Egypt currency crisis stokes project delay fears
17 January 2023
Concerns about widespread infrastructure project delays are worsening in Egypt as the country’s currency crisis escalates.
The North African country has $368bn of active infrastructure projects, all of which could potentially be impacted by the turmoil to varying degrees.
This includes $90bn in chemical projects, $123bn in construction projects, $24bn in industrial projects, and $18bn in oil and gas projects.
A total of $119bn of these projects are under execution, while $249bn are in pre-execution phases.
Egypt pound hits record low
The Egyptian pound plunged to 31.95 to the dollar in state banks on 11 January, hitting a record low, before settling at 29.7 in the afternoon, according to the country’s central bank.
On the same day, it was reported that the Egyptian pound was trading at around 35 to the dollar on the black market.
The decline in the value of the Egyptian pound came after the IMF released a report relating to its $3bn financial support package to Egypt.
The report, issued on 10 January, stated that the country had agreed to a “flexible exchange rate regime” for the pound in order to receive the assistance.
Egyptian authorities also told the IMF that they would only intervene in foreign currency markets in cases of “excessive volatility”.
Economic hardships
The Egyptian pound has lost half of its value since March, causing the price of basic foods to triple and prompting a wide range of severe economic challenges.
Inflation continues to rise, with Egypt’s annual headline inflation hitting 21.9 per cent in December, and billions of dollars in goods are backlogged in Egyptian ports.
Many people are struggling to feed their families and this is stoking resentment against the government
Source in Egypt
Financing and procurement problems mean that many infrastructure projects that have been announced and are either in a pre-execution or execution phase are already experiencing or preparing to face delays.
Optimism about the prospect of new projects being announced has also declined as the government has pushed to reduce public spending.
Earlier this month, Egypt’s government instructed ministries to cut non-essential spending until the end of the fiscal year in June as it tries to cope with continuing pressure on its currency and rising inflation.
The 4 January decision includes postponing any new national project reliant on foreign currency.
It also requires ministries to seek Finance Ministry approval on foreign currency expenditure.
The health, interior, foreign and defence ministries are exempted, as well as agencies tasked with expenditure on subsidised food products and energy.
According to the decision, which was announced in Egypt’s official gazette, activities listed as non-essential spending include travel, marketing and conferences, as well as grants and training for employees.
Ports backlog
As the Egyptian pound came under pressure in February 2022, the central bank implemented changes to the rules around import financing that led to a huge backlog of goods at ports.
The worsening currency crisis has compounded the problems relating to the changes to the rules around import financing. However, over recent weeks Egypt has taken several measures to try to release these goods.
The efforts to restore order at the ports have included reversing the letter of credit (LC) system introduced in February last year and restoring the previous documentary collections system.
The decision to enforce the LCs system, effective since March, required Egyptian banks to accept only LCs for imports to curb dollar outflows from the country.
On 11 January, Egypt’s cabinet issued a statement saying that goods worth $1.5bn had been released from Egyptian ports over the first 10 days of the year.
This makes the total value of released goods since the start of December $8.5bn.
The goods that have been released include items required for industrial purposes as well as spare parts, medicine and food.
“The government has prioritised restoring order at the ports,” said one industry source. “There has definitely been progress, but the economic impact is still likely to be felt for years to come.
“It isn’t easy to untangle the backlog of containers as many perishable goods are now worthless and, in some cases, companies that were meant to collect items have gone bankrupt.”
Political instability fears
Stakeholders watching Egypt are also concerned about the possibility of political instability related to the economic problems.
One source said: “Across the board, citizens that are earning money in Egyptian pounds are seeing their purchasing power decimated.
“Many people are struggling to feed their families and this is stoking resentment against the government.
“Egyptian police forces have a reputation for dealing with protests with a heavy hand – and this means that many people are likely to be reluctant to go to the streets to demonstrate because of this.
“However, as the situation continues to worsen, some people may start to feel like they are desperate for change and have no other options left open to them.”
Some projects are likely to get through these issues with minimal disruption while others could potentially experience delays that last for years or even cancellations
Source in Egypt
On 10 January, President Abdul Fattah al-Sisi directed the government to continue releasing all goods stuck at the country’s ports and simplify all customs clearance procedures.
One source said: “Project exposure to the current currency crisis in Egypt is going to vary considerably.
“Some projects are likely to get through these issues with minimal disruption while others could potentially experience delays that last for years or even cancellations.”
Industrial projects, energy projects and construction projects all have the potential to be impacted by the ongoing turmoil in Egypt’s economy.
It is likely to have severe implications for some stakeholders within Egypt as well as ramifications for regional partners and suppliers.
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