Egypt - 3 main themes for 2025
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
The main topics in Egypt in 2025 will be speeding up structural reforms, maintaining macroeconomic stability, and shoring up external reserves in the face of large external debt payments due this year. Here is a short overview for each:
Structural reforms
Despite the challenging start of 2024, Egypt managed to implement several key reforms last year, which unlocked a total of USD 57bn external financing over 2024-27 and put the economy on a more solid footing. Looking at 2025, reform priorities comprise boosting domestic revenues, improving the business environment, accelerating divestment, enhancing governance and transparency. Egypt also needs to speed up reforms to improve the business environment and ensure that the private sector becomes the main engine of growth. Egypt's ambitious divestment program stalled last year, so investors as well as the IMF will be looking closely at the progress of the program this year.
Further, maintaining a flexible FX rate regime remains one of the key priorities under a USD 8bn IMF loan program as the regime aims to shield the economy from external shocks and reduce macroeconomic misbalances. The central bank has also committed to maintaining tight monetary conditions to further reduce inflationary pressures, which erode real incomes and hide social and political risks.
Fiscal consolidation remains key for debt sustainability
The government has committed to a fiscal consolidation program built around primary surpluses in order to preserve debt sustainability, reduce large interest costs and gross domestic financing requirements. Egypt has also enforced a ceiling on public investments, which include capital expenditures associated with public entities that operate outside the general government budget. The government also promised the IMF to completely phase out the fuel subsidy by the end of 2025 and remove the electricity subsidy over the next four years.
Further, Egypt needs to enhance domestic revenue mobilization efforts as the government had promised to increase the tax-to-GDP revenue by 2.0pps of GDP over the next two years. Taking into consideration the challenging external environment, Egypt will this year focus on the elimination of exemptions rather than an increase in tax rates. A comprehensive reform package is needed to ensure that Egypt rebuilds fiscal buffers to reduce debt vulnerabilities, and generates additional space to increase social spending, especially in health, education and social protection.
Egypt faces another year of challenging external debt payments schedule
The government faces more than USD 22bn in principal payments and interest on its medium- and long-term external debt in 2025, according to projections made by the central bank. Meanwhile, revenues from the Suez Canal - one of the key FX earners - have plummeted because of insecurity in the Red Sea. Egypt plans to fill the gap with FDIs and soft loans and the country has witnessed a massive inflow of portfolio investments in its short-term debt market, which has made the economy even more vulnerable to capital outflows. Foreign investors rushed to buy T-bills and bonds through the stock exchange, leading to USD 17bn portfolio inflows, while we think another USD 8bn worth of bills were purchased directly from the local banks. While Egypt has managed to improve its resilience to external shocks thanks to recent reforms and relatively large external reserves it remains to be seen how the country will manage to navigate the global uncertainty and geopolitical challenges.