt. The EU signed a deal in March to provide Egypt with €7.4 billion in financial assistance until the end of 2027. EPAShow less

The European Commission's disbursal of €1 billion ($1 billion) in macroeconomic assistance to Egypt under its continuing strategic partnership is a “drop in the bucket” when compared to the financing needs of the Arab nation over the current fiscal year, an analyst told The National.

The amount is hoped to “help Egypt cover part of its financing needs for the fiscal year 2024/2025 and ensure macroeconomic stability, while supporting its home-grown reform agenda in conjunction with the ongoing International Monetary Fund (IMF) programme”, the EU said on Sunday.

However, with loan repayments amounting to more than $60 billion for the continuing fiscal year, according to Egypt’s central bank, the country’s financing needs far outweigh the EU’s latest disbursal.

For its current fiscal year, which began in July, Egypt paid $14.7 billion in the first quarter while $15 billion is due for the continuing quarter, which ends in a week. The largest quarterly repayment, worth $20.59 billion, will be due in the third quarter, which starts in January, with another payment of $10.5 billion required for the final quarter.

“The €1 billion that will be given to Egypt by the EU is not going to make a dent in the mounting debt, import bill or government expenses, but the EU is a valuable partner to have even if it doesn’t provide large sums of money itself like the UAE for example,” said financial analyst Mohamed Ragab.

“The EU’s stamp of approval opens Egypt up to countless other financing options, not to mention the increased co-operation between European businesses and our own private sector.”

Egypt upgraded its relationship with the EU to a strategic partnership earlier this year during a visit by President of the European Commission Ursula von der Leyen, when a deal was signed in March to provide Egypt with €7.4 billion in financial assistance until the end of 2027.

The total amount includes €5 billion slated for macroeconomic assistance and €1.84 billion allocated for “additional investments”. The deal also covered €600 million in grants, including €200 million given to Cairo for “migration management”.

Migration is a key area of co-operation between Cairo and the EU under the deal. The EU has continued to partner with North African governments to help manage the influx of irregular migration to the EU from Africa and the Arab world.

Egypt's agreement with EU followed a separate deal with the IMF under which it would receive $8 billion in financing over the next four years. The IMF deal, which came less than a month after a UAE consortium purchased 130 million square metres of Egypt’s Mediterranean coast for $35 billion, came with stringent economic reforms including a free float of the Egyptian pound and significant reductions on food and energy subsidies.

A market in Abdeen district of Cairo. The country's debt payments due this fiscal year remain extremely high. EPA-EFE

Growing strain

One of the most significant obstacles to economic improvement in Egypt is disruptions to Suez Canal shipping traffic. Israel’s war on Gaza has led Houthi rebels in Yemen to target ships traversing the vital waterway, one of Egypt’s most crucial sources of foreign currency.

Revenue from the canal dropped by 60 per cent in the past year, according to government officials. If the geopolitical situation worsens, Egypt’s misfortunes will also mount, according to Mr Ragab.

“The fact that Egypt secured different kinds of financing deals this year has helped it evade economic disaster. The EU deal is very comparable to the IMF deal. Both provide small, incremental disbursals that are often given right back to them as repayments for earlier loans. The benefit is in their stamp of approval,” Mr Ragab said.

“The Ras El Hekma deal, which was of a different kind entirely, was really the crucial factor this year that improved the situation in Egypt tremendously.”

The Ras El Hekma deal allowed Egypt’s external debts to decrease from $168 billion in December last year to $152 billion this month, according to the country's central bank. The country’s foreign reserves also increased by $11 billion during the same period.

The country’s debt-to-GDP ratio also dropped from 96 per cent in June last year to 89.6 per cent in June 2024, according to remarks made in November by Egypt’s Finance Minister Ahmed Kouchouk who anticipates the ratio to decrease further to 85 per cent by June next year.

Despite the overall improvements, the World Bank’s October projections on Egypt’s economy anticipated the country’s budget deficit to widen from 3.6 per cent of gross domestic product in 2024 to 7 per cent of GDP in 2025, primarily due to “higher interest payments and the vanishing impact of the (one-off) Ras El Hekma transaction”.

The deficit is anticipated to decrease in 2026, according to the World Bank and Egypt’s Finance Ministry.

Without another influx of cash like the Ras El Hekma deal, the World Bank anticipates that maturing debt and due payments of arrears to international oil companies (an important part of the IMF programme) could put pressure on the country’s foreign reserves and push them down again. The World Bank advised Egypt to focus on boosting private sector activity.

Despite the funding support, Egypt's economic future remains uncertain. The country's substantial debt obligations, coupled with the potential for further geopolitical instability in the region, continue to pose significant challenges.