Ebeid's plan under fire
The government's new recovery agenda stirred negative reactions despite its ambitious plans to brighten up a depressing economic atmosphere, Sherine Abdel-Razek reports
Prime Minister Atef Ebeid's statement last week, which revealed the dire state of the country's economy, was also an opportunity to present the government's new remedial policies. While experts found little news in Ebeid's figures, few expressed support for the government's plans to pull Egypt out of the quagmire.
In light of the state's mounting debt and the increase in basic food prices, announcing previously concealed unemployment figures and admitting the difficulty of realising the promised 4.6 per cent GDP growth rate, this year's statement was grim news. However, Prime Minister Ebeid tried to be optimistic by presenting a number of new plans to face the economic challenges he pinpointed in his statement.
As the government focusses on ways to lower the public debt and cope with the problematic foreign exchange rate, monetary policy reform topped Ebeid's agenda. As a part of these reforms, Ebeid proposed introducing new savings accounts in dollars with a 2-2.5 per cent interest.
However, it was this suggestion for monetary policy reform that drew the harshest reactions. The interest rate on the dollar used virtually worldwide is set by the US Federal Reserve Bank and currently ranges between 0.5- 0.75 per cent.
"This is disastrous," commented Amr Bahaa, head of the treasury at the Egyptian Commercial Bank. "This will simply exacerbate the dollar shortage problem as it will increase demand for the greenback."
"Moreover it will load the treasury with a two per cent interest rate payment at a time when we are trying to lower our fiscal burden," he said.
According to Bahaa, the Egyptian pound has lost around 40 per cent of its value since its floatation last January, and the interest rate has not been raised to bolster the pound. Raising the interest rates on the dollar to exceed the international level is expected to increase dollarisation, which currently stands at 27.3 per cent, Bahaa said.
"The low interest rate on the dollar worldwide, in a way, supports the pound's position against the dollar. I can't believe we are reversing this blessing," he added.
Experts also reacted negatively to Ebeid's plans to deal with the local debt. According to Ebeid, with the local debt constantly growing and the cost of its service increasing, the government is desperate to find new sources of money. Ebeid proposed using the LE80 billion blocked account at the Central Bank of Egypt.
In 1991, when the Paris Club of donor countries rescheduled the debts of Egypt's public sector entities, it was agreed that these entities would pay the local treasury a certain part of the loan and its service on a monthly basis, which the treasury would then pay in instalments to the Paris Club donors. The accumulation of these payments at the CBE has grown to LE80 billion.
"The new plan is that instead of the government paying interest rates on loans that it takes from the Central Bank [of Egypt] to cover its expenditures, it will use this account as collateral to obtain interest-free loans," said Abdel-Fatah El-Gibali, adviser to the minister of finance. According to El Gibali, this will save the government millions of pounds.
The plan was surprising as most analysts and economists said it was the first time the government revealed this LE80 billion figure.
But the plan which raised the loudest criticisms was the government's debt reducing "debt to equity" plan. According to Ebeid, the government will swap its debts to different state-owned bodies and economic entities for ownership of state assets. The government's debts to pension funds are the first to undergo this new practice.
El-Gibali explained that pension funds obtain contributions from government and private sector entities and use part of them to pay pensions while the rest is deposited in the National Investment Bank (NIB) at an interest rate of 11 per cent. The government pays the bulk of pension contributions for its employees, as well as contributions to private sector employees. When the money is deposited in the government owned NIB, the government has to fork over the 11 per cent interest on the deposit. Moreover, when the government borrows this money from the National Investment Bank, it pays 12 per cent interest. Instead of shouldering all these financial costs, the government plans to give assets in public sector entities to the pension funds, which would presumably replace the interest rates on deposits in the NIB as the source of the funds' income.
The government's critics are up in arms over this plan, arguing that if the swapped assets were profitable, the government would have used them to pay its debts in the first place.
"Selling government assets to another state owned entity is anti-privatisation," said economist Ahmed Galal, executive director of the Egyptian Centre for Economic Studies.
"The problem is that the government considers only the debt of the treasury to be public debt, but the debts of different state owned economic authorities are also public debt," he said. "So if I am selling my debt to a public body, I am doing nothing but trying to make my finances look better. But in reality, there is still the same level of public debt."
