Where did all that money come from?

29-10-2014 06:23 PM

Fady Labib

Egypt has a reputation for being a poor country. Official statistics by CAPMAS, the Central Agency for Public Mobilization and Statistics, declare that in 2013 some 26.3 per cent of the population lived below the poverty line. With such figures, it came as a stunning surprise that Egyptians were able to raise some EGP64 billion in a mere eight days. But even more amazing was the fact announced by Hisham Ramez, Governor of the Central Bank of Egypt (CBE), that some EGP27 billion of the total sum raised had come from outside the banking sector.


Poverty-stricken Egypt?
The billions were raised by Egyptians who purchased investment certificates to raise funds for the national mega-project of the New Suez Canal. The project involves the deepening and reinforcement of the current canal, the digging of a parallel waterway, and the establishment of state-of-the-art logistics and commercial centres alongside the canal. The Suez Canal should then become the fulcrum of shipping activity in the Middle East. Financing is totally Egyptian, through ‘investment certificates’ that were sold to the public and which yield 12 per cent annual profit.
In Mr Ramez’s words, the staggering EGP27 billion came from individual, personal sources not from savings in banks. They had been drawn, he said, from ‘under the tile’, a common Egyptian expression that denotes money hoarded at home.
The Suez Canal investment certificates were issued by the CBE at values of EGP10, EGP100, EGP1,000 and their multiples. According to Mr Ramez, 82 per cent of the purchases were made by individuals. Demand on the smaller category certificates was very high: 70,000 Egyptians bought the EGP10 certificates and 150,000 bought the EGP100. Investment certificates sold through the offices of Egypt Post raised EGP730 million.
At first sight, one is tempted to ask: Is ‘poverty-stricken’ Egypt awash with cash? What do the figures have to say about the Egyptian economy and all that cash available outside the banking sector? Is there an entire economy in Egypt that never surfaces in official figures?
Watani took the question to the experts.

Aerial view of the USS Scott in the Suez Canal, Egypt

Vote of confidence
The Egyptian Centre for Economic Studies (ECES) has estimated the size of the informal economy in Egypt in 2013 at 2.7 million establishments employing a labour force of 5 million workers, and generating almost 40 per cent of the country’s GDP.
Economic expert Salah Gouda told Watani that the size of the informal economy in Egypt exceeds EGP750 billion, which is equivalent to more than 45 per cent of the formal economy. “The EGP27 billion raised from Egyptians’ personal savings from outside the banking system and used to buy Suez Canal investment certificates are a clear vote of confidence to President Abdel-Fattah al-Sisi,” he says. “True, the 12 per cent interest rate acted as a big attraction, but the mere fact that a million Egyptians, down to the poorer classes, went out and in a matter of eight days bought all the certificates issued indicates they were moved by the national weight of the project. President Sisi indeed succeeded in rallying Egyptians behind a national endeavour.” The New Suez Canal project, he said, will pay the interest to the certificate holders from the revenues of the canal itself.
The informal sector of the economy where most of the people who do not put their money in banks work is, according to Dr Gouda, a significant source of liquidity. “The activities are numerous,” he says. “They include anything from private tutoring to illegal land grabs and land banking. And they yield high revenues. It was not pre-required of buyers of the investment certificates to cite the source of their money.”
Dr Gouda insists that the volume of liquidity and cash flow in Egypt is very high, and this should allow for the establishment of other national projects that ensure quick and sustainable revenue.

Reinvesting personal funds
“The money for the Suez Canal investment certificates came from one of two sources,” economic expert Mukhtar al-Sharif explains. “The first was bank savings of any type or post office saving funds that were withdrawn and used to buy the certificates. This is a reinvestment of money in a different financial product.” But there was also another source: the cash owned by Egyptians. Someone may have been saving to buy a car, or may have inherited a sum of money and was considering the best way to invest it, or someone may have sold personal jewellery. All this was hoarded money awaiting lucrative investment. The new Suez Canal emerged as a clearly defined national project, backed by a well-prepared feasibility study and offering secure and high interest rate. “If other projects of the same caliber are established,” Dr Sharif says, “they will surely meet with the same success provided that they enjoy the same transparency, motive and lucrative revenue,”
According to Dr Sharif, no official study has so far been conducted to analyse the character of the people who invested in the Suez Canal certificates. Whether they were mainly farmers or employees and whether they came from specific governorates is not yet known. He says it is imperative to conduct such statistical studies and use them as reference for the future. “In Egypt, we still rely on cash transactions rather than the electronic payment so widely used in the West. The number of credit card holders in Egypt is very small in comparison to the entire population. In addition, many expatriates send money to their relatives in Egypt and this reaches an annual USD19 billion, most of which is used for consumption.”

Legal and illegal
“Even though the informal sector of the economy, which is anywhere between 40 to 50 per cent of the GDP, includes illegal activities such as drug dealing and smuggling of goods,” says Ali Soliman, Professor of Economics at the British University in Egypt. “The biggest portion includes small and micro enterprises in various commercial and industrial fields. The state of worry and instability that existed in Egypt over the past few years led many people to hoard their cash until the situation improved. The raising of EGP27 billion is a good indication of the amount of money in Egypt which is being hoarded instead of invested.”
Dr Soliman says that such hoarded capital could be used to fund many projects in Egypt, as it did the New Suez Canal project. “Funding is needed to solve the enormous problems of the railway system, to build schools; and to establish new projects for power generation,” he says.
The ECES has advised that the informal sector should be incorporated into the formal economy. This could lead to an additional annual economic growth of 2 per cent, a huge leap in the economy and a decrease in poverty levels. Workers would benefit from social security and tax revenues would increase. This, however, requires regulations that encourage those in the informal sector to formalise their operations.

Safety net
Many economists believe, however, that the informal sector acts as a safety net during periods of economic downturn. Dr Sharif believes that apart from the known disadvantages of being unlicensed and uninsured, the informal economy does have advantages. Other than not having to pay taxes, those in the informal sector have a better ability to ‘read’ the demands of the market and can shift from one activity or location to another with a high degree of flexibility that is not available in formal economic activities.
“The informal economic sector can be considered a ‘bumper’ that absorbs economic shocks in times of crises,” he says.

Watani International
29 October 2014



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