The end of subsidies and possible investments by Gulf countries to Egypt could severely affect Cairo's economy

Economic aid to Egypt: Gulf countries withdraw subsidies and seek more profitable investments

PHOTO/ARCHIVO - Abdel Fattah al-Sisi y Tamim bin Hamad al-Thani
PHOTO/FILE - Abdel Fattah al-Sisi and Tamim bin Hamad al-Thani

The Gulf countries appear to be shifting their stance on Egypt's economy, expecting a mutual economic relationship from Cairo, as opposed to their previous stance, which focused on injecting the country with subsidies and aid. The Gulf countries would be more interested in making investments that would guarantee long-term benefits.

Today, the nations of the region have decided to diversify their investments more. These economies seem to be more interested in investments focused on East Asia, specifically China. They are expected to invest between 1 and 2 trillion dollars in the Far East over the next 5 years, with the majority of this investment focused on China.

Egypt, on the other hand, is in the midst of a crisis caused mainly by rising inflation and an exchange rate crisis. According to the MiddleEastObserver, "the value of the Egyptian pound has continued to fall following its decision to switch to a flexible exchange rate. The currency has lost around 50% of its value against the dollar since the beginning of 2022".

AFP/KHALED DESOUKI - El Banco Central Egipcio en el centro de El Cairo
AFP/KHALED DESOUKI - The Egyptian Central Bank in downtown Cairo

External factors such as the COVID crisis or the ongoing conflict in Ukraine have also severely affected the country's economy. Egypt is heavily dependent on wheat imports, being the world's largest wheat importer, mainly from Eastern Europe. Earlier this year, the government allocated 127.7 billion Egyptian pounds ($4.14 billion) for food subsidies, as the majority of low-income households (about 30% of the population) depend on such basic subsidies.

One of the main reasons why Gulf countries have reduced their aid and investments in Egypt is the delay in the executive's decision to liberalise the exchange rate of the Egyptian pound, as well as the existence of two exchange rates in the country and higher tax rates in the markets given the current global price crisis. These conditions make Egypt's economic climate unfavourable for these Gulf countries.

To alleviate the crisis, the government has decided to sell shares in 32 state-owned companies and to relinquish control of certain sectors of the economy to the public sector, such as transport, electricity, sewage, etc.

Last May, Qatar affirmed the cessation of aid or subsidies to Egypt. Kuwait and Saudi Arabia have also decided to change their approach to aid. These countries are waiting for Cairo to implement the reforms proposed by the International Monetary Fund (IMF) following the IMF's $3 billion bailout package, such as the sale of state-owned companies and the transition to a flexible exchange rate. The IMF will conduct a report to analyse Egypt's proposed changes, and if it approves the analysis, a second loan of some $354 million will be granted. In the wake of this, economic analysts say Gulf countries will be more willing to invest domestically.