Israel-Hamas conflict: What are the repercussions and prospects for the Egyptian economy in 2024?

The Egyptian economic and financial situation remains worrying in many respects while the year 2023, which was also that of the re-election of President Sissi, was marked by the clear deterioration of the main macroeconomic indicators. The challenges for 2024 are numerous: weight of public debt, shortage of foreign currencies, including the necessary budgetary consolidation and control of inflation.

The growth outlook for 2023/24 has thus been revised downwards several times by the IMF from 5% to 4.1% in July 2023 then 3.6% in October and finally 3.0% in January 2024. Private sector activity has continued to contract over the last 38 months (PMI index at 48.1 in January 2024). Rating agencies have also lowered Egypt’s sovereign rating several times to reach B- with a stable outlook in October 2023 (S&P and Fitch).

Moody’s also opened the way for a further downward revision by adopting a negative outlook in January 2024, fueling the crisis of confidence among all economic players.

International crises are increasing and with them their consequences on the Egyptian economy.

Russia’s invasion of Ukraine in February 2022 had already led to an increase in energy prices and the cost of food products in Egypt, the world’s largest wheat importer, as well as an investment flight. portfolio (-24.8 billion USD over the last two financial years).

To these persistent difficulties were added the repercussions of the Israel/Hamas conflict and the attacks in the Red Sea on two of the country’s three revenues: tourism first, with a drop in reservations estimated at around 26% in December 2023 and revenue from the Suez Canal then due to the bypass following the Houthi attacks (-42% drop in commercial volume over December/January 2024).

Unrelated to the conflict, transfers from expatriate workers, the third largest foreign currency income in the Egyptian economy, fell by 30.7% over the 2022/23 financial year to reach USD 22.1 billion due to the emergence of a parallel foreign exchange market in the summer of 2023 with rates 30 to 50% higher than the official market.

The situation of public finances has deteriorated due to the upward trajectory of public debt (93% of GDP in 2022/23), linked to the accumulation of deficits (budgetary and commercial) and the depreciation of the Egyptian pound (49% depreciation of the EGP/USD rate between January 2022 and January 2024).

External public debt is increasing, reaching 20.9% of GDP in June 2023, compared to 7% in 2016, attesting to a growing dependence on external financing. In addition, public debt is very expensive and exposes Egypt to refinancing risks in a context of high rates. On its external debt alone, Egypt must repay USD 25.4 billion for the 2023/24 fiscal year according to the Central Bank.

Inflation, at 33.7% year-on-year in December 2023, including 78.7% for food, also appears to be an additional factor leading to the deterioration of the population’s purchasing power. The external financing gap has been revised upwards, to around USD 20 billion and almost USD 25 billion over the next four fiscal years, according to Goldman Sachs.

It is in this context that the review by the IMF of its program with Egypt implemented in December 2022 took place from January 17 to February 1 (extended credit facility with a duration of 46 months for an amount of 3 billion USD) whose reforms are slow to be implemented by the Egyptian authorities, in particular on the liberalization of the exchange rate and the disengagement of the State in the economy.