Minister of Finance Amr El-Garhy had said on Sunday that the ministry has set three goals for the country’s budget in the fiscal year (FY) 2017/2018. According to him, the ministry plans to focus on sustainable development, by raising the GDP by 5%, reducing unemployment to 11%, and cutting the national debt to 94% of Egypt’s GDP.
Despite the minister’s plan, there are many financial indicators that seem to suggest that these plans may not be as achievable as El-Garhy would like. In May, the credit ratings and research company Fitch Ratings predicted that Egypt’s fiscal deficit in FY 2016/2017 would be 11.6% of the GDP. The agency added that the GDP growth rate for FY 2015/2016 is estimated at 3.2%.
“General government debt increased to an estimated 90.3% of GDP in FY 2016/2017. Yet, the external debt is relatively low. We expect debt/GDP to edge up to 90.5% in FY 2017,” the agency noted.
While in theory the ministry’s plan may sound feasible, El-Garhy’s promise to reduce the national debt conflicts with the government’s current rate of borrowing, the difficulty in achieving a growth in GDP in the current FY, and the rising rate of unemployment.
In order to better understand the goals set by the ministry, and the obstacles they may face, Daily News Egypt spoke to several experts who have said that some of the government’s goals are ambitious and likely unattainable, while others are within their reach.
5% GDP growth in FY 2017/2018
Medhat Nafea, a professor of economics at Cairo University, said that the government’s goals are too optimistic when compared to current economic figures, adding that the figures for the current FY fall short of the minister’s targeted goals.
“The government’s performance does not even come close to the promises they are making,” Nafea added.
He explained that GDP growth in Egypt depends mainly on consumption, adding that previous governmental decisions raised inflation, which has affected prices and reduced the citizens’ purchasing power.
“The higher the purchasing power of the population, the more demand is created,” Nafea explained. “Purchasing power has a direct effect on the GDP, and the higher our purchasing power becomes the higher our GDP will rise.”
Nafea added, however, that purchasing power was not enough on its own to meet the government’s target. “The government must also attract new investments in order to push for GDP growth,” he said. “However, the government can hardly attract new investments due to the high rate of interest the banks are providing, which is meant to reduce the negative effects of high inflation.”
“The economy is interconnected, and unfortunately the government does not examine all of the possible effects of its decisions,” he noted.
He emphasised that, in the current economic reality, achieving a 5% growth in GDP is not possible.
On the other hand, Aliaa El-Mahdy, a former dean of the Faculty of Economics and political science at Cairo University, believes that achieving a GDP growth rate of 5% is possible if the government worked on implementing solutions that improve the investment climate.
She added that fixing investors’ disputes is one of the main things that could help the government attract more investments either by expanding local investors or by attracting foreign direct investments.
“The government has to find solutions for the disputes between the investors on one hand, and the government or the banks on the other,” El-Mahdy said. “Attracting foreign investments or promoting local investors are the only way to achieve the government’s goals of raising the GDP by 5%, which would also help reduce unemployment.”
Reduce unemployment rate from 12.8% to 11% in FY 2017/2018
Nafea says that the unemployment rate is a result of the gap between the growing number of people entering the employment market, and the stagnant number of jobs available to them.
El-Mahdy said that every year, almost 800,000 to 850,000 new graduates enter the Egyptian market looking for jobs. “Unfortunately investments are not enough to absorb such numbers,” she added.
“The only way to reduce the rate of unemployment to 11%, which is not an easy thing to do, is to attract new investments that create new jobs,” Nafea said. “The government must focus on small- and medium-sized enterprises (SMEs), because they provide job opportunities for a large number of people and are relatively easy to establish.”
“The most effective step,” he added, “is to consider formalising the informal market,” he noted, adding that some studies suggest as much as 80% of the labour force works in the informal market.
Nafea explained that one of the most important indicators is labour productivity, which is very low in Egypt compared to other countries. “The government must look into this issue to discover why,” he said, adding that low levels of productivity reduce the competitiveness of Egyptian products internationally.
El-Mahdy said that the only way to create jobs that help the government to reduce the current rate of employment is to attract private sector investments. “Government mega projects such as the Suez Canal do nothing to reduce unemployment in the long run because it only produces jobs for the duration of the project’s construction,” she said. “I believe that if the government did its job correctly, unemployment could drop to 12%, but their goal of reducing it to 11% will be very hard to achieve.”
Reduce the national debt to 94% of the GDP
Days ago Sahar Nasr, the minister of international cooperation, signed two loan agreements with the World Bank and the African Development Bank worth $1.5bn. Nafea is critical of the government’s loans, calling its plan to lower the national debt unrealistic.
“The government has borrowed a lot of money from international institutions and from local banks in the past two years,” Nafea said. “To say they are working on reducing Egypt’s debt is completely meaningless when Nasr proudly announces the government is receiving new loans every week.”The domestic public debt jumped from EGP 2.116tr at the end of June 2015 to EGP 2.612tr by the end of June 2016, according to the Central Bank of Egypt.
“What worries me the most are the International Monetary Fund (IMF) loans,” Nafea explained. “It would pose a very serious problem if Egypt is unable to repay those.”
El-Mahdy shared Nafea’s scepticism, saying that “it is not currently possible to reduce the national debt because Egypt is witnessing its highest rates of borrowing ever. Egypt’s current foreign debt is $70bn, which becomes even more terrifying when you convert that figure into Egyptian pounds.”
“The sheer number of loans will continue to contribute to the rising debt,” El-Mahdy said, adding that “Egypt is still scheduled to receive several loans from the IMF, the World Bank and the African Development Bank. We have also signed loan agreements with Russia in order to build a nuclear reactor and with China for a myriad of projects.”
El-Mahdy warned that the debt’s interest rate will likely be very high in the next budget payment, adding that she expects “debt interests to be almost 40% of the payments in the budget of FY 2017/2018”.
“The government did reduce subsidies, yet it has to pay the debt interests which are collected in its original currency,” El-Mahdy added.