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Al-Ahram Weekly 27 April - 3 May 2000 Issue No. 479 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 27 April - 3 May 2000 Issue No. 479
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Special Features Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Revitalising credit
By Aziza Sami
Following a series of high-level meetings headed by President Hosni Mubarak this week, Prime Minister Atef Ebeid announced a nine-month deadline for the government to repay LE25 billion in accumulated debts to the public and private sectors. An average sum of LE2.5 billion will be repaid every month, starting in May.
"The government will take steps to end stagnation and to stabilise the financial and credit markets," Ebeid said after meeting with a visiting International Monetary Fund [IMF] delegation.
The action came after recession and a liquidity squeeze forced market transactions to grind to a near halt.
President Mubarak has formed a task force representing the National Investment Bank, the Central Agency for Mobilisation and Statistics and the Ministry of Planning and International Cooperation to determine the full volume of government debt.
"Real resources" -- mainly privatisation proceeds, taxes, custom tariffs and oil revenues -- will be used to repay the debt. The 2000-2001 state budget, which is currently being debated by parliament, will make specific allocations needed for debt repayment.
Although these specifics have not yet been announced, state revenue will presumably account for the larger part of the repayment allocations. Ebeid is predicting an increase in the annual income from oil to around LE3 billion. The government is also expected to speed up the privatisation process, starting with the partial sell-off of the telecommunications sector and internal trade companies.
As a result of launching mega development projects over the past years, the government accumulated a large debt volume owed to private and public sector construction companies as well as the national electricity companies. Government debts to the contracting sector alone amount to LE22 billion, causing this sector to fall into a vicious circle of borrowing from banks in order to fulfil commitments and meet payrolls.
Mubarak on Tuesday asked for the rationalisation of credit extended by banks to the private sector. The banking sector has been blamed for over-extending credit to construction and non-productive projects. As part of the government plan, the banking sector will reschedule the debts owed by the private sector and decrease interest rates.
The lack of liquidity has been compounded over the past years by a high demand on the US dollar and Egyptian pound exchange difficulties, forcing the government to draw on its hard currency reserves which have fallen from over $20 billion to the current $15 billion.
Inter-bank rates had risen two months ago to an unprecedented 17 per cent, leading the Central Bank of Egypt (CBE) to reinforce liquidity by re-purchasing treasury bills (repos). Recurring Central Bank intervention in the financial market through repurchasing agreements has exceeded LE10 billion during the past year.
The liquidity squeeze and subsequent recession have been attributed by observers to the government's sluggishness in injecting money into the economy. "It is normal for any economy to have fluctuations in liquidity," Hassan Abbas Zaki, a board member of the Central Bank and former minister of the economy, told Al-Ahram Weekly. "When the volume of money in circulation falls or rises, the Central Bank must inject the needed money or retract the excess. It is a question of timing. The matter was exacerbated because it was not dealt with at the right time."
Zaki recommended that the time span for repaying the government debt should be less than eight months, especially since government repayments will not include interest.
The recession is exacerbated by stocks of inventory accumulated by the private sector, estimated at approximately $8 billion, and which will have to be sold at low prices in order to activate the market. The government announced that it is looking into ways of encouraging the private sector to market its inventory. The banks had extended large amounts of credit to the private sector to fund real estate construction and the import of cheap Asian products, resulting in over-supply. Demand for expensive real estate in the new cities has not met investors' expectations and, as a result, constructing companies are defaulting on their loans, compounding liquidity problems for the banking sector.
"In order to alleviate the current liquidity squeeze, and expand credit extension to the private sector, one course would be to decrease the percentage of the commercial banks' reserves deposited with the Central Bank," Zaki said. "If every bank reduced its deposits at the CBE, which account for 15 per cent of its local currency deposits, to 12 per cent, this would free no less than LE5 billion and partially help resolve the liquidity problem. It will also reduce interest rates by around 1.5 per cent."
But although the liquidity problem is the most pressing in the short run, there are other deep-rooted causes for the current recession. The government and private sector have opted for large-scale, rather than medium and small, enterprises.
The economy exhibits poor export performance as well as low productivity. A rising trade deficit has been coupled with an internal pattern of spending that favours long-term non- productive projects. This puts pressure on the available resources and has an ultimately inflationary impact.
The liquidity squeeze has also hit the stock market, with share prices in sharp decline for two weeks now. The two market leaders, Media Production City and MobiNil, have lost 20 per cent of their value. But Sameh El-Torgoman, chairman of the Cairo Stock Exchange, told a news conference that the slump was temporary and was caused by the "psychological factor" resulting from the recent sharp fall in stocks in global capital markets.
Also see Economy and Opinion pages
