Gulf countries pledge $22 billion to help Egypt avert economic crisis amid Russian-Ukrainian war

Egypt’s allies in the Gulf have pledged up to $22 billion to help the country deal with the effects of the war in Ukraine.

Aid from Qatar, Saudi Arabia and the United Arab Emirates will come in the form of central bank deposits and investments, according to government and media reports, which did not specify the period over which the amount will be disbursed.

It will be the third time in less than a decade that Gulf states have bailed out the most populous Arab state.

“It’s really needed and it’s a very natural course – we’ve seen it over the last decade or so that Arab Gulf states support Egypt,” said Ashraf Naguib, chief executive of the think tank. Global Trade Matters based in Cairo. “Overall, a stable Egypt equals a stable region.”

As one of the most indebted countries in the Middle East with around half of its population living near or below the World Bank’s poverty line, Egypt was already in a precarious situation, aggravated by the conflict. underway in Europe which has strained its food supplies.

Russia’s invasion of Ukraine has had a drastic effect on Egypt’s food security, with warring countries accounting for 80% of its wheat imports.

In addition, Egypt is suffering from rising import costs and energy prices, dwindling foreign exchange reserves and tourist inflows.

The country’s annual urban inflation rate hit 8.8% in February, the fastest rate in nearly three years, due to soaring food prices.

Overall, a stable Egypt equals a stable region

Ashraf Naguib, Managing Director of Global Trade Matters

Saudi Arabia pledged $15 billion. The kingdom has deposited $5 billion in Egypt’s central bank, the Saudi Press Agency reported on March 30.

The Saudi Public Investment Fund is weighing $10 billion in investments in Egypt’s health, education, agriculture and finance sectors, according to a statement from the Egyptian cabinet.

Qatar has agreed to sign investment agreements worth $5 billion, the Egyptian cabinet said in a statement on March 29.

Last month, Abu Dhabi wealth fund ADQ reached a deal worth around $2 billion to buy Egyptian state-held stakes in listed companies.

ADQ investments could include acquiring stakes in listed and unlisted Egyptian companies, said Ayman Soliman, managing director of Egypt’s Sovereign Wealth Fund. Al Arabiya Television Monday. Details could be announced within days, he said, declining to name specific companies.

Saudi Arabia’s Public Investment Fund could buy stakes in military-owned Wataniya Petroleum and three Siemens-built power plants as part of its promised $10 billion investment in Egypt, Soliman said.

To ease economic shocks caused by supply chain disruptions and bolster foreign currency reserves, Egypt recently introduced a 130 billion Egyptian pound ($7.1 billion) relief package, raised interest rates interest, allowed its currency to weaken sharply and requested support from the International Monetary Fund.

The central bank raised interest rates for the first time since 2017 and allowed the pound – which had been stable against the dollar for around two years – to weaken by more than 15%. The currency closed at 18.19 pounds to the dollar on Monday.

Unlock IMF support

Egypt has started discussions with the IMF on new support which could include a loan. The country has turned to the Washington-based lender three times in the past six years, borrowing $12 billion in 2016-19 as part of an economic reform program and another $8 billion in 2020 during the pandemic.

“We welcome Egypt’s response to avoid the balance of payments shock and the impact of rising prices,” said Gerry Rice, director of communications at the IMF, on Friday.

“IMF staff is working closely with the Egyptian authorities to prepare program discussions to support these common objectives of economic stability and sustainable job-rich growth and inclusive medium-term growth for Egypt.”

Support from Gulf countries could help unlock IMF support by covering part of the expected financing gap, as the recipient is usually required to provide funds from other sources.

In addition to soaring commodity prices, Egypt faces $3 billion to $4 billion in lost revenue due to lower numbers of Russian and Ukrainian tourists, said research director Allen Sandeep. at investment bank Naeem Holding in Cairo.

“Overall, Egypt faces a financing gap of around $15 billion over the next 12 months,” Sandeep said.

“KSA’s $5 billion deposit will add a lot of confidence in terms of exchange rate stability, in terms of liquidity,” he added. “We are still waiting to see what form the rest of the money will be in. It will take longer to filter into the economy.”

Political stability

Egypt’s food subsidy bill, which was budgeted at 88 billion pounds ($4.8 billion) before the war in Ukraine, is expected to rise due to rising commodity prices in general. The country’s subsidized program includes providing cheap bread to 70 million people and raising the price is a very busy prospect.

The interrelationship between food security and political stability is a key motivation for financial support from Gulf Arab states.

“They are hyper aware that 11 years ago food prices were part of the cause of the Arab Spring,” said Ryan Bohl, Mena analyst at the Rane Network’s Stratfor geopolitics platform.

Egypt’s January 2011 revolution led to the removal of then-President Hosni Mubarak and the election of Islamist President Mohammed Morsi in 2013.

Morsi’s ouster in mid-2013 was led by Abdel Fattah El Sisi, then army chief and now president. In an apparent sign of approval, Kuwait, Saudi Arabia and the United Arab Emirates sent $23 billion in grants, cash deposits and fuel deliveries in the 18 months following the rebellion against Morsi.

While at the time this was linked to the perceived threat of the Muslim Brotherhood to security and stability in Egypt, similar incitements remain.

“The Arab world and mainly the Gulf world has learned the lesson of 2011 and beyond,” said Mohamed Farahat, director of the Al Ahram Center for Political and Strategic Studies. “The main lesson is that a strong economy and a strong state in Egypt are very important for overall stability in the region.”

In 2016, when Egypt devalued the pound by half, Saudi Arabia deposited about $3 billion and the United Arab Emirates $1 billion in the central bank ahead of the IMF deal, the report reported. official news agency of the United Arab Emirates WAM.

Economic incentives

This time, the dynamic is slightly different in that the financial support comes more in the form of investments.

“It’s the perfect balance between supporting the Egyptian people for stability and at the same time making viable investments in a developing country that will pay off for you,” said Mr. Naguib of Global Trade Matters.

In the case of Qatar, it is also a sign of improving relations after the two countries ended a years-long feud in early 2021. Bahrain, Egypt, Saudi Arabia and the Emirates United Arab Emirates froze relations and severed ties with Qatar in 2017 following accusations that it supported extremists. .

“This is how Qatar reintegrates into the Arab diplomatic fabric,” Bohl said.

The $5 billion investment plan was announced after Egyptian Foreign Minister Sameh Shoukry met with his Qatari counterpart last week. One of the talking points was reportedly the reopening of the Al Jazeera network office in Cairo after nearly a decade of closure.

Although investments and financial support are not explicitly linked to a counterpart, they are often useful.

For example, in 2017 President El Sisi ratified an agreement ceding sovereignty over the two uninhabited Red Sea islands of Tiran and Sanafir to Saudi Arabia, despite widespread public criticism of the deal. .

“This is true for any government in the world that lends or provides aid to another country; there are usually some sort of conditions attached, one way or another,” said Amy Hawthorne, deputy director of research at the Project for Middle East Democracy.

The question is how sustainable this model is for Egypt, which continues to rely heavily on foreign funding to keep its economy afloat.

“Once again, it is on the verge of crisis. Once again it comes back to the IMF and has to fill the void with the support of the Gulf countries…it’s the same cycle of problems that seems to be repeating itself,” Ms Hawthorne said. “These are only short-term solutions.”

Updated: April 06, 2022, 12:05 p.m.

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