Billions of dollars in aid from the Arab Gulf have pushed Egypt’s balance of payment to a surplus of US$2 billion for July–December 2013, compared to a deficit of $551.5 million in the same period the previous year. However, economists warn that the influx of foreign aid masks weak economic fundamentals.
Historically, Egypt has run a trade deficit, importing more than it exports and relying on the global market to supply everything from wheat to industrial equipment. Prior to the revolution, a robust tourism economy and foreign direct investment balanced out the deficit and brought in hard currency to pay for essential imports.
“We still have a trade deficit and we didn’t know how to cover it,” said Moheb Malak, an economist at Prime Securities. “Gulf Aid did that job. It filled the gap and basically financed the trade deficit temporarily”
According to figures released by the Central Bank of Egypt (CBE) foreign aid reached $6.02 billion during the reporting period, a dramatic increase from $629.4 million the previous year.
Meanwhile, service receipts plummeted, dropping below $8 billion, compared to some $11.76 billion in the same period in 2012. The decline was driven by weak tourism revenues, which reached just $1.9 billion, compared to $5.6 billion the year before, a decline of more than 66 percent.
The CBE notes that not only did fewer tourists arrive during the reporting period, they typically stayed for fewer nights and spent less money per day during their visits.
“This is very bad news, because this means Egypt’s tourist industry has missed its peak season,” said Moustafa Bassiouny, economist at the Signet Institute.
Non-petroleum exports fell to $6.53 billion in the second half of 2013, down from $7.01 billion in the same period in 2012, pointing to a weakness in the manufacturing sector.
Meanwhile, both petroleum and non-petroleum imports declined, reaching a combined total of $30.24 billion, compared to $28 billion during the same period the previous year.
This helped narrow Egypt’s trade deficit to $15.44 billion, compared to $18.55 billion in the latter half of 2012, a roughly 16 percent decline. However, Bassiouny notes that declining imports aren’t necessarily a good sign, since Egypt’s manufacturing sector relies heavily on imported machinery and components.
There are a few bright spots. Foreign direct investment inched up to $2.85 billion in the second half of 2013, compared to $2.48 billion in the same period in 2012. Likewise, Suez Canal receipts rose to $2.73 billion, up from $2.63 billion.
Petroleum exports also showed growth, passing the $6 billion mark, compared to $4.67 billion the previous year. “This looks healthy for the oil and gas sector,” said Malak.
The CBE does not break down petroleum trade by category, but economists say the increase was most likely driven by crude oil exports, rather than products like natural gas. However, Bassiouny points out that the reporting period ended in December, before Egypt’s energy crisis escalated.
“Without the assistance from the GCC, the CBE would’ve lost reserves,” concludes Bassiouny. “This shows that the improvement in the figures are not driven by stronger fundamentals, but because of GCC aid … The money has been spent. The impact was felt at the time, temporarily, but the fundamentals have not changed.”
The CBE has not yet released final figures for the first quarter of 2014, but provisional reporting shows the current trend is likely to continue. Tourism revenues for the first quarter of 2014 were reported at an anemic $931 million, compared to $2.64 billion in the same period last year. Meanwhile, transfers from foreign governments skyrocketed to $4.27 billion, up from $40.4 million in the first quarter of 2013.
First quarter shows weak economic growth
Real GDP growth fell to one percent in the first quarter of the 2013/14 fiscal year, which began in July 2013. According to the Ministry of Finance’s Monthly Bulletin for March 2014 growth is down from 2.6 percent in the same period a year earlier.
The report attributes weak growth to “security reasons and political developments during this period,” which began with the overthrow of former President Mohamed Morsy, and included the bloody August crackdown on Muslim Brotherhood-led camps in Cairo as well as the imposition of a curfew across most of Egypt.
The Ministry also reports that the budget deficit narrowed to six percent of GDP during July 2013-February 2014, compared to 8.4 percent of GDP during the same period a year ago.
Total government revenue during the reporting period reached LE254.2 billion, a 35 percent increase over the same period the previous year. The increase was driven by grants totaling LE51.4 billion — including LE21 billion in cash from the Gulf, as well as LE29.7 billion in stimulus funds allocated by the CBE — and a rise in tax revenues, particularly receipts from the state-run Egyptian General Petroleum Company.
Expenditures also rose, but at a lower rate, reaching 373.3 billion, compared to LE329.9 billion the year before, a rise of some 13 percent. The increase was driven primarily by growing bills for wages, subsidies and interest.
In related news, the Ministry of Finance announced legal changes on April 4 that will see tax evasion classified as a felony offense instead of a misdemeanor, and tighten controls on “harmful” tax planning.
Telecom Egypt to get mobile license
After more than three years of discussion, Egypt’s National Telecom Regulatory Authority approved on April 2 a unified licensing system that will allow telecommunications companies to offer both mobile and fixed line services.
The new regulations will allow landline-monopoly Telecom Egypt (TE), which is 80 percent state-owned, to pay LE2.5 billion for a license to offer mobile telephone and data service, using the infrastructure of competing mobile operators.
In turn, mobile phone operators Mobinil, Etisalat and Vodafone will each be allowed to purchase a LE100 million license to offer landline services using Telecom Egypt’s infrastructure.
The new regulations also created a national entity to create and manage the basic telecommunications infrastructure.
The move was welcomed by Telecom Egypt, which has for years been advocating for the right to offer mobile services. The move was necessary for the survival of Telecom Egypt in general, Telecom Egypt’s investor relations manager Mohamed Kamal told Mada Masr. “All operators in the market will be allowed to operate in the telecom space in general.”
However, the new regulations are not without controversy. Telecom Egypt owns a 45 percent stake in Vodafone’s Egypt unit, raising anti-trust concerns. Mobile operators have also complained that the new rules do not give them access to high-speed fiber broadband, instead limiting them to TE’s older and slower copper network.
The new system is scheduled to come into effect in June 2014. A second phase, which will allow mobile operators to set up portals for international calls, and which will see 4G broadband licenses granted, is scheduled for June 2016.