Tuesday,24 October, 2017
Current issue | Issue 1128, 27 December 2012 - 2 January 2013
Tuesday,24 October, 2017
Issue 1128, 27 December 2012 - 2 January 2013

Ahram Weekly

Could become Greece

While going bankrupt is a far fetched scenario, the way the economy is going puts Egypt at great risk‭, ‬Sherine Abdel-Razek‭ ‬reports

Standard&Poor
Standard&Poor
Al-Ahram Weekly

Standard and Poor’s‭ (‬S&P‭), ‬the American rating agency‭, ‬lowered Egypt’s long term credit rating to B‭-. ‬This means that Egypt is now in the‭ ‬“Junk level”‭ ‬which is the rating agency’s term describing borrowers with very high risk‭. ‬This is six levels below the appealing and safer‭ ‬“investment level”‭ ‬where Egypt was before the 25‭ ‬January uprising‭. ‬

When Bloomberg broke the news of the rating change‭, ‬the headline of the story was‭ ‬“Egypt Rating Cut to Same Level as Greece at S&P amid Unrest”‭. ‬Coupling the near-default Greece with Egypt mirrors a lot of fears in Cairo ignited by official statements on the gravity of the economic situation‭.‬

Last week witnessed both minister of finance Momtaz Al-Said and Minister of Trade and Industry Hatem Saleh saying that Egypt might face that dreaded fate‭ ‬—‭ ‬bankruptcy if reform plans including tax hikes and austere public spending measures are not implemented‭. ‬

And while Greece has not yet gone officially bankrupt‭, ‬which means failing to meet its obligations to its foreign lenders‭, ‬it is‭ ‬facing severe problems in repaying these obligations and has so far been given 240‭ ‬billion euros as a bailout from the IMF and‭ ‬EU‭. ‬Greece’s mounting public debt is expected to reach 190‭ ‬per cent of GDP by next year and its economy‭, ‬in recession for four years‭, ‬is projected to shrink by 6.5‭ ‬per cent this year and by a further 4.5‭ ‬per cent in 2013‭. ‬

The case of Egypt‭, ‬however‭, ‬is different with the overall debt equivalent to only 85‭ ‬per cent of its GDP while the economy is still growing at 2.2‭ ‬per cent‭. ‬

“All the official statements about nearing bankruptcy are not new‭. ‬This is a threat used several times since the revolution whenever the government wants to decrease protests and anger in the streets using the economic whip‭,‬”‭ ‬said Samir Radwan‭, ‬Egypt’s first minister of finance after the revolution‭.‬

“Egypt never defaulted its debt even in the worst situations‭,‬”‭ ‬Radwan added‭.  ‬

Khaled Zakaria Amin‭, ‬assistant professor of public policy and finance at the American University in Cairo‭, ‬seconds Radwan‭, ‬saying the government is using this threat as a political manoeuvre to prepare the people to accept austerity measures and new taxes‭.‬‭ ‬

The political uncertainty following the revolution left Egypt’s main foreign currency resources like tourism‭, ‬exports and foreign direct investments drained‭. ‬Net international reserves are dwindling‭. ‬The fiscal deficit is ballooning to as high as 11‭ ‬per cent and the currency is on the slide‭.‬

The government resorted to the IMF earlier this year for a‭ $‬4.8‭ ‬loan‭. ‬Negotiating the loan was postponed earlier this month when‭ ‬the government decided to put on hold planned tax hikes for 50‭ ‬commodities for fear it might ignite more anger in a politically‭-‬rifted society amid the unrest created by the referendum on Egypt’s first post-revolution constitution‭. ‬Nevertheless‭, ‬it is expected that the reforms including the new taxes are to be imposed any time soon‭.‬

While ruling out defaulting as a possible scenario‭, ‬Amin does not deny that the economic situation‭, ‬especially on the fiscal side‭, ‬is bad especially that the imminent devaluation of the pound will bring more pressure‭. ‬He explains that the further depreciation in the local currency versus the dollar will increase the dollar denominated debt and push up the real value of the subsidy‭ ‬bill in addition to the inevitable effect on food commodities inflation as Egypt is a net importer of food‭. ‬

Egypt’s currency lost almost eight per cent of its value since the revolution‭. ‬

The gloomy economic atmosphere according to Amin‭  ‬pushes depositors to withdraw their money from banks‭. ‬The resulting lack of liquidity leashes banks’‭ ‬ability to invest in treasury bills and bonds which is the main source of budget deficit financing‭. ‬And this makes the situation more entangled‭.‬

“If we don’t deal with the problems with a set of fast‭, ‬well planned policies it will get even worse‭,‬”‭ ‬Amin warned‭. ‬

It is the lack of professional management of the economy that is the main threat to the economy and not bankruptcy‭, ‬from Radwan’s point of view‭. ‬He added that the government has to set its priorities‭, ‬put an overhaul plan and present it to the nation‭ ‬“but the problem here is that there is no professionalism in the way economic decisions are made‭. ‬Those responsible for taking decisions in the economy are mainly third grade bureaucrats‭.‬”

Even if Egypt succeeded in acquiring the loan‭, ‬its problems will not end‭. ‬Both Amin and Radwan point out that the loan will be given in tranches‭, ‬the first of which will range between‭ $‬500‭ ‬and‭ $‬1‭ ‬billion to be disbursed in the first year‭. ‬The value of the‭ ‬tranche would not be able to help much and this is the mistake of those negotiating with the IMF‭, ‬Amin said‭. ‬

Radwan recalls that when he‭, ‬as finance minister‭, ‬negotiated terms for acquiring a loan from the IMF he stipulated that the largest chunk of the loan be upfront‭. ‬

Also‭, ‬the reform plan‭, ‬according to Radwan‭, ‬is flabby and lacks a lot of planning and clear objectives‭, ‬a fact that means it will not result in a real solution for the economy‭. ‬Radwan explains that the plan targets to employ 800,000‭ ‬every year an aim that‭ ‬would not be fulfilled unless the economy grows by at least seven per cent which is impossible according to the current situation‭.  ‬

“If the growth rate on average since the revolution hovers around 1.1‭ ‬per cent and growth in the population is also 1.1‭ ‬per cent‭,‬‭ ‬this means that the growth in population eats out any growth in the economy‭.‬

“Does the current economic team have any plan to deal with this‭? ‬I doubt it‭,‬”‭ ‬Radwan added‭. ‬

The problem crippling economic recovery now is that the government is using the economy as a means to flirt with the streets‭. ‬“When you are desperate to secure both political consensus and economic policies that have societal consent at the same time‭, ‬you‭ ‬are in a dangerous situation as you will never be able to fulfil either‭,‬”‭ ‬said Radwan‭. ‬

AUC’s Amin said that if governments after the revolution have been realistic and honest with the people‭, ‬Egypt would have escaped the current dilemma‭. ‬

“Back then‭, ‬the government painted a rosy economic picture based on the possibility of regaining the money that the previous regime transferred abroad and writing off our debts‭. ‬They also flirted with people in Tahrir by giving salary raises and appointing‭ ‬thousands of temporary workers‭, ‬putting a huge burden on the budget‭.‬”

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