CAIRO: Egypt’s central bank (CBE) expects its current account deficit at the end of the third quarter of the current financial year to double over the previous quarter, reaching a deficit of more than $3 billion, Reuters reported.
The July-December 2010 quarter deficit was $1.4 billion. The third quarter ends March 31.
"It is expected that the balance of payments at the end of the third quarter of the current financial year which ends on March 31, will register a deficit of more than $3 billion," the central bank said in a statement
The CBE said that falling tourism revenues, diminishing remittances from workers abroad and declining foreign investment resulted in a deficit increase after weeks of tumult brought down the regime of former president Hosni Mubarak.
In an emailed statement, investment bank Beltone Financial said that the current account will be impacted negatively by a temporary reduction in exports and weaker tourism receipts, but this will be partly offset by a reduction in imports as domestic demand slows down
“The capital and financial account will also be impacted, negatively, through a reduction in foreign direct and portfolio investment inflows. Consequently, Egypt’s external position will weaken, but would rebound once the political situation stabilizes,” the statement added.
Magda Kandil, director of research at the Egyptian Center for Economic Studies, said that the loss of foreign reserves could weigh on the pound as the supply of dollars falls below growing demand.
“This loss could end if the fundamentals of the economy improve to reverse the downward trend in tourism, FDI, remittances and exports,” she said.
For Kandil, the government may not be able to influence the current account much directly, but there is plenty to do indirectly.
The government can try to provide more political stability and address security concerns, it can enforce an economic strategy that increases investor confidence about the direction of policies, uphold earlier reforms in support of private-led growth, while enforcing new reforms aiming at establishing better institutions, good governance, rule of law, accountability and transparency.
“The fiscal deficit is a big drag on the economy and fiscal consolidation should arrest concerns about rising debt and the cost of borrowing,” she said.
Commenting on the current government’s stance towards the recent events and their effect on the economy, Kandil said that fiscal stimulus in the form of capital spending and investing in capacity building, including in infrastructure and health and education services, cannot be justified unless the government have the fiscal space that would allow access to financing without facing liquidity and solvency risks.
“To my knowledge, the LE 5 billion stimulus package is in the form of compensation for losses. Most of that spending will be spent by the recipients on consumption, which could accelerate inflation, without increasing productive capacity. Deterioration in the fiscal deficit will crowd out resources available for the private sector,” she added.
The problem with ongoing social agenda is that it is reacting to short-term pressures, without having a long-term vision.
Given the projected increase in the deficit, Kandil believes that a comprehensive social agenda should be integrated in the context of broad-based reform of the public finance to trim the waste in spending, including in the form of untargeted subsidies, and mobilizing additional revenues.
“In short, with limited revenues, spending priorities for fiscal stimulus should be carefully managed to boost productive capacity in support of private sector-led growth that avail more jobs for the unemployed. The best solution for social equity is to create more jobs and grow wages in line with productivity,” she concluded.
In the period July to December 2010, the CBE said imports grew faster than exports and investment income shrank, according to Reuters.
It reported a rise in imports of 10.9 percent to $26 billion dollars, due to a 33.6 percent rise in petroleum imports, and non-petroleum imports by 8.5 percent. Exports rose by about 10 percent.
Investment income decreased 58.3 percent to $211 million from $506 million in the same period of 2009, it said.
Tourism revenues in July-December grew 15.6 percent to $6.9 billion in July-December 2010, the statement said, adding that transfers, including remittances from abroad, increased 45.3 percent to $6.3 billion and and Suez Canal revenues rose by 10.9 percent to $2.5 billion. –Additional reporting by Reuters.