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Suez Canal to establish sovereign wealth fund

The Suez Canal Authority has unveiled a plan to establish a sovereign wealth fund to shield the canal from fluctuations in global trade and crises like COVID-19.
A file picture dated Nov. 24, 2008, shows an Egyptian patrol ship navigating the Suez Canal.

CAIRO — The Suez Canal Authority (SCA), the government body that operates the Suez Canal, plans to establish its own sovereign wealth fund for the first time.

The fund will be established to cushion the canal from possible crises and fluctuations in international trade, SCA officials say.

The SCA channels the revenues of the canal, including transit fees, to the Egyptian Ministry of Finance at the end of each month.

However, an SCA official revealed recently that it had already started setting aside some of the revenues so that it can establish the planned sovereign wealth fund.

Ibrahim Beshara, head of the SCA's financial administration, told the Committee on Budget and Planning in the House of Deputies (lower chamber of parliament) on Dec. 15 that the fund was proposed by Egypt's political leadership as part of its long-term strategy for the canal.

"The new fund will mean that the SCA will not send all the revenues of the canal to the Ministry of Finance as usual," he said.

The Egyptian Ministry of Justice has already approved a bill drafted by the SCA for the creation of the fund, according to Beshara.

The new bill is expected to be referred to the House of Deputies for debate soon, after getting approval from the Cabinet.

Deep under the possible funds are the numerous challenges the Suez Canal, the shortest shipping route between Europe and Asia, faced over the past period.

The masterminds of the fund are also apparently preparing for possible hardships ahead.

COVID-19 has taken its toll on international trade, including on the international maritime movement.

The SCA had to introduce cuts to canal tolls, especially for cruise ships, to overcome the pandemic-induced recession.

It also embarked on an aggressive marketing policy, including through incentives, to attract international maritime lines.

The incentives included for the first time exemptions from the value-added tax for transiting ships.

These measures, maritime transport specialists say, have saved the canal in the face of the pandemic.

"The SCA dealt with the effects of COVID-19 in a very professional manner," Mahmud Mitwali, a retired Egyptian navy admiral, told Al-Monitor. "This professional way helped the canal avoid the adverse effects of the pandemic."

The positive effects of these measures have already manifested themselves in canal revenues.

The canal's revenues until the first half of December from the beginning of 2021 amounted to $6 billion.

This is 13% higher than the revenues made by the canal in the corresponding period last year.

The SCA expects the revenues of the canal to increase by 11% in the first half of 2022. 

The International Monetary Fund also expects the revenues of the canal to reach $7.6 billion in the fiscal year 2024-2025.

The administration of Egyptian President Abdel Fattah al-Sisi invested billions of dollars in the past six years to maximize the canal's revenues and increase its competitive edge against alternative routes.

Efforts in this regard included the digging of a parallel channel to allow two-way traffic in the canal, for the first time since the canal's opening in 1869.

The SCA also started recently widening and deepening some sections in the southern part of the canal to allow for the passage of gigantic container ships.

The decision to widen and deepen the southern section of the canal came after a giant container ship blocked the canal for a whole week, costing the SCA tens of millions of dollars in tolls and delaying international trade.

If anything, the blockage of the canal taught its operators that unexpected and sudden emergencies can cost the canal a lot, specialists said.

"This is why canal officials and engineers work day and night to prevent this catastrophe from happening again," Mahfouz Taha, an independent maritime transport expert, told Al-Monitor. "Blockages of the canal, even if brief, can cost Egypt and the international economy a lot."

The Suez Canal matters for Egypt because it is a prime source of national income for the populous Arab country.

It also matters to the world, being at the center of international trade.

Around 12% of the world's trade passes through the canal from the Mediterranean to the Red Sea and vice versa.

The Egyptian waterway also receives around 30% of all the world's containers on the road to international markets from production points everywhere in the world.

However, the status of the canal has come under threat in recent years, including because of the emergence of some potential alternative routes.

The challenges also include some regional projects that can bypass the Suez Canal, thus potentially reducing the amount of trade transiting it.

This can all explain the eagerness of the Egyptian government to create the new fund.

Beshara said the money that would be set aside from the revenues of the canal would be classified as emergency funds until the new sovereign wealth fund is officially created.

The new fund, local economists say, will be instrumental in helping the SCA cope with some of the challenges facing this vital waterway.

These challenges, they add, also include the need for continually upgrading the canal so that it can deal with new generations of container ships and oil and LNG tankers.

Sisi had to turn to the members of the public to finance the digging of a parallel channel to the canal in 2014.

Local banks had to offer those offering their money for the project investment certificates with 15% and 16% in interest rates, which were unprecedented in Egypt's banking history.

"The Suez Canal is in continual need of upgrade so that it can deal with new generations of vessels," Ahmed al-Shami, a maritime transport adviser for the Egyptian Ministry of Transport, told Al-Monitor. "Returns from the upgrade, regardless of what it may cost, are usually high and reflect on the canal's capacity at the end of the day."