How does Egypt benefit from converting Gulf deposits into investments?

Egyptian President Abdel-Fattah El-Sisi’s call for the Gulf countries to convert their deposits with the Central Bank into direct investments constituted a shift in Egypt’s economic policy towards maximizing direct investment opportunities instead of relying on deposits to secure cash reserves.

El-Sisi said - during his interview with a number of media professionals in Sadat City, north of Cairo - last Monday, "We are trying to make these deposits investments, and we have many projects. Egypt has 100 million and many opportunities, whether as a joint investment or a single one."

Saudi Arabia, the UAE and Kuwait have always provided generous financial support to the Egyptian authorities since July 2013 in the form of deposits of billions of dollars with the Central Bank of Egypt, and these deposits constituted the majority of the volume of foreign exchange reserves.

The last deposit Egypt received was on March 30 from Saudi Arabia, worth $5 billion, to face the repercussions of Russia’s war on Ukraine and to strengthen its cash reserve, which declined sharply as a result of its use to support the Egyptian pound, cover the exit of foreign investments, pay international obligations related to foreign debt, and secure import imports. Strategic Commodities.

erosion of cash reserves

Egypt's foreign exchange reserves lost $5.5 billion during last April and May, reaching $35.5 billion at the end of May, down from $40.99 billion at the end of last March, according to the Central Bank.

The central bank attributed the reasons for the decline at the time to compensating foreign outflows, paying debt service and purchasing strategic goods, and said that it had mobilized excess foreign exchange reserves to calm the markets during periods of exceptional pressure.

Meanwhile, Egypt's external debt rose at the end of last year to 145.5 billion dollars, and the bank's data showed that the domestic public debt rose to 4 trillion and 742 billion pounds (255 billion dollars) by the end of June 2020.

The support of Saudi Arabia and the UAE for the monetary reserve plays an important role in stabilizing the Egyptian pound as well, according to press statements by banking expert Mohamed Abdel Aal, in addition to activating direct and indirect investment and reducing any currency shortage due to the global negative consequences of the Russian-Ukrainian war and its expected repercussions on the exacerbation of the trade balance deficit.

Support or chaos

An article by Egyptian journalist Imad El-Din Adeeb, in which he talks about the need for Arab countries to support Egypt in facing the effects of Russia's war on Ukraine, sparked widespread controversy and questions on social networking sites in Egypt.

In the article, Adeeb warned of catastrophic consequences that threaten Europe and the Arab countries if they do not urgently and directly support the Egyptian economy with the amount of 25 billion dollars that the Egyptian budget incurred as a result of that war, according to him.

Egyptian journalist Amr Adib followed his brother Imad's article with a paragraph entitled "Thank you for the fish, but I want the hook" in his "Al-Hekaya" program broadcast on a satellite channel, calling on the Gulf Cooperation Council countries to convert their deposits in Egypt into investments.

Adeeb said, "We thank you for the deposits and the existing Arab support, but why not an investment? This is Egypt's current policy, which sees that localizing investments and partnering with them are better than deposits."

In order to enhance this trend in attracting direct Arab investments in the Egyptian economy, the government signed several agreements with Saudi Arabia, the UAE and Qatar to establish investment funds and partnerships worth billions of dollars.

An investment message to the world

In turn, the economist, Dr. Abdel Nabi Abdel Muttalib, believes that Sisi's call to convert Gulf deposits into investments is a message to increase direct investments in Egypt and to emphasize the existence of an encouraging investment climate, and that the state of uncertainty that existed in a state-controlled market no longer exists.

In his speech to Al Jazeera Net, Abdel Muttalib added that President Sisi's invitation is positive for both parties, a message to reassure local investors and global investment, and that the investment climate in Egypt will become more competitive, a call that reflects the authorities' desire to correct their economic policies.

The importance of Gulf deposits, which began 10 years ago with a Qatari deposit in 2012 - according to the economist - is to raise the value of the cash reserve, which strengthens Egypt's position when negotiating with international institutions and banks to obtain loans, aid, or financing investment projects and not to reduce Egypt's credit rating.

Abdul Muttalib pointed out that we must ask: Does not converting deposits into investments mean reducing the size of the reserve?

The answer is that these deposits were not in the form of stored money, but were used to finance imports, and dollar balances were inserted in their place through the proceeds of exports, tourism, the Suez Canal and Egyptians abroad.

Egypt's external debt rose at the end of last year to 145.5 billion dollars (European News Agency)

How erosion of the Egyptian reserves?

According to the economist Mamdouh Al-Wali, the central banks have many purposes in forming foreign currency reserves, including meeting emergency import needs, facing rising import prices, increasing the ability to withstand external shocks, and defending the exchange rate by pumping dollars into the market when it is in short supply. The fulfillment of external debts, and the financing of all external payments when dollar resources are unable to meet this.

Al-Wali pointed out in an article on the Al-Jazeera Mubasher website that all these evidence indicate a severe shortage of dollars in the Egyptian market that has absorbed these loans, in addition to paying the value of imports and paying interest and foreign debt installments.

He expected this to be repeated with obtaining new loans, which would go first to fill the deficit in the net foreign assets of the banking system, meet import demands and face the increase in import prices.

Al-Wali believed that the alternative for the Egyptian authorities is to expand the sale of state-owned assets to secure dollar liquidity, especially in light of the absence of hot money, the continued suspension of Russian and Ukrainian tourism, the weak movement of foreign direct investment in the world, and the exit of foreign investors from the Egyptian Stock Exchange during the last three years.