Reforms: Egypt’s Economic Crisis Holds Lessons For Nigeria

Experts have urged Nigeria to learn from the debt crisis of Egypt by embarking on spending that will make a positive impact on the nation’s economy.

According to experts, Egypt’s economic bold reforms were held up as a model country for Nigeria as the country became the darling of investors. However, the country later undone the gains of those reforms with huge spending of borrowed funds on megaprojects from a new capital city to presidential palaces that have not delivered economic gains.

An economist familiar with the matter said that the spending spree, financed mainly by foreign loans, has put Egypt at risk of a rare bond default. He said Egypt’s case shows reform is not enough, if it is not complemented by purposeful leadership.

A public finance expert, Musa Adekunle said Nigeria can learn from some mistakes made by Egypt such as failed industrial development due to poor planning and heavy bureaucracy, and export policies that created a persistent trade deficit.

He said, “A borrowing spree under President Abdel Fattah al-Sisi left Egypt with heavy foreign debt. Foreign creditors have been shying away, pushing the Cairo government to borrow domestically even as interest rates surge, spawning bigger deficits. This, and an expansion of the money supply, have fuelled currency depreciation and higher inflation.

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Over the past two years, an acute dollar shortage suppressed imports and caused a backlog at ports, with a knock-on effect on local industry. Prices for many staple foods rose much faster than headline inflation, which accelerated to a record 38%. Economic growth has slowed, and many Egyptians say their standard of living has been eroded.”

Fresh data released by the Central Bank has shown that Egypt’s foreign debt increased by $3.5 billion in the last three months of 2023 which has deepened her debt crisis as the country’s foreign debt now amounted to 43 per cent of its Gross Domestic Product. According to Business Insider Africa, total foreign debt in the country climbed to $168.0 billion from $164.5 billion at the end of September and $162.9 billion at the end of December 2022.

Egypt has quadrupled its external debt since 2015, using it to finance various initiatives such as constructing new capital, developing infrastructure, procuring weaponry, and sustaining an overvalued currency, Reuters reported.

The central bank reported that the foreign debt, of which 82.5 per cent was long-term, amounted to 43 per cent of the gross domestic product.

Following the Ukraine crisis, which resulted in a chronic shortage of foreign currency and prompted an exodus of foreign investors, the government of Egypt sought assistance from the International Monetary Fund (IMF).

The country deliberately allowed its currency to weaken by over 35 per cent in a much-anticipated devaluation, potentially opening the door for additional loans from the IMF.

In March, the International Monetary Fund (IMF) approved a $5 billion augmentation to its loan programme for Egypt. The approval increased the Extended Fund Facility arrangement from the initially approved $3 billion in December 2022 to $8 billion.

The IMF has consistently advocated for Egypt to implement tighter monetary policies to address nearly 30% inflation and adopt a more flexible official exchange rate.

As part of the agreement, Egypt committed to reducing spending on large government projects. Also, in March, Egypt raised the prices of various fuel products, fulfilling a commitment made to the IMF as part of the financial assistance agreement.