Exclusive | From Consumer Spending to Development: How Egypt Utilizes Remittances?

Updated 6/10/2024 1:15:00 PM
Exclusive | From Consumer Spending to Development: How Egypt Utilizes Remittances?

Arab Finance: Economists and migration experts have called on the government to better utilize remittances from Egyptians abroad while integrating them into the national economy through investment rather than predominantly consumer spending.

Remittances are Egypt’s largest source of foreign currency, surpassing tourism and Suez Canal revenues in the balance of payments (BoP).

Citing the latest official government report, Assistant Professor and Chair at the American University in Cairo’s (AUC) Department of Economics Dina Abdel Fattah highlighted that remittances from Egyptians overseas amounted to $24 billion in 2023, down from $31 billion in 2021.

Hence, she posed the question of whether this decline will carry on over the coming period or if remittances will increase or at least remain steady in 2024.

Expectations of Higher Remittances on Stable Exchange Rate

Remittance flows could increase if interest rates rose and the gap between the official exchange rate market and the parallel market is closed, Abdel Fattah told Arab Finance.

She stressed that the government must not treat Egyptians living abroad merely as ATMs dispensing cash in foreign currencies.

Instead, the government should encourage Egyptian immigrants and those working abroad to invest within Egypt, the economic expert added.

She also referred to the government’s attempts to encourage Egyptians to invest in the local market, focusing mainly on the real estate sector.

Additionally, she mentioned that the Egyptian Exchange (EGX) has made efforts to attract their investments in the stock market as well as in saving funds. However, the parallel market previously overshadowed any incentives for this kind of investment.

Egyptians abroad no longer believe in the stability of the Egyptian economy since they do not spot any crucial change that guarantees a return on their investment, Abdel Fattah explained, noting that this hinders the integration of such investments into the Egyptian market.

Also, the language used with Egyptians abroad reinforces the notion of them as cash dispensers who solely transfer remittances to Egypt and nothing more, she said.

Triple Win in Migration

In her exclusive statement to Arab Finance, Abdel Fattah also emphasized the importance of maintaining communication with Egyptians overseas and reinforcing the concept of mutual benefit for migrants, the homeland, and the destination country.

This concept, known as “triple win”, involves a full understanding of the challenges Egyptians abroad face in general, she explained.

Moreover, she recommended the necessity of addressing these challenges to strengthen the relationship between Egyptians abroad and their homeland. This would build on economic stability, which would lead to a potential increase in remittances.

Yet, she pointed out that most remittances are spent on consumption rather than saving or investment. With the ongoing difficult conditions of living and soaring prices, consumer spending of remittances persists.

Before benefiting from remittances, Egypt needs to benefit greatly from the expertise and skills of Egyptians abroad, Abdel Fattah highlighted. This would help build trust between migrants and Egypt, consequently boosting remittances and directing them toward savings and investment.

For his part, Ayman Zohry, President of the Egyptian Society for Migration Studies (EGYMIG), said that the elimination of the parallel market, the current unified exchange rate, and the stable banking system would contribute to ramping up remittances in the near future.

However, the issue remains that only 15% of these remittances are used in investment and saving, even if in low-intensity labor projects, Zohry highlighted.

Meanwhile, about 85% of remittances are spent on living expenses, including housing, food, and clothing, due to the high poverty rates in Egypt, he added.

Remittances are the largest contributor to Egypt's BoP, representing roughly 5x tourism revenue and double of revenue from the Suez Canal, he noted. Thus, integrating these remittances into the Egyptian economy is vital.

Remittances for SMEs

Furthermore, Zohry clarifies that many Egyptians overseas are unaware of Law No. 111 of 1983 which deals with their remittances as investments.

He also called for setting future programs to channel remittances from Egyptians abroad into small- and medium-sized enterprises (SMEs) that contribute to economic development.

In the past period, Egypt had two exchange rates, one in the official market and another in the parallel market. As a result, several remittances were directed towards the parallel market due to its higher exchange rate for foreign currencies. This trend was curbed after the Central Bank of Egypt (CBE) decided to liberalize the exchange rate and raise interest rates by around 6% at once.

Unifying the exchange rate is part of the CBE’s commitment to fulfilling its role in protecting the requirements of sustainable development and eliminating the accumulated demand for foreign currency.

According to the CBE, eliminating the parallel foreign exchange market would curb inflationary pressures subsiding with the unification of the exchange rate.

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