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The painful economic reform measures of the last four years have left many people suffering as a result of high inflation, but there have been improvements in other economic indicators, report Niveen Wahish and Sherine Abdel-Razek
The economy and consequently the people have been through a lot over the past four years, as the government attempts to improve the country’s macroeconomic indicators through its economic reform programme while massive efforts are being made to overhaul infrastructure and create new jobs.
One of the main features of economic policy over the last four years has been heavily investing in national mega-projects. These include digging a New Suez Canal, the reclamation of 1.5 million feddans of land, developing a new administrative capital, bulding power stations and constructing thousands of km of new roads and bridges.
The combined value of all the projects the government has embarked upon has not been revealed, but it could be around $50 billion – the Dabaa nuclear plant alone is to cost some $25 billion. But these projects have helped improve the country’s infrastructure, especially its road network, and the energy projects have managed to solve the shortages of electricity.
Unreliable electricity supplies were one of the main complaints made by investors surveyed for the World Bank’s “Doing Business” report in 2016. Thanks to improvements in the electricity infrastructure, Egypt has now jumped from 129 in 2016 to 88 in 2017 in the World Bank’s ranking of countries.
Major projects are underway with Siemens and General Electric. The former is building three power stations that will generate around 45 per cent of the country’s electricity and serve around 45 million people. GE is adding 2.6 gigawatts of power to the national grid.
However, in spite of the fact that when launched these projects received extensive media coverage, some observers have been sceptical about the reliability of the feasibility studies that were carried out for some of them, including the controversial New Suez Canal.
Such projects need heavy spending and years before completion, and as a result they are not expected to yield obvious benefits anytime soon. This makes them a controversial investment priority at a time when the economy is suffering from a huge budget deficit and a lack of foreign currency resources.
To finance such projects, especially in the absence of Gulf aid over the last two years due to declines in international oil prices, the government has become a major competitor to the private sector in seeking finance from the banks. This has increased local debt to unprecedented levels, reaching 100 per cent of GDP. Meanwhile, financing energy deals, especially the $10 billion deal with Siemens, has added to the foreign debt.
But such investments have helped push the growth rate of the economy from an average of two per cent four years ago to around four per cent forecast for the current year. A growth rate of 5.5 per cent is targeted by 2018-19.
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Another milestone of the past four years, or more precisely the past nine months, has been the International Monetary Fund (IMF)-supported economic reform programme put in place by the government.
In November 2016, Egypt signed a $12 billion three-year extended fund facility loan with the IMF, and $4 billion has already been disbursed in two tranches. The reform programme aims to streamline government finances and rein in the budget deficit and burgeoning public debt. The government is targeting a 10.5 per cent deficit in the current fiscal year. The budget deficit stood at 12.4 per cent of GDP in 2013-14.
A core component of achieving the targets of the economic reform programme is allowing the currency to float, the removal of fuel subsidies, imposing a new value-added tax (VAT) of 14 per cent in the new fiscal year, and divesting shares in government-owned companies.
It is too early to tell whether these measures are succeeding. Though the subsidies were cut on schedule, the sum earmarked for them actually increased due to the depreciation of the value of the pound after last year’s flotation.
Some LE110 billion has been earmarked for fuel subsidies in the budget for next year, much higher than the subsidies allocation in the 2016-17 budget, originally around LE35 billion. The government has yet to assess the revenues of the first year of the application of the new VAT. It is targeting around LE30 billion in 2017-2018.
BURDENS OF INFLATION: The reforms that consecutive governments have introduced before and after the IMF agreement have added much to the burdens of millions of Egyptians, half of whom already live under poverty line.
The reductions in the energy subsidies together with the introduction of the new VAT, the increase in customs duties and most importantly the devaluation of the pound have meant that inflation has soared to unprecedented levels.
Annual inflation in April and May hit its highest level in 30 years, exceeding 30 per cent, and many people have complained that it is now impossible for them to buy vegetables and fruit let alone meat, poultry and milk.
The inflation has affected consumption and slowed down economic growth rates this year. It is also a sensitive political issue, and over the past four years, in moves aiming at calming the frustrations of the needy, the government has introduced many measures to cushion the effects of its policies.
These have included overhauling the ration-card system and replacing it with smart cards that provide millions of people with subsidised food items to a certain sum per individual which went from LE15 to LE21 late last year and was increased again 140 per cent this Tuesday to LE50 per person. This will bring to LE85 billion the sum earmarked for food subsidies in the new budget, up from LE45 billion last year and LE17 billion in 2010-11. The inclusion of subsidised bread in the smart-card system was a breakthrough that guarantees each individual five loaves of bread a day at the subsidised price of LE0.05 each.
The army stepped in to help distribute discounted food items in vans throughout the country.
Last month, the government approved a social spending plan of LE45 billion on income tax discounts, bonuses for public employees, and increased pension payments in the new fiscal year. It also increased the number of beneficiaries of social security schemes Takaful and Karama to 1.7 million to shield the most vulnerable from the effects of rising prices. Monthly disbursements to Takaful and Karama beneficiaries are also set to increase by LE100, President Abdel Fatah Al Sisi announced on Tuesday. This will cost the budget more than LE8billion compared to LE4 billion last year, he said.
Aware of the tensions the economic difficulties have been causing, president Abdel-Fattah al-Sisi has stressed in his speeches over the past four years that people should be patient and that collective sacrifice is necessary to save the country from ruin.
In its bid to promote the reform programme even with its painful side-effects, the government has launched a billboard campaign and TV ads. Meanwhile, the agreement with the IMF and the depreciation of the pound helped the country’s balance of payments to show a $4 billion surplus in the third quarter of 2016/2017, the first recorded net inflow since 2010/2011.
Efforts to limit imports, together with increased exports due to the depreciation of the value of the pound, translated into a 16 per cent decline in the merchandise trade deficit during the third quarter of 2016/2017.
The currency floatation and the subsequent rise in interest rates also had positive effects on interest on Egyptian debt instruments. Foreign holdings of Egyptian debt were about LE120 billion in early June, with many seeing this as a vote of confidence in the economy.
The currency floatation has also encouraged Egyptians expatriates to channel their remittances through official banking channels. Remittances are one of the main hard currency earners for the country, and transfers between November 2016, after the floatation, and April 2017 increased to $9.3 billion, up $1 billion compared to the same period the year before, according to Central Bank of Egypt (CBE) figures.
The agreement with the IMF has also facilitated Egypt’s going to the international markets twice this year, issuing $7 billion worthof eurobonds. These were much oversubscribed, which according to officials is testimony of their success.
All this has helped to push the country’s international reserves to almost pre-Revolution levels, reaching around $31 billion at the end of May 2017. But the reforms have not come cheap, and Egypt’s foreign debt jumped 40.8 per cent year-on-year to $67.32 billion in December. This compares to around $34 billion in 2011.
The government has said that it is not worried about the country’s growing foreign indebtedness, saying that foreign borrowing is a way of varying sources of financing instead of depending on the local market where borrowing is more expensive because of high interest rates.
It is now trying to improve the investment climate to attract new projects, create jobs and increase production, and a new investment law was recently approved by parliament. According to Sahar Nasr, minister of investment and international cooperation, new legislation will be issued before the end of the month.
Foreign direct investments went up 12.3 per cent in the nine months ending in March to reach $6.6 billion. Portfolio investors also showed more interest in the stock market, resulting in a net inflow of $3.8 billion compared to an outflow of $1.5 billion in the first nine months of 2015/2016.
Other laws long called for by the business community are also in the works. They include the new mineral resources act, amendments to the 1941 commercial fraud law, and a long-anticipated law on bankruptcy.
© Al Ahram Weekly 2017
