Egypt’s imminent bailout
Why Egypt is getting bailed out, and why it will need an even bigger bailout in the coming years.
Egypt is set to receive an IMF package which may be as high as USD 12 billion in the coming few weeks. This follows a commitment from the UAE to invest up to USD150 billion in the country, of which USD35 billion would be invested immediately. The Egyptian pound’s black-market rate has improved from EGP 70/USD on 31 January to EGP 48.67/USD as of 29 February 2024, compared to an official rate of EGP31/USD.
Why now?
The IMF is saying that issues hindering an agreement have been resolved. This is unrealistic, as not much has changed in Egypt. There is no reason to anticipate any alteration of Egypt’s political economy, which is dominated by the military and tycoons connected to the Sisi government. Rather, Egypt has successfully used the Israel Gaza War and the ensuing risk of instability in Egypt – which would lead to conflict with Israel and enormous migrant flows to Europe – to force the West and its allies into supporting it, as we had anticipated would occur. Recall that Egypt had signalled its willingness to mobilise its army towards Sinai, sending air defence systems there. Moreover, Egypt received Turkish president Recep Tayyib Erdogan, implicitly threatening to side with Türkiye against the UAE in various theatres, from Libya to Somalia to Sudan. The pressure paid off, with both the UAE and the IMF falling in line.
What’s on offer?
The UAE’s investment begins with a plan to build a new city in Ras al-Hikma, on the north coast of Egypt, 212km west of Alexandria, for USD35 billion. This is set to inject USD15 billion in FDI in the coming days, and another USD20 billion within two months, according to Egypt’s Prime Minister Mostafa Madbouly. The foreign currency will go to the Central Bank of Egypt immediately, and the CBE will disburse pounds to the Ras El Hekma joint stock holding company. That company is owned the Abu Dhabi Development Holding Company (ADQ), which is owned by the government of Abu Dhabi. 35% of profits would go to Egypt, possibly through the Talaat Mustafa group. Abu Dhabi will also “waive” USD11 billion in deposits at the CBE – this means that the CBE reserves included USD11 billion in deposits formerly owed to the UAE, and that the project amount is USD24 billion.
Implications
Economically:
The UAE’s move is simply a bailout, presented as an investment in a project. Furthermore, Egypt that will provide the funds in EGP for the project, and the price it will do so at is unclear – Egypt may well provide funds at EGP31/USD then devalue the currency, or provide some funds at the current rate and others at the post devaluation rate. Recall that the fear of devaluation had deterred the UAE from going through with some previous privatisations. Now the UAE has accepted that risk.
It will likely be Egyptian companies that are contracted for the project – Talaat Mustafa has been flouted as a partner. Meaning that the funds will circulate within Egypt.