Thursday,19 July, 2018
Current issue | Issue 1177, (19 December 2013 - 1 January 2014)
Thursday,19 July, 2018
Issue 1177, (19 December 2013 - 1 January 2014)

Ahram Weekly

Finding its feet?

Aid from the Gulf has been the lifeline for an Egyptian economy hard hit by violence in 2013, writes Sherine Abdel-Razek

Al-Ahram Weekly

Egyptian business tycoon Naguib Sawiris, whose family controls the Orascom corporate empire, Egypt’s largest employer, has said he will invest $1 billion in the country in the first quarter of 2014 in construction, real estate, agriculture and microfinance.
Moreover, an Emirati businessman told Reuters on the fringe of a conference pitched at Gulf investors in the first week of December that nearly $5 billion had been committed in loans and investments in Egypt in the last four months and there was scope for more.
Such news could represent a change of fortune for an economy that both local and foreign investors had turned a cold shoulder to until the middle of the third quarter of the year.
In the first half of 2013 and until the ouster of former president Mohamed Morsi, many businessmen were dismayed by the aggressive attitude of the Muslim Brotherhood-led government which wanted to replace the business elite associated with the rule of ousted former president Hosni Mubarak with financiers close to the group.
Sawiris himself left the country in March for a two-month exile because of accusations that his political party, the Free Egyptians, was supporting anti-Morsi protests. The tensions between the government and businessmen reached their peak in May, when the authorities imposed a travel ban on Naguib’s younger brother Nassef, head of the Orascom Construction Industry (OCI), the largest listed company on the country’s stock market, together with their father, Onsi Sawiris, on allegations of tax evasion.
This move came a few weeks after a court decision to freeze the assets of 23 Arab and Egyptian businessmen for alleged stock market manipulation related to the 2007 sale of the Al-Watany Bank of Egypt to the National Bank of Kuwait.
While the Sawiris family eventually returned to Egypt after agreeing to pay LE7 billion in tax arrears and the assets of the 23 businessmen were unfrozen, the incidents hit the business sector hard until Morsi and his regime were toppled.
However, things did not get better immediately after Morsi’s removal, as violence spread in various governorates during and after the crackdown on the Morsi supporters sit-ins in Rabaa Al-Adaweya and Nahda Square on 14 August. This crippled the economy and was reflected in negative sentiments among different businesses, as was shown in the very low growth rate during the third quarter.

BETTER BUSINESS SENTIMENTS: However, things started to improve slowly in the fourth quarter.Since then the situation has improved, and this was reflected in the latest figures of the HSBC Purchasing Managers Index (PMI) Egypt, which reflects activity in 350 non-oil producing private-sector companies.
The Index measures sentiments in five fields: new orders, output, employment, suppliers’ delivery times and stock items purchased. It recorded its highest-ever increase in November since its inception in April 2011.
According to the measure, new orders rose at a record pace, with companies commenting on relatively stable political and economic conditions in the country and stronger demand from foreign markets, including Morocco, the Gulf countries and the UK, among others.
“The November survey gives the first concrete evidence that the real economy has started to find its feet. It will take time to reverse the heavy losses of the past year, and many difficult challenges lie ahead. But provided political order holds, I’m hopeful recovery will gradually pick up steam,” Simon Williams, chief economist for the Middle East at HSBC commented.
When interim Prime Minister Hazem Al-Beblawi formed a new cabinet of technocrats and economic experts in July, observers expected a change in the economic scene compared to the amateurish way in which the economy had been managed under Morsi. However, the government adopted the budget proposed by former prime minister Hisham Kandil’s team, which was approved by the Islamist-majority upper hoe of parliament the Shura Council.

STIMULATING THE  ECONOMY: The only difference was the LE23 billion stimulus package revealed in August. This later increased by a third to LE29.6 billion, and there are plans for yet another LE24 billion package early next year. The packages are supposed to lubricate private and public spending and motivate investment. They have been complemented by three reductions in the interbank lending and borrowing interest rates since August to encourage credit and stimulate the economy, emphasising growth over inflation.
The economy grew by a meagre 2.2 per cent in the year to 30 June, and almost 1.2 per cent in the third quarter of the year. Al-Beblawi said the government aimed for economic growth of 3.5 per cent in the current fiscal year, presumably as a result of the expansionary package.
However, experts see this rate as overly optimistic, and the IMF’s bi-annual World Economic Outlook for October seemed pessimistic regarding Egypt’s growth rate this year, forecasting 1.8 per cent real growth. “Growth prospects for Egypt’s economy have continued to sour over the past few months,” said William Jackson, a macro-economy analyst with Capital Economics in London.   
What has made growth prospects weaker is the fact that private consumption, or household spending, which has for years been the main engine behind economic growth, has decelerated due to the slowing economy, increased unemployment and soaring inflation.
Growth in the value of Egyptian household spending is expected to reach 2.5 per cent by the end of the current fiscal year, compared to 5.5 per cent in 2010/2011.
“The economy is not only coming from a very weak starting point, but it also still has persistent problems like the lack of foreign currency, the unstable political situation, and the still undealt-with budget deficit,” Jackson told Al-Ahram Weekly.
Had not it been for the generous Gulf aid packages that have poured into Egypt since the ouster of Morsi, reaching $15.9 billion by early December, the government would not have been able to finance the stimulus plan, replenish the reserves and support the pound.
It was also thanks to this aid that Egypt’s foreign reserves, down to a decade’s low at $13 billion in March, returned to almost $19 billion in October. The figure went down to $18 billion in November, when the government returned a deposit of $500 million to Qatar, an ally of Morsi’s regime.
The pound, which had lost 15 per cent of its value during the first half of the year to reach LE7.02 per dollar at the end of June, gained ground to reach LE6.8 currently.

MORE AID NEEDED: Nevertheless, Moheb Malak, an analyst at Prime Securities in Cairo, believes that with the current low rate of foreign investments and tourism, Egypt will be left in need of further aid or at risk of further depreciation of the currency towards the end of the fiscal year.
“The Egyptian economy will need between $3 and $5 billion in additional aid during the current fiscal year ending in June to avoid a renewed crisis in reserves and downward pressure on the pound,” he said in a research note issued earlier this month.
Egypt is betting on Gulf investment and an expected improvement in tourism to provide the needed foreign currency. While Saudi Arabia, Kuwait and Qatar have poured in billions of dollars in aid, their investments have yet to follow.
Foreign direct investment (FDI) in Egypt fell to $3 billion in the 2012/13 financial year, which ended in June, compared with more than $13 billion a few years earlier. Net FDI flows in the first half of the year came in as low as $301 million, according to the Central Bank of Egypt (CBE).
Tourism is showing slight signs of recovery after it had been hardest hit since 2011 during the third quarter of the year, with revenues declining by 69 per cent in September compared to a year earlier. Egypt’s tourism minister said last month that the government plans to launch a marketing campaign in the hope of attracting 13.5 million tourists next year. Only 9.8 million tourists visited the country in 2011, down from 14.7 million the previous year.
While the IMF has reiterated that it is ready to cooperate with the new government in negotiating the $4.8 billion loan that has been on the table since January 2011, it seems the government prefers to depend instead on unconditional Gulf financing.
The IMF loan comes with pre-conditions, the most important of which is a committed and fast-paced plan towards subsidy reform along with austerity measures that would bring the budget deficit to a more sustainable level.
“While all the consecutive governments since January 2011 have avoided the loan because of the harsh conditions that will come with it, the loan will remain as the last resort to avoid a severe economic crisis driven by further devaluation, which would dismantle the subsidy system and enforce austerity measures anyway,” Malak commented.
Under Morsi’s rule, the budget deficit increased to 14 per cent of GDP, and the new government, again backed by Gulf aid, hopes to tighten it to 10 per cent this year. However, Malak said that the “the eruption of street violence and the application of a dusk-dawn curfew seriously harmed business activity and consumption in the first quarter, lowering tax revenues more than previously forecast by the budget.”

Social justice: Since it took charge over the summer, Al-Beblawi’s technocratic government has taken several policy measures in the direction of social justice that will also up the state’s expenditure bill.
Besides setting a minimum wage of LE1,200 in the public sector, it has introduced a 10 per cent increase in pensions with a minimum hike of LE50 in addition to raising the income tax exemption bar to LE12,000 annually.
The government may be trying not to introduce socially painful measures, but it does not seem to be good at making living conditions better. According to the Central Agency for Public Mobilisation and Statistics (CAPMAS), the poverty rate in Egypt has increased to 26.1 per cent, which means that the number of those living on less than LE10 per day has increased by one per cent of the population over a year.
The standard of living became even worse as a result of the inflation rate spiking, especially in the fruit and vegetables categories. Egypt’s unemployment rate also jumped to 13.4 per cent in the third quarter of 2013, compared to less than 10 per cent before the 25 January Revolution.
With a quarter of the population living in poverty, it is clear that the current economic crisis has compounded the more long-standing patterns of social deprivation that contributed to the fall of Mubarak in 2011, stated a fact sheet issued by the Egyptian Centre for Economic and Social Rights, a local NGO.
According to this fact sheet, consumer prices for food and beverages increased by 16.3 per cent between January 2010 and September 2013, a steeper rate than the overall consumer price index. Prices for items such as vegetables and breads and cereals have also experienced particular spikes of 21.3 per cent and 16.3 per cent, respectively.
“This is having a serious impact on household consumption. The percentage of vulnerable households reporting that their income does not cover their monthly expenditures increased from 78.9 per cent in September 2011 to 88.9 per cent in March 2013,” the fact sheet noted.

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