Egypt’s economy
Foreign direct investment is expected to rise to $14 billion annually if Egypt adopts the reform path
Egypt faces a challenging economic environment, with external financing options significantly curtailed. According to a recent report from Goldman Sachs, access to capital markets remains limited, and the International Monetary Fund (IMF) seems reluctant to provide more large-scale financing without a significant increase in effort on the reform front.
Goldman Sachs said this leaves Egypt with a stark choice: either accelerate implementation of the reform agenda or move toward more painful accommodation. With traditional avenues for external borrowing narrowing and external financing requirements remaining high, Egypt must choose between two paths.
The first track, according to Goldman Sachs, involves accelerating the implementation of its reform agenda. This will include increasing FDI inflows and gradually reducing the current account deficit by further supporting export growth over the medium term. This approach will require significant effort and political will, but it might lead to economic stability and long-term growth.
While the American Bank indicated that the second path involves continuing the path of complex external and internal adjustment. This means accepting more painful adjustments such as devaluation, subsidy cuts, and austerity measures. While this approach may provide relief in the short term, it might lead to social unrest and political instability in the long term.
Goldman Sachs wrote in its report published on Tuesday that the size of Egypt’s trade balance deficit is the biggest problem, as it represents 10% of GDP, which is the largest rate among emerging markets.
The report pointed out that Egyptian imports are not as large as we see in many emerging markets, which is rare. However, the problem is weak exports, which are equivalent to only 10% of the gross domestic product. Therefore, one of the keys to the solution is pushing to raise export numbers to close the gap, which is The most prominent problems.
Goldman Sachs indicated that the size of the Egyptian budget deficit has doubled in recent years, which was mostly around the level of $10 billion annually, to jump to between $20 and $30 billion since 2021.
Egypt faces difficult choices as external financing options narrow. The country must choose between accelerating its reform agenda or accepting more painful adjustments. While both paths present challenges, the first offers the best chance for long-term economic stability and growth.
As a result of Egypt choosing the first scenario, Goldman Sachs expected a significant increase in foreign direct investment, to exceed $14 billion annually over the next three years. and inflows of foreign portfolios, which will lead, accordingly, to a gradual decline in the current account deficit to 2.6% at the end of the forecast period, compared to 3.5% in the last fiscal year.
In the event that the “adjustment” scenario is chosen, Egypt’s foreign exchange reserves will quickly collapse, reaching less than $13 billion by the end of the fiscal year 2025/2026. Assuming that the government will not allow such a collapse in reserves, its way will be to focus adjustment on the current account. Especially imports, which Egypt will seek to reduce by an additional $7 billion, but it may face more pressure due to the potential decline in exports and remittances of Egyptians abroad as a result of not adopting a reform plan.
