Egypt’s current account deficit remained almost unchanged, recording $13.6bn in the first three quarters (July/March) of fiscal year (FY) 2021/22, despite the increase of $3bn in the trade balance deficit which came as a result of $14.9bn rise in merchandise imports (oil and non-oil).
The widened trade deficit mainly reflected the unprecedented inflationary waves currently sweeping the world as the sectors that had been deterred by the COVID-19 pandemic resumed their usual activity. Furthermore, adverse impacts of the Russia-Ukraine crisis which coincided with the western sanctions on Russia, drove fuel and primary commodity prices to unprecedented levels. This has led many countries to tighten their monetary policies to contain inflation.
The global economy has endured the ramifications of the Russia-Ukraine war, and Egypt was no exception. Besides the rise in imports amid escalating global prices, the economy has been affected by large-scale portfolio outflows by foreign investors which exited the market in a seamless manner. This led to a fall in the net inflows into the capital and financial account, resulting in an overall deficit of $7.3bn in the balance of payments, most of which was registered in January/March 2022.
Factors that adversely impacted current account:
Non-oil trade deficit widened by 22.5%, to about $37.7bn (against $30.7bn in the corresponding period); as the increase in non-oil imports surpassed that of non-oil exports, as illustrated below:
Non-oil merchandise imports rose by $11.7bn to $57.1bn. The rise was concentrated in the imports of production inputs, such as propylene polymers, inorganic and organic compounds, and cast iron; agricultural crops, mainly soybeans, maize, and wheat due to the rise in global prices; medicines; pharmaceutical preparations; gauze pads; and vaccines in light of the state’s efforts to combat COVID-19 pandemic.
Non-oil merchandise exports increased by $4.7bn to about $19.4bn. The increase was mainly seen in the exports of: – Finished goods, mainly phosphate/mineral fertilizers, ready-made clothing, medicines, transmitter and receiver devices of radio/television, and household electric appliances; and – Semi-finished goods, mainly organic and inorganic compounds and ethylene-propylene polymers.
Investment income deficit grew by 27.2% to about $11.3bn from $8.9bn, as an outcome of the following developments: Investment income payments went up by $2.7bn, to register $11.8bn, reflecting the rise in both, earnings of FDI in Egypt; and interests and dividends of non-residents’ investments in Egyptian bonds and securities. Meanwhile, investment income receipts moved up by $259.1m to $579.2m against $320.1m in the corresponding period, mainly due to the rise in interest and dividends on foreign bonds and securities.
The rise in the current account deficit was mitigated by the following positive factors:
The services surplus widened by $4.8bn, to reach $7.9bn, mainly due to the following factors: o Tourism revenues rose by $5.1bn to $8.2bn from $3.1bn in the corresponding period, although negatively affected by the absence of Russian and Ukrainian tourists since the outbreak of the Russia-Ukraine crisis. o Transport receipts increased by 27.8%, to reach $7bn (against $5.5bn), mainly due to the rise in Suez Canal receipts by 16.9% to $5.1bn from $4.3bn.
The oil trade surplus went up by $4bn, to register $4.1bn well above the $174.9m of the corresponding period. This was a main result of the rise in the value of natural gas exports to $5.6bn, of which, $2.5bn were registered in October/December 2021, and $2.6bn in January/March 2022, triggered by the noticeable escalation of global prices, the rise of the exported quantities, and the opening of new markets in Turkey and Europe, mainly in Italy, France, Spain, Croatia, and Greece.
Workers’ remittances rose slightly by 1.1%, to record $23.6bn against $23.4bn.
As for the capital and financial account, net inflows declined by 36.6% in July/March of FY 2021/2022 to only $10.8bn from $17.1bn in the corresponding period. The following is a review of the main developments:
Portfolio investment in Egypt shifted from a net inflow of $16bn to a net outflow of $17.2bn, mainly during January/March 2022, which witnessed net outflows of $14.8bn. This reflected investors’ concerns over the Russian-Ukraine conflict that could escalate into World War III, as well as the contractionary monetary policies adopted by the Federal Reserve leading to outflows of hot money from emerging markets.
Medium- and long-term external loans & facilities recorded a net disbursement of only $1.3bn against $5bn, on the back of the rise in repayments to $5bn from $2.4bn, and the decline in disbursements to $6.3bn from $7.4bn.
Changes in the liabilities of the CBE posted a net inflow of $16.4bn, of which $14.1bn was recorded in January/March 2022, mostly representing deposits from Arab countries.
Net FDI in Egypt rose by 53.5% to $7.3bn, as shown below:
First: FDI in Non-oil Sectors
Net FDI in non-oil sectors mounted by $3.9bn, to record a net inflow of $9bn of which $4.6bn were registered in January/March 2022), as a result of the following: Net inflows for green investments or capital increases of existing companies rose by $1.5bn to $2.6bn, of which $208.2m went to green investments. The sale proceeds of companies and productive assets to nonresidents increased by $2.2bn to $2.3bn. Net inflows for real estate purchases by non-residents mounted by $189.8m to $643.5m; and net retained earnings and credit balances surplus stabilized at $3.5bn.
Second: FDI in Oil Sector
FDI in the oil sector registered net outflows of $1.7bn (against just $322.5m in the corresponding period). This came as an outcome of:
The rise in outflows, representing cost recovery for exploration, development and operations previously incurred by foreign partners, to $5.4bn from $4.6bn.
Total inflows, representing new investments of foreign oil contractors, declined to $3.8bn from $4.3bn.