Tuesday,25 September, 2018
Current issue | Issue 1277, (7 - 13 January 2016)
Tuesday,25 September, 2018
Issue 1277, (7 - 13 January 2016)

Ahram Weekly

Tough times ahead

Lower oil prices are not necessarily a blessing for Egypt, despite the country’s growing balance of payments deficit, writes Sherine Abdel-Razek

oil prices
oil prices
Al-Ahram Weekly

Egypt’s balance of payments registered an overall deficit of $3.65 billion in the first quarter of 2015-2016, compared to a surplus of $410 million in the same quarter a year earlier.

Reflecting Egypt’s transactions with the rest of the world through trade and investments during the three-month period, the figures are worrisome for the government.

The main reason behind the decline is the 144 per cent increase in the deficit in the current account, part of the balance of payments that includes the trade balance and transfers.

The trade deficit, which is the difference between what Egypt exports and what it imports, came in at the same level of the corresponding quarter of 2014-2015, at $10 billion, due to the decline in world prices of oil and other commodities, which in turn affect the balance.

While imports declined by 10 per cent on the back of the fall in international oil and food prices, saving around 30 per cent of the value of Egypt’s oil imports, the same reasons stripped export receipts by almost a quarter. International oil prices declined by almost 50 per cent over the three-month period.

The fact that non-oil exports have declined despite the devaluation of the Egyptian currency is an indicator that the problem with Egyptian exports is not just their pricing, according to a research note prepared by Prime Securities, a leading investment bank.

“Foreign currency shortages that have deprived domestic industries from acquiring their imported materials, as well as energy constraints and in addition to the still-deteriorating security conditions in some of the most important markets importing Egyptian exports such as Yemen, Iraq, Libya and Syria,” are some of these constraints, the report said.

Prime expects the trade deficit for the current fiscal year to come in at around $40.4 billion, compared to $38.8 billion for the previous year, on the back of a decrease of 4.1 per cent in exports and a 2.3 per cent hike in imports due to the expected devaluation of the Egyptian pound, increasing the costs of importation.

Limiting imports tops the government’s priorities, as well as those of the Central Bank of Egypt,with a view to limiting the drainage of foreign reserves.

Last week, the Ministry of Trade and Industry announced a new system that sets out conditions for approving the foreign factories that may export to Egypt. The factories should be inspected by a technical team to make sure they abide by quality control and health standards and meet the rules of the International Labour Organisation, it said.

While the government claims that these new regulations are intended to weed out fake products and protect companies from brand imitation, importers believe they are a means to cap imports.

Egypt imported $60 billion worth of goods in fiscal year 2014-2015, compared to only $22 billion in exports.

As for the balance of services, this witnessed a decline in the surplus by 22.6 per cent to $1.7 billion. The decline was expected as tourism revenues fell by 17.5 per cent in the light of the drop in the number of tourist nights spent in Egypt, from 26.1 million to 23.7 million during the quarter.

Moreover, Suez Canal receipts declined by 7.3 per cent due to slower growth in world trade.

“A further decline in these revenues is expected to continue for the rest of the current fiscal year on the back of the current insecurity incidents witnessed in the country, especially after the Russian plane crash that occurred last October, as well as the global recession and the fall in international oil prices that will affect the flow of trade passing through the Suez Canal,” commented Prime researchers.

As for transfers, which indicate the flow of foreign capital into the country, these were particularly hard hit, losing 98 per cent of their value. The setback was expected as the Gulf countries, main donors to Egypt since July 2013, are burdened by the decline in world oil prices.

Foreign capital flows are not expected to improve any time soon, as Saudi Arabia is attempting to curb its budget deficit and cut spending, making further aid to Egypt doubtful.

Prime expects official transfers to not exceed $1 billion for the current fiscal year, compared to $2.7 billion and $12 billion in 2015 and 2014, respectively. The figure assumes that the government will acquire a grant for $500 million, currently under negotiation, as part of the $1.5 billion aid package offered to Egypt by the Saudi Development Fund.

A five per cent increase in foreign direct investment to reach $1.38 billion was one rare positive aspect of the balance of payments figures.

The bearish performance of the Egyptian stock exchange also translated into a decrease in portfolio investments to register an outflow of $1.4 billion last year, compared to an inflow of $316 million in the same period of the previous year.

Part of the decline is attributed to the repayment of $1.25 billion of maturing US-backed bonds in September.

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