News / Economy

With Gulf Aid, Egypt Economy Can Limp Through Crisis

A general view of the Egyptian stock exchange in Cairo, August 18, 2013.
A general view of the Egyptian stock exchange in Cairo, August 18, 2013.
Reuters
 Egypt's political crisis has dealt a blow to any hopes for a quick economic recovery, but aid from its Gulf allies is likely to prevent a financial collapse.

Clashes between followers of deposed Islamist President Mohamed Morsi and security forces have caused the deaths of at least 830 people since Wednesday, the worst political bloodletting to rock Egypt in recent history.

When the army-backed government took over after the ousting of Morsi last month, it hoped to repair the business environment and attract money back to Egypt by improving security, removing logistical bottlenecks and pumping in new funds. That in turn could reduce social tensions by starting to create jobs and raise living standards.

The latest violence may have doomed such hopes for some months at least. If the conflict continues to worsen, the economy could slow further from the anemic 2.2 percent growth in the first quarter of this year - a rate already much too low to cut unemployment, officially estimated at around 13 percent.

“If you see widespread terrorism and bombs, you won't get a recovery in tourism or domestic investment, and capital flight may continue,” said Simon Kitchen, a strategist with investment bank EFG Hermes.

But after Morsi was deposed, Saudi Arabia, Kuwait and the United Arab Emirates promised Egypt a total of $12 billion in loans, grants and fuel shipments. Of that, $5 billion has already arrived - an unusually fast delivery of aid commitments, showing the importance the Gulf attaches to stabilizing Egypt.

That means a balance of payments crisis or a collapse of government finances - which had seemed possible during Morsi's administration - do not appear to be on the cards.

Late on Monday, Saudi Arabian Foreign Minister Prince Saud al-Faisal signaled that the world's top crude oil exporter was ready to provide more billions if necessary.

“To those who have declared they are stopping aid to Egypt or are waving such a threat, the Arab and Muslim nations are wealthy with their people and resources and will not shy away from offering a helping hand to Egypt,” he told state news agency SPA in Jeddah.

Tourism damaged

Much depends on whether the struggle between the army and the Islamists develops into a protracted armed conflict. Even if it does not, the latest violence is likely to have harmed the economy for some months.

Tourism may not recover before next year at the earliest. In 2010 Egypt attracted 14.7 million visitors, according to the Organization for Economic Co-operation and Development; in the wake of the 2011 revolution, the number fell to 9.5 million that year before partially recovering to 11.2 million in 2012. The tourism sector directly accounts for about 7 percent of Egypt's GDP, according to its State Information Service.

In response to the latest violence, European travel agents are again suspending trips to Egypt, while the United States has warned citizens against traveling to the nation.

After closing facilities in Egypt for several days, major foreign investors such as General Motors, German chemicals firm BASF and Swedish home appliance maker Electrolux have fully or partially reopened for business this week.

They are likely to stay open, barring another big outbreak of violence. But even a low level of political unrest or tension in coming months could hurt the Egyptian economy at the margins, by making foreign buyers of its exports more cautious.

Efforts to put Egypt's catastrophically weak state finances on a sustainable footing may be another casualty. The army-backed government has inherited a budget deficit that since January has been running at around $3.2 billion a month, equivalent to almost half of state spending.

The Cabinet expects to be in power only until early next year, when it is to be replaced after planned elections, so it lacks a popular mandate to take big steps to cut the budget deficit. Locked in a struggle with the Brotherhood, it is even less likely to push politically sensitive economic reforms.

“If the violence continues, the government will be even less politically armed to go out and control the budget deficit by reducing subsidies,” said John Sfakianakis, investment strategist at Saudi investment firm MASIC.

Budget deficit

Being unable to fix the finances may not matter so much, however, if Egypt can draw on the resources of the Gulf's wealthy oil exporters, most of which view crushing the Muslim Brotherhood as a geopolitical priority, since they see the group as a long-term threat to their monarchies.

Egypt's foreign reserves totalled $14.9 billion at the end of June, before any of the Gulf aid announced in July arrived. Excluding inflows of aid, they had been falling by around $1-2 billion every month, so the aid may cover Egypt's external deficits into early 2014.

By itself, the Gulf aid announced so far only covers a few months of Egypt's state budget deficit, but confidence created by the aid should help the government finance the rest of the deficit with borrowing. Yields at government Treasury bill auctions fell after Morsi was deposed; they spiked up during last week's violence, but are still a couple of percentage points or more below their peaks under Morsi.

Most importantly, as Prince Saud indicated, Egypt can count on additional billions from the Gulf if its political turmoil causes fresh capital outflows or delays the transition back to civilian rule.

This should more than offset any potential loss to Egypt if the European Union or the United States cut back their economic and military assistance to Cairo in protest at the killings.

The EU and international financial bodies last year promised Egypt 5 billion euros ($6.7 billion) of grants and loans over several years, but little of that money has actually arrived and much has been blocked because Cairo failed to meet conditions for democratic reform. Washington has provided $1.3 billion of military aid and just $250 million of economic aid annually.

Qatar, which had good ties with the Muslim Brotherhood, spent about 4 percent of its GDP helping Egypt before Morsi's downfall. Back-of-the-envelope calculations suggest Cairo could receive a further $40 billion, in addition to the money pledged last month, if Saudi Arabia, the UAE and Kuwait were to match prior Qatari levels now Morsi has gone. The Saudi government's budget surplus in 2012 alone was $103 billion.

Even so, such massive dependence mortgages Egypt's future; much of the aid is in the form of loans, which must ultimately be repaid.

But for now, it gives Cairo room to maneuver. The government's economic planning team said on Monday that it would work to provide financing for the budget and import essential commodities by attracting more foreign investment, especially from Arabs.

It promised to speed up implementation of public-private partnerships, especially to build roads, sanitation and hospitals, and give priority to investment projects that affect the daily life of citizens. Cash from the Gulf may make some of these projects possible.

The resilience of Egypt's stock market shows how the Gulf aid has kept hopes for the economy alive. The market is down about 4 percent since last week's violence, but it is still up 21 percent from its low in June.

The gap between the official and black market exchange rates of the Egyptian pound against the dollar, which almost disappeared in the initial weeks after Morsi was deposed, has widened since last week but remains under 2 percent. It reached 7 percent or more under Morsi.

You May Like

HRW: Egypt's Trial of Morsi ‘Badly Flawed’

Human Rights Watch says former Egypt leader's detention without charge for more than three weeks after his removal from office violated Egyptian law; government rejects criticism More

Photogallery Lancet Report Calls for Major Investment in Surgery

In its report published by The Lancet, panel of experts says people are dying from conditions easily treated in the operating room such as hernia, appendicitis, obstructed labor, and serious fractures More

Music Industry Under Sway of Digital Revolution

Millions of people in every corner of the Earth now can enjoy a vast variety and quantity of music in a way that has never before been possible More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Study: Insecticide Damaging Wild Bee Populationsi
X
April 24, 2015 10:13 PM
A popular but controversial type of insecticide is damaging important wild bee populations, according to a new study. VOA’s Steve Baragona has more.
Video

Video Study: Insecticide Damaging Wild Bee Populations

A popular but controversial type of insecticide is damaging important wild bee populations, according to a new study. VOA’s Steve Baragona has more.
Video

Video Data Servers Could Heat Private Homes

As every computer owner knows, when their machines run a complex program they get pretty hot. In fact, cooling the processors can be expensive, especially when you're dealing with huge banks of computer servers. But what if that energy could heat private homes? VOA’s George Putic reports that a Dutch energy firm aims to do just that.
Video

Video Cinema That Crosses Borders Showcased at Tribeca Film Festival

Among the nearly 100 feature length films being shown at this year’s Tribeca Film Festival in New York City are more than 20 documentaries and features with international appeal, from a film about a Congolese businessman in China, to documentaries shot in Pakistan and diaspora communities in the U.S., to a poetic look at disaffected South African youth. VOA’s Carolyn Weaver has more.
Video

Video UN Confronts Threat of Young Radicals

The radicalization and recruitment of young people into Islamist extremist groups has become a growing challenge for governments worldwide. On Thursday, the U.N. Security Council heard from experts on the issue, which has become a potent threat to international peace and security. VOA’s Margaret Besheer reports.
Video

Video Growing Numbers of Turks Discover Armenian Ancestry

In a climate of improved tolerance, growing numbers of people in Turkey are discovering their grandmothers were Armenian. Hundreds of thousands of Armenians escaped the mass deportations and slaughter of the early 1900's by forced conversion to Islam. Or, Armenian children were taken in by Turkish families and assimilated. Now their stories are increasingly being heard. Dorian Jones reports from Istanbul that the revelations are viewed as an important step.
Video

Video Migrants Trek Through Western Balkans to Reach EU

Migrants from Africa and other places are finding different routes into the European Union in search of a better life. The Associated Press followed one clandestine group to document their trek through the western Balkans to Hungary. Zlatica Hoke reports that the migrants started using that route about four years ago. Since then, it has become the second-most popular path into Western Europe, after the option of sailing from North Africa to Italy.
Video

Video TIME Magazine Honors Activists, Pioneers Seen as Influential

TIME Magazine has released its list of celebrities, leaders and activists, whom it deems the world’s “most influential” in 2015. VOA's Ramon Taylor reports from New York.
Video

Video US Businesses See Cuba as New Frontier

The Obama administration's opening toward Cuba is giving U.S. companies hope they'll be able to do business in Cuba despite the continuation of the U.S. economic embargo against the communist nation. Some American companies have been able to export some products to Cuba, but the recent lifting of Cuba's terrorism designation could relax other restrictions. As VOA's Daniela Schrier reports, corporate heavy hitters are lining up to head across the Florida Straits - though experts urge caution.
Video

Video Kenya Launches Police Recruitment Drive After Terror Attacks

Kenya launched a major police recruitment drive this week as part of a large-scale effort to boost security following a recent spate of terror attacks. VOA’s Gabe Joselow reports that allegations of corruption in the process are raising old concerns about the integrity of Kenya’s security forces.
Video

Video Japan, China in Race for Asia High-Speed Rail Projects

A lucrative competition is underway in Asia for billions of dollars in high-speed rail projects. Cambodia, India, Indonesia, Malaysia Thailand and Vietnam are among the countries planning to move onto the fast track. They are negotiating with Japan and the upstart Chinese who are locked in a duel to revolutionize transportation across Asia. VOA Correspondent Steve Herman in Bangkok has details.
Video

Video Scientists: Mosquitoes Attracted By Our Genes

Some people always seem to get bitten by mosquitoes more than others. Now, scientists have proved that is really the case - and they say it’s all because of genes. It’s hoped the research might lead to new preventative treatments for diseases like malaria, as Henry Ridgwell reports from London.
Video

Video Bible Museum Coming to Washington DC

Washington is the center of American political power and also home to some of the nation’s most visited museums. A new one that will showcase the Bible has skeptics questioning the motives of its conservative Christian funders. VOA religion correspondent Jerome Socolovsky reports.
Video

Video Armenia and Politics of Word 'Genocide'

A century ago this April, hundreds of thousands of Armenians of the Turkish Ottoman empire were deported and massacred, and their culture erased from their traditional lands. While broadly accepted by the U.N. and at least 20 countries as “genocide”, the United States and Turkey have resisted using that word to describe the atrocities that stretched from 1915 to 1923. But Armenians have never forgotten.
Video

Video Afghan First Lady Pledges No Roll Back on Women's Rights

Afghan First Lady Rula Ghani, named one of Time's 100 Most Influential, says women should take part in talks with Taliban. VOA's Rokhsar Azamee has more from Kabul.
Video

Video New Brain Mapping Techniques Could Ease Chronic Pain

From Boulder, Colorado, Shelley Schlender reports that new methods for mapping pain in the brain are providing validation for chronic pain and might someday guide better treatment.

VOA Blogs

World Currencies

EUR
USD
0.9238
JPY
USD
119.51
GBP
USD
0.6614
CAD
USD
1.2119
INR
USD
63.562

Rates may not be current.