Egypt faces ‘stark choice’ in order to emerge from economic crisis, says Goldman Sachs
▶ The country must accelerate pace of reforms or make more ‘painful adjustments,’ investment bank says
Cash-strapped Egypt must speed up the pace of its reforms or make more “painful adjustments” to lift its economy out of a deepening crisis, according to global investment banking group Goldman Sachs.
The Arab world’s most populous country – with about 107 million inhabitants – is saddled with double-digit inflation and a currency crisis, putting immense strain on the economy.
“In our view, this leaves Egypt facing a stark choice: accelerate the implementation of a reform agenda or move towards further painful adjustment,” the investment bank said in a report released this week.
Egypt has already devalued its currency three times over the past year – allowing the Egyptian pound to shed about 50 per cent of its value against the US dollar.
The devaluations have made little headway in alleviating a stubborn foreign currency crunch or attracting sufficient interest in Egypt’s once-lucrative debt market.
Caused in large part by the fallout from the Russia-Ukraine war, the country is also facing double-digit inflation, which reached 31.9 per cent in February, mainly on the back of a steep increase in food prices.
President Abdel Fattah El Sisi’s government has doggedly defended its economic policies – blaming the crisis entirely on the Russia-Ukraine war.
It has used a narrative in which the country’s economic predicament is cast as inflicted on it by a global crisis in which it played no part.
But critics claim the crisis, at least in part, is the outcome of lavish spending on mega national projects that were either unnecessary or could have waited. They also cite excessive borrowing and lack of transparency.
“Yes, the world is going through a very big economic crisis and it has a huge impact on us. But … we are steadfast and will pass it,” Mr El Sisi said last week while visiting troops in the Sinai Peninsula.
“There is no such thing as a problem that cannot be solved. This problem will be history – just like terrorism,” he added.
Last week, Mr El Sisi said that an insurgency in Sinai by Islamic extremists had been defeated.
Under a deal reached with the International Monetary Fund late last year, Egypt received a $3 billion loan to overhaul its economy. That was linked to adopting a genuinely flexible foreign exchange regime, reducing the government’s footprint in the economy and opening up state assets to investors.
Egypt must accelerate implementation of the reforms agreed with the IMF, Goldman Sachs stressed in its report.
Six months after the deal with the IMF, the foreign exchange regime appears to be partially controlled, with the dollar trading at about 30 pounds at banks for the past few weeks, it said.
In the parallel market, the dollar is trading at 36 to 37 pounds, evidence of a continuing gap between the country’s dollar requirements and availability in the banking system.
The disparity in the dollar’s value has renewed speculation that the pound may be devalued again, although the government would be wary of such a move given its effect on prices and fears of unrest.
Egypt’s options to overcome its dollar shortage are limited, the report said.
Cairo’s traditional economic backers in the Gulf region – the UAE, Saudi Arabia and Kuwait – have signalled their preference for investing directly in the local economy rather than depositing billions of dollars with Egypt’s central bank, as they had done for years.
The IMF is unlikely to offer Egypt any more substantial loans “without significantly increased efforts on the reform front”, Goldman Sachs said.
Egypt already owes the Washington-based lender about $20 billion – making it the world’s second-largest IMF borrower after Argentina.
Uncertainty over the pound’s value against the dollar is preventing Egypt’s debt market from regaining its past attraction. At least $20 billion worth of investment in the debt market swiftly left the country after Russia’s invasion of Ukraine in February last year.
Investors are holding back on buying bonds on the expectation that treasury bond yields will begin rising to match increase in overnight rates decreed by the central bank last week, Reuters reported on Tuesday.
While IMF-prescribed reforms could boost the inflow of direct foreign investment, there are risks, said Goldman Sachs.
Egypt last month said it was offering investors stakes in 32 state enterprises – including banks and military-owned companies. It hopes this will attract interest from sovereign investment funds in the Gulf. But the pace has been slow.
Goldman Sachs said “stalling” in the sale of Egypt’s United Bank to Saudi Arabia’s Public Investment Fund and the postponement of plans to sell 10 per cent of Telecom Egypt have “undermined investor confidence”.
Critics claim the crisis, at least in part, is the outcome of lavish spending on national megaprojects