Egypt seeks to attract Arab investments with new sovereign wealth fund

Egypt has $44 billion in foreign currency reserves at the central bank, but this amount of money is partly made up of Arab deposits and loans.
Sunday 27/05/2018
Major leap. Egypt’s Finance Minister Amr al-Garhi attends a news conference in Cairo.                                                                              (Reuters)
Major leap. Egypt’s Finance Minister Amr al-Garhi attends a news conference in Cairo. (Reuters)

CAIRO - Egypt’s first sovereign wealth fund will help the country diversify investments, shield the economy against unexpected fluctuations and open the door for investment partnerships with other Arab states that have financial surpluses, the government says.

Egyptian Finance Minister Amr al-Garhi hailed the new fund and its potential effects.

“The creation of the fund is a major investment leap,” Garhi said. “It is an important mechanism for perking up the investment climate and making business with investment partners.”

The government inaugurated the fund in mid-April with the aim of managing unexploited state assets to bring additional revenue to the state treasury. The $11.3 billion fund is small compared to funds managed by countries like the United Arab Emirates, which in 2017 boasted a fund of $828 billion, but the Egyptian government said it is a good first step for future investments and financial gains.

One of the fund’s major aims is to allow the Egyptian government to diversify investments, especially in sectors of the economy that do not traditionally attract private sector investment.

Infrastructure projects, economists said, and water and electricity plants, for example, do not attract the private sector, even though they are important to the general public.

“This is where the fund proves to be extremely important, among other things,” said Rashad Abdo, an economics professor at Helwan University. “It enables the government to set aside investments for sectors neglected by the private sector.”

The creation of the fund is part of broader efforts by the Egyptian government to secure different sources of income. Egypt previously relied on traditional sectors of the economy for income, particularly the tourism sector, which was hit hard following the 2011 revolution.

In late 2015, the bombing of a Russian passenger plane over Sinai led almost all Western countries to suspend direct flights to Egypt. While tourism numbers have slowly been increasing over the last two years, boosted by the restoration of direct flights to Cairo from Moscow in April, the vulnerabilities of Egypt’s tourism sector have been exposed.

Egypt’s plans to serve as a major trade hub also failed to bear fruit in the short term. In the second half of 2014 and the first half of 2015, Egypt spent billions of dollars to upgrade the Suez Canal by digging a parallel channel to allow two-way traffic for the first time since the digging of the canal almost 150 years ago.

However, the recession that hit the world economy a short time later meant that global trade was down and an expected increase in usage of the canal failed to materialise.

A sovereign wealth fund, economists said, can shield the national economy against unexpected fluctuations and secure revenues for the state treasury, especially if its investments are managed properly.

“The fund is a non-traditional way to generate revenues and solve some of our economic problems,” said Egyptian economist Hany Tawfiq, who has extensive experience in private equity and venture capital firms. “Fund managers will create these revenues by skilfully managing unexploited assets.”

Tawfiq and other economists refer to the presence of tens of billions of dollars in unexploited assets nationwide. They include massive plots of land in desirable locations, with thousands of buildings, some of them overlooking the Nile, as well as beaches and other tourist infrastructure that are crying out for investment.

Nonetheless, one of the challenges that will face those putting the fund to work, economists say, is the lack of financial surpluses either at the central bank or in government coffers.

Garhi did not mention where the $11.3 billion in the fund will come from, but economists said it would most likely manage the value of unexploited assets.

Egypt has $44 billion in foreign currency reserves at the central bank, but this amount of money is partly made up of Arab deposits and loans. Egypt also needs the reserves to secure the needs of its people, such as food, from international markets for several months to come.

“Sovereign funds need money to turn into an effective tool that serves economic development,” said Ehab al-Dessouki, an economics professor at the state-run Sadat Academy for Management Sciences. “However, ongoing financial constraints can derail the new fund and prevent it from functioning effectively.”

Garhi said the government would solve this problem by inviting friendly Arab states to invest some of the money available in their sovereign wealth funds in the new Egyptian fund.

Saudi Arabia is reportedly planning to invest in the fund. Garhi said Egypt would also propose the idea to the United Arab Emirates, another close ally.

“The fund is also open for investments from the local and foreign private sectors,” Garhi said. “The private sector will be a main partner in this fund.”