North Africa is the fastest-growing region in the Arab world and Africa. In 2023, the combined gross domestic product of Mauritania, Morocco, Algeria, Tunisia, Egypt and Libya increased by 4.2%, compared with only 1.6% for the Middle East and 3.2% for Africa. The International Monetary Fund (IMF) predicts that North African economies will outperform their peers again this year with 4% growth, but these numbers hide important regional disparities.

With a GDP of around $400 billion, Egypt is the biggest player. In 2023, Cairo maintained a 4.2% expansion and should remain above 3% this year—“remarkably resilient growth,” noted Mathias Cormann, secretary general of the Organisation for Economic Co-operation and Development (OECD), during the launch of its February survey regarding Eygpt.

But Cairo is also entrenched in a decade-long financial crisis. External debt has quadrupled in the past ten years, and 60% of the country’s budget is spent servicing that debt. The Egyptian pound is one of the world’s worst-performing currencies. Inflation hit a record high of nearly 40% last summer, and a third of Egyptians struggle with poverty.

Over the past few years, several international investors and local entrepreneurs stepped out of the market. But, as many observers point out, the Arab world’s most populous country might just be “too big to fail,” especially now with war raging in neighboring Gaza.

“Egypt, given its enhanced geostrategic role in the Middle East, is expected to continue benefiting from international support as it navigates exogenous external shocks, like declining trade volumes in the Suez Canal due to the conflict in the Red Sea,” says Reza Baqir, managing director and global practice leader for Sovereign Advisory Services at management consultancy Alvarez & Marsal.

In March, the EU announced an $8.1 aid package (a mix of concessional loans and investments) and the IMF increased its loan package to Egypt to $8 billion from $3 billion, providing liquidity that should help alleviate financial pressure—for a time, at least. A few weeks prior, Cairo signed a $35 billion deal with Emirati sovereign fund ADQ to develop Ras el Hekma, a small peninsula on the Mediterranean Sea that could attract as much as $150 billion in investments.

The recent announcements spark hope in business circles. “It changes everything,” says Mounir Nakhla, CEO and founder of MNT-Halan, Egypt’s first fintech unicorn, which raised $400 million in February 2023. “Many investors negotiating with us and dragging their feet are suddenly much more bullish about Egypt again.”

OECD’s Cormann highlighted several recommendations to help Egypt achieve “its massive potential,” including lowering administrative barriers to new businesses, decreasing the influence of state-owned enterprises and lowering trade tariffs.

“We are at a point where some are still skeptical. The numbers say that we’re getting out of the big problem, but valuations of companies and assets have not yet adjusted. It’s a great time to invest in Egypt,” adds Nakhla.

The Maghreb

On the opposite side of the continent, Morocco is North Africa’s second economic heavyweight. Decades of fiscal and structural reforms have turned the kingdom into a powerhouse for foreign investment, attracting global firms to set up factories and regional headquarters for African and Middle Eastern operations. Despite challenges from the war in Ukraine and natural disasters at home, growth is expected to keep a strong 3% pace this year.

“Morocco seems to be positioned relatively well, given robust tourism receipts and a rebound in domestic demand coupled with declining inflation and expected domestic rate cuts,” says Alvarez & Marsal’s Baqir.

Some observers thought Tunisia could have played a role similar to Morocco a few years ago, but the country is now deep in a severe financial crisis. Accumulated public debt is equivalent to 80% of GDP, and to service this debt, Tunis relies heavily on loans from local banks, which squeezes its capacity to finance the economy. International ratings agencies have downgraded Tunisia several times, making borrowing harder. And the local authorities continue to reject IMF loan offers.

“We fear an imminent payment default on foreign debt,” says Nader Haddad, CEO of asset manager Finadhad. He predicts a further devaluation of the Tunisian dinar and rising poverty rates.

Tunisia will most likely need external assistance to see the light at the end of the tunnel, but structural reforms will also be required to boost attractivity.

“Tunisia is not welcoming to investors. The local administration is heavy, it’s not digitized, and bureaucracy kills the economy,” says Haddad, highlighting that given the right business environment, the country could present significant opportunities in areas such as industry, agriculture and research and development.

The other countries on Africa’s Northern coast tell a different story. Libya, Algeria and, to a certain extent, Mauritania are mainly rent economies. So while they can boast impressive growth rates like Libya’s 12.5% in 2023 and expected 7.5% this year, these figures are mainly a reflection of oil and gas—or, in Mauritania’s case, gold prices.

Banks, Fintech And Financial Inclusion

How do banks and financial institutions navigate this fragmented region? Over the past decade, most Western lenders—including Barclays, Scotiabank, BNP Paribas and Societe Generale—have gradually stepped out of North Africa, leaving local banks, mainly Moroccan and Egyptian lenders, to scale across countries and establish themselves as market leaders. National Bank of Egypt, Banque Misr and Attijariwafa now rank among the Middle East and Africa (MENA) region’s top 30 banks by assets, according to the latest S&P Global ranking.

At home and abroad, these banks share a common strength in knowing how to approach large unbanked populations to gain new customers. In Morocco, for example, the World Bank’s Global Findex survey shows that in 2021, 44% of adults had access to a bank account, and 30% used digital payments compared with only 29% and 17%, respectively, in 2017.

Most banks have developed their tech to accelerate financial inclusion or have partnered with fintechs, offering simple digital solutions for everyday transactions.

In Egypt, MNT-Halan serves more than seven million customers through services such as microfinance, salary advances, bill payments and digital wallets. Its monthly transaction volume is about $100 million, and its loan book is $550 million.

“We work closely with nearly every bank in Egypt. They supply us with money, and we distribute it. Although there is some overlap, the synergies are much stronger. We are mostly servicing segments they are not reaching or are underservicing, resulting in a very solid partnership,” explains MNT-Halan’s Nakhla.

Despite the severe crisis in Cairo, MNT-Halan “performed much better than expected,” continues Nakhla, indicating the firm’s loan book grew between $20 and $30 million month-over-month in 2023. “We’re very defensive as a company. Our core source of revenue is our loan book yield. In a very high inflationary environment due to the devaluation of the local currency, the average loan size automatically adjusts upwards, and so does the loan book in US dollars.”

Betting on the unbanked is a winning strategy in times of crisis, when some of the poorest drop bank accounts like in Tunisia, but also in more developed countries like GCC states where most of the population is composed of migrant workers who must send remittances.

In October, Morocco’s Cashplus raised $60 million—the MENA region’s fourth biggest fintech round in 2023—to continue transforming the company into a regional super app or one-stop-shop for financial services from a money transfer.

“In many emerging markets and even in some of the most developed countries, access to financial services is still hugely underpenetrated and not happening at its full potential,” says Nakhla, who plans to launch MNT-Halan in four new markets this year.

Climate Finance

The other sector on every North African financier’s radar is climate finance. Last year alone, Morocco suffered a drought and an earthquake, Libya lost thousands of people to deadly floods and a dam failure in Derna, and Algeria grappled with wildfires.

Climate change “affects growth, employment and inflation, the main variables on which monetary-policy decisions are based. Besides, climate-related risks are bound to affect the banking and insurance industries and financial stability generally,” Morocco Central Bank Governor Abdelatif Jouahri warned during a recent conference in Rabat.

“The annual investment required to implement the region’s climate action plan by the National Determined Contributions (NDCs) is estimated to be $25.7 billion up to 2030. Nonetheless, the total climate action finance flows in North Africa amount to $5.9 billion, which is only 23% of the estimated annual requirement,” the African Development Bank group reported in its 2023 Outlook.

For now, foreign donors represent 80% of climate financing, and the local public sector 18%. That leaves opportunities to unlock private investment. Among the most attractive segments, new sun and wind energy-harvesting techniques have emerged as the most attractive. Agriculture—encompassing how to ensure food security amid rising temperatures, manage water resources, and reduce import bills—also presents important growth opportunities, as the sector is still formidable in terms of employment and as a share of GDP in all North African countries.

An essential part of the MENA region, North Africa has great potential thanks to its young population, natural resources and strategic location, but it needs to work on its attractiveness. To convince foreign investors to step in, the region needs reforms to ease business.