Al-Ahram Weekly Online   6 - 12 October 2011
Issue No. 1067
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Published in Cairo by AL-AHRAM established in 1875

Betting on potential

The Egyptian economy may be faltering but economists agree its fundamentals remain strong, writes Niveen Wahish

Figures released by the Central Bank of Egypt (CBE) showing Egypt's domestic debt to have reached LE1,044 billion -- or 76.2 per cent of GDP, up from 73.6 per cent last year -- sparked a flurry of headlines of the borrowing-out-of-control variety.

External debt reached $34.9 billion, up from $33.6 billion a year earlier. Around $27 billion of the total is owed by the government.

Whatever the headlines say, the growth in public debt is hardly surprising, argues EFG-Hermes economist Mohamed Abu Basha.

The need to finance a widening budget deficit means that Egypt's domestic debt has been rising for the last two years. In 2008 spending was increased to off-set the impact of the global financial crisis and nowadays it is needed to counterbalance the fallout of the revolution. Added to this, says economist Reham ElDesoki, is that political instability inevitably impacts economic policy and confidence with the result that revenue falls.

Egypt's economy grew by 1.8 per cent in FY 2010/11 according to government figures, compared to 5.5 per cent the year before.

Sources of revenue and hard currency such as tourism and foreign direct investments have been hit hard by the revolution and subsequent uncertainty. Tourism revenues are expected to be down 25 per cent on last year. The CBE estimates that foreign direct investment will be around $2.2 billion for FY 2010/11, compared to $6.7 billion the year before and $13 billion in 2007/08.

But given such extraordinary circumstances the Egyptian economy is proving surprisingly resilient.

ElDesoki believes that a deficit will be viewed differently when a new president is elected and a more stable environment is in place.

Although Egypt's debt is higher than in 2008 level, it is still below the 85 per cent of GDP recorded in 2007.

The problem, says the anonymous source, is that at the moment there is no clear vision of what needs to be done. And without stability investors will remain shy. He is confident, though, that the fundamentals of the Egyptian economy remain strong.

One worrying problem is the current spate of strikes and industrial unrest.

He urged the government to present workers, whose demands are perfectly legitimate, with a realistic timetable within which they can be met.

Abu Basha is also confident that, "we are not going bankrupt". Egypt's debt profile is not like that of Greece, he explains, where most of the debt is external and owed to international private creditors. Egypt's external debt is only 16 per cent of GDP and consists mostly of concessional or bilateral soft loans.

Borrowing externally, he says, may be necessary to help ease the current financing gap. Government borrowing is negatively affecting liquidity in the domestic market and is becoming increasingly expensive, with rates hitting 14 per cent, making $3 billion loan which Egypt turned down earlier this year from the International Monetary Fund at 1.5 per cent look excessively cheap.

ElDesoki agrees. If borrowing is necessary to bridge the current gap, she asks, does it make sense to borrow at high or low rates?

She argued that though external borrowing comes with conditions they concern the implementation of policies that are more or less along the same lines as those the government has already adopted. And, she adds, any conditionality can be subject to negotiations.

The high rate that domestic creditors are now requesting -- in order to lend to the government -- "is also a condition, after all." (see p.7)

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