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Regional support braces Egypt while it works toward fiscal stability

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Strong support from regional neighbours has helped buttress reserves, and GDP growth should tick significantly upwards next year, but fiscal health nonetheless represents a sticky challenge for whoever wins the forthcoming elections by next spring: traditional revenue sources such as tourism, taxation, exports and investments have declined, while government expenditures in the form of public sector wages and subsidies for both energy and food continued to expand.

While Egypt has a number of appealing long-term fundamentals – including a large and growing population, broad export profile, strong manufacturing base, natural resources and huge potential tourism revenues – the uncertainty over the country’s stability, economic indicators and broader policies has noticeably slowed growth and production over 2013.

Strong support from regional neighbours has helped buttress reserves, and GDP growth should tick significantly upwards next year, but fiscal health nonetheless represents a sticky challenge for whoever wins the forthcoming elections by next spring: traditional revenue sources such as tourism, taxation, exports and investments have declined, while government expenditures in the form of public sector wages and subsidies for both energy and food continued to expand.

The divergent trends are in part a result of the headline slowdown. Real GDP growth has declined from 7.2% in 2008 to 2.2% in 2012, while the balances on the current account have fallen from 2.1% of GDP in 2007 to -3.1% in 2012, according to the IMF’s World Economic Outlook, published in 2013.

Aid from regional supporters

Against this backdrop, the focus of successive administrations since 2011 has been on addressing the nation’s short-term financing needs. In this regard, Egypt has met with considerable success in attracting funds from regional supporters. Over the past year, the nation secured $13bn in aid from Qatar ($8bn), Libya ($2bn), Turkey ($2bn) and Saudi Arabia ($1bn) in the form of deposits to the central bank, loans, oil exports and investments.

In July 2013, after the change in government which ushered in an interim period of military governance, Saudi Arabia emerged as the state’s most significant supporter, coordinating an aid package totalling $12bn, made up of $5bn from its own coffers, $3bn from the UAE and $4bn from Kuwait.

On-going negotiations with the IMF

The generosity of regional governments has granted Egypt considerable room for manoeuvre in its negotiations with the IMF, which commenced after the revolution of 2011. While the $4.8bn of IMF funding currently on the table represents only a fraction of Egypt’s financing needs, receiving the imprimatur of the organisation would represent a welcome vote of confidence in the government’s ability to manage the economy.

Just as importantly, it would open the door to further lending from other institutions, such as the African Development Bank. The changes of government since 2011 have played a part in delaying an agreement with the IMF, although the organisation has indicated that a loan remains a possibility despite the turnover of administrations.

In October 2013, the IMF expressed its willingness to work with the Egyptian authorities, even in the absence of an elected government. Speaking to a regional newspaper, managing director Christine Lagarde said that the organisation has “worked intensively with successive Egyptian governments since the January 2011 Revolution and we are committed to working with the current authorities.”

Revising the subsidy programme

According to press reports, one of the main conditions of the IMF loan – and one that has proven tricky in a country like Egypt where one-quarter of the population lives under the poverty level – is a reform of the subsidy programme.

Around 70% of Egyptians possess ration cards by which they can gain access to subsidised bread and other staples, but it is the state’s energy subsidy programmes, such as those covering butane canisters, diesel and petrol, that are the biggest burden on the national account: in fiscal year 2011/12, energy subsidies accounted for 61% of total subsidy spending, reaching LE86.9bn ($12.6bn).

Preliminary data released in September 2013 shows that increases in subsidy spending, as well as compensation for public employees and interest payments, played a significant part in the budget deficit’s rising to 13.8% of GDP in 2012/13.The government’s generosity, therefore, has cost it dearly, and reducing the subsidy bill has become a priority for the Ministry of Finance (MoF).

A number of initiatives to address this are already afoot, including a new smart card programme being rolled out by state-owned company e-Finance. The smart card programme, based on a pin-and-chip system, will help provide a more targeted form of subsidy distribution and reduce overall inefficiencies. Some 20,000 cards have already been distributed.

In the short term, the MoF can take comfort from the readiness of regional neighbours to support the economy. More cause for optimism can be found in the IMF’s prediction of a modest recovery over the next year: according to the organisation’s predictions, Egypt can expect to see a rise in GDP growth to 3.3% in 2014. However, the longer-term recovery of the economy will likely depend on the government’s ability to tackle the politically sensitive issue of subsidy reform – a task which it must balance with the legitimate demand for social justice so often heard on Egypt’s streets.


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