x Abu Dhabi, UAESunday 23 July 2017

Gulf missing window of opportunity to lead way in Egypt

The biggest single foreign investor in Egypt in 2011 wasn't the US, China or the GCC - it was Britain, and by some margin.

Above, a cotton factory in Egypt. Frank Kane argues that the GCC should invest in the nation's economy. Shawn Baldwin/Bloomberg
Above, a cotton factory in Egypt. Frank Kane argues that the GCC should invest in the nation's economy. Shawn Baldwin/Bloomberg

It came as a something of a surprise to learn recently that the biggest source of foreign direct investment into Egypt was not the oil-rich countries of the GCC, nor the resource-hungry Chinese, not even the wealthy "capitalist imperialists" of the United States.

The biggest single foreign investor in Egypt in 2011 was old, humbled, austerity-laden Britain, and by some way.

Figures from the London consultancy Capital Economics showed nearly 45 per cent of Egyptian foreign direct investment (FDI) came from Britain, way ahead of the next-largest investor, the rest of the European Union.

GCC countries invested about 10 per cent of the total, slightly more than the US. China must be a big component of the "others" at about 10 per cent, but not enough to register as a separate item.

This was surprising on two levels. First, that after decades of colonialism, occupation and outright war (Suez in 1956), Britain was still sufficiently impressed by the attractions of the Arab world's most populous country to invest there big time.

The Cairo-based Egyptian-British Chamber of Commerce enthuses on the benefits of the country, even if it does warn on possible "stagnant" FDI as a result of the Arab Spring. It gives a cumulative figure of some £22 billion (Dh123.64bn at current conversion rates) invested there by 2008, by such British corporate giants as BP, Cadbury, HSBC and Vodafone.

All FDI has fallen since the events of January 2011, but apparently the Brits have been less deterred from putting money into the country than others.

The second reason this is unexpected is that the contribution from the GCC is so low, but this really just hammers home a truth that has become increasingly obvious since the Arab Spring: despite geographical proximity and cultural affinities, the Middle East and North Africa (Mena) region remains largely a construct of the economists' minds, rather than a real trading and commercial bloc.

Of course, the essential difference between the "Me" and the "na" parts of the acronym are that one exports oil, while the other imports it. That is complicated by the presence of Libya as a major exporter in North Africa, and the relatively small oil exports of, for example, Dubai and Bahrain.

But generally speaking, it holds true: the wealthy GCC exports oil to the poorer countries of North Africa and the Levant.

However, other trade links are modest. On average, says Capital Economics, exports from the resource-poor countries, like Egypt, are equivalent to just 1.6 per cent of GDP. For these countries, most trade is with Europe, which does not bode well for them as the euro-zone crisis rumbles on.

What Egypt, Morocco and Tunisia do export to the Arabian Gulf countries consists largely of agricultural products and textiles, rather than high-margin machinery, vehicles and other consumer goods.

Tourism exports, a mainstay of the pre-Arab Spring years, is falling and looks likely to continue to do so.

Investment from the Gulf into the oil-importing countries would have the dual benefit of expanding their productive capacity and therefore boosting growth and employment.

In Egypt, it could help to stave off the major balance of payments crisis that has been the main focus of stalled talks with the IMF this week.

But real, sustained investment is still sadly lacking from the resource-rich, comparatively high-growth countries of the GCC.

There has been aid, notably from Qatar and also some from Saudi Arabia and the UAE. Aid and bilateral loans have been a force for good, especially in Egypt, which badly needed help to tide it over short-term financial pressures.

But aid and loans do not spark sustainable economic growth, and are likely (as the euro zone has discovered) to heighten the risk of "moral hazard" in the recipient countries.

There were calls early on in the Arab Spring for an Arab Bank for Reconstruction and Development to oversee a long-term and properly funded strategy for the Mena region, but they came to nothing.

Maybe it is time policymakers revisited the idea.