With Egypt’s economy increasingly in the doldrums in the aftermath of the 25 January 2011 Revolution, it has become vital…
Among all the crises facing Egypt today, perhaps the most pressing is the nation’s economy. Muhammad Fathy Saqr, professor of economics at Cairo University’s Faculty of Economics and Political Science, believes that the State and government need to resort to unconventional methods to serve society’s immediate needs. With the gradual reestablishment of security, the drafting of a new Constitution and parliamentary and presidential elections that will follow, he says, the economy should find itself on the path to recovery from the doldrums that have increasingly taken hold of it since the January 2011 Revolution.
Dr Saqr says that the trickle in tourism that has been recently gaining force and the decision by some countries to lift the travel ban to Egypt are positive economic indicators. And with the schools and universities back on track, and security gradually returning to the streets, the wheels of recovery have slowly begun to run.
Stimulating the economy
Early on since the interim cabinet was appointed last July, it declared it would not resort to raising taxes or implementing austerity measures to increase State revenue, but would depend on an economic stimulus package to get the economy up and running.
After an initial stimulus package of EGP22.3 billion (USD3.2 billion) last August, a new package of another EGP22.3 was announced last week by Finance Minister Ahmed Galal, to take off in 2014. The Minister of Industry and Trade Mounir Fakhry Abdel-Nour said the new package will be directed to infrastructure, the construction of railways, roads, bridges and 131 stations for drinking water and sanitation, in addition to expansion process of underground metro in Cairo, and improvements to the transports network, and to increase the number of housing units.
The government is aiming to reduce the budget deficit to 10 per cent in the current fiscal year, down from 14 per cent in FY2012/2013, the Finance Minister confirmed.
Last week, PM Hazem al-Beblawi said the cabinet was issuing a set of regulations to rationalise government spending and encourage buying domestic instead of foreign products. These regulations would obligate all ministers and governors to restrict foreign travel to cases of extreme urgency, to rationalise Egyptian representative offices abroad, as well as to refrain from publishing greetings or condolences in the media, and to give up luxury cars.
The case for, and against, a higher minimum wage
As Dr Saqr sees it, the interim government should focus on the urgent issues, major among which is to apply an updated minimum wage and hold down price increases to avoid inflation. It should also work to boost production to provide the local market with a supply of consumer goods and increase competitiveness in foreign markets.
When asked whether the government’s decision to raise the minimum wage would really benefit Egyptians or was mere political propaganda, Dr Saqr said the decision was a socio-economic one that benefited individuals and the society as a whole. The updated value of the minimum wage should take into consideration price levels in the local market as well as living conditions, and should be subject to periodical revision. Since the number of employees in the private sector amounts to almost 20 million, the implementation of a decision for both public and private sectors would have far-reaching benefits. Increased wages should lead to an increase in public spending which in turn should enhance production, revive the market, break the recession and boost the economy.
But the expected price increases resulting from an increase in wages and the consequent rise in demand, Dr Saqr pointed out, could have a negative impact on fixed and low-incomes, and would also work to decrease the competitiveness of Egyptian products on world markets. It would also result in a rise in imports and an increase in State subsidies, which would put more pressure on the State budget. All this, undoubtedly, can only be matched with an increase in production.
Dr Saqr stresses the importance of the private sector in the current period, and calls for it to play an increased role in the economy. The government must work to promote an economic climate friendly to business and investors, especially in areas that can only be served through the government. The private sector, he points out, is strongly shaken by the lack of security on the street; security has been lacking ever since the January 2011 Revolution, he reminds. There have also been lay-offs at many facilities vital to investment, such as ports.
Prior to 25 January 2011, Dr Saqr says, the private sector played a significant role in the Egyptian economy, and prominent businessmen were elected as MPs and even appointed to cabinet posts. During the coming period, the private sector can, and should, play a key role in economic recovery as long as the government provides the necessary guarantees and legal framework for profitability, private ownership and competition, and works on improving the investment climate.
The recent reduction in interest rates, according to Dr Saqr, works to reduce the cost of borrowing for investment purposes and decreases production costs in general.
Bank deposits should be invested
Egyptian banks have announced that they are holding a large volume of funds, estimated at EGP600 billion, in customer deposits, and planned to offer these funds to the private sector for investment as part of the roadmap to revive the economy. If these funds are not used in investment and are left in the form of bank deposits, financiers worry, they will become a burden on the banks and the economy in general, whereas using them by the private sector would help push production forward and reduce unemployment.
The banking expert Ahmed Selim agrees that deposits in Egyptian banks must be properly invested as soon as political stability and security are restored. In the past, he says, banks used to invest these funds in treasury bills because of their safe, risk-free nature. Today, he says, this investment option must be reconsidered because the country’s economy is in dire need of funds to be invested in projects that would increase production and offer job opportunities. If funds from the bank deposits are injected into the private sector, the entire investment system would involve the government, banks, and investors—a near-perfect situation.
Fouad Shaker, former secretary-general of the Union of Arab Banks (UAB), confirms that Egypt’s banks have so far largely directed their investment to government-issued treasury bills to finance public projects planned by the government, in many cases service projects that do not yield returns. Banks, Dr Shaker says, should finance non-government projects that achieve the best return on investment. They should direct the necessary funds to projects with high profitability, possibly entering into partnership based on BOT (Build-Operate-Transfer) or any other system of partnership in which they can settle the investors’ debt and interests by deducting them from the project’s profits.
Hisham Ramez, governor of the Central Bank of Egypt (CBE), has instructed all the CEOs of banks operating in Egypt to focus on financing labour-intensive projects in the fields of investment, development and production to increase the fluidity of the Egyptian economy.
Ismail Hassan, former president of Misr Iran Development Bank (MIDB) and former governor of the CBE, told Watani that it was essential that banks go back to actively financing production projects, in addition to the usual investment projects. Production directly affects the volume of exports and imports, helps stabilise and improve foreign currency exchange and reserve in Egypt, reduces unemployment and raises wages, all of which positively impact the community.
Dr Hassan believes that the government has the necessary tools to enable it to move in the right direction. In confirmation of his words, Egyptian stocks have been steadily gaining in value, ever since the economic stimulus was announced last month, reflecting investor confidence.
1 November 2013