 |
Al-Ahram Weekly 8 - 14 June 2000 Issue No. 485 
|
||
Published in Cairo by AL-AHRAM established in 1875 |
| ||
|
Al-Ahram Weekly 8 - 14 June 2000 Issue No. 485
|
||
| Published in Cairo by AL-AHRAM established in 1875 |
| ||
Egypt Region International Economy Opinion Culture Features Travel Living Sports Profile People Time Out Chronicles Cartoons When in debt, borrow?
By Sherine Abdel RazekWhen the government submitted its new budget for 2000/2001, it announced that the overall deficit of LE13.761 billion will be financed through loans from both local and foreign markets. This shocked public opinion and fuelled the pessimism which had been triggered by the recession, which hit many sectors recently. Even non-experts fear that borrowing from the local market will exacerbate the existing liquidity problem. Fears of rising domestic debts, however, were dwarfed by the reaction to announcements that the government would borrow from international markets.
Foreign debts have diminished as a result of the economic reform programme. Egypt's stance versus the Iraqi occupation led to donor countries (including the United States and Gulf countries) writing off 50 per cent of their debt. Since 1991, when Egypt signed the Paris Agreement with donor countries, debts were reduced as a reward for regular repayment and the government refrained from borrowing.
Nonetheless, government and experts now claim that foreign borrowing -- as stipulated in the new budget -- will not burden taxpayers. Instead, it will be channelled into social and economic development projects needed to realise an annual growth rate of seven per cent .
Minister of Finance Medhat Hassanein recently declared that Egypt's domestic debt and foreign debt together account for less than 50 per cent of GDP, the accepted level worldwide. Domestic debt stands at LE147 billion, the Ministry of Finance foreign debt is $10.3 billion (LE35.5 billion) while GDP is LE362 billion.
According to Hassanein, Egypt must make use of the fact that it is a shareholder in international lending institutions such as the World Bank and the African Development Bank, which provide concessionary loans with extended maturity dates and low interest. This will not exacerbate the servicing of foreign debt, according to financial experts. Egypt's debt service expenditure stands at LE1.5 billion annually and it can cope with new loans. The government is also planning to enter the international debt market with the issue of LE500 million in Eurobonds. These bonds mature after 10 years and bear coupons at lower than the interest rates the government would have to pay if it borrowed from the local banks.
"In addition to filling the persistent gap between investment needs and limited funding resources resulting from low savings rates, the expansion in issuing government bonds will help revive the capital market and become the medium by which the Central Bank of Egypt [CBE] will control liquidity when it opts to buy or sell these papers in open market transactions," stated a report on public debt prepared by the Al-Ahram Center for Political and Strategic Studies.
A percentage of the planned foreign borrowing will be used to settle the debts of public companies. The government has already repaid LE4.5 billion to cotton companies.
Moreover, by tapping the international debt market, the government will encourage Egyptian companies to follow suit in securing similar long-term means of finance, especially since these companies will use interest rates paid on government bonds as a benchmark, said Nashaat Abdel-Aziz, managing director of Egyptian Anglo for Fund Management.
While expressing reservations about the structure of domestic debt, the Al-Ahram Center report warned against the risks of overdependence on treasury bills as a means of short-term finance, since this would in turn be a burden on the budget, ultimately leading to restrictions on public expenditure.
Investors' increasing interest in buying government bonds also means the government is acquiring these savings rather than have them directed to productive investments.
While one disadvantage of foreign debt is that economic resources are diverted to international markets, a disadvantage of domestic debt is the imposition of a burden, seldom borne equally by taxpayers. Concerned about the distribution of debt burden, Sami El-Sayed, professor of economics at Cairo University, said that since the interest rate paid on domestic debt, (an average of 8 per cent in the case of treasury bills and 11 per cent for treasury bonds) is higher than GDP growth rate, which is 6 per cent, this will redistribute national income in favour of subscribers in these papers.
Since no ceiling is placed on the number of bonds to which investors can subscribe, it is those enjoying higher incomes who will accrue the interests on those bonds, which the government will have secured through taxpayer money. Thus lower-income groups will be bearing the brunt of this strategy.
While the restructuring of domestic debt is inevitable, it cannot be the final recourse by which the capital market can be activated, nor can liquidity be controlled mainly through open-market transactions.
Out of the LE52.1 billion worth of treasury bonds in 1998/1999, only LE11.1 billion worth are currently being traded on the market.
