Why is Saudi Arabia reluctant to save Egypt’s crumbling economy?

Egypt’s struggling economy

Egypt’s economy is under severe pressure and is at risk of collapsing in the near future as the Egyptian currency is loosing its value and debt is accumulating.

Egypt’s currency came under continued pressure in February, leading to a decline of 49.8 billion Egyptian pounds in the country’s net foreign assets (NFAs).

According to central bank data, this marked the second consecutive monthly decline, with NFAs falling to negative 704.23 billion Egyptian pounds from minus 654.43 billion at the end of January. Based on end-of-month central bank exchange rates, this equated to a February decline of $1.31 billion. In response, the central bank allowed the official exchange rate of the Egyptian pound to depreciate against the US dollar by 1.4%. Despite these efforts, street dealers were offering to buy dollars for 36 pounds, down from 35 the previous week.

NFAs, which reflect banking system assets owed by non-residents minus liabilities, have been crucial in supporting Egypt’s currency over the past 18 months. As of September 2021, Egypt’s NFAs stood at a positive 248 billion pounds, before the decline began.

Egypt’s economic and financial crisis over the past year can be largely attributed to a policy of excessive borrowing, which the country’s real economy is unable to sustain. With the exception of the energy sector, the current Egyptian economy lacks the capacity to generate adequate added value to cover the costs of high-capital investments.

While there are some low-capital investment options available, President Sisi’s focus on large-scale projects and real-estate schemes designed to attract high-earning investors requires a massive infusion of capital that Egypt cannot raise on its own. Adding to this issue is the lowest level of private sector involvement in such investments since the 1960s. If these investments had paid off, the national budget and other stakeholders, including the army, could have realized a return on their investment and used it to pay off debts and interest. Unfortunately, the scale of the debt, the speed of implementation, and the size of the projects have become so inflated that the gamble cannot pay off and achieve the desired effect.

Sisi’s surprise visit to Saudi Arabia

In what appears to be an attempt at gaining another lifeline for the Egyptian economy and securing Saudi investment in the economy for the upcoming years, Egypt’s President Abdel Fattah Al Sisi has made a surprise visit to Saudi Arabia.

According to the state-run SPA news agency, the Saudi Arabian and Egyptian leaders convened on Monday to discuss regional developments and explore opportunities for joint cooperation. The meeting took place after Egyptian President El-Sisi’s arrival in Saudi Arabia the previous day. The event was attended by several high-ranking officials, including Saudi national security adviser Musaad bin Mohammed al-Aiban and Egypt’s intelligence chief Abbas Kamel, as per the news agency’s report.

Saudi Arabia has been instrumental in providing substantial financial assistance to prop up the Egyptian economy and has frequently offered support to Cairo since El-Sisi rose to power following the overthrow of democratically elected President Mohamed Morsi in 2013. When Egypt’s financial challenges were brought to light and worsened by the repercussions of the Ukraine invasion last year, Riyadh and other Gulf countries made significant deposits into Egypt’s central bank and pledged substantial new investments.

Riyadh has also been an essential political partner of Cairo. Since the removal of Mohamed Morsi, a member of the Muslim Brotherhood, which is regarded as a terrorist organization in some nations, the Saudi Kingdom and other Gulf nations have offered strong support to El-Sisi’s administration.

Saudi Arabia’s change in policy

The latest visit may be futile and too little too late, as Saudi Arabia has in recent months changed its policy on investments and loans, now placing conditions on such activities, even to countries considered as ‘allies’.

El-Sisi’s recent visit to Saudi Arabia follows a shift in the country’s approach to financial support for its allies. In January, the Saudi finance minister announced in Davos that the country would no longer provide unconditional financial aid and would instead work with multilateral institutions to ensure that reforms were implemented.

This change in policy caused some tension between the two countries, with two prominent Saudi commentators criticizing Egypt on social media, and an Egyptian editor-in-chief responding with derogatory stereotypes about Saudi Arabia’s new wealth. However, officials from both countries quickly worked to smooth things over, emphasizing the importance of their relationship.

While Saudi Arabia has provided significant financial support to Egypt in the past, its commitment to further investment remains unclear. In contrast, Saudi Arabia has provided several financial bailouts to Pakistan in recent years, including a $3bn deposit in 2018 and another $3bn in 2021. However, after Pakistan failed to reach a final agreement with the IMF, no new bailout package was initiated by the Saudis. Reports emerged last year that Saudi Arabia was considering increasing its deposits in Pakistan’s central bank to $5bn and making other investments in the country, but little has materialized beyond a recent $1bn oil-sector deal.