Can Egypt's diaspora support the EGP?

Egypt's balance of payment (BoP) released recently showed a surplus that was driven by the capital and financial account. A closer look indicates that transfers by Egyptians living abroad has kept the country's BoP afloat, but how can it be sustained to support the EGP?
By Markets Chimp

6/19/17 6:14 PM

Looking at Egypt's balance of payment (BoP) which was released recently, one can pick out key takeaways that are important to get a better picture of what goes on in the Egyptian economy.

First, let's look at the BoP's current account which highlights how a country deals with the rest of the world. A positive balance indicates that the country is a creditor to the rest of the world, while a deficit indicates it is a debtor. Egypt’s current account deficit reached USD13.2 billion, narrowing by 12.4% YoY during the 9-month period from July 2016 through March 2017 versus the year-ago period, where …

  • Overall trade deficit declined 9.4% to USD27.0 billion.
  • Oil trade deficit widened further by 23.8% to USD3.5 billion.
  • Non-oil merchandise trade deficit fell by 12.9% to USD23.5 billion, mainly because of 23.3% higher exports rather than 3.7% lower imports.
  • Suez Canal revenues were USD3.7 billion, down 4.2% year on year.
  • Tourism revenues were USD2.8 billion, down 12.8% year on year.
  • Egyptian workers' remittances were USD12.6 billion, almost unchanged YoY.

 

Second, let's look at the BoP's capital and financial account which highlight how a country invests or attracts investments and other credit facilities from the rest of the world. A positive balance indicates that the country receives more investments and/or credit facilities from the rest of the world rather than it gives. Meanwhile, a deficit indicates more outflows for the country, investing outside its borders and lending them. During the 9-month period from July 2016 through March 2017, …

  • Foreign direct investment (FDI) increased by 11.5% to USD6.6 billion, but it was mostly driven by investments in oil and gas sector.
  • Portfolio investments, which measures how much foreign investors are investing in Egypt as opposed to Egyptians investing aboard, turned from a negative USD1.5 billion to a positive USD7.8 billion. Of that amount, USD3.2 billion came from selling Treasuries to foreign investors who have been attracted to Egypt's high interest rate (i.e. carry trade).
  • Net borrowing increased by 37.2% to USD7.2 billion.

An important point to note is the drop seen in “net errors and omissions” from a negative USD3.2 billion to only USD475 million, suggesting less FX activity through unofficial channels, thanks to the EGP devaluation in November 2016.

Undoubtedly, the above figures highlight the importance of Egyptian workers’ remittances (otherwise known as Egyptian expats’ transfers). Picture this. In the nine-month period ended March 2017, Egyptian expats’ transfers represented:

  • 0.8x total exports
  • 1.1x non-oil merchandise exports
  • 3.4x Suez Canal revenues
  • 4.4x tourism revenues

More recently, the CBE said that Egyptians living aboard have sent a total of USD9.3 billion in the six-month period (November 2016-April 2017) following the EGP devaluation. This is up 11% higher YoY or USD930 million higher.

In view of the above, the Egyptian government and the CBE should think of ways to attract more transfers from Egypt’s diaspora in more innovative ways. For instance, instead of attracting them to fund the budget deficit by buying Treasuries or Treasuries-like certificates, Egypt should offer Egyptian expats opportunities for long-term wealth creation. I suggest that this is done by attracting Egyptians to invest in the stock market, especially with the upcoming initial public offerings (IPOs) of state-owned companies, such as Enppi and Banque du Caire. This way, Egyptian expats feel connected to their homeland and have vested interest in the country’s welfare. As a result, pressure on the Egyptian pound can be diffused by multiples of expats’ funds flowing back into Egypt as a result.

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