2024-01-18 17:07:12
Egypt’s already deteriorating economy received a “new painful blow” as a result of the sharp decline in revenues after the attacks launched by the Houthis in Yemen on cargo ships, which led to the diversion of commercial shipping away from the Suez Canal, increasing the urgent need for reform measures and obtaining aid from abroad.
Almost all major sources of foreign currency – natural gas exports, tourism, remittances from workers abroad, and most recently the Suez Canal – are now under severe pressure.
Egypt needs foreign currency not only to import basic goods, but also to repay $189.7 billion in foreign debt, most of which has accumulated in the past ten years.
At least $42.26 billion of debt is scheduled to be repaid this year, although analysts expect some of these amounts to be deferred until later periods.
“Taking all of this into account, Egypt’s crisis appears to be approaching a crossroads,” said James Swanston of Capital Economics.
The head of the Suez Canal Authority said last week that canal revenues fell by 40 percent in the first 11 days of January.
In the fiscal year ending June 30, the channel generated record revenues for Egypt amounting to $8.76 billion, and in the third quarter it added another $2.40 billion.
The CEO of Maersk Shipping said on Wednesday that he expected the disruption to shipping resulting from attacks on ships to continue for at least a few months.
After Houthi threats, alternatives to the Suez Canal return to the forefront
The turmoil taking place in the Red Sea in recent weeks off the coast of Yemen has prompted shipping companies to divert their ships away from the Suez Canal and take the Cape of Good Hope route, which circles the entire continent of Africa before reaching Europe.
Maersk and other large shipping companies have instructed hundreds of commercial ships to stay away from the Red Sea, and diverted their ships to the longer route around Africa.
“If Suez Canal revenues continue to decline, this could be a severe blow,” said Allen Sandeep of Naeem Brokerage. “It is a major setback because it is a direct source of foreign exchange revenues for the government.”
Decrease in remittances from workers abroad
Other sources of revenue, such as remittances from workers abroad that go primarily to individuals, continue to contribute to improving Egypt’s foreign exchange position, although not directly to the government.
Remittances tumbled $9.85 billion in the fiscal year that ended June 30, then fell another $1.93 billion in the July-September period, according to central bank figures.
Egyptians abroad are reluctant to send their financial savings back to their country when the price of the currency is far lower than its value on the black market and inflation is rampant.
The exchange rate of the pound on the black market fell to about 57 pounds to the dollar from 39 before the outbreak of the Gaza crisis on October 7. The official rate has remained constant at 30.85 pounds to the dollar since March.
The inflation rate reached 33.7 percent in December, and has reached record levels since June.
Natural gas exports fell by two billion dollars on an annual basis in the period from July to September, according to central bank data, as a result of the decline in domestic production and the decline in global prices.
The value of Egypt’s natural gas exports in the fiscal year 2022-2023 amounted to approximately $7.20 billion.
Tourism, which reached a record $13.63 billion in the 2022-2023 fiscal year and then $4.45 billion in the period from July to September, has slowed since the outbreak of the Gaza crisis. The government did not publish revenue figures for the period after September.
Budget deficit problems
In an apparent measure to finance the budget deficit, the central bank resorted to printing more money. The money supply (M1) jumped 37.7 percent in the twelve months to the end of November.
Peter du Preez of Oxford Economics said: “The sharp rise in money supply and the possibility of further currency devaluations this year will lead to a sharp slowdown in the pace of decline in inflation, which means that inflationary pressures will remain high this year.”
A number of analysts believe that Egypt was waiting until after the presidential elections in mid-December to devalue the currency and undertake other painful reforms necessary to get the economy on the right track.
As expected, President Abdel Fattah El-Sisi, who faced little opposition, won about 90 percent of the votes.
“If the pound does not move soon, investors will likely remain reluctant to invest in the Egyptian economy for fear of a sharp decline in the value of the currency in the future rather than taking the somewhat painful medicine now,” said Swanston of Capital Economics.
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