Egypt’s inclusion in the BRICS alliance of developing nations has sparked hopes of easing its shortage of foreign currency and attracting new investment.
However, analysts caution that while the invitation is a positive development, it may take time before any tangible benefits are realised.
The BRICS alliance, comprising Brazil, Russia, India, China, and South Africa, recently extended an invitation to Egypt and five other countries. Egypt promptly welcomed the offer, with President Abdel-Fattah al-Sisi expressing his appreciation and highlighting the potential for economic cooperation.
Egypt has been grappling with an economic crisis in recent years, exacerbated by factors such as the coronavirus pandemic and Russia’s invasion of Ukraine. The country’s currency has depreciated significantly, experiencing a 50% decline over the past 18 months.
Inflation soared to a record 36.5% in July, and the burden of external debt repayments has intensified due to excessive borrowing over the past eight years. The dollar crunch has even forced Egypt to defer payments for wheat imports, further straining its financial situation.
One of the key advantages of Egypt’s entry into BRICS lies in the bloc’s aim to reduce dollar transactions. This endeavour is expected to alleviate the foreign currency pressure faced by Egypt, offering some respite to its struggling economy.
Membership in the New Development Bank (NDB), an institution established by BRICS members in 2015, also holds promise. The NDB provides concessional funding for development projects, which could contribute to Egypt’s economic revitalization.
In the past, Egypt has explored the possibility of conducting trade in currencies other than the dollar. Discussions have been held with China, India, and Russia regarding the use of their currencies for commodities.
While no concrete agreement has been reached thus far, Egypt’s entry into BRICS may provide a platform for further collaboration and negotiations in this area. Conducting trade in local currencies could reduce the dependency on the dollar and enhance economic stability.
However, it is important to acknowledge that attracting foreign investment is a complex process that goes beyond mere association with a prestigious bloc. Egypt will need to address several challenges in order to attract substantial foreign investment. These challenges include improving its business climate, enhancing regulatory frameworks, and addressing bureaucratic hurdles.
Investors also consider factors such as political stability, legal protections, and the availability of skilled labour when deciding where to invest their capital. Egypt needs to demonstrate a commitment to these factors to make itself an attractive investment destination.
According to Monica Malik of ADCB, Egypt’s inclusion in BRICS membership could potentially attract more investment. While the immediate impact may be limited, it has the potential to strengthen relationships with key emerging market economies.
Charles Robertson, head of macro strategy at FIM Partners, believes that gaining access to affordable funding from the New Development Bank (NDB) would benefit Egypt and it makes sense for them to maintain close ties with China, a potential source of significant foreign direct investment in Egyptian manufacturing. Robertson stated, “Egypt has two pressing needs – FDI and a reduced debt burden – and BRICS membership can address both.”
In addition to Egypt, the BRICS group has also invited Saudi Arabia, Iran, Ethiopia, Argentina, and the United Arab Emirates to join. Robertson added that whether it is Saudi Arabia or the UAE injecting capital into this bank or Egypt drawing on that capital, this expansion is a positive addition to the global financial architecture.
James Swanston of Capital Economics suggests that while the near-term economic effects of BRICS expansion are unlikely to be significant, there may be longer-term implications for trade and economic growth due to possible shifts in geopolitical alignment.