The Egyptian Economy in light of International and Regional Changes: Scenarios and Solutions

In recent years, the Egyptian economy has been exposed to a series of shocks that led to it facing many challenges in its attempt to recover from them, as it was greatly affected by political developments and regional tensions in the world and in the Middle East, including the consequences of the Russian-Ukrainian crisis, and the Israeli attack on the Gaza Strip. Despite this, the Egyptian state is striving to contain various negative repercussions on the economic sector, maintain the stability of the economy, achieve sustainable growth, and protect citizens from the consequences of economic shocks.

In this context, the research paper aims to analyze the regional and international variables to which the Egyptian economy is exposed, clarify the economic effects of these variables on it, as well as shed light on the policies and procedures that the Egyptian economy can follow. Finally, the research paper presents several proposed solutions to enhance the performance of the economy and support its ability to withstand external shocks.

The most important solutions proposed by the paper to enhance the performance of the Egyptian economy were as follows:
-Increase the volume of national projects with a dollar yield and temporarily stop financing projects that need dollar spending.

-Expanding support to the Egyptian industrial sector by paying attention to the strategy of deepening local manufacturing.

-The current boycott campaigns are a golden opportunity for local products to increase their market space through increasing demand for local products.

-The government should focus on increasing the competitiveness and quality of exports and reducing the obstacles facing exporters as exports are a means of obtaining foreign exchange.

-Raising the interest rate will lead to a decline in investment, contraction of economic activity and increasing unemployment.

-Easing the restrictions on obtaining foreign exchange, which the private sector needs to obtain the raw materials necessary for production.

First: Analysis of the regional and international changes to which the Egyptian economy is exposed

The Egyptian economy was subjected to successive shocks (from the corona pandemic to the war in Ukraine). Where it influenced the gains of the economic reform plan, which began since 2016. The Russian-Ukrainian crisis in 2022 has led to significant repercussions on the Egyptian economy as it struggles to recover from the economic consequences of the covid-19 pandemic, as high inflation rates, declining wheat imports and dwindling tourist flow come on top of the negative consequences of this war. Thus, the risk of food insecurity has increased due to the fact that Egypt’s food imports are linked to these two countries.

Egypt sought a new loan from the International Monetary Fund in December 2022 in order to fill part of the financing gap.

The Executive Board of the International Monetary Fund approved a 46-month agreement with Egypt under the Extended Fund Facility worth approximately US$3 billion. The program includes a comprehensive package of policies aimed at maintaining macroeconomic stability and achieving comprehensive growth led by the private sector. The policy package includes a permanent shift to a flexible exchange rate system, a monetary policy aimed at gradually reducing inflation, fiscal consolidation to ensure a decline in the path of public debt while strengthening social safety nets to protect vulnerable groups, and broad structural reforms.

The “Extended Fund Facility” is expected to encourage the availability of more funding for Egypt from its international and regional partners. Despite the promising goals of the IMF loan, however, the transition to a flexible exchange rate policy led to a significant devaluation of the Egyptian pound, which negatively affected the purchasing power of Egyptians and the high import bill. Therefore, the Egyptian government has turned to increasing support for the poorest groups.

It should be noted that China is the second largest economy in the world after the United States, according to gross domestic product, and the world’s number one trading power, as well as being one of the most important engines of global economic growth, and its currency has become one of the IMF’s Special Drawing Rights basket of currencies, starting in October 2016. China’s national income is more than 10.4 trillion dollars, compared to 17.4 trillion dollars for the United States of America. China has a purchasing power equivalent to more than 15 trillion dollars, an estimated 3.7 trillion dollars in hard currency and gold reserves, a third of which is held in US Treasury bonds. China is seeking to reduce its dependence on the dollar, after the Chinese currency covers about 10% of World Trade. Since 2015, China’s arms exports to Africa have doubled, surpassing the US share and accounting for 17% of the African market.

China and the United States are locked in an escalating trade war that has seen rounds of tariffs imposed on each other’s imports, as well as increasingly strained relations due to disagreements over issues such as arms sales and military activity in the South China Sea.

Regarding the trade balance between China and the United States, it tends in favor of Beijing, whose trade surplus exceeded $375 billion in its exchanges with Washington in 2021, noting that the volume of trade exchange between the two countries exceeded $600 billion in 2020, and US exports to China in 2021 amounted to about $116.2 billion, while China’s exports to the United States amounted to about $492 billion in the same year. The United States imports aluminum, steel, electronics, clothing, and machinery from China, while China is the largest importer of soybeans from the United States.

Second: The economic impacts of current international and regional changes on Egypt

The instability and turmoil in the monetary policy of major countries have prompted an exodus of indirect investments in emerging markets, including Egypt, where about 20 billion dollars have flowed out since the outbreak of the Russian-Ukrainian crisis due to interest rate hikes in developed countries, which led to a sharp drop in the exchange rates of the local currency accompanied by record inflation levels as a result of the increase in the cost of imports, but the positive economic growth achieved over the past three years, on the one hand, as well as reforms in the balance of trade, especially the balance of energy, on the other, have pushed the Egyptian economy somewhat away from the severity of the external shock, which will performed Due to high energy and food prices, which undermined economic growth.

-Opportunities – Europe’s increasing dependence on Russian energy essentially pushes European governments to increase their investment portfolio with Egypt in the field of energy, especially natural gas in the short term and electricity in the medium and long term.

-The increasing dependence over the last two decades on factories in China and Southeast Asia has prompted major companies in the world, especially European and American companies, to reconsider the distribution of their factories and production lines around the world, which makes the reforms that Egypt implemented in infrastructure an opportunity to attract the largest possible amount of these investments, as well as About the availability and sustainability of energy on the one hand, and the low cost of labor on the other hand.

Challenges:

-Slowing economic growth:

The slowdown in global economic growth may lead to a recession that includes emerging economies, which may lead to lowering expectations for economic growth. According to the expectations of international institutions, the Egyptian economy is growing at a rate of 5.6% for the current year, amid expectations of a slowdown to reach 4.6% for next year.

-Increase in the general level of prices:

The rise in the general level of prices globally led to a further rise in prices at the local level, which in turn leads to an increase in the state’s obligations towards the most vulnerable groups, and increases the size of the general budget, which requires more borrowing, as the total budget deficit reached about 6.2%. As a percentage of GDP, the following figure indicates the relative distribution of public expenditures in the current budget 2022/2023.

High external public debt:

Egypt’s external public debt reached about $145.5 billion at the end of December from the level of $137.4 billion at the end of last September, an increase of about 5.8%, which may hinder the volume of spending allocated to investments, as interest payments amounted to about 45% of total revenues and about 33%. % of total public expenditures and the equivalent of 8% of the gross domestic product for the current fiscal year. The following figure shows the development of both interest payments on the one hand and the current and total deficit on the other hand.

Challenges of foreign trade:

The effects of the slowdown in international trade appear in two directions. The first is an increase in the import bill as a result of the rise in the price of oil, and about 20 billion pounds to move the exchange rate. The second trend is a decrease in the expected returns from Suez Canal revenues, as a result of the decline in the growth rate of global trade. It is expected that trade growth will decline. The global rate will reach 4.9% in 2023 compared to the current year’s estimated 6.7%, and the rise in interest rates by 100 basis points will contribute to increasing the general budget deficit by about 28 billion pounds.

Third: Policies and procedures that the Egyptian economy can follow

Egypt should resort to a set of policies and procedures to confront international and regional changes at the local level as follows:-

1-to make more efforts to protect the production and marketing activities necessary to meet local and global demand, and that supply chains continue to operate, which means protecting the existing infrastructure for processing crops, livestock and food, and other logistics systems.

2-finding new and more diverse food suppliers, relying on the existing stocks of food commodities and diversifying local production to ensure that people get healthy dietary patterns.

3-expanding the scope of social safety nets to protect the vulnerable.many will be pushed into the cycle of poverty and hunger by the ongoing conflict, which requires the provision of appropriate and targeted social protection programs.

4-avoiding ad hoc policy responses.reducing import tariffs or using export restrictions would help to address food security challenges.

5-enhancing transparency in markets and encouraging dialogue: ensuring greater transparency and information on the state of global markets will help the government and investors to make informed decisions in light of the fluctuations in the agricultural commodity markets.

Fourth:  proposed solutions to enhance the performance of the Egyptian economy and support its ability to face external shocks:

-Increase the volume of national projects with a dollar yield and temporarily stop financing projects that need dollar spending. Sources of dollar liquidity should be diversified more quickly and focus on sources that do not require large infrastructure.
– Expanding support to the Egyptian industrial sector by paying attention to the strategy of deepening local manufacturing. It is necessary to provide alternatives to imports in the Egyptian market to reduce its vulnerability to external shocks.

-Although the devaluation of the currency makes imports more expensive, it makes exports cheaper and increases global demand for them. But the government should take steps to increase the competitiveness and quality of exports, and reduce the obstacles facing exporters as exports are a means of obtaining foreign exchange. There should be more subsidies to support small and medium-sized enterprises in order to help them produce for export.

– -Raising the interest rate by the central bank is not the only solution to curb inflation, especially since inflation is not caused by an increase in demand, but by rising costs and shocks to global supply chains. On the contrary, raising the interest rate will lead to a decline in investment, contraction of economic activity and increasing unemployment.

– -Easing the restrictions on obtaining foreign exchange, which the private sector needs to obtain the raw materials necessary for production. In addition, the private sector is now facing a high cost of financing due to the tightening of monetary policy.

-Reducing the government’s crowding out of the private sector in obtaining local credit, as the bulk of local credit is allocated to the government and the public business sector and represents about 60% of local credit