Tuesday,12 December, 2017
Current issue | Issue 1144, 18 - 24 April 2013
Tuesday,12 December, 2017
Issue 1144, 18 - 24 April 2013

Ahram Weekly

Down the drain?

Officials are leaving no stone unturned in their quest for financing, but some observers are worried how the money will be spent, writes Niveen Wahish

Al-Ahram Weekly

There was a time when high-ranking Egyptian officials would travel east and west seeking investment. That way of operating seems to have taken a back seat, for now at least. Now they go east and west in pursuit of financing.
This week these high-ranking officials fly to Washington for the International Monetary Fund’s annual spring meetings. There they will follow up on negotiations which ended Monday in Cairo with an IMF technical team over a proposed $4.8 billion loan. According to Minister of Planning and International Cooperation Ashraf Al-Arabi, negotiations had been proceeding positively and an agreement will soon be signed. Al-Arabi said in a televised interview that the government is intent on implementing its reform programme and that the IMF is also intent on helping Egypt. The minister said that the negotiations are difficult as the economic situation has deteriorated since the government last negotiated with the IMF in November of last year. Back then the government postponed plans to go through with the loan after a set of tax reforms were not implemented due to political tension.
A statement issued by the IMF team on Monday night quoted Andreas Bauer, mission chief for Egypt, as saying, “discussions with the authorities will continue with the objective of reaching agreement on a possible Stand-By Arrangement in support of Egypt.” Bauer said, “the authorities have already taken valuable first steps to improve the targeting of energy subsidies and are seeking to broaden their revenue base. They intend to build on these steps with further actions to address, in a socially balanced way, the country’s fiscal and balance of payments deficits, and create conditions for a sustained recovery of the economy.”
The negotiations with the IMF have not prevented the government from seeking financing elsewhere. Qatar has provided an extra $3 billion by purchasing Egyptian government bonds. This latest assistance tops some $5 billion the Gulf state has already given Cairo. Qatar also said it would extend gas supplies to Egypt this summer as needed. Libya, too, gave Cairo $2 billion in the form of a deposit with the Central Bank of Egypt.
The Qatari and Libyan assistance cast doubt that the government was not serious in immediately implementing the economic reforms it is agreeing on with the IMF and was buying itself time. In fact there was speculation that talks with the IMF are not going well, and that Egypt needs to enhance its rapidly depleting foreign reserves to pay for imported wheat and fuel and prevent a further slide in the pound. But Al-Arabi denied the reports, saying that the government is well aware that the structural problems will not be resolved without reforms. He said there were no intentions to delay the implementation of reforms until after the parliamentary elections, saying that what has caused economic problems to augment is government delay of critical decisions with the pretext that the timing was not good.
The minister rejected accusations that the government was not making its plans transparent, saying that the government’s plan has been clear all along. He pointed out that the two main issues the government is working on are the rationalisation of subsidies and reforming the tax system. He said that plans are underway to rationalise fuel subsidies to energy intensive industries and that gasoline and mazut will be distributed through smart cards at the beginning of the new fiscal year. Meanwhile, he said that some tax modifications are being reviewed by the Shura Council this week. Furthermore Al-Arabi pointed out that the government is careful to push for measures that will achieve a greater degree of social justice and which will not affect the vulnerable. And he outlined plans for an ambitious safety net programme such as wider health insurance, cash support for the poorest five per cent of the population and social insurance pension for the poor.
The government’s extensive borrowing has not gone unnoticed with some questioning what Egypt is giving in return especially since not long ago Qatar had said that it was not considering giving Egypt further assistance. However, Qatari Prime Minister Sheikh Hamad bin Jassim Al-Thani told journalists that Qatar “did not ask for anything in return”. Still, some fear that the money Qatar has given will give it leverage over Egypt’s economic and political decisions.
Egypt’s growth rate has slowed down considerably in the past two years. The government expects growth of 2.5 per cent for fiscal year 2012/13, down from previous estimates of 3.5 per cent. The World Economic Outlook issued by the IMF Tuesday put Egypt’s growth at two per cent for 2013. It foresaw growth of 3.3 per cent in 2014.
This slowdown has taken its toll on the country’s hard currency income leading to a depletion of foreign reserves to $13.4 billion at the end of March, barely enough for three months of imports. The dollar crunch is making it difficult for the government to fulfil everyday needs for food and fuel. This has also pressured the value of the pound. The pound lost around 11 per cent of its value since the beginning of December and was losing more value on the black market.
These reasons seem good enough to warrant borrowing, even for the opposition. The Egyptian Popular Current, the political coalition headed by Nasserist Hamdeen Sabahi, Wafd and the Salafist Nour Party who met the IMF technical team this week admitted the need for the loan but said that they would not accept that the IMF prescribe harsh conditions that would affect the majority of the population. Azazi Ali Azazi, a member of the board of trustees of the Egyptian popular current, told Al-Ahram Weekly that their unwavering position is that any conditions that will affect support for the poor, the middle class and the low income categories are not accepted. Azazi said measures that will lead to the depreciation of the pound or the replacement of in-kind subsidies with cash subsidies are bound to affect the majority of the population.
Acknowledging its meetings with these various parties, the IMF Egypt mission chief said, “the mission was encouraged by the constructive positions and views expressed by the representatives of political parties on economic reforms and possible IMF support. All sides concurred on the need to protect the vulnerable sectors of society when implementing reform measures.”
But while the borrowing is providing temporary relief for the government, it will be written down in the books. According to March figures by the Ministry of Finance, Egypt’s external debt stock increased by 15.2 per cent — for the first time since March 2008 — levelling at 13.8 per cent of GDP in December 2012 ($38.8 billion) compared to 13.2 per cent of GDP ($33.7 billion) at the end of December 2011. The Ministry of Finance attributed this “notable increase” to the $4 billion deposited in CBE during the second quarter of the fiscal year 2012/2013, as part of a Qatari financial assistance pledge. And the additional $5 billion by both Qatar and Libya will bring that figure to around $44 billion.
However, Gamal Bayoumi, secretary-general of the Arab Investors Association, does not worry about debt in itself as governments worldwide borrow to invest in growth. What does concern Bayoumi is how the government plans to pay it back when currently there are no resources.
The minister of international cooperation in his televised interview said there are experts who are taking care of scheduling the repayment, and that should not be something to worry about as Egypt has never defaulted on repayment of its debt. He further said that despite the increase, Egypt’s external debt remains within the safety limits. And he added that foreign financing is needed to avoid reverting to domestic debt which has reached 75 per cent of GDP and is crowding out the private sector.
But economist Mohamed Samhouri also asked how long the positive impact of these loans will last. He pointed out that loans that Egypt has taken in the past year provided relief but only for a while and Egypt is back again now seeking more loans. Samhouri said the loans have largely been used to finance the soaring budget deficit and to prevent further deterioration in the balance of payments while public investment currently is being financed by borrowing small amounts of money from international and regional development organisations.
Egypt’s budget deficit is expected to grow to LE185 billion by the end of the current fiscal year. And estimates for fiscal year 2013/14 put the deficit at LE197.5 billion, 9.5 per cent of GDP according to a draft budget soon to be discussed by the Shura Council, which for now has parliamentary powers.
Azazi does not want to see borrowed money going down the drain either. Instead, he wants to see it invested in job-creating small and medium enterprises and in creating an investment friendly environment. He stressed that there must be a clear programme that the government is implementing.
Tarek Shaalan, head of the economic committee of the Salafist leaning Watan Party, said that while in normal times he would not support borrowing, Egypt is currently experiencing an unusual temporary situation. “There are commitments and to meet them the government needs the hard currency.” Shaalan is not worried that Qatar has been a major supporter. “We do not have a choice; very few countries are willing to extend a helping hand.” Shaalan is also not concerned that the borrowed money will be used to finance commodities rather than being invested in resource earning projects. To him that is only temporary until parliamentary elections take place after which much needed laws to improve the investment climate can be passed, which will reassure investors into returning once again to Egypt. That having happened, things will slowly return to normal and there will no longer be a need to borrow.

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