Egypt Avoided an Economic Meltdown. What Next?

In a few short weeks in March, Egypt emerged from its worst currency crisis in decades to become the hottest trade in emerging markets. The rapid change of fortune began with a $35 billion tourism development deal with the United Arab Emirates, the largest inward investment in Egypt’s history. This brought an infusion of dollars that paved the way for a record interest rate hike and an expanded International Monetary Fund loan. Whether the government is able to fix the economic problems that precipitated the meltdown isn’t clear. Egypt has a track record of announcing market-friendly reforms, then dragging its feet.

Egypt gets much of its hard currency from energy exports, tourism, fees from ships plying the Suez Canal and money sent home by expatriates. Domestic industries are hobbled by under-investment, and private companies complain of unfair competition from entities linked to the country’s powerful military. This limits foreign direct investment outside the oil and gas industry, leaving Egypt’s finances more susceptible to the volatile flows of “hot money” invested over shorter periods by international funds. A sharp devaluation in the Egyptian pound that began in 2022 aggravated inflation, creating a potential political powder keg in a country where many households depend on state subsidies to afford essential goods. Capital flight and a dearth of hard currency brought the supply of dollars to dangerously low levels in 2023. The pound began changing hands on the black market at twice its official rate, raising costs for businesses and importers. Attacks on shipping in the Red Sea by Yemen’s Houthi militants dented Suez Canal fees. Remittances ebbed as Egyptians abroad held back transfers in the expectation of another devaluation.