Friday,19 October, 2018
Current issue | Issue 1351, (6 - 12 July 2017)
Friday,19 October, 2018
Issue 1351, (6 - 12 July 2017)

Ahram Weekly

Economy on a tightrope walk

The government is determinedly pursuing its economic reform programme, but it has yet to impress those who have been negatively affected, writes Niveen Wahish


Sherif Ismail
Sherif Ismail

News of a strengthening pound has always been a reason to rejoice for many Egyptians. This week the pound broke the LE18 per dollar barrier to trade at LE17.99. It had ranged between LE18.4 to LE18.15 over the past six months.  

Khaled Hamza, group strategist at SIGMA Capital Securities, told Al-Ahram Weekly that though there were no exact figures for the true value of the pound, it is believed it is undervalued as a result of several factors. The latest increase in interest rates should have resulted in some appreciation of the currency, particularly since it was associated with a considerable influx of portfolio investments in government debt instruments, he said.

Foreign holdings of Egyptian treasury bills rose to $7.5 billion at the end of May.

Moreover, Hamza said, the notable success of the government’s latest Eurobond issue in May 2017, oversubscribed at dollar yields lower than the January issue despite the absence of credit rating upgrades between the two dates, also confirmed that the currency was undervalued.  

“We tend to believe that the pound will end the year at lower levels,” Hamza said. Egypt brought in some $7 billion from two Eurobond issues this year. A third for $1.5 billion is reportedly planned before the end of the year.

A stronger pound triggered a sigh of relief for many who hope it could lead to a cooling down of prices. But the good news failed to brighten up many people this time around. For one thing, the strengthening of the pound is not enough and for another it may not last. Pressure could build up on the pound again when demand for the repatriation of profits by foreign companies picks up.

Moreover, many people are still reeling from the shock of the unexpected increase in fuel prices last week. Over recent months, the government has repeatedly said that fuel subsidy cuts would not be implemented early in the new fiscal year.

The government had announced a support package that doubled the allowance for ration-card holders, increased pensions, approved a cost-of-living bonus for public employees, and raised the tax exemption ceiling on lower incomes. LE85 billion was earmarked for the social spending package.

“What good will those increases do now,” asked Fatma Mohamed, a pensioner. “We are paying higher transportation costs, and even basic goods such as fruit and vegetables have been affected.”

Prices on various fuel products increased by between 25 to 100 per cent, with natural gas for cars increasing the least and butane gas cylinders for home and commercial use doubling in price.

 “I spend my daily income now on transportation and eating as I am out all day, and very little is left to take home,” complained Tarek, a 20-year-old painter who is paid by the day.

“The increases exceeded expectations,” a note by investment bank Prime Holding said. And it is predicted to cause inflation to rise above the 30-year high of 30 per cent, the average for the past six months.

Investment bank Pharos Holding estimates annual inflation to reach an average of 33 per cent in the first quarter of fiscal year 2017-18 as the economy fully absorbs the new energy products price, in addition to the one per cent increase in the value-added tax (VAT) rate.

This week not only did people have to adjust to the fuel price increases, but the new fiscal year which began on Saturday also brought an additional one per cent on VAT, bringing the full rate to 14 per cent. Furthermore, the new fiscal year brings new cuts to electricity subsidies, meaning higher electricity bills.

“People were just adjusting to the price hikes of November and then they got another hit on the head,” said Alia Al-Mahdi, a Cairo University economics professor. “The government should have implemented the reforms in one go and spared us the torment. What is happening is very depressing,” she added.

She said the price hikes were eating into people’s spending power, which would be counter-productive for the growth of the economy.

The 30 per cent inflation, according to Khaled Hamza, is one of the main deterrents to growth because it impacts on household consumption, a major component of GDP and will likely keep growth rates muted in the current fiscal year.

While the recent social measures are meant to support the neediest, the middle classes have also been left hanging. Many of those who were on the borderline of the middle class are now being pushed towards poverty, Al-Mahdy added.

To support the middle-income classes Prime Holding called for a restructuring of income-tax segments by raising taxes on the higher-income segments and reducing it on the medium-income ones.

But the reforms have achieved a lot, according to Deputy Finance Minister Ahmed Kouchouk, who commented that unemployment would have been higher had the reforms not been enacted. Thanks to the reforms, unemployment had dropped from 12.8 per cent to 12 per cent, Kouchouk said. Without the reforms, it could have reached 14 per cent.

“Without these reform steps, the government would not be able to provide basic commodities, the budget deficit would increase, and the outlook for the Egyptian economy would deteriorate,” he said.

The IMF is also happy with the government’s measures. “The fuel price increases, together with the higher social spending already announced, will help the budget while protecting the poor,” IMF Mission Chief for Egypt Chris Jarvis told the Weekly.

Asked whether the subsidy cuts were a prerequisite for the disbursement of the second tranche of $1.25 billion of the loan, he said that “the increase in the prices of fuel products… are part of the government plan, as approved by the parliament.”

Egypt agreed in November 2016 to a three-year $12 billion extended fund facility with the IMF.

As far as the budget deficit is concerned, Prime Holding are forecasting it would come in at 10.6 per cent of GDP versus previous forecasts of 11.8 per cent, thanks to the subsidy cuts. The government is targeting 9.1 per cent.

The subsidy cuts offset the effects of the additional social spending, as well as the May 2017 two per cent increase in interest rates, which would have burdened the budget with an additional monthly bill of LE3 billion, Prime Holding said.

Hamza said foreign investors had been praising the continued commitment of the government to its reform plan and that they were benefiting from the post-floatation attractiveness of Egyptian assets.

But local investors were not as happy, he said, except for exporters, because they had found the spike in short-term interest rates for the Egyptian pound deterring and had been troubled by local consumers’ reduced spending powers.

The CBE’s Monetary Policy Committee is set to meet today, and most observers believe it will keep interest rates unchanged. Since November 2016, the CBE has hiked rates by five per cent.

The main drivers of growth for the economy, according to Hamza, will be exports, particularly those with domestically-sourced inputs such as tourism, fertilisers, food and agribusinesses, as well as inbound foreign investments, particularly in infrastructure, oil and gas and energy projects.

He is hopeful that inflation rates by mid-2018 can be contained at the low teen levels, led by higher nominal interest rates, base effect and fiscal consolidation measures.

Furthermore, he is hoping real GDP growth accelerates to close to five per cent on the back of a revival in the tourism sector which is already witnessing some improvement, as well as the commencement of production from the Zohr and North Alexandria gas fields together with the inflow of foreign investment following the enactment of the new investment law.  

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