The relationship between Ethiopia and Egypt is becoming increasingly tense. Fundamentally, it revolves around water, the political effects of climate change, and the involvement of superpowers. This relationship is archetypal of many conflicts we are likely to see elsewhere on the globe in the coming years.
The following blog post is the third of four parts about the relationship between the two countries.
Egypt is facing severe economic problems ...
Egypt’s economy is on a disastrous course. The standard of living has dropped to its lowest level in a decade, fueling social unrest.
Structurally, Egypt’s economy has the same need for climate adaptation investments as most countries in Africa and South Asia. Additionally, Egypt is undertaking some megaprojects, such as the expansion of the Suez Canal, irrigation systems at Lake Nasser, and the New Administrative Capital (NAC) just 40 km from Cairo.
Egypt’s fiscal policy is therefore highly expansionary. From 2022 to 2023, public debt as a percentage of GDP increased from 88.5% to 95.9%. This was due to rising costs for subsidizing fuel and food imports, but especially due to increasing interest burdens from the national debt. Today, nearly half of government spending goes to servicing the existing debt.
… which is partly exacerbated by the country’s currency policy
Egypt is thus in a debt spiral, currently worsened by its fixed exchange rate policy for the pound. Each devaluation results in unpredictable losses for a new round of investors, who can rarely hedge their currency exposure. This erodes international investor confidence and raises their return requirements (risk premiums). Since COVID-19, Egypt’s pound has been devalued four times, now at one-third of its value compared to early 2022. Like many other developing countries, Egypt fears hyperinflation from letting the pound float freely. Inflation is already around 35%.
The economy and foreign reserves were already fragile when the Iranian-backed Houthi movement in Yemen began attacking shipping traffic in the Red Sea with missiles at the end of last year. This forced most Western countries to reroute shipping around the southern tip of Africa instead. Suez Canal revenues are now 65% lower than a year ago. The Suez Canal is Egypt’s primary source of foreign currency.
As a result, Egypt is under immense pressure. All the megaprojects have significantly exceeded their budgets and require ongoing funding to avoid collapse. This has led the largest international investors, the UAE and China, to withdraw from further financing of these projects.
Egypten anses dog ofte som “too strategic to fail”, …
Since the 1970s, Egypt has been one of the largest recipients of U.S. military and economic aid. Although the country doesn’t have a formal security guarantee, it is unofficially seen as “too strategic to fail.” The Suez Canal is a bottleneck for Europe’s and the U.S. East Coast’s trade with India, China, and other regions.
This gives Egypt significant geopolitical influence. The country has also enhanced its role by often acting as a moderator among Muslim and North African nations. For instance, Israel’s war against Hamas has been aided by Egypt keeping its border with Gaza closed. Similarly, Libya’s government policies (and Turkey’s interests) depend on Egypt not providing excessive support to Khalifa Haftar’s forces in eastern Libya.
… and therefore Egypt sought funding from around the world in 2024
The drop in revenues from the Suez Canal made it necessary for Egypt to seek funding worldwide. This has averted a state bankruptcy but has come with political conditions that undermine public trust in al-Sisi’s leadership.
- In late February, Egypt signed a $35 billion agreement with the UAE. The deal aims to develop the Ras e-Hekma area, spanning 16,000 hectares along the Mediterranean, for tourism purposes. In reality, ownership is being transferred to the UAE, although Egypt retains 35% of the shares. Egypt’s stake is merely a financial “tag-along” and a symbolic veto right. The loss of sovereignty over its own land has caused mistrust among much of the Egyptian population, even though the UAE is considered a Muslim “brother country.”
- In March, the EU signed a €7.4 billion aid package for Egypt. The funding included concession loans for investments in renewable energy. Additionally, the loans required Egypt to effectively block migration flows toward the EU and set up detention centers, which is controversial among the Egyptian population.
- In March, the IMF finally averted state bankruptcy with a new emergency loan of $8 billion, and the World Bank provided an additional $6 billion.
Egypt has taken out more emergency loans from the IMF than any other country, second only to Argentina. The fundamental fragility of Egypts's economy was a major reason the country was accepted into BRICS+ at the beginning of 2024.
But the fundamental problems remain unresolved
However, Houthi attacks continue, and shipping traffic has not returned to the Suez Canal. Therefore, Egypt will soon need to take out further emergency loans from the IMF. But this time, the loan process may be long and difficult. The country has failed to meet several of the IMF’s key conditions from previous loans, mainly regarding corruption and separating the military’s ownership of many of the country’s businesses. Al-Sisi himself is a former head of military intelligence.
It is thus in the interest of the U.S. and EU to support Egypt including funding, in the face of the threat from Ethiopia.
