A country’s current account balance shows imports and exports of services and goods, net investment income, and direct transfers. A positive current account means that a country earns more than it spends. A negative account means it spends more than it earns.
Egypt’s current account balance in the second quarter of 2020-2021 not only showed a deficit, but it also registered a whopping 52 per cent increase in the deficit compared to its level a year earlier to reach $4.8 billion. This is the biggest deficit in the balance since the International Monetary Fund (IMF)-backed economic reform programme was introduced in 2016.
An increase in the deficit was expected on the back of the Covid-19 pandemic, translated into a 7.3 per cent increase in the trade deficit. The picture is even bleaker if the second quarter is compared to the previous quarter, where the jump in the trade deficit reaches 20 per cent.
The goods and services balance widened from a deficit of $7.7 billion in the second quarter of 2019-20 to $9.6 billion in the second quarter of 2020-2021.
“Goods exports were hit due to the tightening of Covid-19 restrictions across the world last year, causing them to contract at a faster pace than goods imports, and this was also exacerbated by weaker natural gas exports as lower prices prompted some firms to halt output,” James Swanston, a Middle East and North Africa (MENA) economist at the London-based research group Capital Economics told Al-Ahram Weekly.
Moreover, the ongoing real appreciation of the Egyptian pound against the US dollar, according to a research note prepared by Mona Bedeir, chief economist at local investment bank Prime Group, has added more pressure to export competitiveness and the sector’s ability to recover.
“Despite the 20 per cent decline in hydrocarbon imports, the hydrocarbon trade balance returned back into deficit due to a decline in hydrocarbon exports by 24 per cent,” Bedeir wrote.
Things are not better for the non-oil trade balance, with the trade deficit widening by 6.7 per cent. “The Covid-19-induced lockdown on Egypt’s main trade partners weighed on non-hydrocarbon exports,” Prime said.
The decline in global trade last year also weighed on Suez Canal revenues. Egypt earned $5.61 billion in revenues from the Suez Canal in 2020, down from $5.8 billion in 2019.
The trade in services — defined as payments and receipts for service-related activities such as financial services, transport services, management consultancy, and tourism — registered a surplus, but it was less than its level a year ago by 55 per cent.
A key factor, Swanston said, was that the tourism sector had ground to a halt throughout most of last year, and tourism receipts were down by over two-thirds compared to a year earlier in the second quarter of 2020-2021, registering only $987 million.
Egypt expects tourism to recover from Covid-19 losses, with revenues projected to come in at around $6-7 billion in 2021, according to a Ministry of Tourism and Antiquities official speaking to Reuters earlier this week.
Around 500,000 tourists visited Egypt in the first two months of 2021, generating $600-800 million in revenues.
The Tourism Ministry seems to be betting on the resumption of direct flights between Russia and Egypt’s Red Sea resorts next month after six years of suspension after a Russian plane crashed in Sinai in October 2015 killing all 224 people on board. The official said that one million Russian tourists were expected to visit Egypt this year.
One of the rare positive points in the current account in the second quarter was positive net capital inflows of $3.48 billion. This came despite the 80 per cent fall in foreign portfolio investment (FPI) to just $637 million by the end of the fiscal year 2019-20, as the rebound was faster than expected and the country started to receive capital inflows in June.
“High lucrative real and nominal yields, a stable currency, and a resilient economy in the face of the pandemic crisis helped Egypt restore foreign appetite for local debt instruments,” noted Prime.
Things were not as good on the foreign direct investment (FDI) level as global financial distress and muted demand are still affecting global investment inflows, according to Prime. FDI inflows to Egypt declined by 33 per cent to reach $1.8 billion.
Meanwhile, Egypt’s current account deficit, despite widening in the second quarter, still stands well at 3.8 per cent of GDP compared with other emerging markets.
Swanston added that the second half of the year might be better, as in other emerging markets current accounts tended to improve over the second half of 2020 as the height of the pandemic passed and external strains eased.
*A version of this article appears in print in the 28 April, 2021 edition of Al-Ahram Weekly