YEAREND SPECIAL: A year of economic stimulus and interest rate cuts

Amira Salah-Ahmed
7 Min Read

Egypt s measures to deal with the global economic crisis in 2009 have ranged from introducing stimulus packages to spur growth, upping infrastructure spending to keep the economy moving, to maintaining an interest rate cut policy as a way of combating inflation.

In late 2008, Egypt announced a LE 15 billion stimulus to support growth and deal with the effects of declining tourism earnings, Suez Canal revenues and foreign investment. While it raised the budged deficit, it did help keep GDP in the positive numbers, mainly by allocating almost half of the funds to supporting industries and trade.

In an email interview with Daily News Egypt, Trade Minister Rachid Mohamed Rachid said, “While this was a humble stimulus package compared to what other countries were capable of providing, the fact of the matter is that we used it as efficiently as possible to encourage more investments in key areas and sectors; we managed to continue to encourage exports to continue by increasing the amount of funding available for export reinsurance; and we had a budget allocated for the development and encouragement of internal trade.

The second package was announced in June at LE 8 billion and focused more on infrastructure spending. In October, ministers proposed an additional economic stimulus package worth LE 10 billion, most of which will also go to financing infrastructure projects, waste water treatment projects and road work.

Finance Minister Youssef Boutros-Ghali said in November that the new package may help growth reach 8.5 percent after the government evaluates the economy to see if more stimulus is needed.

Ghali said Egypt is expecting around 5.5 percent growth in the current fiscal year and will hopefully boost that number to 8.5 percent in two to three years.

Egypt’s GDP growth came in at 4.7 percent in fiscal year 2008/09, down from 7.2 percent the previous year, but still above analysts’ expectations.

Analysts attributed the numbers to the stimulus packages introduced by the government.

The stimulus packages did what they set out to do, Rachid said, “provide support so that companies can continue to do business and in some cases grow. It might not have been as quick a growth as we experience in the previous few years but it was still growth.

Ahmed El-Housseiny, managing director of private equity firm Citadel Capital, agreed, saying that “public spending at times of a great extent it alleviates some pressures,

But while government measures to face the crisis have helped keep GDP growth above 4 percent all year, they have raised the budget deficit and deepened government debt. The stimulus packages are largely funded through domestic borrowing from a number of financial institutions.

“One can argue on the right threshold for public stimulus and amount to spend on infrastructure, El-Housseiny said, “Public debt and inflation are the most obvious constraints, but Egypt has fared relatively better than most of the regional economies.

It is “unclear as to how the government will finance additional spending without increasing the deficit or coming out with a package of new measures to increase revenue, said Reham ElDesoki, senior economist at investment bank Beltone Financial, earlier this year.

She added however that “as long as the money is really spent on labor-intensive projects, the government stimulus should be effective.

El-Housseiny also noted consumer-driven growth as key this past year. “This is one of the very few times that having a large population proved to be an advantage. Relying on local consumption and internally generated economic expansion has been important for Egypt [in 2009], he added.

According to a financial report by HC Brokerage released Sunday, “Strong government support has seen the domestic economy weather the global economic slowdown with distinction.[but] there are a number of ongoing risks on the road to recovery.

“Growth has been driven by increased government spending, which mainly focuses on infrastructure, while the larger and more influential manufacturing sector has stagnated, the report said.

The firm raised its GDP growth estimate for fiscal year 2009/10 to 4.3 percent based on higher government spending, but added that the return of inflation removes the support of monetary policy to growth,

Inflation has been on a steadily decline in 2009, dropping from its record high of 23 percent in 2008 to 10.8 percent in September 2009, before rising to 13.3 percent in October.

Coinciding with the fall in inflation has been a steady policy to cut interest rates, which began in February 2009 and saw rates repeatedly cut to bring the overnight lending rate to 9.75 percent and the deposit rate to 8.25 percent.

November was the first time in the past year that the CBE decided to hold rates, and the government began focusing on the newly introduced core inflation index, which strips out more volatile items like food.

While the effectiveness of the rate cut policy has been questionable, the steady decline in inflation was comforting to most analysts. Now that inflation is back on the rise, everyone’s in wait-and-see mode, keeping a watchful eye on the CBE’s next move.

HC said, “The CBE is talking hard on inflation and will not tolerate a rise in core inflation to unacceptable levels. and we expect the CBE to deliver a series of interest rate hikes in 2010.

For his part, Rachid said, “It seems that the international economy has hit rock bottom this year and this means that we are likely to experience a slow upturn.

Egypt will focus on the development of internal trade, diversifying export markets, and identifying niche areas in industry, looking out for sectors where the country has a comparative advantage, Rachid added.

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