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Al-Ahram Weekly 26 Aug. - 1 Sep. 1999 Issue No. 444 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 26 Aug. - 1 Sep. 1999 Issue No. 444
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Focus Culture Features Profile Travel Living Sports People Time Out Chronicles Cartoons Letters What squeeze?
By Gamal Essam El-DinTop government officials said that Egyptian banks are far from a liquidity squeeze. Ismail Hassan, governor of the Central Bank of Egypt (CBE), in a public announcement, said that talk about a liquidity squeeze in banks is based on rumours and is entirely unfounded. "As a matter of fact, the cash liquidity in banks grew from LE224.6 billion to LE227.6 billion between February and March this year," Hassan asserted.
For his part, Prime Minister Kamal El-Ganzouri emphasised at the last cabinet meeting that the market is quite far from a liquidity crisis. The cabinet took a major step last week by settling the debts owed by the government to contracting companies, according to the prime minister.
"The Finance Ministry was instructed to pay back LE1.2 billion in settlement of government debts to a group of contracting companies in a bid to inject liquidity into this sector and other supporting sectors," El-Ganzouri said. This action will not only settle old debts and improve the financial structures of these companies, but it will also increase liquidity in the market at a crucial moment, El-Ganzouri stressed.
The shortage of Egyptian pound liquidity eased in the last few weeks when the CBE began pumping LE3.3 billion into the market. The main instrument of Central Bank intervention has been one-week repurchases (repos) of treasury bills from banks. These repos help banks swap treasury bills for cash on condition that they will repurchase the bills at a later date.
But some economic experts contend that the liquidity squeeze, which hit banks in both pound and dollar terms, was mainly due to a combination of internal and external developments.
Domestically, experts cite increased bank lending as the main reason for the shortage of liquidity. According to the biannual report of the CBE (July-December 1998), total credit for this six-month period equalled LE237.8 billion. More significantly, the CBE report indicated that the largest part of these loans -- estimated at LE126 billion and accounting for 53 per cent of total credit granted in the second half of 1998 -- was provided to the private sector (businessmen and investment companies).
In the same period, the credit provided to government agencies increased by LE8.1 billion to reach a total of LE55 billion, accounting for 23 per cent of overall credit, the report said. As for credit provided to the public enterprise sector, the CBE report said this increased by LE2.1 billion to total LE31.5 billion, accounting for 13.2 per cent of all credit. The remaining credit went to the family sector in the amount of LE25.3 billion, accounting for 10.7 per cent.
Mustafa El-Said, a former economy minister and MP, told Al-Ahram Weekly that most of the credit provided to the private sector recently was directed to real estate investments. "Many times we sounded alarm bells about the grave danger of excessive bank lending to real estate and luxurious housing investments. It is now a fact that the real estate and housing market is currently in the grip of a sweeping recession because it is faced with excessive supplies. This recession has adversely affected private investors in this sector, and a large number of them now face big difficulties in paying back loans borrowed to fund their projects. In short, the recession has caused a high rate of defaults and unrepaid loans, contributing at the end to a bank liquidity squeeze," El-Said said.
Other experts attribute the liquidity squeeze to the unwise involvement of the government in several different development mega-projects at the same time. The government began using a big part of bank deposits to fund such giant projects as Toshka, the Gulf of Suez, East of Port Said and Al-Salam Canal project in Sinai. El-Said, however, argues that funding of these projects leads to excessive liquidity and enhances the purchasing power in society. "Besides, as these projects are still in their early stages of implementation, they do not yet require huge amounts of money to the extent that they would negatively affect bank liquidity," El-Said said.
But not only the housing and real estate sectors are in the grip of recession, the former minister said. "The recession has hit the commercial sector as a whole. It is not a secret that many merchants suffered bankruptcy recently, while many others had to withdraw their banking deposits to meet their needs and financial commitments but at the expense of cash liquidity in banks," said El-Said. This aspect of the recession, he added, was caused by the negative impact of the flood of cheap imports coming from Southeast Asia whose currencies have been hit by severe devaluations in the wake of the 1997 financial crisis.
Abdallah Tayel, chairman of the People's Assembly Economic Committee, told Al-Ahram Weekly that the drop in foreign currency reserves was not so much caused by the implementation of too many development mega-projects as by excessive imports of luxury goods and the poor performance of the local commodity-exporting sector. Figures released by the Central Agency for Public Mobilisation and Statistics (CAPMAS) indicate that the trade deficit in the second half of 1998 stood at $12 billion, reflecting $5 billion worth of exports versus $17 billion worth of imports. The spiralling import bill has exerted tremendous pressure on foreign exchange reserves. According to The Economist, foreign exchange reserves in the CBE dropped from $18.4 billion to $17.5 billion between March 1998 and March 1999. To ease pressure on these reserves, the government ordered importers to provide 100 per cent cash cover for non-essential imports, compared with 10 per cent before. However, this measure proved inadequate to stem the pressure from importers on foreign currency reserves, and it did not close the gap between the two exchange rates for the US dollar in the market, the Central Bank-determined rate of around LE3.48 and the free market rate which stands at about LE3.53.
However, other economists such as Sultan Abu Ali, a former economy minister, cite additional internal reasons for the liquidity crunch. Foremost among them is the large size of bad debts owed by government agencies to state banks. The size of these debts increased by LE10.4 billion between June and December 1998, reaching a total of LE147.1 billion, according to Abu Ali. "The size of these debts and the difficulty of rescheduling them has also been a major reason for the liquidity crunch," said Abu Ali. Egyptian banks should have abided by the terms of the "Basel Conference" which require them to have sufficient reserves to make such loans and to do so only if this does not negatively affect cash liquidity in banks.
In terms of external factors, economic observers cite the drop in revenues from oil, tourism, Suez Canal traffic and remittances of Egyptian workers in the oil-rich Arab Gulf countries last year. According to figures released by the CBE, tourism revenues dropped from $1.9 billion in 1997 to $1.6 billion in 1998. The CBE report also indicated that anti-inflationary measures taken by the Gulf states to cope with the recent fall in international oil prices has led to a significant shrinkage in remittances from Egyptian workers employed there. "The volume of remittances from Egyptian workers in the Gulf countries fell from $1.9 billion in 1997 to $1.6 billion in 1998," the report said.
