The Covid-19 pandemic is affecting the global economy as no crisis has ever done before, with the International Monetary Fund (IMF) recently releasing a report assessing the current and future impact of it on the external sector of economies or how transactions with the rest of the world are being affected by the crisis, including tourism, remittances, and international trade.
“The outlook for external positions remains highly uncertain with significant risks. A further worsening in risk sentiment could, for economies with pre-existing vulnerabilities, such as large current account deficits, a high share of foreign-currency debt, and limited international reserves, further increase the risks of an external crisis,” the report noted.
Egypt has the above-mentioned vulnerabilities, and its foreign-currency resources have been adversely affected. In June, the IMF approved a $5.2 billion standby loan to help the country plug a balance-of-payments shortfall. This was preceded by a $2.8 billion rapid financing arrangement for targeted and temporary spending.
On Monday, the IMF released a paper highlighting the reasons it had extended the loan to Egypt. In addition to the fallout on the tourism industry and remittance flows from expatriate workers and lower Suez Canal receipts, it said that the pandemic had “resulted in financial market turbulence, a significant reversal of capital flows, and large reserves losses.”
The stand-by loan will help to maintain macroeconomic stability amid the heightened uncertainty and address selected critical structural reforms, it said. The IMF said that pandemic-induced tourism losses would be mostly shouldered by large net tourism importers, including Egypt, Costa Rica, Greece, Morocco, New Zealand, Portugal, Spain, Sri Lanka, Thailand, and Turkey.
According to the report, the tourism sector’s losses this year could mount to two per cent of GDP due to global travel restrictions. These projections are provided that global restrictions on travel are lifted next month, a scenario that might seem doubtful as the number of Covid-19 cases seems to be on the rise.
The findings of the report are similar to those of a June study by the National Planning Institute (NPI) in Egypt, which noted that under a best-case scenario Egypt’s tourism industry was expected to lose 73 per cent of its revenue in 2020 on the back of the coronavirus.
There should be a recovery beginning in the third quarter, with flights resuming in early July. However, the persistence of the pandemic would limit leisure travel and reduce overall revenues through the year to $3.45 billion, the NPI report said.
Tourism revenues during the third quarter of 2019-20, which extends from January to the end of March, are the most recent available from the Central Bank of Egypt (CBE) and came in at 11.2 per cent lower than the level of the same quarter last year, as flights were suspended at the end of March.
Tourism revenues hit a record high of $13.03 billion in 2019. They were expected to achieve a record of $15 billion in revenues this year, had it not been for the coronavirus.
Citing a survey by the World Tourism Organisation (WTO), the IMF expects the effects on tourism to persist to some extent in 2021 and beyond when demand for tourism recovers.
Remittances will also be hard hit, with the IMF external sector report warning of a 20 per cent or $110 billion drop in global flows of worker remittances this year, jeopardising economies relying on this source of hard currency like Egypt, Pakistan, Guatemala, and the Philippines.
Egypt is the fifth-highest recipient of remittances in the world, reaching $26.8 billion in 2019 and making up nearly 10 per cent of GDP, according to the Organisation for Economic Co-operation and Development (OECD).
Remittances increased by $1.7 billion to $ 7.9 billion during the first three months of 2020, but the OECD expects a decrease of $2.3 billion from April through to June 2020 due to the pandemic.
Remittances are vulnerable to the Covid-19 crisis as migrant workers are both more exposed to unemployment and wage losses, as they will be the first to go when things get worse in companies they are working for.
A large chunk of up to 80 per cent of Egypt’s five million expatriates work in the Arab countries, especially the Arab Gulf, which has been hard hit by both the decline in oil prices and the repercussions of the coronavirus.
A recent proposal to the Kuwaiti parliament to cut the number of migrant workers from 70 per cent to 30 per cent of the country’s population left thousands of Egyptians there in limbo. The Kuwaiti media has reported that up to 1.5 million expatriates could leave by the end of the year.
There are almost half a million Egyptians currently living in Kuwait.
Neighbouring Saudi Arabia had previously released a decree giving the green light to reduce salaries in the private sector by up to 40 per cent together with the possibility of terminating work contracts as a means to save costs during the pandemic.
This was immediately followed by large companies laying off thousands of expatriate workers.
According to the Egyptian Labour Abroad Division of the Cairo Chamber of Commerce, employment contracts for Egyptians abroad are characterised by a lack of long-term sustainability (most of them are annual), and they give the employer the upper hand. There is usually no mechanism protecting the rights of workers in the event of arbitrary, material, or moral damage.
Remittances are forecast to “only partially” rebound by five per cent in 2021, the IMF added.
Its report predicts that global trade will shrink by 12 per cent in 2020 in a scenario that can be likened to that witnessed during the global financial crisis in 2008. As the fastest shipping route between Asia and Europe, such a decline would badly affect Suez Canal receipts.
Revenues fell to $5.72 billion in the 2019/20 financial year from $5.75 billion the year before. Revenues fell by 9.6 per cent year-on-year in May alone due to the impact of the coronavirus on global trade movements, Osama Rabie, chairman of the Canal Authority, said in June.
The decline in tourism revenues and remittances, main sources of hard currency, have weighed on Egypt’s foreign reserves, which have seen a decline over three consecutive months to reach $36 billion in May compared to $45.5 billion in February.
They edged up in June and July, thanks to the IMF loan and the return of foreign investments in treasury bills, to reach $41.2 billion.
*A version of this article appears in print in the 13 August, 2020 edition of Al-Ahram Weekly under headline: Foreign currency takes a hit