Cairo’s Financial Lifeline: UAE Infusion and IMF Deal Buoy Egypt Amid Economic Strain
By Ben Fishman, Senior Fellow, The Washington Institute’s Rubin Program on Arab Politics.
In a significant move poised to buoy Egypt’s faltering economy, Cairo’s principal financial ally, the United Arab Emirates, has extended a substantial financial lifeline. This intervention, comprising extensive loans, investments, and Central Bank transfers, aims to halt Egypt’s economic descent, albeit at the cost of short-term consumer discomfort.
On March 6, the Central Bank of Egypt enacted a long-anticipated currency devaluation, a strategic move designed to unlock an expanded $8 billion loan program from the International Monetary Fund (IMF). This fiscal maneuver was seemingly facilitated by a substantial cash infusion resulting from a colossal land transaction with the UAE just a fortnight prior. Nevertheless, despite the IMF and the Central Bank’s endeavors to rein in inflation, Egyptians are expected to face increased prices during the Ramadan period.
The Mega-Sale
On February 23, Egyptian Prime Minister Mostafa Madbouly officiated a landmark $35 billion agreement with the UAE, centering on the development of Ras al-Hikma—a strategic Mediterranean segment nestled between Alexandria and Marsa Matruh. The Emirati sovereign wealth fund ADQ committed to acquiring 171 million square meters of land for $24 billion, concurrently channeling $11 billion from the UAE’s existing deposits in Egypt’s Central Bank. According to Madbouly, $5 billion of these deposits were in transit to Cairo in conjunction with the Ras al-Hikma deal, with another $6 billion earmarked for investment in paramount projects across Egypt to foster economic progress and development. The subsequent target could potentially be a new Red Sea resort area.
Projected to commence in 2025, the Ras al-Hikma development is anticipated to draw $150 billion in investments, transforming the locale into a pivotal tourist hub, industrial zone, and airport. This substantial development promises job creation for Egyptian enterprises and laborers while Egypt retains a 35 percent stake in the project. Stakeholders include the Talaat Moustafa Group, a construction conglomerate closely linked with the government and pivotal in the construction of Cairo’s new administrative capital.
ADQ, the smallest of three sovereign wealth funds under the UAE’s wing, holds around $200 billion in assets, significantly trailing behind the Abu Dhabi Investment Authority ($1 trillion) and Mubadala ($275 billion). Both ADIA and ADQ are chaired by the influential Tahnoun bin Zayed al-Nahyan, National Security Advisor and brother of President Muhammad bin Zayed. The Ras al-Hikma investment constitutes over 10 percent of ADQ’s portfolio, underscoring the UAE’s steadfast commitment to Egypt’s stability, as demonstrated by continuous financial support since President Abdul Fattah al-Sisi assumed power.
Economic Impact
In the short term, this cash influx is poised to ameliorate Egypt’s financial predicament and inject vital dollars into an economy beset by soaring inflation and a currency crisis. Following this week’s currency float, the Egyptian pound commenced trading at 50 per dollar—previously valued at 30 for much of the year, with black market rates spiking to 70. This recent devaluation marks the fifth since April 2022, when the rate stood at 15 per dollar.
The Central Bank emphasized that unifying the exchange rate is pivotal, facilitating the elimination of foreign exchange backlogs by closing the gap between the official and parallel market rates. The dollar scarcity has impeded imports, triggered shortages of essential supplies, and stymied investment.
The initial $10 billion installment of the Emirati deal is expected to mediate the currency devaluation’s adverse effects, alleviate banking withdrawal limits, and reverse the decline in remittances precipitated by access concerns. The remaining funds are anticipated within the next two months.
Moreover, this financial boost is crucial for mitigating Egypt’s debt crisis. By September 2023, the external debt-to-GDP ratio surpassed 42 percent, with short-term debt and servicing nearing $40 billion, juxtaposed against $35 billion in foreign reserves. The country’s revenue streams have diminished, significantly impacted by the Gaza conflict, a downturn in tourism, and drastically reduced foreign currency receipts from the Suez Canal due to persistent threats from Yemen’s Houthi movement.
The precise mechanics of the $11 billion Emirati deposit transfer remain uncertain. As of October, the UAE held $6.3 billion in Egypt’s Central Bank, alongside an unspecified portion of the $16 billion previously extended by various Arab nations to aid Egypt. While these funds may not convert easily into investments, they offer immediate reinforcement to the Central Bank’s balance sheet, which tallied $35.3 billion in international reserves as of February 1.
IMF Reform Benchmarks
Post currency float, the IMF declared a staff-level agreement to expand its loan program to $8 billion. The previous $3 billion program, initiated in December 2022 through an Extended Fund Facility agreement, came in the wake of escalated wheat costs due to the COVID-19 pandemic and the Ukraine conflict. This placed Egypt as the IMF’s second-largest borrower after Argentina. The 2022 agreement saw Cairo committing to currency flotation, spending curbs, and a privatization agenda, which was deferred throughout 2023 amidst Sisi’s reelection campaign, drawing warnings from IMF Managing Director Kristalina Georgieva about potential reserves depletion without devaluation.
Georgieva’s stance softened post-Gaza conflict, acknowledging its economic toll on Egypt and lauding the UAE land deal as a positive indicator. Notably, the revised IMF program falls short of the originally anticipated $10-12 billion range.
Cairo’s previous privatization pledge involved selling stakes in thirty-five state-owned enterprises, including military ventures. December announcements from Madbouly indicated $5.6 billion raised via the partial or total sale of fourteen entities, spanning industries from hospitality to renewable energy. The buyers predominantly comprised private Egyptian firms aligned with the government and Emirati entities.
However, the $5.6 billion figure remains challenging to corroborate, given the ambiguity surrounding ownership stakes and sale prices. Most acquisitions were minority stakes, limiting potential impact on operational efficiency—a key privatisation objective. Nonetheless, with the pound’s stabilization, new investors may emerge. Currently, major state-owned assets, including banks and insurance firms, remain unsold.
The U.S. Role
Washington’s focus has largely veered towards the Gaza conflict, overshadowing Egypt’s economic debacles. Despite recognizing the financial crisis’s gravity and its implications for Egypt’s stability, the U.S. has not prioritized immediate engagement, especially as the war’s resolution is anticipated to rejuvenate Cairo’s revenue streams and enable Egyptian participation in Gaza’s reconstruction. Moreover, the UAE’s preponderant influence on Egypt’s economic decisions, underpinned by its vast investment portfolio and aligned human rights perspectives, dwarfs U.S. leverage.
Nonetheless, the United States can play a vital role in encouraging Egypt to adopt sounder economic policies, from public spending cuts to broader IMF reform adherence. This collaborative effort can include bolstering the private sector by curtailing state- and military-entity advantages. Additionally, the Biden administration and Congress could promote private American investments in Egypt through initiatives like the Egyptian-American Enterprise Fund, which has successfully fostered private equity growth despite challenging economic circumstances over the past decade.
Ben Fishman is a senior fellow in The Washington Institute’s Rubin Program on Arab Politics.
