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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 Unstopping the bottle-neck
By Ibrahim Nafie
There are many causes for the current liquidity crisis. With several government sponsored mega-projects being undertaken simultaneously, requiring the import of equipment and machinery, the domestic market has witnessed the diversion of significant sums. The lack of coordination in private sector investment and the consequent duplication of ventures has also resulted in a high excess inventory while the stockpiling of products from Asia following the devaluation of many South East Asian currencies has further compounded the inventory problem.
The real estate market, too, has recently witnessed far too much development at the luxury end. Investments in properties that have so far proved unsaleable have been irrationally high.
Most serious, though, is the fact that there are some 6,000 public projects, ranging from small-scale enterprises to mega-projects, that are in the process of completion. Before contemplating new projects, those in the pipeline must be completed, for only then will they start generating income on the huge investments already made. The completion of these projects will serve to give a major boost to the economy, potentially kick-starting it out of the current stagnation.
The government has already moved in this direction. As part of a two-year plan, it will allocate LE13.9 billion from the 2000-2001 national budget towards completing current projects, with priority being given to those with the best prospects for job-creation and productive capacity. In addition, in keeping with President Mubarak's emphasis on the need to factor in social dimensions, projects relating to potable water, waste water disposal, education and health care will also be prioritised. It is important to stress that the necessary expenditure will be covered by currently available sources and will not require any additional capital raising.
Another major step the government has taken to counter the liquidity crisis is to begin repaying its debts to contractors and other companies. In February it repaid LE2 billion of outstanding debt, and has allocated even greater sums during March, April and May. By fulfilling such domestic obligations, the government, in effect, is injecting liquidity directly into the market which, in turn, should prove a powerful stimulus to the national economy. Furthermore, in President Mubarak's recent meeting with the cabinet's economy group it was agreed that the government would repay debts amounting to LE25 billion over nine months, pending approval by the Peoples' Assembly.
Countering the liquidity shortage should also entail stimulating domestic production. One indicator of growing GDP is higher liquidity in the market which in turn helps to sustain growth, but only so long as the available liquidity is truly a reflection of real economic strength.
On this front it is necessary to prevent dumping in the domestic market of products that have a locally manufactured counterpart. The resultant surplus of such products inevitably complicates the turnover of domestically produced goods, inhibiting the generation of liquidity and adversely effecting the value of the Egyptian pound.
Simultaneously, it is essential to develop monetary policies conducive to the realisation of national economic objectives, which means they must possess an inherent degree of flexibility. A more dynamic approach to interest rate policy is required.
The problem of duplication -- prevalent in the ceramic, iron and steel industries -- must also be addressed. Over production in these areas has resulted in the accumulation of mountains of unsaleable stock. This situation might be remedied over two phases. The first is to appeal to the relevant ministries and to the Federation of Industries to encourage them to adopt appropriate measures for disposing of excess inventory, measures that might entail, for example, reducing prices to stimulate demand both locally and abroad. Then, in the second phase, firms operating in the same field would come together, perhaps under the auspices of the Ministries of Economy and Foreign Trade, and Supply and Domestic Trade, in order to devise an optional plan for avoiding overlaps in production and the more effective tailoring of production to demand.
To counter the shortage in liquidity resulting from idle real estate, referred to above, it should be possible to create a commission consisting of the major real estate firms, their creditor banks and specialised experts, with the purpose of drawing up a more realistic pricing structure for real estate development. Such a structure would be geared to ensure a reasonable profit margin for the real estate firms, a margin that might, for example, be set somewhat above the prime lending rate in order to cover risk. A 20 per cent profit margin, for instance, would generate a faster recycling of capital and greater profits for the real estate companies as a result of the speedier turnover of housing units. It is sufficient here to point out that there are many apartments in Cairo carrying higher price tags than equivalent properties in Western capitals, where incomes are significantly higher.
Banks, too, have a role to play in alleviating the liquidity problem. Above all, they should adopt a more flexible attitude towards their debtors, making it easier for them to reschedule instalment plans and repay loans. The fact is that banks have a concrete interest in helping their customers overcome setbacks, enabling them to stay in business and to improve the performance of their operations. Moreover, banks themselves bear some of the responsibility for the setbacks that befall the ventures they helped finance, as they are responsible for assessing the feasibility of projects and ascertaining the existence of sufficient guarantees for repayment before approving credit.
