31 Jan. - 6 Feb. 2002
Issue No.571
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Al-Ahram Weekly Online 31 Jan. - 6 Feb. 2002 Issue No.571 |
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Seeking commitment
While international donors are expected to support the Egyptian economy, longer term prospects remain in the hands of domestic policymakers, writes Aziza Sami
The World Bank's Consultative Group meeting for Egypt, originally scheduled to take place last October, was postponed following the 11 September attacks and will now take place next week.
On 5 and 6 February representatives from 37 donor countries and institutions will meet in Sharm El-Sheikh to have their arms twisted to provide $2.5 billion in funding -- ideally broken, from the Egyptian government's point of view, into $1 billion in grants and $1.5 billion in loans.
"A quick, short -term disbursal of money will be made for the balance of payments" says the World Bank's Representative in Egypt Mahmoud Ayoub. " Donors will (also) be making commitments for the next two or three years".
Sharp falls in external revenues -- tourism, oil, the Suez Canal and expatriate remittances -- occurring against an international recession have lent urgency to the meeting. Egypt's current balance of trade deficit, downgraded by officials from $12 billion three months ago to $9 billion last week, means that any talk of budgetary expansion is likely to be premature. Yet it is on such expansion that the government is depending to meet its own investment and job creation targets.
In the fourth year of recession the government remains committed to the creation of 800,000 jobs annually, of which 170,000 are expected to be within the already bloated public sector. Yet the ambitious eight per cent growth rate targeted just two years ago has now been downsized to 4.5 per cent, with some analysts suggesting that real GDP growth has slowed to less than one per cent. Against this background the current five year plan (2002-2007), requiring LE40 billion out of a total of LE70 billion in investments to be provided by the private sector, looks increasingly like wishful thinking.
How, then, will the government finance the "expansionary policies" it has announced at a time when taxation revenues and privatisation receipts are both falling? The government also faces the daunting task of containing a budget deficit currently assessed at three per cent of GDP according to Minister of Finance Medhat Hassanein.
In a bid to provide the needed resources the LE 197 billion internal debt will, says Prime Minister Atef Ebeid, be restructured to "free up funds for additional borrowing". The aim is to release LE 10 billion annually over the next five years. The government will also seek to provide LE 40 billion in additional investments, and increase infrastructure and service expenditure to a minimum of LE 30 billion annually.
Meanwhile, the Central Bank of Egypt (CBE) has announced that it will stop issuing short term bonds and treasury bills to finance internal debt, though whether or not this proves practical will depend on securing donor support for the provision of external loans.
While Egypt's external debt of $27 billion currently constitutes 27 per cent of GDP questions are beginning to be raised about the medium and longer term prospects. Quite how sensitive the economic authorities are about such questions was indicated by the promptness of the CBE's response to last week's negative rating by Fitch on Egypt's long term external debt. Egypt is servicing its debt according to schedule, and has repaid over $349.1 million to the Paris Club, the bank announced. In addition, the $63.5 million in coupons due in connection with last year's $1.5 billion Eurobond issue have also been repaid, said CBE officials.
Given the 2003 cut-off date for the EU's Industry Modernisation Programme, strategies for upgrading Egypt's industrial performance will also feature high on the agenda of the Sharm El-Sheikh meeting.
Last week Prime Minister Atef Ebeid announced that credit facilities would be extended within the industrial and agricultural sectors, interest rates on loans reduced, and cash incentives offered to production for export. Quite whether this will outweigh decades of underinvestment, high tariffs on imported capital goods and a bureaucracy that has consistently militated against private enterprise remains to be seen. Nor is it at all clear how the banking sector, given already overstretched resources, will contribute to any expansion of export production.
Continuing pressure on Egypt's foreign reserves is also likely to necessitate even more flexible management of the exchange rate. The tax regime is still in need of a major overhaul directed at supporting industry through incentives while conflicting directives from different government departments continues to undermine the investment climate.
The Social Development Fund (SFD), charged with generating employment through small and medium enterprises, requires an estimated $3 billion to kick start activities, and an additional LE 2.7 billion annually if the target of 800,000 new jobs a year is to be met.
And while Egypt's political and regional weight is likely to ensure a measure of support from its sizeable donor community, longer term prospects remain pegged to the ability of domestic policy- makers to promote exportable production. Only when this is achieved, will the long-term risks incurred by increased borrowing have been beaten.
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