Egypt has invested heavily in improving transport, housing and energy infrastructure in recent years. The government has been moving to establish new railway lines, renovate seaports and airports, and improve road networks (see Transport chapter). It has built new power plants, established new urban areas and expanded the country’s strategic Suez Canal. Much of the government’s current strategy has been aimed at modernising the economy though a revamping of its infrastructure. These efforts have also underscored the importance of financing in meeting modernisation and diversification goals.
Gaps
A 2018 report by the World Bank estimated that Egypt would face a $230bn infrastructure investment gap over the coming two decades, and would require $675bn to meet its infrastructure needs. Although the government could likely provide $445bn of the necessary financing, the report projected additional resources would be needed.
A significant portion of funding needs is concentrated in a handful of sectors. For example, the World Bank found that the development of energy reserves at El Zohr gas field would need to mobilise between $11bn and $16bn. The transport sector, critical to moving goods in a country with over 100m people, would require investment of up to $180bn. Another critical element, water infrastructure, would necessitate around $45bn. These are considerable financing needs, and determining how best to pay for infrastructure will impact how the economy develops in the coming decades. (https://halcyonliving.co.uk/) Although there are a number of different financing mechanisms available, volatility in the global economy may complicate financing, at least in the short term.
Funding Initiatives
Given Egypt’s focus on infrastructure development and its long-term macroeconomic prospects, international financing institutions and a host of governments are increasingly looking at the country as an attractive destination for infrastructure financing. Indeed, in October 2021 the Ministry of International Cooperation announced that it was managing 143 infrastructure projects with $18bn in financing – a figure that accounts for more than 70% of renewable energy, water, health, transport and industry projects in the pipeline. The ministry cited several successful initiatives supported by its international partners, including the expansion of metro lines, railway development and the establishment of dry ports.
In addition to traditional financing institutions such as the World Bank and the European Bank for Reconstruction and Development, other multilateral groups are allocating resources to Egypt’s infrastructure. In October 2021 the Asian Infrastructure Investment Bank, in conjunction with the Organisation of the Petroleum Exporting Countries Fund for International Development, signed a deal to provide a $200m funding facility to the National Bank of Egypt. The financing will be used to channel lending towards infrastructure development.
Similarly, in late 2021 the Kuwait-based Arab Fund for Economic and Social Development announced it would allocate $30m to finance loans for Egyptian small and medium-sized enterprises (SMEs) active in the transport, water and energy sectors. The focus on SMEs is in line with efforts by the Central Bank of Egypt to encourage lending to SMEs. In early 2021 the central bank began requiring that banks allocate 25% of their lending portfolio to Egyptian SMEs, adding preferential interest rates, onboarding policies and credit guarantees for banks as a means to incentivise lending (see Banking overview). Because of the volume of infrastructure work expected to take place in the coming years, the scope for construction and infrastructure SMEs to benefit from those projects is significant.
Even so, banks continue to face challenges and risks when lending to smaller companies. Much of this is attributed to the fact that many SMEs operate in the informal economy. However, the Ministry of Finance and other government agencies are working to incentivise formalisation throughout the economy through measures such as the introduction of an e-invoicing system and mandatory registration with the Egyptian Tax Authority.
Regional and sector-specific multilateral institutions are also financing efforts to develop Egypt’s infrastructure. The Arab Petroleum Investments Corporation, an institution focused on the energy sector, partnered with the Islamic Development Bank in early 2022 to establish an infrastructure financing mechanism focused on the private sector in member countries, including Egypt. The new fund’s value is expected to reach $1bn, and the investment mechanism will channel financing to water, electricity, renewable energy and gas projects.
Project finance is also being contributed by foreign governments. In early 2022 the Egyptian government signed a deal with South Korea to borrow up to $1bn in infrastructure finance capital from the Economic Development Cooperation Fund. South Korean firms and financing are already involved in the $251m project to revamp the railway between Luxor and the Aswan High Dam in Upper Egypt.
Green Financing
Egyptian authorities have also been opting to leverage new environmentally friendly investment products in infrastructure development. In September 2020 Egypt launched the MENA region’s first sovereign green bond to finance sustainable projects, including those in renewable energy, clean transport, water and wastewater management, and pollution control and prevention. Listed on the London Stock Exchange, the $750m bond was launched with a five-year maturity and a 5.25% interest rate. The fact that it was five times oversubscribed – which allowed Egyptian authorities to increase the total value of the bond from an initial $500m – underscored not only the global appetite for green project financing, but also the market’s interest in Egypt’s infrastructure goals. The bond also highlighted potential for future offerings: Mohamed Maait, the minister of finance, told international media at the time of the offering that Egypt had $1.9bn worth of green projects in its portfolio.
Another Egyptian green bond was issued in mid-2021 by Commercial International Bank, making the bank the first private lender in the country to issue a green bond. The $100m bond will be used to finance green building, renewable energy, water and wastewater management, and energy efficiency. The bond, backed by the International Finance Corporation, has a tenor of five years.
Challenges
Despite the potential for rising volumes of infrastructure financing to modernise the economy, the performance of the global economy and international crises will impact Egypt and its effort to finance infrastructure development. The invasion of Ukraine by Russia in February 2022 accelerated inflation of key commodities such as energy and wheat, the latter of which was a particular concern as in 2021 Egypt imported more than 80% of its wheat from the two countries. The war also caused investors to pull money from Egyptian Treasuries, resulting in a currency devaluation of 16% to the US dollar in March of that year. While it is not clear what the long-term impact of this will be on the country’s ability to attract investment in infrastructure, it is expected that higher commodity prices will put pressure on Egypt’s economy and currency.
Moreover, efforts by the US Federal Reserve to slow inflation by raising interest rates three times during the first half of 2022 caused international investors to shift their exposure away from the Egyptian debt market to US-based investments with higher rates of return, and threatened to raise rates on emerging markets’ sovereign debt. This is especially notable as Egypt’s debt-to-GDP ratio is set to reach 94% in 2022, before falling to 89.6% in 2023 and reaching pre-Covid-19 pandemic levels by 2026, according to an April 2022 report from the IMF.
