Sustaining high levels of growth and investment is important for raising people’s incomes: Elwy

Hossam Mounir
13 Min Read

Sherif Elwy, Arab Bank’s regional Egypt country manager, addressed in an interview with Daily News Egypt the reforms taken during last year and its influence on the market.

Between the Euromoney Conference 2016 and that of 2017, the government and the Central Bank of Egypt have taken several measures as part of the economic reform programme. How do you evaluate these measures and their impact on the Egyptian economy?

In this year, the government and the Central Bank of Egypt have embarked on a comprehensive and integrated reform programme in several areas. First, the programme addressed the imbalances in the foreign exchange market. Second, it implemented ambitious steps in a medium-term fiscal consolidation programme to reduce the debt burden. Third, the government initiated structural reforms to welcome greater levels of investment and business activity.

These reforms have been eagerly anticipated and widely welcomed by the business community. This is evident in the reaction of the stock market and in the large inflows of investment and workers’ remittances, which reflect a vote of confidence in these measures. These reforms are necessary and important for restoring confidence, energising investment, improving growth, and creating more jobs. Moreover, these reforms are also expected to lead to much larger levels of exports and foreign direct investment over time. At the same time, it is important to recognise that these measures have costs in the short run, particularly in higher levels of inflation and somewhat subdued economic activities while interest rates are elevated. The hope is that inflation is brought down within a few quarters, and that the benefits from the reforms start materialising more broadly, particularly in terms of increased job creation.

At the moment, what is your vision for the Egyptian economy?

We view the Egyptian economy as a large market with substantial potential, following several years of sub-par economic growth. Realising this potential would entail substantial investment, efficiency improvements, and job creation, and would lead to sustained improvement in living standards and reduced unemployment. To achieve such results, the private and public sectors have a lot of work to do.

What are the main challenges facing the Egyptian economy right now?

The main immediate challenge facing the Egyptian economy is the need to bring down the high level of inflation. It is natural for the inflation rate to rise following the large currency depreciation in late 2016, in addition to the fiscal measures adopted. However, clarity on the expected course of inflation is important for businesses and people in making current decisions.

In addition to reducing inflation, there are other significant challenges. Sustaining high levels of growth and investment is important for raising people’s incomes. Reducing unemployment from its current level of 12% to less than 10% is also another challenge, particularly given the need to rely on job creation by the private sector. The public sector also has the challenge of reducing the fiscal deficit in order to lower the public debt. This is expected to entail additional hardships, particularly those stemming from raising taxes and containing expenditures. Given the overall level of hardship already impacting the Egyptian public, ensuring broad and sustained support and tolerance for the multi-year economic reform programme is also important for reforms to remain on track.

How can those challenges be overcome?

The currently high inflation challenge can be overcome through tight monetary policy and improved visibility on the future course of inflation, to absorb the impact of the currency depreciation while also managing inflationary expectations. These actions are currently being done by the Central Bank of Egypt (CBE). The currently tight monetary policy is a result of the Monetary Policy Committee’s decisions of raising interest rates three times, in November 2016 by 300 basis points, and in May and July by an additional 200 basis points each time. Moreover, the deposit auctions of the CBE aim to absorb short-term excess liquidity. Also, the Monetary Policy Committee’s statements have improved visibility and clarified its target path of lowering the inflation rate to 13% in the fourth quarter of 2018, and to single digits afterward.

Sustained increases in private investment over several years are needed to raise the growth rates. In this regard, adopting the New Investment Law in May 2017 was an important step, and we look forward to easier facilitation of business activity and higher levels of domestic and foreign investment. Moreover, higher levels of exports, which already started materialising after the currency depreciation, are expected to lead to greater investments in export-oriented activities.

On the fiscal challenge, the government has already implemented a sizable share of the measures in its fiscal consolidation programme. These measures should reduce the budget deficit and lower the public debt.

Higher levels of growth, investment, and export would create jobs and reduce the unemployment rate. It is also important to maintain and sustain popular support for the ongoing reform efforts. This requires ensuring that the standards of living of broad segments of the population increasingly improve over time.

What is required to push the Egyptian economy forward and enable growth?

We already discussed the broad measures needed for enabling higher levels of growth, including the adoption of the New Investment Law. What can be emphasised here is that timely and consistent implementation of the laws and measures can be just as important as the adoption of good laws and measures. The new executive regulations of the Investment Law, adopted by the cabinet in August 2017, are important to clarify implementation issues. As such, the reaction of domestic and international investors will be an important barometer of the success of the policy measures and of the need for fine-tuning implementation.

In addition, effective public-private partnerships will improve needed infrastructure and enhance economic growth, without adding to current demands on the budget. Renewable energy is an important area for adopting these public-private partnerships.

What activities or projects can assist with helping the Egyptian economy to grow?

I like to emphasise the importance of the broad-based actions that offer clear rules for businesses, along with a fair and competitive environment for businesses. These actions entail making the bureaucracy more business-friendly and more transparent. Such an environment would also be expected to support small and medium enterprises (SMEs) and start-ups, which are important for job creation.

How did the flotation of the Egyptian pound impact the performance of banks?

The flotation had several effects. There are banks with a good performance, but the currency depreciation adversely affects the reported results if the bank’s financial statements are reported in foreign currency. On the other hand, some banks with financial statements in local currency benefited from the depreciation of the pound to the extent that they have revenue sources in foreign currency.

The flotation substantially improved the availability and liquidity of foreign currencies. This helped banks reduce the cost of lending in foreign currency, as banks are in a much better position to meet the various foreign currency demands of the clients.

The flotation also increased market maturity in general as both corporations and banks had to deal with a larger and more dynamic number of variables. The flotation and a more competitive exchange rate created new business opportunities for banks. These opportunities include supporting businesses with expansion plans to replace imported inputs with more competitive locally produced goods. Other opportunities include businesses that produce local outputs that have become more competitive with imported goods or have a potential for export.

Moreover, some corporations may become stressed as a result of the currency depreciation, which in turn may affect their banks through their ability to maintain loan payments. Such banks will need to watch the performance of these loans and maintain the quality of their portfolio.

What role could banks play in assisting the Egyptian economy?

Over the next few years, banks can increase their business focus on SMEs. This would beneficially dilute the banks’ concentration of credit exposure to large corporations. It would also help small businesses to grow to become medium-size firms, while medium-size businesses grow to become large firms. This process will help economic activity and will assist the SMEs in job creation. This is indeed a key driver in the Central Bank of Egypt’s campaign to increase bank lending to SMEs.

Over the longer run, banks can become an additional strategic source of foreign exchange, in addition to the current key sources: the Suez Canal, remittances of Egyptian expatriates, tourism, and exports. In addition, with a sounder fiscal policy and less reliance on banks to finance the budget deficit, banks can finance more dynamic infrastructure projects. This will encourage economic growth and job creation.

What projects and activities does your bank focus on financing in order to assist the economy?

Generally, the Arab Bank-Egypt has an appetite for financing most economic activities. Our exposure covers mainly industrial and infrastructure projects, in addition to services and trading. It’s worth noting that we support the expansion plans of the private sector across the board, including large corporations and SMEs, in addition to key and strategic government projects.

What are the most important indicators of the performance of your bank in the recent period?

As of end of the first quarter of 2017, Arab Bank-Egypt achieved a 45% growth rate in net revenues and 46% growth in net interest income, and these are considered among the highest in the market. This is primarily a result of the healthy growth in loans by 11.3%, which is higher than the market’s growth rates for the same period.

What activities do you intend to focus on in the coming period?

Again, the focus of Arab Bank-Egypt is basically on most of the local economic activities, subject to their commercial viability. We believe that a focus on industrial related projects will be of increasing importance in the coming period.

We have been expanding selectively across the different market segments with increased focus on SMEs and the lower tiers in the large and middle markets.

We have also supported expansion plans of local companies that decided to replace imported products with similar locally produced products. Supporting such companies, especially SMEs, which produce locally competitive products, is a new window that has expanded following the currency flotation, as stated earlier.

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