It’s increasingly clear that the outbreak of COVID-19 will be devastating for the global economy. The IMF has declared that the economic fallout will be the worst since the great depression and “far worse than the global financial crisis.” In the case of Egypt, not only is the economic fallout of the pandemic likely to erase many of the limited gains that have come about as a result of the reforms undertaken since 2016, but the country’s dependence on debt-driven stimulus and often fragile sources of dollars, coupled with the global nature of the crisis, will exacerbate the economic strain it endures and is likely to complicate its ability to finance its recovery when this health crisis is over. As is the case in many nations, this crisis is exposing the structural weaknesses in Egypt’s economy and the human costs that spring from them.
Protecting the pound through a crisis
Early into the outbreak of COVID-19 it was clear that Egypt was going to take a number of hits to its main sources of dollar revenue. Lower volumes in global trade would mean reduced revenue from the Suez Canal. Further drops in the already depressed price of natural gas meant that Egypt’s newly-prized energy export was going to bring in less revenue than previously projected. As the global population is told to stay home and many countries move to close borders, it’s clear that Egypt’s newly-recovered tourism industry is once again being devastated. Finally, the collapse in oil prices indirectly threatens Egypt’s largest source of dollars: remittances, which primarily come from Egyptian expatriate workers in countries whose economies are dependent on oil.
Another crucial source of dollars for Egypt is its sale of debt. The challenge for Egypt is that with all these other sources of dollars drying up and the economy likely heading for recession, the country may struggle to attract investors to continue buying its treasuries as aggressively as in the past few years. Until recently, Egypt was considered one of the best carry trades in the world. On top of the Central Bank of Egypt (CBE) offering generous interest rates on Egyptian debt, the currency had benefited from a massive inflow of dollars buying that debt on top of growth in tourism, canal revenues, and investment in its oil and gas sector, collectively driving up the value of the pound and adding significantly to the returns of those invested in Egyptian debt. The Egyptian pound was one of the best performing currencies in the world in 2019 and doing well in early 2020.
Clearly things have changed. In a recent interview, finance minister Mohamed Maait estimated that foreign holdings of Egyptian treasuries had declined from $28 billion to as low as $13.5 billion. He also said that he suspected government revenue during this crisis would drop anywhere from 25 percent to 50 percent, as many sectors lose revenue and the government rolls out various tax breaks to ensure businesses have liquidity.
The question now isn’t whether the pound will lose ground against the dollar but how much ground and how quickly. While the Egyptian pound has technically been a free-floating currency since it was floated in November of 2016, the Central Bank has since surreptitiously intervened to protect and stabilize the currency, as an investigative report from Reuters confirmed at the end of 2018. Given the pace of dollar the Central Bank will is likely to move to to slow the drop in the pound’s value to avoid a new shock to the country’s currency. Indeed, given the pound’s stability in the past few weeks despite massive outflows and a drop of over $5 billion in reserves, it’s possible the CBE is already doing so. Most Egyptians were overwhelmed when the pound suddenly lost half its value in 2016, and the Central Bank will want to avoid the cost to public confidence in the pound that would come with another collapse in its value.
Currently, the CBE is struggling to set a cohesive strategy for how it deals with the economic fallout of this crisis and consequently is using tools that appear to have contradictory effects as it tries to address two competing concerns. It is both trying to protect the Egyptian pound and slow efforts by the public to buy dollars, while at the same time working to inject liquidity into the market to keep the economy running as the private sector’s contraction accelerates.
To keep cash in the market the CBE cut rates in mid-March by 300 basis points, reducing the cost of borrowing. On top of that it has recently announced new subsidized loans for businesses, further reducing the cost. All of this should theoretically help businesses with access to liquidity as they struggle to cope with reduced demand.
At the same time the CBE, out of clear concerns about panic withdrawals, has imposed strict withdrawal limits. These measures may be explained by reported concerns at the CBE that Egyptians, worried about the pound’s prospects, are likely to buy dollars. Slowing their ability to withdraw would curb the trend. Another measure that takes cash out of the market but also discourages dollarization is the CBE offering depositors, through state banks, certificates of deposit (CD) that pay 15 percent interest, 475 basis points above the new overnight lending rate, while having Egyptian banks lower the interest paid on dollar deposits to make dollars less attractive and give depositors added incentive to keep their savings in pounds. These CDs between the National Bank of Egypt and Banque Misr have already attracted nearly $55 billion pounds (nearly $3.5 billion) in deposits.
A workforce already under economic pressure
While the CBE struggles to balance competing concerns about the country’s currency and financial markets, the Egyptian government is also facing a gargantuan challenge; how to encourage social distancing in a country in which a third of the public lives in poverty and roughly 60 percent of the public lives near or below the poverty line, a problem exacerbated by years of austerity following the IMF’s bailout in 2016. An estimated 5.2 million workers (20 percent of Egypt’s labor force) are daily workers with no fixed regular employment. Most Egyptians simply do not have the financial means to stay home for any extended period of time, and those same laborers do not typically have the option of working from home. Meanwhile, the state already carries a large amount of debt and will inevitably see its revenue decline significantly this year while the path to recovery remains unclear.
The government has tried to increase its cash assistance to those in need. The Ministry of Manpower distributed payments of 500 LE ($32) through post offices to informal workers. They reportedly reached 1.3 million workers but that’s just over 10 percent of the estimated 11.9 million informal workers in Egypt who make up nearly half of Egypt’s labor force. The country’s two means-tested cash transfer programs have increased pay-outs and added families to try to help those in need. The trouble is that Egypt’s infrastructure for means-tested cash transfers is still not adequately developed. Despite efforts to expand their coverage the Takaful and Karama programs collectively only cover roughly 10 million Egyptians. According to the government’s own estimates, over 30 million were in poverty before this crisis began. If the Egyptian government moves to enforce a more stringent lockdown it will prove extremely challenging both in terms of cost and the infrastructure for distributing the resources needed to make it feasible.
We don’t yet know what the scale of the impact of COVID-19 will be on Egypt’s economy because there are still many variables that researchers are trying to understand. How long this slowdown lasts both in Egypt and globally as well as how the medical system is able to cope are open questions of great consequence. What is more or less certain is that Egypt, like much of the world, will require substantial financing to fuel a recovery when this is all over. Multiple issues are likely to complicate its ability to secure that financing.
Global demand on international financial institutions will be unprecedented. Egypt will be competing with much of the world in seeking financing. On top of that, its most generous benefactors in the Gulf oversee economies that are largely dependent on the sale of oil. Aside from dealing from the fallout from the pandemic and the consequent collapse in demand for energy, OPEC has been embroiled in a price war with Russia that has caused prices to collapse even further to historic lows. When the dust settles, Egypt’s Gulf partners will be busy coping with their own economic crises and may not be in the position to give Egypt the assistance it has secured in the past.
Anticipating economic trajectories—as the world contends with what appears to be the worst pandemic in over a century amid an array of unanswered scientific questions—is challenging. How this plays out and for how long will have an enormous impact on the ultimate scale of the damage and the difficulty of recovery going forward. What’s clear is that the challenge is tremendous and growing. In a matter of weeks, the sense of risk felt by governments and markets appear to have already grown immensely.