28 Dec. 2000 - 3 Jan. 2001
Issue No.514
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Al-Ahram Weekly On-line 28 Dec. 2000 - 3 Jan. 2001 Issue No.514 |
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Along the fault lines
Newspapers and periodicals over the past year carried many anecdotal analyses of the liquidity crisis and stagnation in the Egyptian economy. Indeed, the issue received top priority on the government's agenda. To some, it appeared as though this crisis had erupted suddenly, without prelude or signs to presage its onset.
Yet as early as 1998 the problems of liquidity and recession were already keenly felt and began to dominate talk in the marketplace, government circles and economic fora. On the other hand, numerous economic indicators clearly revealed the persistence of such trends. The discounted commercial bills rose from LE859 million in 1997 to LE1,270 in 1998, while the inter-bank lending rate climbed from 8.7 per cent in June 1997 to 11 per cent in January 1999. Also of considerable concern was the growing phenomenon of bounced checks, with, in December 1999 alone, some 63,280 cases before the courts in Assiut, Port Said and Alexandria involving outstanding claims due to non-payable checks to the tune of LE48 million. During that same month, the Central Bank reported a decline of LE1.7 billion in deposits in local currency.
More ominously yet, bankruptcy debts rose to LE1.6 billion in 1999, up 79 per cent from the previous year. And a study of 61 of the top companies listed on the stock exchange showed a drop in the volume of spending on household products in 1999 from the previous year while they recorded an average 10 per cent drop of sales, a growth in profits of only six per cent and a rise in unsold stock of 53 per cent.
If, as the preceding statistics indicate, the liquidity squeeze and debt accumulation had already become critical two years ago, it is nevertheless important to distinguish between a "liquidity crisis" as such, and a crisis in the management and distribution of available liquidity. The liquidity crisis has not spread itself evenly over the various portions of the Egyptian economy. While certain markets and sections of the economy suffered a severe shortage of liquidity, other parts have enjoyed a surplus, reflecting the maldistribution of income and wealth in Egypt in general.
Perhaps the most noticeable feature shared by the plethora of articles on the subject in the press was the tendency to attribute the "liquidity crisis" to the government's outstanding debts to the private business sector, estimated at LE12 billion. A closer inspection of the situation, however, reveals that the "crisis" that was on everyone's lips was the product of numerous interrelated factors, all of which combined to aggravate it from 1998 to 2000.
PUTTING ON THE SQUEEZE: From the sensational case of the loan deputies to businessmen-cum-parliamentarians, business and politics are even further inextricably intertwined. Fears that UK retailer Sainsbury's (top) is planning to slip out after a less-than-spectacular opening in the Egyptian market this year follow a popular local boycott on the grounds that the British mother company donates part of its profits to Israel; newly-elected businessmen and NDP-member Mohamed Abul-Enein (top right) has been tapped to head the housing committee, but four former NDP parliamentarians were found guilty this year along with 31 other businessmen of sweeping financial irregularities; as the so-called liquidity crisis deepened and the dollar climbed higher and higher (above), prominent businessmen were also feeling the heat -- when asked to pay up on mounting bank debts, the likes of Mustafa El-Beleidi (second from top right) and Rami Lakah (third from top right) fled the country, along with Tayseer El-Harawi and Mohamed Anwar El-Garhi; the story wasn't over for Lakah, however, who returned to a triumphant election to Parliament in October, despite questions about his eligibility to hold a seat and debts outstanding; all was not economic entrenchment, as this year saw mega-projects (second from top) like the Gulf of Suez Development Project and the East of Port Said Project catch some of the limelight
phots: Khaled El-Fiqi
A prime cause was the spending behaviour of high-income sections of the household sectors, whose consumer patterns are characterised by a concentration on imported goods and services or activities with limited spread effects, thereby minimising what is known as the spending multiplier, in the Keynesian sense. Examples of this form of consumer behaviour are the enormous personal outlays on mobile phones, private lessons and fast food meals.
The private business sector's investment patterns have also been responsible for generating the crisis. Rampant investment in real estate, particularly in luxury housing in the new satellite cities, has given rise to a huge stockpiling of idle, unmarketable real estate. This, in turn, has absorbed an extensive portion of this sector's available liquidity from the banking sector, thereby freezing the moneys that could otherwise be turned to loans or investments in other branches of economic activity. In a similar manner, the expansion in the commercial sector's purchases of household products from southeast Asia has greatly exceeded the absorptive capacity of the Egyptian market, leading again to a huge stockpiling of products, which have now become difficult to dispose of without undercutting the sellers' own prices and damaging their profit margins. The problems of liquidity and stagnation in this sector have been exacerbated further by the fact that many importers have been unable to repay their loans to the banks over the past three years, rendering it increasingly difficult for the banks to re-extend credit to other potential investors.
A third contributing factor was the government's rush to implement a number of national mega-projects at once, without sufficient study of the direct and indirect financial and monetary burdens of this policy. This, in turn, has absorbed a significant portion of the liquidity available to the government and the treasury, while another significant portion of its assets has been channeled abroad in the purchase of the necessary materials and equipment for these projects, the result of which has been to dissipate the spending multiplier effects of these expenditures, sucking the liquidity away from the domestic economy again.
If repeated reference has been made to the government debt arrears to the private business sector as a major cause of the liquidity crisis and stagnation, few have concerned themselves with the other side of the coin. The government is owed some LE17 billion in tax arrears. According to a statement by the minister of finance, the figure far exceeds the government's debt arrears to the private business sector.
This issue brings to the fore the question of our system of national fiscal management For while in a sense it is comforting to know that the government's debt arrears are matched by the accumulated tax arrears, there are severe defects in coordinating the two sides of the equation. Clearly what is needed is for the Ministry of Finance to create a computerised information system that generates monthly, if not daily, data to present up-to-the-minute on-line reports on the position with regard to taxes due and financial liabilities.
Finally, the banking sector is guilty of approving loans without securing sufficient collateral and out of proportion with its asset base. Thus, in many banks the ratio of total loans to total deposits exceeded customary levels, which range between 65 and 75 per cent, and the volume of the liabilities of the private business sector to the banking sector skyrocketed due to the combined effects of over-lending, on the banking sector side, and over-trading without sufficient study of the domestic market, on the private sector side. Simultaneously, by mid-1998, the ratio of the volume of debt to the total assets of some real estate companies reached 90 per cent and the ratio of debt to the total property rights of some of Egypt's major real estate firms varied between 250 and 1,000 per cent.
The "liquidity" and "recession" crises, therefore, are the symptoms of a far more profound crisis that resides in income distribution, consumer and investment policies. Thus any corrective policies must address these issues at their roots, if we do not want to emerge from the current "liquidity" crisis only to confront a more intractable structural one.
Perhaps one of the most important issues that arose during the discussion of the liquidity and recession crises in 2000 was the existence of indicators suggesting overall growth and the availability of liquidity in the national economy as a whole. It may be that the cause of this "paradox" resides in a certain duality in the income structure in the economy and, consequently, in the demand structure, a phenomenon that was severely aggravated by the structural adjustment policies adopted in the '90s.
If we consider our economy in terms of two components: a) rising sectors and b) receding sectors of activity, we find during the '90s an upswing in those areas where there is a high demand from high-income strata, and a decline in the lines of activities fuelled by the demand of middle- and lower-income classes. According to reliable data, the share of the top 20 per cent in the national income accounts for approximately 41 per cent of the total spending of the household sector in Egypt and the upper 40 per cent accounts for nearly two thirds of the aggregate spending of this sector. At the same time, their relative share in total household spending of the lower middle and popular classes, who make up approximately 60 per cent of the population, comes to 37.7 per cent. As for the lowest 20 per cent on the income scale, their share stands at only four per cent of aggregate household spending.
Perhaps one of the most telling signs of the duality in the income-demand structure appeared in Al-Ahram of 12 March 2000, in an article titled "The longest winter sale." The sale in question, which lasted from 1 February to 10 March, was a failure, despite discounts on durable household products that ranged from 40 to 70 per cent. Many shoppers at the time opined that the cost of private lessons for their children was the primary reason many were unable to take advantage of the winter sale. That "private lessons" have supplanted essential and household goods purchases in the budgets of limited-income and poor families is indicative of the enormous pressures this form of spending (ranging between LE11 and LE12 billion annually) has placed on these segments of society.
Also indicative of the disparities in income distribution and purchasing power in Egyptian society are the records of credit card sales. By December 1999 the upper-income strata of the populace possessed some 204,000 Visa cards and registered LE821 million in purchases with these cards, in spite of the fact that no more than 15,000 merchants in Egypt accept payment by Visa card. Naturally, a significant portion of credit card spending is on imported goods or services, or at least goods and services that have a high import component, and therefore do not contribute to stimulating the domestic economic cycle.
As a result, we find that many productive and service activities in the formal and informal sectors are suffering a sharp decline in activity, manifested in reduced exploitation of their productive capacities, lower levels of employment and plummeting profits.
Because of these structural imbalances, the Egyptian economy does not progress and grow at a single pace, but rather at two speeds: a) high speed, in those areas associated with the needs and activities of the upper strata of businessmen, professionals, technocrats and consultants -- in short the top 20 per cent on the income distribution scale; and b) low speed, in those areas associated with the lines of activities of the non-tradable domestic market, and the rest of those sectors of society that live on wages and subsistence and marginal incomes.
Economic growth and expansion is thus concentrated around certain activities that cater solely to the needs of the energetic upper-income strata, while the vaster, if stagnant, market that caters to the needs of the bulk of the populace, but with low profit margins, is ignored. Eventually, the cohabitation between these two sub-economies, indeed, these two separate societies will become increasingly difficult, which in turn will aggravate social tensions and compound the risks of economic and political instability.
The "liquidity crisis" is not merely a monetary problem. It is the manifestation of a much more deep-seated structural crisis embedded in the economic system and the mode of income and wealth distribution that has prevailed since the mid-'80s. In short, the Egyptian economy is not merely lacking oil to grease the wheels in the form of cash flows; more importantly, and of graver consequence, the cogs in the machinery of the Egyptian economy are not fitted properly, and it will require a lot more than superficial body work to put it into good working order.
* The writer is professor of economics at Cairo University.
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