Dollar drain: Egypt’s government crowds out the private sector

Dollar-denominated government borrowing from domestic banks reached its highest level in nine years by the end of November 2024, according to the International Monetary Fund/IMF.

The surge comes as foreign currency lending to the private sector continues to decline, reflecting intensified competition for dollar liquidity between the state and private firms.

In its fourth review of Egypt’s ongoing loan program, published in July, the IMF said total foreign currency borrowing from local banks had doubled since 2015, rising from around $30 billion to $60 billion.

State-owned entities, including economic authorities, accounted for most of the increase, expanding their share from less than $5 billion to roughly $45 billion over the period. In contrast, non-financial private firms saw their borrowing shrink from $20 billion to $16 billion.

The government’s borrowing spree is driven by national projects that require significant foreign currency, such as the monorail and other large-scale infrastructure initiatives, according to Amr Elalfy, head of equity strategy at Thndr Securities.

Although authorities introduced measures in late 2023 to curb foreign currency spending by postponing import-dependent projects, further steps were taken in 2024 to tighten investment budgets.

However, the IMF’s latest data indicates continued overspending. The expectation was that public investment would remain under 350 billion pounds ($7 billion) during the second half of FY 2023/24, but it topped 531 billion pounds ($10.6 billion).

The Fund has repeatedly urged Egypt to rein in public investments, citing the rising fiscal burden from megaprojects like the new administrative capital and rail expansions. It also flagged the growing role of the military in investment activity, noting that 25% of the 62 companies under the National Service Projects Organization were established in the past decade.

In its Letter of Intent to the IMF, Egypt’s government defended its position, stating that total investment spending in FY 2024/25 remained below the 1 trillion pound ceiling ($20 billion), and that the FY 2025/26 budget will be capped at 1.158 trillion pounds ($23 billion)—resulting in flat real growth in investment outlays.

The IMF also raised concerns about financial guarantees issued by the Finance Ministry, particularly for the state-run Egyptian General Petroleum Corporation/EGPC. These guarantees now amount to an alarming 18% of GDP. The EGPC faces mounting financial pressures as liquefied natural gas imports increase and the state electricity company struggles to settle its debts.

According to Mohamed Fouad, director of the Cairo-based El Adl Center for Public Policy Studies, the government’s reliance on local bank financing has become a structural rather than temporary trend. “The state is increasingly turning to local banks to plug widening fiscal gaps,” he said. 

World Bank data cited by Fouad shows private sector borrowing as a share of GDP fell from over 50% in 2004 to just 27% in 2024.

“With soaring energy subsidies and import costs, local borrowing has become the government’s almost exclusive tool to sustain public spending,” Fouad told Al Manassa.

Private Sector Strains

Private borrowers, meanwhile, face growing restrictions. To qualify for dollar-denominated loans, the Central Bank of Egypt/CBE has recently imposed strict rules requiring firms to demonstrate clear and consistent foreign currency revenues—typically from exports or overseas transfers.

Economist Moataz Yeken explained that this policy, introduced amid persistent dollar shortages, has further constrained private credit growth. 

“This pattern reflects the private sector’s inability to expand, not just because of a lack of funding, but because of its inability to generate dollar revenues due to weak export capabilities,” Yeken said. He noted that, according to central bank data, non-oil export growth has slowed from 12% in FY 2020/21 to just 3.9% in 2022/23.

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Elalfy also believes that recent difficult economic conditions have forced private firms to delay their foreign-currency investment plans. This has led banks to direct available foreign liquidity to the government, which is seen as “strong and more creditworthy.” The IMF noted that public investment accounted for 74% of Egypt’s total investment in 2023—among the highest ratios in emerging markets.

Yeken added that financing constraints are only part of the problem. “Without removing the obstacles they face, we can’t expect the private sector to play its hoped-for role,” he said.

Public vs. Private: Crowding Out?

While the private sector still contributes around 70% of GDP and employs 80% of the workforce, critics warn that Egypt is reverting to a state-driven economic model in which the government acts as financier, regulator, and producer—leaving the private sector subordinate.

Fouad warned against preferential treatment for state-owned enterprises and economic authorities, which he said undermines competition and distorts the credit market. He also criticized the state’s continued reliance on borrowing rather than tax revenues, which accounted for just 13% of GDP—well below the African average of 16% and the OECD average of 30%.

Fouad urged faster privatization and a review of budget financing strategies. Elalfy, meanwhile, expects credit conditions for private firms to improve gradually as macroeconomic stability returns and dollar shortages ease.