2016: an opening for Egypt’s economy to recover or an entryway into a dark tunnel?

Mohamed Ayyad
25 Min Read

At a time when the government is intensifying its moves to secure US dollar resources to bridge the estimated $30bn financing gap over the next three years, economists believe that 2016 will be a decisive year for Egypt. The government will either begin to achieve a minimum level of sustainable economic recovery, or enter into a dark tunnel if it fails to manage those funds.

Experts fear that the current economic administration may fail to manage the estimated $21bn in loans, or debts, that were agreed upon with a number of international financial institutions. History tells us that Egypt has consumed $29bn in foreign aid since 2011 with the result of no recovery, but rather more and more suffering.

This Daily News Egypt feature will shed light on Egypt’s chronic economic problems and will feature discussions with experts on how to properly employ these loans to learn whether Egypt is able to solve these problems through painful but necessary reforms thus driving the economy out of the dark tunnel.

Economists and specialised investment banks stress that loans will not achieve the targeted recovery and improve the lives of Egyptians, but rather will fix the structural problems in Egypt’s economy and ensure repayment of older external debts to curb the gaping budget deficit. For real change, the business environment must be reformed to attract new investments that can stimulate growth and erode unemployment.

They say that the government should work on implementing reforms in each sector separately—beginning with a fair and real currency value based on supply and demand, followed by ensuring investors to gain their confidence in the national economy. Moreover, the government must address the tourism problems and help the industry regain its power, besides improving exports and rationalising imports to adjust the balance of payment. Otherwise, they warn, the economy will absorb the funds and enter an even bigger cycle of debts and crises.

Egypt received grants of EGP 95.85bn in fiscal year (FY) 2013/2014, according to the final account for the same year. The following year, aid totalled EGP 25.6bn, also according to the financial statement for 2015/2016.


Mohamed Farid, chairperson and CEO of Dcode EFC
Mohamed Farid, chairperson and CEO of Dcode EFC

Setting the national currency at a fair, low price is the first step to stimulating foreign investment and reducing tourism expenses

Egypt needs to move quickly to stabilise its foreign exchange market and manage it better based on supply and demand, otherwise these loans will only add to the currency problems, said Mohamed Farid, chairperson and CEO of Dcode Economic and Financial Consulting.

He added that the Central Bank of Egypt (CBE) should put together a professional currency trading scheme that offers flexibility in the official market, which would then erode the informal market or, at least, limit its competitiveness with the official market.

But Farid stipulated the success of the move—which he believes to be necessary—to increase the foreign exchange reserves to secure six months’ worth of imports, at least, and cover the deficit in the balance of payments.

The current deficit in the balance of trade is $45bn. Before the 25 January Revolution, this gap was $9.5bn. With import needs of roughly $80bn against exports of $35bn, Egypt has been suffering from imports overweighing exports.

Prime Holding for Financial Investments recently published a research paper stating that Egypt must take “harsh, yet necessary” policies to overcome the difficult economic situation. The most important of these policies, according to the report, is liberalisation of the exchange rate and increasing the foreign exchange reserves.

Farid believes that a low price of the Egyptian pound against the US dollar will catalyse foreign direct investment in Egypt as it would mean less investment costs for businessmen. This would have the same positive impact on tourism, he added. “Cheaper touristic destinations for foreigners will result in more inbound traffic.”

Moreover, Farid says that increasing foreign exchange reserves will be sufficient for the country to begin repayment of foreign liabilities, including dues to foreign investors.

He added that a stable currency price will be predictable by examining supply and demand, making it easier for investors to consider injecting funds into Egypt. Furthermore, he explained that this will help investors to regain their trust in Egypt’s economy based on acquiring sufficient foreign exchange reserves for them to repatriate their proceedings and dues without delay.

The Egyptian tourism sector—one of the country’s main sources of hard cash—has been suffering successive hits over the past few years: the murder of the young Italian scholar Giulio Regini and the downing of the Russian Metrojet, among other incidents, have all reduced the flow of tourists to Egypt, hence, less revenue.

The Ministry of Tourism is currently coordinating with specialised companies to promote Egyptian tourism to the world as a safe and inexpensive tourist destination, in order to restore a main source of much-needed foreign currency.

According to estimates of Beltone Capital Investment Bank, a fair dollar price would be EGP 11-12. This figure could drop to EGP 10, but only if the economy sees large inflows of hard currency.

Former CBE governor Hisham Ramez followed a monetary policy based on the gradual devaluation of the pound’s value against the dollar since the end of 2012. This was done through weekly auctions, in which the CBE offered dollars to banks. However, the dollar’s value on the parallel market did not stop rising, despite all efforts.

Then came the new governor Tarek Amer. He drastically depreciated the value of the pound against the dollar in March. The price dropped to EGP 8.87 from EGP 7.73 in an exceptional tender.


Deputy Minister of Finance Mohamed Meit
Deputy Minister of Finance Mohamed Meit

Directing loans to support the budget without stimulating the economy forewarns dire future: Adly

Deputy Minister of Finance Mohamed Meit said that the government is moving quickly and urgently to mitigate the consequences of economic reform measures by strengthening social safety nets and expanding the takaful and karama social support programmes, in addition to providing direct cash support for the poor.

Meit added that borrowing from international institutions saves Egypt from defaulting on its external liabilities. “This regains the trust of business communities in Egypt,” he stressed. Moreover, Meit noted that repaying loans on time reduces the cost of future borrowing by raising the country’s credit rating.

Minister of Finance Amr El-Garhy also said that borrowing from the International Monetary Fund (IMF) has become a necessity, as the budget deficit has reached EGP 320bn in the current fiscal year. “There is no hope in benefitting from the economic reform programme when the debt is 100% of GDP with interest and instalments of an extra EGP 300bn every year,” El-Garhy noted.

But according to Abu Bakr Emam, head of the research department at Prime Holding, poor economic management of the economy puts Egypt at risk of an upcoming crisis. He said that directing loans to bridge the budget deficit or the US dollar shortage would be fruitless, as these are all yield-less channels.

The annual loan service amounts to $3-4bn, with expectations that this will increase to $7-8bn. Will the Egyptian economy then be able to generate enough dollars to cover these liabilities and, at the same time, fund development projects?

Emam said that the loan will be spent on current expenses, whereas he believes they should be used to remedy structural imbalances in the economy.

According to the minister of finance, Egypt targets to utilise the loan to fill in the financing gap for its projects, regain investors’ confidence, and encourage international financial institutions to approve more funds that cover the gaps in the economy.

But Emam says that the state should drop borrowing altogether, including borrowing from domestic banks by offering treasury bonds, in light of the rate of the debt. The state, he added, should instead stimulate the economy and seek resources and investments.

He noted that the government should also move quickly toward protectionist measures to reduce the effects of borrowing and reform plans through the creation of more jobs and improving citizens’ incomes by attracting more local and foreign investment.

For a target of 5% growth per annum, Egypt requires about EGP 750bn. Local investors secure roughly EGP 300bn of investments, while the government and the foreign private sector should cover the rest.

Meit said that Egypt does not have the choice to postpone payment of any of its external liabilities, as it would put the economy in jeopardy of losing the value of all reforms.

Emam noted that the current government stance shows that officials are willing to accept any measures to overcome the present economic situation. “But this is only a short-term solution with medium-term risks,” he added. “If the economy fails to generate dollars through tourism, foreign direct investment, and attracting Egyptians’ remittances into the banking system, we will be led into a disaster.”

He warned that any future deficiency in generating foreign exchange after obtaining $21bn worth of loans would have a catastrophic impact.


How can US dollar flow be ensured to alleviate pressure on balance of payments?

Amr Adly, a non-resident scholar of the Carnegie Middle East Centre, said that the economic reform programme Egypt has adopted follows policies to rationalise spending in national currency, but failed to include factors that ensure dollar flows to the country or even mechanisms to limit the growing demand on the greenback.

Adly wondered how the government can guarantee repayment of instalments of the same loan without adding more pressure, in the future, on the balance of payments itself? He noted that the government announced it has ensured dollar inflow after regaining the confidence of investors and business communities on the back of lowering the budget deficit as part of the economic reform programme.

Egypt is a powerful state and has a great future, but has been experiencing some problems that need urgent and rapid intervention, said Chris Jarvis, IMF mission chief for Egypt and advisor, following the initial agreement with Egypt to borrow $12bn over three years.

However, Adly said that the current administration has claimed that it is acting as quickly as possible in order to stimulate the economy by improving the real environment for doing business, including establishing company procedures and licence measures as well as ensuring easy market exit, along with access to finance and guaranteeing competitiveness.

He also called for a comprehensive evaluation of the industrial sector in Egypt to facilitate its growth. This would increase the output and usage of local components to add value to the national economy, thus strengthening the country’s foreign exchange reserves.

As another part of Egypt’s plan to increase its dollar resources, the Ministry of Investment also aims to put up shares of public companies on the Egyptian Exchange (EGX) to introduce more liquidity to the market.

According to Minister of Investment Dalia Khorshid, activating the capital market and offering more shares on the EGX will contribute to injecting funds into Egypt, improving economic activity, expanding and attracting investment from abroad, and stimulating the EGX itself. Through this move, Egypt aims to attract $2.5bn.

A government source said that the Ministry of Investment is currently considering, in collaboration with concerned bodies, completing evaluation procedures of state-owned companies to offer them on the EGX. Sale of these shares will take place in dollars by individual foreign investors and firms interested in buying the pound to subscribe to the IPO. Part of the offering will be also set in Egyptian pounds.


The expected slowdown of the global economy threatens the Egyptian dream of recovery: economist

At a time when the government is counting on the outside world to pump investments following the implementation of Egypt’s structural reforms and improving economic indicators, expectations of major international financing institutions—such as the World Bank and the IMF—indicate a continued slowdown in the global economy, which could threaten the Egyptian dream of mobilising more investments.

“The government is gambling on an influx of more foreign investments but the deck lacks the cards,” Adly said.

Adly said that the slowdown in the global trade volume will not only affect the ability of the country to attract more foreign direct investments but would also adversely impact Egyptian exports which are, even now, low.

Export earnings have fallen during the past period, despite measures taken by the government to devaluate the Egyptian pound against the US dollar, which aimed to make exports more attractive for foreign markets—but in vain.

Adly noted that proceeds from exports have been in decline over the past two years due to shy global economic growth—despite the declining value of the Egyptian pound. This will also limit the purchasing power of consumers in the global markets.

The financial statement included a package of measures such as controlling the aggravation of wages and implementing the value-added tax, along with proceeding with the energy subsidy allocation cuts, which initially kicked off in FY 2014/2015.

Adly said that the government’s trend of borrowing lifted growth rates and indicators in the macro-economy to attract investments is nothing but fish in the water. He pointed out that raising the rate of growth in light of the downturn in the global economy and the decline in international trade movements clearly indicates that the advent of investment is not certain: “The only certain thing is Egypt’s obligations following these loans.”

According to a statement from the IMF, Egypt is struggling through a financing programme signed for a $12bn loan over three years, with the aim of improving the currency markets, bridging the budget deficit and reducing public debt. It is also expected that the public debt will fall from 98% of GDP in FY 2015/2016 to 88% in FY 2018/2019.


Evidence of economic pressures

Daily News Egypt reveals the details of Egypt’s economic problems that need quick interventions and reforms that could be painful to citizens but are necessary to lead the economy out of the dark tunnel in the medium- and long-terms.

Experts are able to name the factors stressing Egypt’s economy: most prominently is the deficit in the trade balance, which tilts heavily in favour of imports by $9.5bn before 2010 to more than $45bn now. This is especially pertinent as Egypt needs imports worth $80bn per year, versus exports of no more than $35bn.

As a result of this problem came fears of rising inflation rates, which moved up to about 15%. The government has taken control over the pound’s exchange rate—but this caused even more damage than it fixed, leading to the depletion of reserves from $36bn down to $17bn.

The country’s foreign exchange reserves that used to be enough for an entire year are now unable to cover three months’ worth of trade deficit, which is the gap between Egypt’s exports and imports.

Meanwhile, the rising value of the dollar against the pound stimulated the parallel market, widening the gap between the price of the national currency in the official and unofficial markets. The dollar is now trading hands in the official market at EGP 8.88, while in the informal market the price set is an average of EGP 12—adding yet another burden to Egyptian imports.

This was followed by a rise in the unemployment rate to more than 13%, and unemployment among youth alone recorded 40%.

The slowdown in tourist activity—which was once a main source of hard cash—has lost the government a great deal of its much-needed dollars. The number of tourist arrivals has dropped to about 1.1 million visitors per year from 3 million in 2010.

This is in addition to the sharp decline in foreign direct investments: down from $36bn in 2007 to negative $49m in 2011 at the outbreak of the 25 January Revolution, and then all the way down to $2.8bn in 2012. It began to rise again in 2013, registering $4.2bn and $4.7bn in 2014, then to $6.8bn in 2015.

The government, with the help of reforms, aims to capitalise investments to record $10bn in FY 2016/2017.


Current loans: $21bn

Egypt is currently negotiating to secure $21bn with a number of donor institutions and countries within its efforts to finance the funding gap estimated at $30bn over the next three years.

These funds include a $12bn loan from the International Monetary Fund over three years and three tranches, beginning right after the final approval of the fund’s Executive Board.

Moreover, there would be $1.5bn from the African Development Bank and $3bn from the World Bank on three tranches over three years to finance development projects. Procedures for the disbursement of the first tranche are underway.

The government will also offer US dollar-denominated treasury bonds worth $3bn on international markets, along with an Emirati deposit that the Central Bank of Egypt has already received. The state has also been negotiating to accelerate the arrival of a $2bn deposit from Saudi Arabia.


Previous loans of $29bn

According to a Central Bank of Egypt press release in August, the total aid received by the country since 2011 amounted to $29bn, including $8bn in aid from Saudi Arabia, $6bn from the UAE, $5bn from Kuwait, and $8bn from Qatar—during the regime of former president Mohamed Morsi.


Experts fear Egypt’s entry into a vicious circle of debt

A fear is growing among many economists that the government could fail to carry out the required reforms at a slow pace, or even implement them at all. This, they say, may put the country into a vicious circle of debt in the future.

Prime Investment Bank warned that the government’s failure to implement the reform programme agreed upon with the International Monetary Fund (IMF) may put more pressure on it for obtaining other tranches of the loans.

“Without implementing the reforms, devaluing the Egyptian pound and all foreign support would have been be nothing but fruitless, temporary solutions that will lead to deeper problems,” the report said.

According to Abu Bakr Emam, head of the research department at Prime, economists are worried about the state’s growing stance to borrow from the world to finance economic growth—with domestic debt being a worse solution. “Loans are not a solution,” he stressed.

Amr Adly also agreed, saying that the announcement of a $21bn package of loans means that the country would partake in its most unprecedented borrowing since the 1990s.

The external debt of Egypt jumped by 34.1% in the third quarter of last fiscal year, which ended on 31 March, to reach about $53.4bn, compared with $39.9bn in the same period of the previous fiscal year.

Emam said that in March 2015, the government was seeking solutions to attract foreign investments, in reference to the economic conference in Sharm El-Sheikh. “But now, the government is looking for short-term solutions through borrowing instead of investments.”

He added that this pattern of thinking drags the country into a vortex of borrowing to repay a previous loan and so on and so forth—something Emam described as extremely risky.

Emam stressed that the seriousness of this debt may not be tangible now, but will materialise at the time of repaying those debts, especially as Egypt’s current industries cannot generate enough US dollars to pay them off.

But, at the same time, he said that signing a deal with the IMF provides a “sense of guarantee” that the government will implement all the agreed upon reforms. “This makes the deal different than any other funding received from the Gulf in previous years,” he added.


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