The European Union last week unveiled an $8bn package of financial assistance for Egypt, in a move that economists expect to bolster the country’s beleaguered economy and attract greater inflows of foreign investment.
Egypt’s economy has been on a downward spiral since the outbreak of the coronavirus pandemic, when revenues from tourism, which contributed over $30bn to the economy in 2019, practically disappeared and other major industries were badly hit.
Nouran el-Khouly, an economist at CFI Financial Group in Cairo, tells African Business that “the EU package for Egypt is no ordinary package – it covers many different aspects of the economy and goes beyond a simple aid package to help finance some loans. The EU aid will also boost investors’ confidence in the Egyptian economy.”
Areas of focus for the package include cooperation in renewable energy, trade and security, underpinned by grants, loans and other funding over three years to support the Egyptian economy.
“I am optimistic that the package will have a positive impact on the Egyptian economy in both the short and long term,” says el-Khouly.
“In particular [the package] will help reign in the foreign exchange black market and stabilise the Egyptian pound – the financing has come at a critical time, with Egypt in dire need of foreign currency.”
The loss of international business during the pandemic led to a severe shortage of US dollars and other foreign exchange in Egypt. This shortage – combined with the onset of higher interest rates in the United States, a stronger US dollar, and weaker Egyptian pound – made it increasingly difficult for Cairo to service its external debt, which officially stands at around $31bn.
As a result, Egypt was forced to turn to assistance from the International Monetary Fund, receiving a $3bn bailout package in December 2022. However, this package required Egypt to liberalise several aspects of its economy, including its foreign exchange market. These reforms saw the Egyptian pound drop to record lows against the greenback.
This currency depreciation has contributed to high inflation in Egypt, with prices currently rising at over 35%. This challenging macroeconomic environment has dented the profit margins of Egyptian businesses and significantly increased the cost of living for Egyptians.
The EU package is designed to help alleviate some of these pressures, with $5.45bn earmarked for concessional loans and almost $2bn set to be invested in Egyptian projects. A further $600m will be provided in grants to Cairo, including $200m for managing migration, with Brussels eager to reduce the flow of migrants from North Africa into Europe.
Optimism returning
Charlie Robertson, head of macro strategy at FIM Partners in London, notes that traders appear to be increasingly bullish on Egyptian assets. The EU package, along with funding from other sources, is widely seen as ensuring macro stability and promoting stronger economic growth, he says.
“Foreign portfolio investors are pouring in money, thanks not only to the €7bn of EU cash, but the total $57bn of support,” Robertson tells African Business. “Foreign direct investment will take longer though – you need three years of macro stability before a foreign investor will decide to put a factory, for example, in a country for 10-15 years.”
