Balancing Egypt’s books

31-07-2013 05:00 PM

Fady Labib

Once upon a time, Egypt had a thriving economy and a growth rate that reached some 7 per cent a year. Which doesn’t mean that people did not complain, but their complaints were those of a people who saw that they deserved better and who hated the corruption that reared its ugly head from every corner.

Well, that was before the January 2011 Revolution. Ever since that fateful February in 2011 when the revolution drove the former president Hosni Mubarak to step down, it has been from bad to worse. Egypt suffered political turmoil and a serious security breakdown, which took a heavy toll on its economy. Production suffered a setback, investment opportunities retreated, tourism came to a near standstill, and cash reserves dropped. 

Economy in free fall
Instead of improving when an elected president came to office in June 2012, Egypt saw its economy take a free fall. The Islamist president Muhammad Mursi’s every move to entrench his power and Islamise the country led to unprecedented instability on the political and security levels that further impacted tourism, construction and real estate, with economic growth rates registering only 2.3 per cent in the first nine months of the current fiscal year. This, added to the Islamist policy of deducting form Egypt’s narrow resources to supply neighbouring Gaza with its needs of energy and fuel, led to grinding shortages in energy, fuel, and basic commodities in Egypt, and in turn raised unemployment rates to 13.2 per cent in the first quarter of 2013, compared with 12.5 per cent in the third quarter of 2012.
Since its instalment in August 2012, Prime Minister Hisham Qandil’s cabinet announced an intention of implementing austerity measures to reduce the growing budget deficit and pave the way for borrowing from the IMF. The postponement of some of those measures, however, caused the budget deficit to continue to widen, reaching some EGP203 billion in 11 months, up 48 per cent from the same period in the previous fiscal year.
The budget deficit led to greater internal and external borrowing, causing the local public debt to hit EGP1.3 trillion by the end of March 2013, the equivalent of 80 per cent of the gross domestic product. In June, the Governor of the Central Bank of Egypt (CBE) said external debt had climbed to USD44 billion.
From inside and outside Egypt
So when Egypt’s millions took to the streets on 30 June and, backed by the army, succeeded in overthrowing the Islamist president Mursi, the economy was in an unenviable state. In fact, it was a major element in the public wrath that toppled Mursi. 
Mursi’s overthrow was followed by the highest gains in the history of the Egyptian stock exchange, estimated at EGP22.7 billion. Net earnings throughout the week came to EGP36 billion.
The Egyptians embarked on a roadmap plan to attain a fully democratic, civic State in some nine months. It started by installing an interim president, Adly Mansour who was head of the Supreme Constitutional Court and who lost no time in appointing a new prime minister, Hazem al-Biblawi. Biblawi formed a cabinet of technocrats, with Ahmed Galal as the new finance minister. 
It had been crystal clear that Qatar was the only member-state of the Gulf Cooperation Council (GCC) to express no fear over the rise to power of the Muslim Brotherhood movement, to which Mursi belonged, in Egypt. The energy-rich State presented a few billions of dollars in aid to Egypt while Mursi was in office.
For other Gulf regimes, the end of MB rule was good news. Saudi Arabia, the UAE and Kuwait have pledged between them USD12 billion in aid to help Egypt sustain its exhausted economy, including oil and wheat supplies. 
The Gulf injection of dollars into the Egyptian economy coincided with an initiative to support their country launched by a group of Egyptian businessmen through the establishment of a fund to which anyone or any entity could donate money. The internal donations by the Egyptian people—including children, individuals, businessmen, emigrants and private companies and institutions—swelled into the account 306306 (the number stands for 30.6, meaning 30 June). 
Shot in the arm
“In spite of Egypt’s economic decline, the 30 June Revolution has offered us a good chance and we must use it well,” Hussein Sabbour, head of the Egyptian Investors Society, told Watani. Getting rid of the old regime which had failed to make any achievement on any level, most especially on the economic front, was in itself an accomplishment according to Mr Sabbour. The old administration, Sabbour said, had no calibre to speak of, let alone any vision of the present or the future. Today, we can expect security to be restored and the political turmoil, protests and sit-ins to end soon. With a new government of technocrats in place, Egyptians will be able to focus on production and on its resources.
“Egypt will only be built through the efforts of her children, not through donations and aid which will not last forever,” Mr Sabbour said. But he admitted that at this point in time Egypt needed these donations which acted as a shot in the arm. But only production can counterbalance the huge budget deficit, he said.
“Once security is restored we should reactivate tourism, especially since tourism is the activity that can yield the fastest rotating income. We should then focus on agriculture, then production and exports in general. We should strive to multiply the work and effort directed towards these fields, and give higher priority to quality.” 
Mr Sabbour stressed that we should not forget to work on the national unity between Muslims and Christians in parallel with the production path. Only then, he concluded, would foreign and Arab investments come back to Egypt; only after they are reassured that there is an unruffled security climate in Egypt. 
Vote of confidence
Adela Ragab, economics professor at the Cairo University, said that as soon as Mursi was toppled and Egyptians were reassured that the Islamists had fallen from power there was a remarkable boom in the Stock Exchange. “The Egyptian economy’s indexes are currently positive and are constantly improving,” Dr Ragab said. She too expects a good recovery in tourism, but not before calm and stability have been restored. “The riddance of the hegemony of the Islamists over political life should send to the world messages of reassurance that democracy is finding its way to Egypt. This will attract back foreign investments,” she added.
Dr Ragab commended the 306306 homegrown initiative to support the Egyptian economy. She said that the fact that Egyptians and others responded well to this initiative only reflected their confidence that the Egyptian economy would overcome this critical period and then start to prosper. She pointed out, however, that it was very important to have a board of trustees supervise this fund and investigate how to invest the money it held. She suggested that the fund might finance a large national project that could offer numerous job opportunities, or several smaller projects such as the recycling of solid waste. Dr Ragab added that the fund would act as a cornerstone to employ resources and calibre.
For his part, the international funding expert Hany Tawfiq stressed that now, with a new era in Egypt and a new administration in the Stock Exchange, several stock exchange-related decisions that had been taken by the previous regime should be reviewed. 
Home from exile
Already Egyptian tycoon Naguib Sawiris, whose family controls the sprawling Orascom corporate empire, has said that he and his brothers will be “investing in Egypt like never before” after the ousting of a president he accused of bullying opponents to his rule
Mr Sawiris, a prominent Christian who was an outspoken critic of Mursi, told Reuters that the Islamist leader’s government had sought to co-opt executives or, as in his case because he was in opposition, hit his family businesses with exceptional taxes.
The eldest of three billionaire brothers, Mr Sawiris has spent much of the past year in self-imposed exile.
The Orascom group of companies is one of the biggest private sector employers in Egypt – providing more than 100,000 Egyptians with jobs according to Mr Sawiris, who now runs a new investment firm Orascom Telecom, Media and Technology.
“I am very, very sure that Egypt will come back very strongly now,” he said.
Stimulus, not austerity
In his first press conference since he took office, Egypt’s new finance minister Ahmed Galal earlier this month said the government would seek to avoid major austerity measures and instead work to stimulate the economy by improving security and pumping in new funds. 
The government inherits a budget deficit that since January has been running at around USD3.2 billion a month, equivalent to almost half of all state spending. But it is under intense pressure to avoid unpopular steps such as increasing taxes or reducing spending on energy and food subsidies, which eat up a quarter of the budget. But Mr Galal insisted that stimulating the economy should work to raise tax revenues and this, in turn, should reduce the deficit.
“We will seek to pump more new funds into the economy,” he said.
Mr Galal said his main objectives were “fiscal discipline, macroeconomic balance, stimulating the economy to create jobs and achieve social justice, and efforts to have the fruits of growth reach all segments of society, especially those with low incomes”.
He played down talk of resuming negotiations for a USD4.8 billion International Monetary Fund loan that Mursi’s government had been working on since August, which he said last week was only “part of the solution” to Egypt’s problems. An IMF loan would bring with it credibility and new funds but, Mr Galal insisted, we need to make reforms irrespective of the IMF.
The IMF for its part said it would not resume loan talks with Egypt until its interim government gained international recognition.
WATANI International
31 July 2013
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