Over the last few years, Egypt has been enacting a vigorous economic reform program in hopes to overhaul its economy, attract tourists and investments, and, consequentially, fix the government’s balance of payments to avoid budget deficits that have become chronic to its economy over the past three decades.
One widely-unpopular step in the program, in addition to the devaluation of the Egyptian pound in late 2016, is gradually removing oil subsidies. This has a clearly positive impact on the government’s balance of payments, but as a country which imports much of its oil needs, its efforts in that regard remain subject to the global oil market. Any shock in oil prices could profoundly impact Egypt’s reform effort. In recent weeks, mounting tensions between the US and Iran have shed light on the vulnerability of oil supplies in the Gulf region.
But could price shocks in the oil market affect remittances inflow to Egypt?
It is noted that remittances constitute a valuable part of the Egyptian economy. Through the unrest and economic instability the country experienced post the 2011 revolution, foreign direct investments and tourism took a massive hit – both being crucial sources of foreign currency. Remittances, on the other hand, exponentially grew during the same period, jumping from $8.3 billion in 2009 to $18.3 billion in 2014, acting as a crucial stabilizing force for the Egyptian economy.
However, seeing that remittances inflow to Egypt mostly come from Egyptians living in oil-dependent GCC countries, at 70%, how vulnerable are they to potential shocks in the oil market?
A new study by Cairo University researcher Mohamed Samir Abdalla seeks to answer that question by testing the response of remittances inflows to oil price shocks in the period extending from 1960 to 2016, aiming to aid decision makers to design better policies and regulations to ensure the stability of remittances.
What is the relationship?
For starters, oil price shocks could go one of two ways – a shocking hike or a shocking decrease. A shocking hike is described as negative price oil price shock, while a decrease is a positive oil price shock.
As was revealed in the study, when oil prices increase, the inflow of remittances to Egypt has increased – on average by 13.76% over a period of three years. When they decrease, on the other hand, has decreased remittances to Egypt by an average of 5.79% within a year, as concluded by the study.
This could potentially be caused by better economic performance in GCC countries in the case of price increases, but Egypt remains a net importer of oil, meaning the actual impact on its economy could be a little more complicated to gauge.
It’s not that black and white
There are, as explained in the paper, two contradictory impacts on oil-importing economies in the case of price changes.
In Egypt, sharp oil increases positively raise the oil exporting bill. It also simultaneously increases the relative size of oil imports and remittances inflow, with the net impact mostly depending on the combined relative size of oil imports and remittances.
“Thus, although the positive association between oil price increases and remittances inflows to Egypt, it may be the case that the net impact of oil price increases on the Egyptian economy is negative at least in the short term,” the paper highlights.
Add that to lower remittances, and the situation could quickly present itself as a major obstacle to economic reform. What should be done to avoid such a scenario?
“Egypt can benefit from the positive effect of remittances. That is by considering remittances inflows as an alternative that offsets the loss of foreign currency and may mitigate oil costs in the public budget due to oil price increases,” the paper explains.
The paper carries on to suggest important steps to addressing such a scenario, namely increasing the number of Egyptian migrants to oil-exporting countries, promoting the financial sector, and lowering remittances’ transaction costs to increase inflow.