Egypt’s outstanding credit to the IMF has risen to US$19 billion, the second largest amount after Argentina’s, with debt now exceeding 90% of the country’s GDP. Revenues from tourism and trade have diminished, with already significant potential liabilities increasing in the country’s Suez Canal and Nile waterways.
Egypt remains vulnerable to shocks, due to its high public debt, and gross financing needs. Some analysts have labeled the accident that occurred in the Suez Canal in late March as a “gray rhino” event, meaning an occurrence resulting from a highly probable, high-impact, yet neglected threat. From a country risk perspective, Egypt is facing mounting government debt, reduced income from tourism, and persisting dependence on waterways – both Suez transits and the Nile basin.
According to the Central Bank, Egypt's external debt had increased by 21% year-on-year, as of June 2021, to US$134.8 billion. The Egyptian government is expected to proceed with privatizing at least 10 army-owned companies in September. The initiative is one of the conditions of Egypt’s IMF program that stipulates the sale of 23 state-owned enterprises, alongside other reforms. Among those expressing initial interest in the sale are several state-backed Gulf companies, including companies from the United Arab Emirates and Saudi Arabia.
Egypt’s assertive military posture and regional diplomacy on different fronts, including the eastern Mediterranean (Turkey, Libya) and the Middle East, come at a cost. Consequently, the size of new foreign loans that the government could be expected to take on to help cover military expenditures may be significant. With 439,000 staff, Egypt already employs the largest military personnel in the region and the ninth largest in the world.
Additionally, the government has received, or has committed to buy, numerous advanced major weapon systems in recent years. According to the Stockholm International Peace Research Institute, the estimated cost of these purchases totals US$16 billion – roughly 4% of Egypt’s 2020 GDP and double the military spending target set by the North Atlantic Treaty Organization.
Water resources are managed by the military, meaning heightened insecurity could have severe implications for the agricultural sector, which accounts for 11% of GDP and employs a quarter of Egypt’s labor force. An Egyptian-Kenyan defense cooperation agreement signed in July, is the fourth military pact penned between Egypt and other countries of the Nile Basin – namely Sudan, Uganda, and Burundi – since March 2021.
These agreements are intended to build a network of supportive states around Ethiopia, which is in a dispute with Egypt over the Grand Ethiopian Renaissance Dam (GERD). Egypt hopes to increase its advantage in the decade-long GERD standoff, and ultimately convince Ethiopia to shift its stance regarding the rate at which the dam reservoir is filled, in order to allow more water to flow to Egyptian farms.
The odds that this dispute could result in outright interstate conflict are low. However, the tension arising from this deadlock serves to maintain the Egyptian military's grip on economic sectors where they are most active – including heavy industry, construction, and infrastructure development — and to increase the likelihood of arbitrary judicial intervention, at the expense of foreign investors, in the same fields. The Ethiopian government may also seek a limited escalation, in order to realign national interests, by focusing on an external enemy.
As in many countries, Egypt’s tourism industry was one of the sectors most severely affected by the pandemic. Given its considerable share in employment and foreign currency earnings, the tourism downturn has affected the entire economy, putting pressure on external balances in particular. The recovery of the tourism industry will likely take time, as global travel disruptions are expected to last through 2022.