A project on

“A comparative analysis on the impact of the

distribution of balance of payments between
developed and developing countries”

INDEX

SERIAL NO. TITLE PAGE NO.

1. CONTRIBUTION 3

2. ABSTRACT 4

3. INTRODUCTION 5–6

4. LITERATURE REVIEW 7

5. RELEVANCE 8

6. OBJECTIVE 8

7. FINDINGS 9

8. ANALYSIS 10

9. CONCLUSION 11

10. BIBLIOGRAPHY 12 – 13
Page 2 of 12
 ABSTRACT
Developed countries operate under a balance deficit while maintaining superfluous
magnitudes of direct foreign investments. In retrospect, developing countries have a balance
surplus and tend to display constant growth over periods of time. The dominant explanation
for the cause of foreign investment is geo-political and cultural issues. A key note in
economic papers being the rise of nominal growth over real foundation. This paper aims to
delve deeper into the balance of payment accounts and dissect piece by piece the nature of
investment and the impacts they create over the economy. It has been observed that there is a
massive difference in the weight of current and capital accounts of developing and developed
countries. With the latter being focused on the capital account. Further analysis, displays that
a capital account foundation creates stability in a nation’s economy and distances it from the
massive impacts of supply shocks. To conclude, while a balance surplus or deficit does
display a nation’s situation on an international marker, it is only when individual components
and other indicators have been taken into consideration.

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 INTRODUCTION
‘Balance of payments, or payments of one currency to another, are the differences between
countries' international payments or transfers of goods, services, and cash transfers. If the
payments of a nation exceed the purchases of a nation, the balance of payments is stated to be
in surplus. If they do not, the balance of payments is in deficit. For an accounting year, a
change in the balance of payments can occur at any time, including within a single
accounting period.’

‘The Balance of Payments system evolved after World War I in response to the need to
monitor and balance the flow of goods and services between countries. The original purpose
of the Balance of Payments calculations was to provide a transparent account of the flow of
goods and services between countries. International Monetary Fund (IMF) data now shows
that the balance of payments is essential for the following reasons: it provides a global
measure of the level of the international payments, measures the exchange rate between two
countries, measures the flow of goods and services from one country to another, and
measures the flow of hard currency (dollars) to countries.’

‘The Balance of Payments of the United States measures the flow of goods and services
between the United States and the rest of the world. A surplus or deficit indicates that the
United States is receiving payments or making purchases above its obligations. The current
account balance tends to be negative in the United States because they import more than
export. For example, in 2015, the current account balance was $478 billion (or about 4% of
GDP). This means that, on average, there was $478 billion worth of goods and services that
the country received from other people and nations and did not pay for. Since they spend
more than they earn, their current account surplus is negative.’

‘The Egyptian economy consists mainly of the following parts: manufacturing, construction,
energy, and agriculture. Egypt's balance of payments in 2017 was positive $2.3 billion, or
2.7% of GDP. This means that they earned more in international payments than they spent, so
they had a surplus. This is because Egypt's exports were more than its imports. Furthermore,
Egypt's balance of payments flipped to a surplus of USD 1.9 billion in the state fiscal year
ending 30 June 2021, compared with a deficit of USD 8.6 billion in the previous fiscal year,
when the early days of the covid-19 pandemic wiped out tourism and slowed global trade.’

‘Saudi Arabia is one of the world's largest economies and a major oil producer. The country
has one of the highest per capita GDP's in the world. It is also a member of the Gulf
Cooperation Council (GCC), the Organization of Islamic Cooperation (OIC), and the United
Nations (UN). Saudi Arabia is a major regional and international actor.
The balance of payments in Saudi Arabia in the fourth quarter of 2020 was in surplus, the
first time since the global financial crisis. The result was significantly better than the deficit
of 594.9 million in the same quarter the year before. The surplus was driven by a 3.6%
increase in exports, which according to government data, was the highest in five years. The
current account surplus was also a significant improvement over the 2.3 billion surplus
recorded in the previous quarter.’

‘Following Egypt's independence from protectorate status under the United Kingdom in
1922, the United States established diplomatic relations with the country. The US and Egypt
have a strong partnership based on shared interests in Middle East peace and stability,
Page 4 of 12
economic opportunity, and regional security. Promoting a stable, prosperous Egypt in which
the government protects its citizens' basic rights and fulfils the Egyptian people's aspirations
will remain a key goal of US policy.’

‘In 2019, total two-way goods trade between the United States and Egypt was $8.6 billion.
Wheat and corn, mineral fuel and oil, machinery, aircraft, and iron and steel products are
among the products exported by the United States to Egypt. Egyptian imports to the United
States include clothing, natural gas and oil, fertilizers, textiles, and agricultural products. The
United States waives duties on Egyptian imports if the value includes 10.5 percent Israeli
content under the Qualifying Industrial Zone agreement; this programme promotes stronger
ties between the region's peace partners. In 1982, Egypt and the United States signed a
Bilateral Investment Treaty to encourage and facilitate bilateral investment. Egypt and the
United States have signed a trade and investment framework agreement, paving the way for
increased trade and investment flows.’

‘Following the 2013 military coup in Egypt that deposed President Mohamed Morsi, a
Muslim Brotherhood member, Saudi Arabia, the United Arab Emirates, and Kuwait
showered Egypt with approximately $12 billion in economic assistance, with total estimates
of $30 billion through 2016. This generosity was intended not only to support what these
countries hoped would be a return to the status quo ante—that is, the restoration of a military-
backed authoritarian regime opposed to the democratic contagion spawned by the Arab
Spring—but also to support a common ideological front with the Muslim Brotherhood.’

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 LITERATURE REVIEW
Author Title Criticism Findings
Mohamed A. The Factors It does not place a This research helps us to know
Elshehawy, Affecting Egypt’s strong emphasis on how certain economic factors
Hongfang Shen & Exports: how the influence Egyptian exports and
Rania A. Ahmed Evidence from government can how the government can take
(2014) the Gravity take these factors these factors into consideration.
Model Analysis into consideration
and the sample size
was also too small
for the whole
economy.
Dirar Abdul-Hamid A Study of It is not diversified This paper gives us an insight on
Al-Toum Al-Otaibi, Financial for application into how short-term and long-term
Hossam Hosney Development different economies variables can help Saudi Arabia
Abdul Aziz & Impact on as different and Egypt become financially
Shady Mohamed Economic economies will developed.
Shawky Abdel- Growth: A have different
mawgou (2021) Comparison factors that will
Between Egypt help them in
and Saudi Arabia economic growth.
David Kenner & The US-Saudi This paper did not This paper helps us to know this
Kameal Al-Ahmad Economic take the cultural economic tie is more than just
Relationship: differences into for oil and arm deals. It helps us
More than Arms consideration while to know how Saudi Arabia can
and Oil (2021) talking about the also benefit from their relation
student exchanges United States.
as it will play a big
part.
Bessma Momani Promoting This paper does not Helped to understand how the
(2003) Economic tell us on how USA concept of liberalization was
Liberalization in can benefit more achieved by privately investing
Egypt: from their economic in Egypt and not by giving aid.
From U.S. relation with Egypt Also, helped us to know how
Foreign Aid to and how these economy of Egypt has emerged
Trade and economic ties can in the past decades.
Investment be more fruitful in
the coming future.
Amr Adly (2019) Will Saudi- This paper does not The findings of this paper tell us
Egyptian specify what will be about their geological location is
Geopolitical the future of this tie helping both the countries to
Partnership Push in case the strengthen their economic ties
for Economic dependency of and how this economic relation
Integration? either of the country will benefit the Middle East
Increasing shifts to another region as a whole. It also tells us
interdependencie country. how their cultural differences
s will help them to come forward

Page 6 of 12
 and make a great alliance.

RELEVANCE
The research into multiple bilateral papers as well as a peek into the geographical and
ideological nature of the Egyptian status has made us keenly aware about the ramifications of
perspectives in the development of economy and the nature of international trade. Egypt’s
position as a geographical center to trans-eurafricasian hub as well as a close neighbor to
middle-eastern interest have made it a strategic beneficiary of American aid. Its ideological
and cultural outlook as a part of the Muslim brotherhood has gained it significant backing via
middle-eastern channels. Both these sides vie to influence political shifts to the country via
the backing to its economy. As such its balance of payment is expected to be influenced via
the debts and export or import surplus over the years. This paper aims to take a deeper look
into the nature of the Egyptian economy, its real situation and the effect of massive economic
gratification by world superpowers over a period of a few decades.

OBJECTIVE
The objective of the research paper is to analyze the relations between the balance of
payments of the united states of America and Saudi Arabia with Egypt giving due
consideration to the geopolitical and cultural issues surrounding these countries. We aim to
gain deeper understanding about the fiscal difference that occurs due to the paradigm shifts
taking place due to regional differences. Furthermore, we look forward to dissect interesting
tidbits and the effects of the coronavirus supply shock event on these countries.

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 FINDINGS

Graph 1.0 Balance of Payments USA

Graph 2.0 Balance of Payments Saudi Arabia

Graph 3.0 Balance of Payments Egypt

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 ANALYSIS
According to data gathered at a far glance it would seem that the US has a fiscal deficit when
compared to its contenders and as such it would make less sense for it to invest in Egyptian
interest compared to its Saudi counterpart.

However, on deeper examination, we understand that the US recently opted to a 125 million
dollar investment with 4 further similar investments lined up as close as November 2021.
This is to a further 40 billion dollars invested over the past few decades. Saudi Arabia too has
invested massively in the Egyptian economy with a portion of 27 billion dollars over 5000
investments. These investments however aren’t monetary investments. Most of these
investments are service and manufacturing investments. With various sprinkles into
freshwater services and healthcare industry of the country. As such when looking at current
accounts of the country it appears that the Egyptian economy is booming despite the
coronavirus pandemic and the larger countries investments make less sense as their own
economies suffer.

Yet it is looking at percentage change between quarters that the true image appears. Egypt
went through a period of decline 6000k USD during the coronavirus period. This is a 600%
decline to an economy that had been growing for more than a decade. The United States on
the other hand went through a meager decline of less than 40 percent and then again began a
continuous upward incline. A similar shift in the Saudi economy took place with a decline of
less than 200 percent followed by a continuous incline. This displays that the balance of
payment formation that is shown in the graphs for Egypt is actually due to current account
shifts, wherein the transfer of payments plays a massive difference leading to the massive
changes in economic growth. While, the United States despite its deficit has a much sturdier
base in the form of a strong capital account. Hence, shifts in current account due to shock
pandemics don’t create massive deflation.

This relation also answers our second observation as to the nature of investments into Egypt.
Egypt has a weak capital account with multiple assets owned by foreign investors such as the
US and Saudi as well as income through necessary services such as water management and
transport of essential goods going to foreign reimbursement and management. These create a
situation where Egypt’s rising economy is actually built on a weak foundation of forced
exports and imports leading to further influence by its foreign counterparts. The Egyptian
government too has noticed this occurrence and has over periods of time tried to create
capital assets for long term financial stability. However, if the current situation is to be
believed there is still much to be achieved.

Page 9 of 12
 CONCLUSION
Through this assignment we have observed that what appears to be a sturdy balance of
payment may actually not be so and it is important to view the components that make up the
payment to gain deeper understanding of the real situation as compared to the nominal one.
We also observed that economies behave differently during times of strife and that an
economies real strength is displayed during them. Herewith, economies with stronger capital
accounts tend to stand greater foundational integrity and don’t suffer massive paradigm
shifts. We learnt that foreign investments when used correctly can be a massive boon to an
economy may not be the same if an over dependency to them is enforced.

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 BIBLIOGRAPHY
 Momani, Bessma. (2003). Promoting economic liberalization in Egypt: From US
foreign aid to trade and investment. Middle East Review of International Affairs. 7.

 Al-Otaibi, D. A. H. A. T., Abdul Aziz, H. H., & Abdel-mawgoud, S. M. S. (2021). A

Study of Financial Development Impact on Economic Growth: A Comparison

Between Egypt and Saudi Arabia. Research in World Economy, 12(4), 94.

https://doi.org/10.5430/rwe.v12n4p94

 Elshehawy, M. A., Shen, H., & Ahmed, R. A. (2014). The Factors Affecting Egypt’s

Exports: Evidence from the Gravity Model Analysis. Open Journal of Social

Sciences, 02(11), 138–148. https://doi.org/10.4236/jss.2014.211020

 Kenner, D., & Al-Ahmad, K. (2021). The US-Saudi Economic Relationship: More

than Arms and Oil. King Faisal Center for Research and Islamic Studies, 1–32.

https://www.kfcris.com/pdf/fa44c5224398c3228021a5ece35ec0706048ae8922d93.pd

 Amr Adly (2019). Will Saudi-Egyptian Geopolitical Partnership Push for Economic

Integration? Increasing Interdependencies. Robert Schuman Centre for Advanced

Studies

 https://www.ceicdata.com/en/egypt/balance-of-payments/bop-overall-balance

 https://mped.gov.eg/assets/uploads/NSDP.html

 https://www.economy.com/united-states/balance-of-payments-table-11-us-

international-tranctions-balances-balance-on-current-account-line-1-less-

line#:~:text=The%20U.S.%20Balance%20of%20Payments,current%20account%2C

%20the%20capital%20account%2C

 https://tradingeconomics.com/saudi-arabia/current-account

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 https://www.mof.gov.sa/en/NSDP/Pages/statistics.aspx

 https://www.state.gov/u-s-relations-with-egypt/

 https://eg.usembassy.gov/the-united-states-provides-125-million-in-economic-

assistance-to-egypt/

 https://egyptindependent.com/saudi-arabia-is-2nd-largest-investor-in-egypt-minister/

 https://www.arabnews.com/node/1259251/saudi-arabia

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