In economic terms, 2018 was relatively less turbulent in Egypt than the preceding two years, in which the government began implementing an IMF-backed economic reform package that led to the highest levels of inflation in the country since the 1980s.
To try and adapt to the soaring costs of living, some Egyptians pushed for wage increases and altered their spending habits. Many others, however, were crushed by the austerity measures attached to the $12 billion dollar IMF loan, and fell below the poverty line.
Yet everyone has questions about the future: Is Egypt on the verge of another currency devaluation? Will the Egyptian pound hold up in the midst of the crisis in emerging markets? Should we be optimistic about megaprojects, like the new administrative capital, or are we creating a real estate bubble that could cause a future financial crisis? Why do we not feel the fruits of economic growth and the budget surplus that the government speaks of? And why does the government think it succeeded under the tutelage of the IMF when Egypt’s foreign debt has approached US$100 billion?
These questions, among others, were put forward to macroeconomic analyst Ahmed Shams Eddin and economic journalist and researcher Wael Gamal last week at a round table organized by Mada Masr on Egypt’s macroeconomic projections for 2019.
Although some analysts predict that the US dollar will reach LE19 in 2019, Shams Eddin does not think that the Egyptian pound is on the verge of a strong devaluation like that of November 2016, when it lost more than half of its value against the dollar. However, Egypt’s large foreign currency reserves do not necessarily reflect a rosy future, he points out.
Shams Eddin maintains that, while it is difficult to predict Egypt’s Central Bank policies, the country’s overall financial situation does not signal a significant depreciation of the Egyptian pound.
“The external financing gap in the upcoming period — which we usually measure by calculating Egypt’s foreign debt obligations plus the projected deficit — is around $12 billion. Given that Egypt’s foreign exchange reserves reached $44.5 billion, Egypt can safely meet its obligations and import basic commodities.”
However, the large reserves are not enough to finance the economic growth needed to provide job opportunities to the unemployed, Shams Eddin adds. He estimates that the country needs an annual growth rate of 9 percent to provide jobs for new entrants to the market. “Dollar resources are insufficient to finance economic activity until economic growth reaches the appropriate rates,” he says.
Foreign currency reserves declined sharply after 2011, but since the liberalization of the pound in 2016, they have steadily rebounded, recently reaching their highest levels since the 2011 revolution. Yet Shams Eddin believes the numbers can be deceiving, and that the country’s overall financial situation remains worse than it was before the uprising.
“Before 2011, we had reserves of about $35 billion (which is lower than current reserves), but they came from financial resources than belonged to Egypt, such as tourism and foreign investments, even proceeds from privatization — despite the fact that they were nonrenewable resources, they belonged to us, and were not debts and financial obligations that must be met later,” he says.
In Shams Eddin’s opinion, what alleviates concerns about foreign debt is that 40 percent of it is comprised of soft loans from international financial institutions, with low interest rates of around 1.5 percent. “However, the really worrisome aspect is the dollar bonds that are determined by the market price. The value of debt obligations from these bonds ranges between $18 and $20 billion,” says the analyst.
Shams Eddin goes on to explain that a reliance on the international market to provide foreign sources of finance will not be secure in light of the escalating crisis in emerging markets, which was triggered, in part, by US policies in the wake of the 2008 global financial crisis.
To counter the recession, the US kept interest rates at very low levels to promote borrowing and stimulate investment. As the US economy improved, the Federal Reserve rushed to raise interest rates at a rapid pace, prompting investors to quickly withdraw from emerging markets and return to the US market, creating enormous pressures on the former.
The new directions of the Federal Reserve also led to the rise of interest rates on developing countries’ foreign debt, threatening to create a situation similar to the Third World debt crisis of the 1980s if the situation is not properly contained.
While the governor of the Central Bank of Egypt, Tarek Amer, believes that Egypt is “safe” from the crisis, Finance Minister Mohamed Maait does not deny that “astronomical figures were taken out of Egypt” as foreign investors disposed of their investments in Egyptian securities. Yet, according to the finance minister, foreign reserves increased due to “the strength of the economic reform program.”
Shams Eddin attributes the increase in foreign reserves to the central bank’s reliance on the dollar balance of commercial banks to cover foreign investors’ flight during the last period.
The analyst warns that there are many factors that point to an escalation of this emerging markets crisis in the coming period. He believes that improving Egypt’s ability to attract foreign direct investments has become a matter of urgency.
But the reality is that the government has failed to attract foreign direct investments – in the production or service sectors – in recent years, and has been unable to achieve its target of reaching an annual net investment of $10 billion. Instead, Egypt has relied heavily on borrowing, which is not a sustainable long-term solution to mitigate the impact of the emerging markets crisis, he says.
It appears that the Egyptian economy will be running around in circles in 2019: It will be able to meet its financial obligations but will remain burdened by debts that pose a future risk. It will also generate reasonable growth rates but stay shackled to external obligations that prevent it from meeting the needs of broad sectors of the population.
Furthermore, the current impasse is not limited to foreign debt alone, according to Gamal, who says that components of economic growth need to be re-examined. Although the 2017/2018 fiscal year witnessed Egypt’s highest growth rate in 10 years — reaching 5.3 percent — extractive industry operations were the main driver of this growth, which recorded a growth of 8.6 percent and contributed 15.8 percent of the total annual growth rate. These operations are not labor-intensive, Gamal explains, and this breakdown contradicts government claims that Egypt is achieving comprehensive growth, the fruits of which are distributed among the largest base of the population.
Gamal believes that social policies in the coming period will not be sufficient to address the needs of broad sectors of the population, given the dominance of the financial targets set out by the government and the IMF.
As such, he criticizes the government’s boasting about achieving a primary budget surplus (the difference between expenditure and revenues, after excluding debt-servicing requirements). “What does that indicator mean if debt-servicing requirements make up almost 40 percent of total expenditures?” Gamal asks.
In regards to austerity measures and social policies adopted by the Egyptian government since November 2016 as part of the IMF agreement, Gamal describes Egyptian officials as “more royal than the king,” explaining that the IMF “has been more reasonable than the government.”
Shams Eddin agrees. “The IMF, for instance, did not request an increase in the prices of metro tickets.”
“There were many goals agreed upon by the government and the IMF that were not met, including spending more on nurseries to encourage the further integration of women into the labor market — which some may see as a minor reform, but even this measure was neglected,” Gamal points out. “What is more important to the government is reducing the budget deficit.”
Obsession with financial indicators, while overlooking the impact of economic policy, is a cause for concern for Shams Eddin, who believes that boosting domestic demand amid the murky global economic landscape may be the most suitable approach, particularly since recent economic measures have affected the purchasing power of population segments that provide the primary demand for small and medium enterprises — companies which account for more than 90 percent of operating businesses in Egypt.
“The budget of the Takaful and Karama cash transfer program was about LE16 billion last year, and this figure could be doubled in the coming period, especially if the local interest rate is reduced (thus allowing more resources to be spent in this area). This aid is necessary — from an economic perspective and not just a humanitarian one, because it stimulates demand,” adds Shams Eddin.
On the threshold of the new year, Al-Borsa published preliminary indicators from the long-awaited report on household income and expenditure. Ever since the start of the IMF-backed economic reform program, the state has not released any new data on poverty rates in Egypt. According to the report, the proportion of people below the poverty line rose from 27.8 percent in 2015 to about 30 percent.
Gamal maintains that the percentages presented by the report on household income and expenditure understate the real extent of inequality in Egypt, given the inability of researchers to reach both marginalized, lower-income groups as well as higher-income segments. He explains that the data collected from a 2015 survey on household income, expenditure and consumption did not accurately reflect reality because it deemed “an individual who spends more than LE1,600 [approximately $90] per month as part of richest 10 percent in Egypt, and the most expensive housing unit in the research sample was an apartment in Heliopolis,” he states. (While Heliopolis is considered an upscale district of Cairo, new developments emerging on the outskirts of the city boast properties that are valued at tens of millions of pounds).
In this respect, Gamal believes that Egyptians will continue to be put under economic strain in the 2019 as the government remains focused on fiscal indicators at the expense of social welfare.
Even as the state expands into mega-construction projects that will provide job opportunities, such as the new administrative capital, Gamal believes that the approach is misguided. He explains that these projects may seem closer to Keynesian policies that advocate increased government expenditures, but “Keynesian economics assumes that you implement policies to generate higher incomes and thus stimulate demand. I do not think we are on this path as the current inflation rates actually decrease real wages.”
The conversation about the new administrative capital prompted a question for Shams Eddin regarding the future of the real estate sector, which has seen a rapid increase in prices — especially for luxury housing units targeting higher-income groups: Are Egyptians living in a real estate bubble that might cause a financial crisis?
“I don’t think we have a bubble. That term means that there are clients who took out loans to purchase property then failed to repay them. This is an unlikely danger because our credit penetration rates are low,” Shams Eddin answers. “What is happening in Egypt is that real estate is becoming increasingly important as a store of value in light of the current economic conditions. And by selling housing units before starting their construction (off-plan property sales), real estate developers are able to expand without putting pressure on their budgets. On the other hand, there are signs of stagnation in the real estate sector that you can notice in secondary market transactions (resale of purchased units).”