Mahmoud Aboul Oyoun, the former governor of the Central Bank of Egypt (CBE), professor of economics at Zagazig University, and chairperson of the Egyptian Financial Advisory Group (FA Group), said that Egypt’s economic reform programme was needed, as Egypt had reached the point of no return mid-2016.
“The only options were to reform or to stop serving external and internal loans and put an end to economic life,” he added.
He told Daily News Egypt that keeping the exchange rate unchanged following January 2011, despite the loss of $12bn worth of investments, required justification by the government and CBE officials at the time.
He noted that some people still try to thwart the new system currency exchange system by not dealing with banks and resorting to the unofficial market.
Despite the emphasis on the power of the Egyptian banking system, he predicted that the current year will come with challenges for the banking sector, due to the high cost of deposits and the possibilities of borrowers defaulting.
How do you see the Egyptian economy now and in 2017?
It has been six years since the 25 January Revolution in 2011. Yet, there was no government able to come clean about the economic problems. All measures taken were shallow to meet the demands of certain segments without fixing root problems. This accumulated the problems, causing more issues in production, investment, and financing.
What are the most prominent of those problems?
Many factories stopped production, while the state failed to fix the problems facing local investors. The governments refused to pen clear plans to fix the real problems in the industrial and agricultural sectors.
Hence, private investments moved to real estate and savings were used for speculation in the foreign exchange market. Investors dropped the maintenance of their existing investments, which spiked problems in many services and confined the ability of industries to expand.
At the same time, the state could not even assist in bringing in new investment, amend worn-out legislation, or encourage foreign investments.
Consequently, productive capital eroded, due to depreciation and the lack of maintenance and renewal in factories, infrastructure, and communications.
Moreover, no new jobs were created, even though thousands of youth poured into the labour market every year. This caused unemployment to rise, while the ability to meet local demand depreciated. Egyptians then replaced the local goods they needed by higher-quality imported ones, which stressed the balance of trade in absence of substantial amendments in the exchange market system for about four years.
What about the financing sector?
In the finance sector, the public treasury and government pressured to increase wages, but refrained from modifying the foundations of pricing subsidised commodities in fear of low income citizens—not to protect them as it is said. Meanwhile, the government expanded in financing national projects and financed its spending by borrowing from domestic and external sources.
None of the successive governments had the desire or the ability to control the growth of public spending or to increase public revenues. Therefore, fiscal deficit reached unprecedented levels amid increased issuance of government debt instruments to finance this gap.
Of course this meant that domestic public debt would grow to the size of the GDP. The cost of serving those loans ate a third of public revenues, while external debt ceased to stop hiking.
At the time, Egyptian banks became the main financiers of the budget deficit, as government debt instruments are considered sovereign safe investments with good return, unlike borrowing production and the services sector which are high-risk investments.
What about the external sector?
Keeping the exchange rate unchanged in the first year after January 2011, despite the loss of $12bn worth of investments, requires an explanation by the then government and CBE officials.
This led to the collapse of the state’s foreign exchange reserves. We had to seek foreign aid and deposits from Arab Gulf states with maturity periods of more than a year so they can be included within the CBE’s assets.
Worse, exports did not grow in value and tourism revenues kept on declining. The exchange rate was the only constant put to face all of these circumstances. This led the unofficial market to rise and stole hard cash from official channels.
Many entities refused the measures of the CBE in 2015, related to curbing imports and outlawing the unofficial market.
Banking missions went to Arab countries to beg Egyptian expats to send remittances through official channels, even though everyone knew it was pointless in light of the presence of two exchange rates.
Without the aid of Arab and foreign deposits and loans that appeared in the capital and financial balance, the external situation would have reached a dangerous stage much worse than the current situation.
By mid-2016, Egypt had reached a point of no return, as the only paths available were to either implement reform or stop serving external and internal debt, setting the tombstone of Egyptian economic life.
Was our economy really that bad?
Yes. We, as Egyptians, could not comprehend the proverb “cut your coat according to your cloth”. Our cloth was not enough and demand was bigger than supply.
I stressed back in 2016 that no government will be able to face these structural problems and dare to convince the Egyptian people to swallow the bitter medicine unless it sought the help of the International Monetary Fund (IMF), and so it did.
What is the active ingredient of this medicine?
The bitter medicine is fixing problems that have been accumulating since the financial crisis in 2008, which was when the government claimed Egypt will not be impacted by the crisis. But in fact, we blindfolded ourselves for nine years. We must swallow the medication in doses to open up the arteries of the Egyptian economy, which were once partly clogged.
In the production sector, we have to reach the highest level of self-sufficiency to develop the production of industry and agriculture.
This must be accompanied by a quick and immediate action to deal with government bureaucracy, corruption, and authoritarianism to boost confidence in the private and national sector, rather than intimidating it, to increase investments.
Furthermore, the government must also adopt new controls and rules for establishing companies and granting licences without favouritism or bribes. Litigation procedures and access to credit must be enhanced, while unnecessary interventions of regulatory authorities must be halted. More laws should also be passed to increase local and foreign investments in the framework of incentives linked to development strategies.
It is also necessary to encourage private enterprise owners to merge with the official economy by issuing laws for one-man companies and similar legislations, encourage micro, small-, and medium-sized enterprises, facilitate bankruptcy proceedings, and improve the overall public production not by selling it or its assets, but by helping the sector provide local production that competes with international brands.
In terms of fiscal policy, the recommended actions are even bitterer and less popular as they are linked to different segments of the society, but they must aim to bridge the budget deficit in a specified period.
Therefore, they will be of two parts: public spending and state revenue.
The most important of those measures will be shifting to the cash subsidy system instead of the traditional scheme in the current fiscal year. We should also provide a clear, stable organisation to explain the new system.
The government should also refrain from providing support to those who do not need it across fuel, electricity, and all other commodities. We should know who needs subsidies and who does not. Even better, we should be smart in choosing which commodity to subsidise and when, so it does not reflect on the market’s unsubsidised prices of these commodities and services.
In addition, the state should stop the unaccounted increase in salaries and wages, apply the Civil Service Law efficiently, and channel spending on investment to infrastructure. Also important is the government being an example of austerity to manifest seriousness.
Moreover, the state should also review customs tariffs on luxury goods, activate real estate and value-added taxes, work to quickly issue their bylaws, and speed up deciding on appeals filed from those who were affected by taxes to shorten the cycle of collecting taxes.
We also have to move away from selling the state’s assets, even residential units and lands, to stop speculation on land and real estate prices. The government should rather encourage low-cost investments and sell usufruct rights, which would guarantee the inflow of cash.
Local councils should also be pushed to collect the state’s revenues to maximise tax collection, while protecting the most vulnerable—after excluding those who do not deserve protection—by implementing target-specific mechanisms that are reviewed on an annual basis. Those who deceive the state to obtain undeserved funds should be strictly punished.
As for the external sector, my opinion is to assist the decision of amending the exchange rate system and management of the foreign exchange market. This could rectify the behaviour of economic players and the future of economic changes.
But, in return, we should also face external liabilities with accuracy, whether by paying dues, or obliging to repay foreign debt in a timely manner. The only thing we need in the coming period is the return of tourism.
What do you think about the factors needed by the Egyptian economy to kick off in the coming period?
What we need is the will of government-backed popular belief. This is linked to clarity, candour, and frank confrontation.
The government is not just a fire fighter, but a planner and executive.
The current government has taken the courageous decision to go for reform, but it needs more government coordination, particularly between the ministers of the economic group, through the presence of a person responsible for a set of economic ministers at a CBE governor level. This person must be a supporter of free market economies. There should also be a deputy prime minister for services affairs.
In addition, the government has to announce the reform strategy and the timetable without waiting for the IMF to announce that information. The government should be clear without putting the head of the state in the position of defence.
Local councils must be activated to face violations without fears, unlock quick justice measures, and move towards unity to achieve a unified announced goal, which is improving the living standards of Egyptians.
What are the features of the monetary policy needed by the Egyptian economy?
Inflation rates that have occurred recently as a result of the direct impact of exchange rate adjustments are exaggerated. This is caused by the simulation conducted by service providers and producers in Egypt.
But it is like throwing a stone in a lake; the prices will decline in the coming period, unless the government takes any other measures that push the prices further upwards.
According to Law 88 of 2003, the monetary policy aims to achieve price stability. As long as the CBE does not have a reason to defend the currency exchange rate, the monetary policy will become restrictive.
But, in fairness, I have to say that the success of monetary policy is linked to the government’s success in limiting financing the budget deficit through issuing debt instruments leading to inflationary monetary expansion.
How do you see the Egyptian banking sector?
Since I took the responsibility of the CBE in 2001, my efforts went to strengthen the banking system. This continued with all successive governors.
I can say with confidence that the Egyptian banking system is strong. It has a good level of capital adequacy with low defaulting rates.
However, this year will be challenging for the banking sector. The cost of deposits increased on the back of the interest rate hike. There is also a higher level of potential defaulting in loans, which would impact capital adequacy rates at a number of banks.
I believe that the CBE has recently supported public banks and those it owns through injecting supportive financing to maintain the level of capital adequacy.
I also believe that the experience of Egyptian banks and their leaders boost my confidence that they will overcome the phase of restrictive monetary policies.
Can Egyptian banks well manage the foreign exchange market despite lack of experience?
It is true that Egyptian banks did not manage the Egyptian exchange market alone before, but they have treasury leaders and dealers who are very efficient and knowledgeable.
I believe in the ability of those dealers to coordinate to manage the exchange market as soon as the current wave ends.
What do you mean by the current wave?
It is the stage of overshooting following any flotation.
We saw this before in January 2003 when the government amended the exchange rate. The US dollar price hiked to EGP 7, while banks were selling at EGP 5.2. This is happening again in Egypt and it happens everywhere following flotation.
In my humble opinion, there are many in the market who bet against the success of the new system; hence, they are trying to thwart it by continuing to deal in the unofficial market, saying that banks are not able to meet their needs.
Even if some are allowed to in light of the CBE’s import priorities, the imports of luxury and non-essential goods, as well as foreign tourism, registered over $4bn last year. This should stop by increasing the cost of imports, not by quantitative prevention.
All of this will stop when tourism is back to normal and the gas fields begin producing.
If the government succeeds in implementing the requirements and procedures for the reform in the productive sector through 2017, local production capacities, exports, and foreign direct investment indicators will all improve, which would support the value of the Egyptian pound against foreign currencies.
What message would you like to convey through us?
I am optimistic. I ask everyone to work for the success of our economy and to stop pointless talks and debates of non-experts or those who are sceptical that do not aim for reform.