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.
 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

Video Americans, Tourists, Reflect on Meaning of Thanksgiving

VOA garnered opinions from several people soon after November 13 Paris attacks, which colored many of their thoughts

Video Thais Send Security Concerns Down the River

In northern Thailand, the annual tradition of constructing floating baskets to carry away the year’s bad spirits highlights the Loy Krathong festival

Video Tree Houses - A Branch of American Dream

Workshops aimed at teaching people how to build tree houses have become widely popular in America in recent years

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Islamic State Unfazed by Losses in Iraq, Syriai
November 26, 2015 5:21 AM
Progress in the U.S.-led effort to beat Islamic State on its home turf in Iraq and Syria has led some to speculate the terror group may be growing desperate. But counterterror officials say that is not the case, and warn the recent spate of terror attacks is merely part of the group’s evolution. VOA National Security correspondent Jeff Seldin has more.

Video Islamic State Unfazed by Losses in Iraq, Syria

Progress in the U.S.-led effort to beat Islamic State on its home turf in Iraq and Syria has led some to speculate the terror group may be growing desperate. But counterterror officials say that is not the case, and warn the recent spate of terror attacks is merely part of the group’s evolution. VOA National Security correspondent Jeff Seldin has more.

Video Taiwan Looks for Role in South China Sea Dispute

The Taiwanese government is one of several that claims territory in the hotly contested South China Sea, but Taipei has long been sidelined in the dispute, overshadowed by China. Now, as the Philippines challenges Beijing’s claims in an international court at The Hague, Taipei is looking to publicly assert its claims. VOA’s Bill Ide has more from Beijing.

Video Syrian Refugees in US Express Concern for Those Left Behind

Syrian immigrants in the United States are concerned about the negative tide of public opinion and the politicians who want to block a U.S. plan to accept 10,000 Syrian refugees. Zlatica Hoke reports many Americans are fighting to dispel suspicions linking refugees to terrorists.

Video After Paris Attacks, France Steps Up Fight Against IS

The November 13 Paris attacks have drawn increased attention to Syria, where many of the suspected perpetrators are said to have received training. French President Francois Hollande is working to build a broad international coalition to defeat Islamic State in Syria and in Iraq. Zlatica Hoke reports.

Video US, Cambodian Navies Pair Up in Gulf of Thailand

The U.S. Navy has deployed one of its newest and most advanced ships to Cambodia to conduct joint training drills in the Gulf of Thailand. Riding hull-to-hull with Cambodian ships, the seamen of the USS Fort Worth are executing joint-training drills that will help build relations in Southeast Asia. David Boyle reports for VOA from Preah Sihanouk province.

Video Americans Sharpen Focus on Terrorism

Washington will be quieter than usual this week due to the Thanksgiving holiday, even as Americans across the nation register heightened concerns over possible terrorist threats. VOA’s Michael Bowman reports new polling data from ABC News and the Washington Post newspaper show an electorate increasingly focused on security issues after the deadly Islamic State attacks in Paris.

Video World Leaders Head to Paris for Climate Deal

Heads of state from nearly 80 countries are heading to Paris (November 30-December 11) to craft a global climate change agreement. The new accord will replace the Kyoto Protocol on Climate Change that expired in 2012.

Video Uncertain Future for Syrian Refugee Resettlement in Illinois

For the trickle of Syrian refugees finding new homes in the Midwest city of Chicago, the call to end resettlement in many U.S. states is adding another dimension to their long journey fleeing war. Organizations working to help them integrate say the backlash since the Paris attacks is both harming and helping their efforts to provide refugees sanctuary. VOA's Kane Farabaugh reports.

Video Creating Physical Virtual Reality With Tiny Drones

As many computer gamers know, virtual reality is a three-dimensional picture, projected inside special googles. It can fool your brain into thinking the computer world is the real world. But If you try to touch it, it’s not there. Now Canadian researchers say it may be possible to create a physical virtual reality using tiny drones. VOA’s George Putic reports.

Video New American Indian Village Takes Visitors Back in Time

There is precious little opportunity to experience what life was like in the United States before its colonization by European settlers. Now, an American Indian village built in a park outside Washington is taking visitors back in time to experience the way of life of America's indigenous people. Carol Pearson narrates this report from VOA's June Soh.

Video Even With Hometown Liberated, Yazidi Refugees Fear Return

While the northern Iraqi town of Sinjar has been liberated from Islamic State forces, it's not clear whether Yazidi residents who fled the militants will now return home. VOA’s Mahmut Bozarslan talked with Yazidis, a religious and ethnic minority, at a Turkish refugee camp in Diyarbakır. Robert Raffaele narrates his report.

Video Nairobi Tailors Make Pope Francis’ Vestments

To ensure the pope is properly attired during his visit, the Kenya Conference of Catholic Bishops asked the Dolly Craft Sewing Project in the Nairobi slum of Kangemi to make the pope's vestments, the garments he will wear during the various ceremonies. Jill Craig reports.

Video Cross-Border Terrorism Puts Europe’s Passport-Free Travel in Doubt

The fallout from the Islamic State terror attacks in Paris has put the future of Europe’s passport-free travel area, known as the "Schengen Zone," in doubt. Several of the perpetrators were known to intelligence agencies, but were not intercepted. Henry Ridgwell reports from London European ministers are to hold an emergency meeting Friday in Brussels to look at ways of improving security.

Video El Niño Brings Unexpected Fish From Mexico to California

Fish in an unexpected spectrum of sizes, shapes and colors are moving north, through El Niño's warm currents from Mexican waters to the Pacific Ocean off California’s coast. El Nino is the periodic warming of the eastern and central Pacific Ocean. As Faiza Elmasry tells us, this phenomenon thrills scientists and gives anglers the chance of a once-in-a-lifetime big catch. Faith Lapidus narrates.

Video Terrorism in Many Forms Continues to Plague Africa

While the world's attention is on Paris in the wake of Friday night's deadly attacks, terrorism from various sides remains a looming threat in many African countries. Nigerian cities have been targeted this week by attacks many believe were staged by the violent Islamist group Boko Haram. In addition, residents in many regions are forced to flee their homes as they are terrorized by armed militias. Zlatica Hoke reports.

Video Study: Underage Marriage Rate Higher for Females in Pakistan

While attitudes about the societal role of females in Pakistan are evolving, research by child advocacy group Plan International suggests that underage marriage of girls remains a particularly big issue in the country. VOA’s Ayesha Tanzeem reports how such marriages leads to further social problems.

VOA Blogs

World Currencies


Rates may not be current.