From Being An Example To Nigeria, Egypt Is Now A Financial Disaster
Nigeria can learn a lot from Egypt's bold market reforms, but Nigeria has undone them by lavishing hard-earned money—or, in this case, "hard-borrowed money"—on megaprojects like a new capital city and presidential palaces that haven't generated economic growth.
Egypt is now at risk of a rare bond default due to the spending binge, which was primarily supported by foreign loans.
"Egypt's case shows reform is not enough, if it is not complemented by purposeful leadership," a knowledgeable economist stated.
Egypt's credit rating was lowered by Moody's last week from "B3" to "Caa1," one of the lowest levels of speculative grade, due to the country's increasing debt affordability.
According to the credit rating agency, which rated Egypt's outlook as "stable," "Moody's expects the materialisation of asset sale proceeds at the central bank to help restore the economy's foreign currency liquidity buffer."
Following the downgrading, the nation's dollar-denominated bonds plunged and were among the biggest losses in developing markets on Friday, slipping even farther into trouble.
Compared to the 10.5 percent yield on Nigeria's 2025 notes, the yield on Egyptian Eurobonds with maturities in 2025 was as high as 23 percent on Monday.
An investment analyst told BusinessDay, "Clearly, the market is concerned that Egypt may not repay but is not concerned about Nigeria.
Egypt's Protracted Path To Disaster
Following an eight-year borrowing binge that made it harder and harder to repay its external debt, Egypt has been experiencing record inflation and a persistent foreign currency shortage.
The primary contributors to the yearly inflation rate in Egypt—grains, meat, poultry, fish, and fruit—rose by more than 70% when compared to the same month last year, setting a new record high of 39.7%.
Acute foreign money shortages and repeated devaluations of the native currency exacerbate the increase.
Since Russia's full-scale invasion of Ukraine in February of last year, which sent commodity prices rising and caused foreign debt investors to withdraw $20 billion from the nation in a flight to safety, Egypt has been trapped in a foreign exchange crisis.
Since the Russia-Ukraine war, the Egyptian pound has lost more than half of its value in relation to the dollar.
Egyptian Pound
Egypt has imposed import limits to help with the foreign currency shortfall, and at least two national banks have stopped allowing customers to use their Egyptian Pound debit cards outside of Egypt.
In an effort to raise foreign currency and support its pound, which has been under pressure for more than a year, the nation is now aiming to generate some $1.9 billion in revenue from asset sales.
The ambitious proposal to earn billions of euros by privatising 32 state-owned enterprises, which was unveiled in February but halted due to alleged conflicts with Gulf investors over the price of the assets, includes shares in oil corporations and iconic hotels in the sell-off.
Egypt wasn't always the financial disaster that it is now. Economists at home and abroad praised the country's decision to float the pound and eliminate energy subsidies in 2016 as clearing the way for increased investment and economic growth.
Although the reforms first brought to a painful rise in inflation and increased poverty, Egyptians found comfort in the reform's long-term benefits.
Gains appeared to have materialised as soon as the inflation began to decline and capital inflows increased.
Currency stability was also a result of the reforms, which helped Egypt get a much-needed $12 billion in assistance from the International Monetary Fund.
However, those advances were just temporary, as Egypt is currently experiencing its greatest crisis in more than ten years.
