Al-Ahram Weekly On-line 21 - 27 September 2000 Issue No. 500
Published in Cairo by AL-AHRAM established in 1875

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Banking on improvements

By Niveen Wahish

In recent months, the Egyptian banking sector has faced many problems. First there was, and continues to be, the dollar shortage, then a liquidity crunch emerged. Added to this, a number of parliamentarians and businessmen defaulted on loans. Bankers themselves are baffled by how complicated the situation has become as the problems dogging the banking sector spilled over into the economy, triggering a vicious circle.

To get to the bottom of the matter, President Hosni Mubarak requested that Prime Minister Atef Ebeid provide him with a full report on the status of the Egyptian banking sector. Scheduled to be delivered within a few days, the report will then be discussed by President Mubarak and Central Bank of Egypt (CBE) governor Ismail Hassan along with representatives of other banks.

The issues to be discussed are numerous and interrelated. Defaults on loans by prominent businessmen and members of parliament, for which the banks have received most criticism, will undoubtedly be at the top of those issues. Observers have suggested that banks surpassed safe limits in their lending and have failed to follow up adequately on their loans. However, CBE officials have denied this. Hassan has been quoted saying that Egyptian banks did not exceed the safe credit limits, adding that since 1991 Egypt has been applying the criteria of the international Basle Agreement, which includes guidelines for banking.

Similarly, Mahmoud Fahmi, former chairman of the Capital Market Authority (CMA), stressed that the fact that a few clients have defaulted on their loans does not mean that the system has failed. Bank loans to the private sector that have gone bad represent only a fraction of banks' loan portfolios. In fact as Ahmed El-Bardei, chairman of Banque du Caire, was quoted as saying that a minority of clients have defaulted on their loans representing no threat to the Egyptian economy, considering that the current value of loans made by Egyptian banks exceeds LE220 billion.

One of the reasons borrowers are defaulting on their loans is the market's limited liquidity and the recession through which the economy is currently navigating. As Mahmoud Fahmi explained, tight liquidity is not so much a lack of cash as it is restricted movement of funds. Some of this money is tied up in investments that have not yet yielded revenues.

Mounir El-Zahid, general manager of the credit department of the Egyptian British Bank, attributed the liquidity squeeze to the expansion of manufacturing enterprises. The products of these are not absorbed by the local market and there has been little success exporting them. Many of the components of these manufactured goods are imported, making them too expensive to be competitive in the international market.

Another source from the banking sector, who spoke to Al-Ahram Weekly on condition of anonymity, suggested that stagnation in the real estate sector was to blame for the recession. Compared with the billions of pounds spent by the contracting sector and its many feeder industries, returns have been minimal.

State debts of over LE147 billion to various parties represent another ring in the chain. Once a substantial portion of these are paid, something the government has promised to do by the end of the year, it is expected that money will circulate more easily and thereby ease the recession.

Until that time, Prime Minister Ebeid along with CBE governor Hassan have said banks will help their serious clients get back on their feet by rescheduling their debts. But, warns El-Zahid of the Egyptian British Bank, lending institutions will need to watch out for companies who are able to pay, but are taking advantage of the situation and "playing dead."

Another factor which Mahmoud Fahmi expects will relieve the liquidity problem is the easing of the dollar shortage. He pointed out that over LE20 billion have been taken out of circulation -- the sum paid by banks for the $5 billion they purchased from the CBE during the past two years.

But no end appears in sight for the dollar situation, which in recent weeks saw its value climb to a new height of LE3.65 at foreign exchange companies, an increase of 10 piastres in less than a month.

Speaking pessimistically, the anonymous banking-sector source said that although the factors which originally caused the dollar shortage -- namely uncontrolled importation of consumer goods accompanied by the poor performance of sources of foreign revenue -- have vanished, the problem has actually worsened. She attributed this situation to speculation on the dollar. Both businesses and individuals are "sitting on their dollars" hoping to make a profit on them as the price rises. "No one is selling dollars," she said, adding that "Since last year the banks' only source for the dollar has been the Central Bank."

One oft-mentioned measure that might encourage the public to let go of their dollars, is raising the interest rate on the Egyptian pound to as high as 18 per cent as was done in the early 1990's at the beginning of the reform programme. Such a step is a double-edged sword, pointed out the source, explaining that it would probably discourage investment and definitely put more pressure on borrowers, many of whom are already having difficulty paying their debts.

El-Zahid of the Egyptian British Bank also believes that shortage in dollar supply has become a "chronic" problem. To deal with this he suggests two long-term measures. The first is to obtain more hard currency by exporting natural gas which should help to make up for the decline in oil revenues. The second is to reduce expenditure of hard currency through an agriculture policy directed towards achieving self-sufficiency in cereals for which the state spends $8 billion annually, a figure El-Zahid characterised as "alarming."

El-Zahid said that although the injection of dollars by the Central Bank has been timely, it is only a palliative measure. "It will not cure the ailment," he said, adding that it will only be effective as long as ample reserves are available for such a purpose.

While failing to come up with an immediate solution, devaluation was ruled out completely by those who spoke to the Weekly. Any advantages which might result from devaluation, such as increased competitiveness for a small part of Egypt's exports, would be outweighed by the drawbacks, namely a doubling of Egypt's import bill which exceeded LE50 billion 1999.

For Mahmoud Fahmi, the outlook is less bleak. According to him, the exchange rate at foreign exchange companies should not be taken as the main indication of the strength of the pound because these companies satisfy demand by individuals or small companies. The large sums needed to open letters of credit, for example, can only be provided by banks. And despite the drop in hard currency reserves from over $20 billion to around $15.6, Egypt is within the safety limits, having reserves to cover around 10 months-worth of imports of goods and services. This is more than double the amount considered "safe" by international standards.

He pointed out that recent indicators have shown that revenues from tourism and even from the Suez Canal are regaining ground, which means that "we will not reach a dangerous point." In fact, Prime Minister Ebeid last week stressed that the economy is strong, constantly improving and growing steadily.

 

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