Tuesday,17 July, 2018
Current issue | Issue 1296, (19 - 25 May 2016)
Tuesday,17 July, 2018
Issue 1296, (19 - 25 May 2016)

Ahram Weekly

Shaping the future

This week’s downgrade in the outlook for Egypt by credit rating agency Standard & Poor’s underlines the urgent need for serious economic reform, write Niveen Wahish and Sherine Abdel-Razek

Al-Ahram Weekly

It has been a week of mixed economic news. On the downside, credit rating agency Standard and Poor’s (S&P) downgraded its outlook for the Egyptian economy from stable to negative. On the plus side, tens of landmark infrastructure developments were inaugurated across the country.

The International Monetary Fund also listed Egypt as the second-largest economy in Africa, taking over from South Africa, whose slip in position is largely a result of the depreciation of the rand.

“The downgrade had been expected given the situation of the foreign exchange market,” said Omar Radwan, head of asset management at HC Securities and Investment. “No one was surprised.”

Unfortunately, he added, it comes at a time when Cairo needs to look into borrowing from international markets.

In recent years Egypt has depended on bilateral loans and grants from countries in the Gulf and Asia to fill the gap in its hard currency needs. This year, however, it was planning to raise $1.5 billion of bonds on the international markets.

The downgraded outlook means that if no fundamental changes take place in the next six months Egypt will see a further reduction in its rating, from B- to CCC+. And that, says Amr Hassanein, head of the Middle East Rating and Investment Services, would place it on the verge of defaulting on current obligations.

A lowering of credit worthiness undermines a country’s ability to borrow money from international markets and increases the level of interest that must be paid on debt.

In making its assessment, S&P highlighted how Egypt’s external and fiscal vulnerabilities could dampen economic recovery and exacerbate socio-political challenges.

Instability in economies of the Arab gulf countries adds to the problem. Last week Moody downgraded Saudi Arabia, Oman and Bahrain and assigned negative outlooks to the United Arab Emirates, Oman and Bahrain.

Gulf aid has been a lifeline for Egypt: in the past four years Saudi Arabia, the United Arab Emirates and Kuwait have extended $25 billion in aid. The government is currently in talks with the United Arab Emirates to receive a $2 billion deposit — the equivalent of 3.6 months of imports — to support its foreign reserves.

So is there a way out?

“We have to get our act together,” said Radwan, adding that this is easier said than done. Tourism could be a starting point because, unlike sources of hard currency such as the Suez Canal that depend on global trade, there are things Egypt can do to attract more visitors.

Egypt received $6.1 billion in tourism revenues in 2015, half the amount received in 2010. The drop, mainly attributed to unrest since the revolution in 2011, has been exacerbated by other factors: the downing of a Russian plan over Sinai in 2015, the murder of Italian researcher Giulio Regeni, and the aerial bombing of a group of Mexican tourists who were mistaken for militants.

“Once we secure steady foreign currency revenues everything will fall into place,” said Radwan, explaining that the CBE will then have the wherewithal to defend a realistic rate of exchange against black market machinations.

Though these are tough times Radwan is optimistic there will be a turnaround soon “as many infrastructure projects are being completed and this will allow us to market Egypt as a destination for mega-projects, hopefully attracting plenty of foreign direct investments [FDIs].”

In the last couple of weeks Egypt has inaugurated projects aimed at upgrading the supply of electricity, improving roads and guaranteeing food security.

While delivering a much-needed improvement of infrastructure that will serve citizens and the business community, the mega-projects have been criticized for being a drain on the national budget, especially given falls in hard currency earnings.

Egypt’s budget deficit hit 11.5 per cent in 2015-2016 despite an initial target to cut it to below 10 per cent. It is the highest budget deficit in any economy rated B+ by S&P.

“If we want to fix the economy we need a more inclusive politics,” former finance minister Ahmed Galal told Al-Ahram Weekly. Real parties, civil society and syndicates that represent different points of views will ensure politicians do not overstep the mark, he said.

Engaging the public more in the problems that Egypt is facing is also necessary, said Hassanein.

“The government has to engage the people in deciding what to do. Egyptians have to know the truth about the deficit between our revenues and expenditures if they are to be encouraged to alter their own spending and consumption habits.”

Radwan argues that there is also an urgent need to streamline investment laws and regulations. The time needed to create a company, and to allow companies to exit the market, both need to be reduced.

The most important legislative change, according to a recent report by local think tank the Egyptian Centre for Economic Studies, is to amend the investment law.

Tax laws also need to be simplified.

“Normal law-abiding citizens do not know how to deal with Egypt’s tax regulations,” said Radwan.

Galal agrees. The tax system is long overdue a major overhaul, he said, and any reforms should institute a more progressive tax system and expand the pool of taxpayers.

But long-term sustainable growth will not be achieved by simply improving the business environment and resolving investor disputes more quickly. The government needs to take a close look at the bigger picture and decide what its priorities are.

“What kind of economy does Egypt want to be?” asked Galal. “Will it be one based on rent-seeking, or on entrepreneurship and innovation? Based on exports or producing for the local market?”

He continued, “We need coherent industrial policies. The government already has policy instruments that can impact the decisions businessmen make to invest in one sector rather than another.” Galal pointed out that the level of protection given to domestic car producers has created an inefficient industry that makes money by selling locally rather than exporting its product.

“A great deal was expected of the current government but the plan they presented to parliament fell well short of expectations. It has too much about mega-projects and too little on policy,” warned Galal.

Bureaucracy, which has increased in size and scope since the revolution, is another problem the government needs to work on, said Hassanein.

Senior government officials, who have seen their colleagues face corruption investigations and charges of squandering public money, are often too worried to take significant decisions or sign important deals for fear they will face the same fate. It is almost as if the government is punishing the state, said Hassanein.

S&P says the political, social and security environment in Egypt remains “fragile”. On the political and security front it referred to the uproar over the recent decision to transfer the control of two Red Sea islands to Saudi Arabia and the “continued hostile situation” in Sinai. On the social front, the government failed to secure the approval of parliament for a new civil service law that sought to tackle bureaucratic inefficiency.

But gaining public approval for meaningful reforms will be a tough job given that many people already feel that their backs are against the wall. Egyptians are unlikely to readily accept the imposition of new measures that reduce their earnings still further.

 Inflation hit 10.3 per cent in April compared to nine per cent in the three first months of the year, reflecting the way that March’s devaluation of the pound is starting to feed into the wider economy. The prices of basic food items are increasing on a daily basis despite government efforts to keep prices low at its own outlets and mobile shops operated jointly with the army. The pound value of food subsidies on ration cards has also been increased.

Prices could see another leap with the application of a value-added tax (VAT), scheduled to be presented to parliament for approval in the coming days. VAT will replace the existing sales tax but will be applied on a wider scale.

Electricity bills are also increasing as plans to phase out subsidies for all but the poorest families by 2019 are applied. Nor have medicines been spared. This week the cabinet agreed to increase the prices of medicines that cost less than LE30 by 20 per cent. The move comes on the back of complaints from suppliers that the depreciation of the pound has increased the cost of raw materials.

“The future is unknown but we can shape it,” said Galal. “We have many factors working in our favour.” Among those factors are a market of 90 million citizens, a diversified economy, human capital and multiple market-access agreements.

“It all depends on us following the right policies.”

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