Egypt: Large external support to ease liquidity pressures

Liquidity pressure exacerbated by the war in Gaza

Egypt has been facing severe liquidity pressures despite the adoption of an IMF programme in late 2022. The country’s liquidity woes have been prolonged by the perception of slow and insufficient implementation of the structural reforms negotiated under the IMF agreement, notably the shift to a more flexible exchange rate. In this context, IMF disbursement and significant financial support from key regional partners (e.g. Saudi Arabia) were delayed. Furthermore, liquidity problems have been exacerbated by the fallouts from the conflict in Gaza on key sources of hard currency such as the Suez Canal revenues and, in a lesser manner, the tourism sector.  

Large external support alleviates liquidity pressure

However, since the beginning of 2024, the country’s liquidity prospects have improved significantly following announcements and pledges of large external support from regional partners and multilaterals. In particular, the United Arab Emirates have agreed to invest USD 35 billion in a large infrastructure project. Given the deal’s size and the rapid disbursement schedule against the estimated Egyptian external financial needs, the deal alone has substantially improved Egypt’s liquidity outlook. Moreover, following Egypt’s central bank shift to a more flexible exchange rate, the IMF Executive Board completed on 29 March the first and second reviews of the EFF arrangement and approved the increase of the arrangement from USD 3 billion to USD 8 billion, unblocking immediately USD 820 million for Egypt. The EU also signed an aid deal with Egypt, worth around EUR 7.4 billion in grants and loans. The funds should be disbursed in tranches between 2024 and 2027. Last but not least, the World Bank also pledged to provide USD 6 billion to Egypt over the next three years.
 

The situation remains challenging

Despite those positive developments, Egypt’s economy is still facing key challenges. In the near-term, the difficult socioeconomic situation will continue to weigh on the capacity of authorities to pursue IMF reforms, especially as the devaluation of the pound will exacerbate existing social grievances. Moreover, Egypt still suffers the fallouts from the conflict in Gaza on key sources of foreign exchange revenues (tourism and the Suez Canal). More importantly, there is a risk that authorities introduce only “cosmetic” reforms, avoiding structural ones (e.g. measures fostering the private sector). Implementation risks are important given that substantial external support has decreased the urgency to implement structural reforms in the short-term, while, in fact, they remain crucial to ensure medium and long-term macroeconomic stability. In this context, Credendo maintains Egypt’s short-term and medium- to long-term political risks ratings in category 6/7, with a slightly positive outlook for the liquidity situation.

Analyst: Andres Hernandez Cardona – a.hernandezcardona@credendo.com