30-10-2013 01:40PM ET

More than temporary relief?

What dWhat does a further $4.9 billion in fresh financing from the United Arab Emirates really mean for the Egyptian economy, asks Sherine Abdel-Razek

More than temporary relief?

The visit by an Egyptian delegation headed by Prime Minister Hazem Al-Beblawi to the United Arab Emirates (UAE) last week concluded with the signing of a new aid agreement with Egypt of $4.9 billion.
The aid package aims to support Egypt’s development and includes a $1 billion grant and further loans to help provide Egypt with its petroleum requirements. Both parts of the package have already been received by Egypt.
The package does not include a $2 billion deposit by the UAE at the Central Bank of Egypt (CBE). It pushes the overall aid that Egypt has thus far received from the Gulf country since the ouster of former president Mohamed Morsi last July to $6.9 billion.  
The new funds are mostly in the form of grants, which means that they do not have to be paid back. They will be used to revive the economy, which has been witnessing its worst slowdown in decades on the back of the aftermath of the January 25 Revolution.
More than $1 billion of the sum will be directed to supplying Egypt with fuel, while the rest will fund development projects including the construction of 15 wheat silos with a capacity to store 15,000 metric tonnes of wheat and 79 healthcare centres.
Linking aid to development projects is a new approach for Egypt, which two months ago unveiled a LE23 billion stimulus plan to help revive the economy based on injecting investments to spur growth.
The plan aims at achieving a growth rate of at least 3.5 per cent this fiscal year from about two per cent in the previous year. Moreover, it targets a budget deficit of 10 per cent compared to 14 per cent last year.
The prime minister described the package as a successful model that he wanted to repeat with other countries.
“It is outright bullish for equities and government securities,” Hani Genena, head of research at Pharos Securities, a leading local investment bank, said in commenting on the package.
Writing in a research note, Genena said that the package coupled with the CBE’s decision last week to double the value of legal foreign currency transfers to $200,000 per year starting in January 2014, “bodes exceptionally well for a strong recovery in foreign-fund inflows into equities and government securities in 2014”.
On the back of these flows, Genena expected the Egyptian pound to appreciate further to LE6.50-6.75 versus the dollar.
Moreover, the interest rates paid on government bills, now seen as carrying less risk by investors, is likely to decrease to eight per cent compared to the almost 16 per cent a year ago, he said.
According to Genena, the availability of fresh liquidity will give a further push to the stock market, which has been following an upward trend that has been scarcely interrupted since the ouster of Morsi.
The local bourse’s main EGX30 index has gained almost 25 per cent since Morsi was toppled.  
Egypt has been largely depending on Gulf aid from the UAE, Saudi Arabia and Kuwait over recent months to push its economy forward, as many foreign donors held back their aid after the military, backed by millions of Egyptians, removed Morsi from power in July.
While there have been pledges of $12 billion in aid from the three countries, so far Egypt has received $7 billion that helped to boost its foreign reserves to $18.7 billion by the end of September.
According to Al-Beblawi, the government sees no immediate need for more aid to improve the foreign reserves. “If we need this, we will certainly make that known,” Bloomberg quoted Al-Beblawi as saying.
“At present, the reserves are good and the balance of payments is improving. We hope the political situation stabilises and tourism will recover.”
A report by Bank of America noted that while the Gulf aid had bolstered the foreign reserves, the latter will be facing pressures during the current transitional period, especially since $1 billion worth of Qatari debt servicing is due by the end of this year.
Qatar, a staunch supporter of the Muslim Brotherhood, poured aid and grants into Egypt during Morsi’s year in power. The overall value of the Qatari aid, including grants, deposits at the CBE and loans, was some $8 billion.
Egypt returned $2 billion of this to Doha last month after negotiations to change it into bonds failed.
According to the report, the reserves cover 2.8 times the country’s short-term debt and are equivalent to 3.5 months of imports. Bank of New York said the risk-free level for a country like Egypt, according to IMF criteria, should be around $24 billion.
The reserves, which stood at $36 billion in January 2011, have been draining since the 25 January Revolution, with political uncertainty and violence stripping the economy of the bulk of its two main sources of foreign currency: tourism and investments.
Since then, the country has run through more than $20 billion in reserves, borrowed billions from abroad, and delayed payments to oil companies.
The risk of a repeat of this scenario might not be too far away, even given the recent good economic news. During Al-Beblawi’s visit to the UAE, Mansour bin Zayed Al-Nahian, the Emirati deputy prime minister, said that while his country supported Egypt, Gulf support could not last forever and Egypt would have to find ways to deal with its own problems.
Backed by the Gulf aid, the government has shifted its focus from introducing the reforms demanded by the IMF and tightening the ballooning budget deficit to an expansionary policy accompanied by the introduction of many social-friendly moves like setting a minimum level for state employees’ salaries and exempting students at public schools from tuition fees.