Page 31 - Issue 59

ELITE
Vol.1

Issue 59

September raising interest rates, a debt vulnerability inflation has surged in Egypt, reaching 40%, due
analysis was conducted by researchers at to the devaluation of currency, which led to
2023 World Bank group. Egypt’s debt was in the negative real interest rates. Regarding
group with least resiliency and highest hydrocarbons, exports are limited by the huge
exposure to debt risk. Egypt has been consumption of Egypt, which leaves little to be
accumulating huge piles of external debt since exported, and revenues are volatile Egypt also
2015. Since then, its external debt has depended on Israel by importing gas and
doubled 4 times, reaching $160bn in 2022, exporting it as LNG. But the production of
equivalent to 37% to GDP, compared to 17% Egypt’s largest gas field has slumped recently,
in 2013. And in order to borrow all this leading to power cuts, and Israel has stopped gas
money, Egypt had to offer high real interest imports. Revenues from tourism slumped
rates for investors- the highest, indeed. The because of the pandemic and the war. Foreign
fact that debt service payments have reached workers' remittances decreased as the margin
60% of the budget and that they have between the official value of the dollar and its
surpassed the debts themselves tells us how value in the black market widened. Meanwhile,
excessive government’s borrowing was. Most Egypt exports remained between $25bn and
of this money has been spent on mega $30bn from 2014 till 2021, and only surged to
projects and infrastructure, which did not $43.9bn in 2022 due to the surge of gas prices,
lead to any significant growth that would which did not compensate for growing
generate more income that would compensate borrowing costs and the loss of foreign currency
for the cost of borrowing these debts. Thus, from other sources. Egypt used to depend on
most of debt repayments were actually these sources to pay its external debts interest.
financed from new debts and not increased But as the current account (Exports+
revenues. Everything looked stable for a remittances- imports) was already in deficit, and
while since interest rates were stable. since foreign direct investment remained stable
However, a new crisis was looming as Egypt’s and humble since 2012, Egypt depended on hot
excessive borrowing has limited its capacity to cash the most to fill the gap from 2017 to 2021,
absorb a rise in the Fed’s interest rate, which which Dr. Mohamed Moait, the Egyptian
caused its external debt repayments to rise minister of finance, has admitted it was a
from around $15bn in 2022 to $19bn in 2022. mistake. Had the government worked on
According to forecasts, its expected to surge increasing industrial and agricultural exports, it
by $10bn in 2024, reaching $29bn. The would have managed to secure a relatively more
second policy is depending on volatile sources stable source of foreign currency, decrease its
of foreign currency while neglecting industrial current account deficit, decrease its funding gap,
and agricultural exports. The government reduce its exposure to changes in Fed’s interest
depended mainly on hot cash, gulf states rate by depending less on hot cash. These
deposits, and hydrocarbons exports, tourism, vulnerabilities reacted with each other making
foreign workers' remittances for foreign the perfect formula for an external debt crisis.
currency. Of those, only gulf states deposits Excessive borrowing led to a projected deficit of
are involatile- so far- for political reasons. 30$bn, according to Reuters, as borrowing costs
Hot cash, which Egypt depended on the most, increased, which Egypt’s ability to finance by
has escaped as soon as the Fed raised interest borrowing is limited because of high financing
rates, sparking a portfolio investment outflow costs. And depending on volatile sources of
calculated at $20 billion. They did not return, foreign currencies caused a sudden huge
though Egypt has secured a deal with IMF- a shortage in dollars, which Egypt needs to pay for
signal of assurance for investors- and ECB external debt repayments. Thus, the currency
has raised interest rates, but these two was devalued twice and restrictions on imports
measures failed to attract them back because have been placed as Egypt is in dire need of
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