Making a case for Egypt’s immediate economic needs

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CAIRO: In recent weeks, Egypt’s Finance Minister Hazem El-Beblawi has indicated that the country is open to restarting discussions on a possible loan from the International Monetary Fund, to ease worsening liquidity issues.

However, the IMF is yet to receive an official request from Egypt, Andreas Bauer, division chief of the fund’s Middle East and Central Asia department, told Daily News Egypt.

“We have not received any requests so far, this is up for Egyptians to decide. …We will learn more about that [during the visit],” he added.

Looking at the region, the IMF has said it foresees possible request of an estimated $35 billion in assistance.

During his Egypt visit, Bauer participated in a seminar on Tuesday, along with panelists El-Beblawi and Social Solidarity Minister Gouda Abdel Khaleq, discussing “Prospects and challenges for the global economy and the MENA region.” The panel was moderated by Ahmed Galal, managing director of the Economic Research Forum.

The wide-ranging debate juxtaposed the short-term needs with the long-term challenges facing Egypt, and ways to address both.

While El-Beblawi is concerned with budget support and dealing with immediate liquidity issues, Abdel Khaleq reiterated the need for policies to bring about social justice. While not mutually exclusive, the latter is clearly a longer-term goal, perhaps highlighting the ministers’ differing mandates as well as underscoring the parallel debates ongoing in Egypt at the moment.

What remains to be seen, however, is how these points will be reconciled, and how soon action can be taken on either front.

One way to meet short-term needs and combat an impending liquidity crisis, El-Beblawi argues, is by resorting to foreign borrowing.

“We have a liquidity problem…and we need a quick cure,” El-Beblawi said.

Countering some public opinion that questions the core of Egypt’s economy, he said the issue at hand is one of financial pressure, likening it to any company or factory that fails due lack of capital.

“Egypt is not in a crisis, some sectors are actually performing better while some have been mildly affected. …Yes tourism has decreased but at the same time, exports [both oil and non-oil] have increased,” he added.

The reason why foreign reserves have declined — “naturally and inevitably” — by around $10-12 billion, he said, is directly tied to the outflow of foreign direct investment, which Egypt has come to rely on over the years.

FDI was at $13.5 billion before the global economic crisis, and after taking a hit, climbed back up to $8.6 billion before the January 25 uprising.

He also attributed the drop in FDI to renewed turmoil in the global economic climate as well as uncertainty from locals and foreigners surrounding developments in Egypt.

Reiterating the immediate financing needs, El-Beblawi said that domestic borrowing has already surpassed limits. He argues that the more the government borrows domestically, the less banks are likely to finance the local economy, since lending to the government is less risky.

In other words, he said, “they [banks] get lazy” and this could eventually threaten the country’s financial system.

Moreover, “financing the budget is very important, and it comes at a lower cost when it’s from abroad.”

“There will come a time when we have to bite the bullet,” he said referring to accepting foreign loans, adding that what’s worse is to ignore the situation.

Another of his key concerns is maintaining the stability of the Egyptian pound. “A pre-requisite [to investment] is to ensure fiscal and monetary stability. …If the pound falls drastically, it is a negative indication of economic conditions.”

Despite all of these factors, however, details regarding negotiations of the IMF loan, which are reportedly ongoing, were not given. But the door is clearly open now after former finance minister Samir Radwan previously had to turn down the IMF offer.

The IMF’s Bauer told DNE, “We’re just here to hear how we can help. It’s important not to rush — the ministers are putting up an important debate. You have challenges in the short term and in a way you have to cushion this transition to provide some buffer, some additional resistance that can retain a stable economy…and help restart growth.”

“Today the economy is held down by sectors that depend a lot on confidence: tourism, for example, and investment. It’s important for the government to spin out a very coherent strategy moving forward when liquidity is short, and to what extent domestic funding or foreign funding — which can come from different players — can help.”

The former minister’s decision, however, was welcomed at the time by a significant segment of the population that is against borrowing from institutions such as the IMF or the World Bank. They argue against the lack of transparency around conditions tied to these loans. Still, some economists and experts make the case that this financing helps restore investor confidence, is inevitable, and comes at a lower cost.

Asked how the IMF views this negative public sentiment in Egypt towards the institution, Bauer said, “There are, unfortunately, a lot of urban myths about what the IMF does…the IMF is an institution that comes into play when countries are in difficulties and when difficult decisions have to be taken.

“This is why the IMF is more controversial than other institutions that provide development loans…we come in when countries really need help.”

Debating subsidies

Another hot topic was restructuring subsidies, an issue that has been consistently on and off the table for years.

“Subsidies make up 33 percent of Egypt’s spending, two-thirds of which go to oil,” El-Beblawi said, adding that “the cancer in the budget is subsidies.”

There is consensus on gradually lifting subsidies namely from energy-intensive industries, a move that began over the past few years but was never enforced in full.

In effect, Egypt ends up “subsidizing the profit of industries,” El-Beblawi said, since their energy is subsidized but they end up selling products at close to international levels.

“We are looking for things that do not affect consumers,” he added.

Abdel Khaleq concurred, and added that a plan for using coupons to buy subsidized butane gas could save the government LE 3 billion. He criticized media for reporting that the plan was scratched when in fact it was said in the beginning that it would be implemented by year’s end.

All agree that the issue of food subsidies, however, is clearly sensitive on a social scale.

Abdel Khaleq did say that bread subsidies need to be reviewed so that the end-product is subsidized, not the raw material delivered to bakeries.

El-Beblawi said that cracking down on tax evasion is more vital than merely increasing taxes, which he described as “window dressing.” The same applies to customs tariffs. Tax on shisha tobacco, for example, if paid in full, can bring in LE 3-4 billion.

“I think this discussion is going in the right direction, as well as the discussion on how to strengthen social safety nets, what the role of subsidies might be. The discussion has evolved over the last months,” Bauer said.

On social justice, Abdel Khaleq said it is not begin addressed properly. “We need to create fiscal space to focus on internal advantages,” he said, adding that Egypt’s trade, tax and economic policy need to be reviewed.

He also said the nature of Egypt’s economy needs to be defined, raising several questions: “Is it a free market? Others say it must adhere to social justice. Some say free market brings social justice. The Occupy Wall Street movement has shown that capitalism in its current form is flawed.”

While the answers are still unclear, he stressed, “We cannot deal the same way now as we have in the past.”

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