Thursday,21 February, 2019
Current issue | Issue 1123, 22-28 November 2012-
Thursday,21 February, 2019
Issue 1123, 22-28 November 2012-

Ahram Weekly

Still safe

Amid continued controversy surrounding the IMF loan, Sherine Abdel-Razek takes a look at Egypt’s foreign debt status

Chart 1
Chart 1
Al-Ahram Weekly

The IMF delegation visiting Egypt has  on Tuesday reached a staff-level agreement to provide Egypt with a $4.8 billion loan.
The facility is expected to trigger an influx of foreign investment and more loans to an economy that is trying to survive a budget deficit of 11 per cent and a lack of foreign currency revenue since the 25 January Revolution almost two years ago.
Moreover, representatives of the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) visiting Egypt this week said the banks are to disburse two billion Euros each, and the European Commission is to give another one billion Euros in assistance to Egypt.
According to the Central Bank of Egypt (CBE), the country got and is negotiating a sum of $16 billion in foreign assistance since the revolution.
While Egypt has a ballooning domestic debt that puts a great burden on the economy, its foreign debt is still in the safe zone.
Egypt’s obligations to non-residents in foreign currency, as the foreign debt is defined, stands at $34 billion (LE207 billion) compared to a domestic debt of  LE1.2 trillion.
“We haven’t resorted to external markets for a long time as in the second half of the 2000s the fiscal deficit was tightening and there was no need to borrow to cover it,” according to Alia Mamdouh, economist at CI Capital.
The fiscal deficit averaged around eight per cent in 2000-2007 then fell to 6.9 and 6.8 per cent in 2008 and 2009, hovering at around eight per cent before the revolution. It now stands at 11 per cent.
Egypt’s foreign debt was a real threat at the beginning of the 1990s, but the Paris Club of nations wrote off almost 50 per cent of this debt. The Paris Club debt relief package totalled $19.6 billion.
“Back then we got the debt relief in return of participating in the war against Iraq. The former regime learnt its lesson well they were very cautious about resorting to foreign borrowing for fear it comes with political and military consequences,” said Hani Geneina, chief economist at Pharos Holding.
Prior to debt reduction, Egypt’s sovereign foreign debt was $48 billion — equivalent to 50 per cent of GDP compared to 15 per cent currently.
Geneina points out that since the South East Asian crisis in the second half of the 1990s where excess foreign exposure shook the Asian banking sectors and economies, countries worldwide became reluctant to resort to foreign borrowing.
In the recent five years, Egypt’s debt never exceeded 21 per cent of GDP.
Though the relatively low percentage of debt to GDP is a positive factor, it is not the main determinant as to whether the country is safe, said Geneina.
The main criteria to judge the safety of the foreign debt level, according to Geneina, is to know if foreign currency receipts as reflected by the current account of the balance of payments holds enough to cover debt payment and service.
Egypt’s current account started to witness deficits in 2009. But that was not worrisome because net international reserves were enough in recent years.
Egypt currently has an annual  debt and interest payment of around $2-2.5 billion. And while it is true that reserves are currently being depleted alarmingly, loans mature over time, so payments dues do not all coincide at the same time and thus do not represent an unbearable burden so far, according to Geneina.
An important feature of foreign debt is that only eight per cent of it is short-termed. The bulk of foreign debt is long term. “Resorting to loans means by default that a country can not secure liquidity in the short term, so what makes sense is that more debts of longer maturity dates,” comments Mamdouh. Egypt’s bond maturities extend to 2050.
Some economists criticise this situation as it means that future generations will be obliged to pay current debts.
Egypt’s foreign debt structure includes different types of borrowing with bilateral loans from other countries comprising the largest chunk in the overall value of debts — around 36 per cent. This is followed by loans from international organisations at 29 per cent, and then by bonds sold in foreign currencies, which account for eight per cent. The rest of the loans include those from the Paris Club and deposits from foreign countries at the CBE.
An Egyptian economist with the World Bank told Al-Ahram Weekly that this composition of foreign debt, according to the creditors structure, the maturity and the conditions of acquiring finance, is one of the best in the world.
“We have long-termed, diversified and concessional foreign credit,” said the economist who asked not to be named.
The creditors structure remained unchanged for years with the US and the EU the largest creditors, followed by Japan, but the percentages changed after the revolution with Arabs getting a larger chunk and the Turks joining in recently.
“As usual, the breakdown of foreign debts by creditor reflect the forces that have a stronger role in the political scene,” said the World Bank economist. “I don’t have the exact figures, but I am sure that Qatar’s stake is on the increase now.”
The CBE expects the country’s external debt to increase to $50 billion if it receives the loans currently being negotiated, said a note prepared by HC Securities late last week.
The note said that as part of the negotiations, the CBE requested that the government include a grace period of at least five years before its first loan payment as $14 billion is expected to be directed towards debt servicing within the coming five years.
Fears were down played by Geneina and CI Capital’s Mamdouh.
“This is an exaggerated estimate as we are not going to get the loans in one shot. Even the IMF’s loan will be acquired in tranches, and thus the debt service will take place over a long timespan,” said Mamdouh.
Geneina points out that the nature of loans differs according to donors. For example, loans taken from the World Bank are directed to certain projects and will be repaid from revenues from these projects and will not overburden the state budget.
He underlined that the size of foreign debt should not be the main concern as we are by far still in safe territory. What is of importance is reducing foreign currency usage.
“Yes, we have an accumulated foreign debt of $34 billion that might increase, but we also have an import bill of $50 billion annually. This is a much larger problem,” said Geneina.



The IMF’s $4.8 billion en route

EGYPT reached a staff level agreement this week on a 22-month Stand-By Arrangement (SBA) in the amount of about $4.8 billion with the International Monetary Fund (equivalent to 335 per cent of Egypt’s quota in the IMF). Egypt’s request has yet to be submitted to the IMF Executive Board for approval in a few weeks. The SBA will support the government’s economic programme through fiscal year 2013/14, an IMF press release said on Tuesday. Egypt will receive the sum in three tranches. The 22 months begin in December 2012 through October 2014.
Under the terms of the agreement Egypt will enjoy a grace period of three and a quarter years and it will pay back in eight quarterly instalments, so the loan will be fully paid back after five years.
An IMF mission left Egypt this week after two weeks of deliberations during which it examined the Egyptian government’s economic plan before reaching an agreement.
According to a statement by Andreas Bauer, IMF division chief in the Middle East and Central Asia Department, who headed the IMF staff mission to Egypt, “the policies contained in the authorities’ programme will help address Egypt’s pressing economic and social challenges, and reduce vulnerabilities.”
He said that the Egyptian authorities’ national programme seeks to promote economic recovery, address the country’s fiscal and balance of payments deficits, and lay the foundation for rapid job creation and socially balanced growth in the medium term.
Egypt had signed a similar agreement for the sum of $3.2 billion back in May 2011 but the ruling Supreme Council of the Armed Forces had decided not to go through with the loan for fear of indebting future generations. After Egypt’s presidential elections, the new administration had decided to raise its loan request to $4.8 billion.
However, many activists and non-governmental organisations have resisted the loan. Their resistance emanates from their opposition to indebting Egypt and for not having been included in the negotiations process.
However, Bauer said in the statement that “broad-based domestic and international support will be crucial for the successful implementation of the planned policies. The authorities intend to disseminate the contents of their economic programme to a wide range of domestic stakeholders.”
The Egyptian authorities were keen on concluding the agreement with the IMF not solely for the financing but because it would represent a vote of confidence in the Egyptian economy, opening the way for additional support packages from other international entities.
“The authorities’ programme will be supported by a financing package of $14.5 billion in loans and deposits on favourable terms from a range of bilateral and multilateral partners, including the IMF,” said Bauer, adding that “the availability of external financing will allow for a gradual adjustment of the economy and substantially reduce Egypt’s cost of borrowing, given the much higher interest rates on domestic loans.”
According to Bauer, a cornerstone of the economic plan is fiscal reforms. The resources generated from these reforms will be used to boost social spending and infrastructure investment, and to gradually reduce the large budget sector deficit from almost 11 per cent in 2011/12 to 8.5 per cent of GDP in 2013/14.
The fiscal reforms include reforming energy subsidies and better targeting them to vulnerable groups. Moreover, the Egyptian government intends to raise revenues through tax reforms, “including by increasing the progressivity of income taxation and by broadening the general sales tax to become a full-fledged value added tax.”




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