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Why credit cannot bridge the spending gap

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By Tarek Elhousseiny

As the Egyptian economy slowly starts getting back on track, there have been discussions in the business community, both here and abroad, about the country’s vast potential across all sectors. The economy is still expected to register a growth rate of 2 percent in 2011, according to the Ministry of Finance as reported in April.

A recent report published by HSBC stated that with a steady growth rate of 4 percent over the next 40 years, Egypt has the potential to emerge as the largest economy in the Middle East by the year 2050, surpassing Saudi Arabia. Given the impressive growth of the Egyptian economy over the last few years, this optimistic outlook seems plausible, as long as the necessary reforms and restructuring of key industries are put in place.

It’s clear that much must be done, by both the public and private sector, before the real business and economic benefits of the recent events can even begin to be realized. The banking sector will play a crucial role in the development of the economy and payment cards in particular are the engine that can help drive that development.

Moody’s Economy.com recently completed a study that measured the economic impact of the shift from cash to digital currency in 51 economies worldwide. Credit and debit card usage delivered an additional $1.1 trillion to the global economy cumulatively between 2003 and 2008, representing 0.5 percent increase in total annual GDP.

The study claims that the use of digital currency expands consumer markets, making it easier for consumers to make purchases; digital currency also increases access to banking systems, and creates more macroeconomic efficiencies. In Egypt, a 10 percent increase in card penetration would yield a 0.04 percent growth rate in GDP. In theory, such an increase in card penetration would have a significant macroeconomic effect on a developing nation like Egypt.

It would demand further development of the payment card industry infrastructure and more options for the banked population, while drawing in the remaining, largely unbanked population (over 65 percent of the population). Conceptually, we would also require increased access to liquidity which would facilitate the process of receiving lines of credit (LOCs) or consumer loans.

Meanwhile, consumer spending would naturally increase, creating demand and production of goods, which creates more jobs, thus providing more people with steady incomes to complete the natural consumer cycle.

Egyptian consumers have traditionally trended more towards credit cards rather than debit or prepaid cards. Given recent events, some banks have made credit issuance more stringent for a number of reasons that stem from the current political and, by proxy, economic uncertainty. There have been layoffs, income reduction and ambiguity about the future of some corporations, which have all led to a natural decline in consumer spending and general wariness about the market.

Furthermore, although banks were initially more strict and cautious about issuing any form of credit or loan immediately following the revolution, the situation seems to be easing.

In addition, marketing investments have either been pushed forward to the latter part of 2011 or canceled altogether. This leads to a ripple effect. Cutbacks in marketing means less advertising; little advertising means a decrease in product promotions; less product promotions could lead to a potential decline in sales which means shops will see a decrease in revenue.

If the collective opinion in the banking sector is to control or stop LOCs for all the valid reasons, including credit cards, we should account for the gap it may create. One of the ways to bridge this gap is to encourage debit card usage through expanding acceptance levels with local merchants and encouraging salary payments to be made by direct debit transfer. This is not to say that there should not be tighter controls on LOCs, but this is an opportunity to convert cash withdrawals on ATMs — which currently comprise 94 percent of debit transaction volumes in Egypt — to payments at merchants through points-of-sale.

Credit is what consumers want. They want a readily available LOC to be used whenever they want. It’s their first choice. In light of recent developments, it makes sense to accelerate debit growth as debit may very well be the solution to move money around within the banking system in a very cost effective and transparent fashion.

Tarek Elhousseiny is Visa’s General Manager for North and West Africa. This article was written exclusively for Daily News Egypt.

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