Extra homework

The government will have to go about its business differently if it wants to realise the goals it has set for itself.

03 April 2016

The government will have to go about its business differently if it wants to realise the goals it has set for itself, reports Sherine Abdel-Razek
More mega-projects, increased public investments, restricting imports and devaluation. These are the recent economic policies that have been making headlines and absorbing most of the efforts of the government.

The results? The government has so far not achieved its economic targets. The currency black market is still thriving, with the exchange rate increasing to LE10 a dollar on Monday, the highest rate ever. The growth rate is slowing down, the trade deficit is ballooning and there is a buildup of anger due to the spiralling inflation.

Is the government getting it all wrong? Observers believe not. But there are complementary policies that should be adopted to guarantee a speedier and more efficient recovery of the economy.

Supporting the industrial sector is one. Not only is the growth rate in manufacturing output slowing down but the contribution of the industry to the GDP is diminishing. This means less production, withdrawal of foreign currency to import alternative products and more threats to the local industry.

The slowdown is attributed to the dollar crunch. "Hundreds of producers are unable to get their factories running because of the lack of dollars needed to pay for their imports of raw materials and machinery," explained Omar Al-Shenety, managing director at Multiples Group, a Dubai-based investment bank with a private equity and investment practice.

Al-Shenety said the decline in the value of the pound does not help support exports of the industrial sector since the decline in the currencies of emerging markets make the competition with their products "very hard", another factor that has limited the growth of the sector.

To increase production the government, as was stated by its agenda for the next two years which it revealed on Sunday, is targeting an industrial growth rate of eight per cent by 2017-2018 and to increase the contribution of the industry to 21 per cent of GDP. The intent is to lessen the trade deficit and increase foreign income resources.

The plan includes focusing on industrial clusters and injecting investments of LE5.2 billion to create 30,000 job opportunities in the Robeeki area, specialised in leather tanning, and in a new furniture city in Damietta.

"This is a good plan as the focus must shift to the industries where we have a competitive edge to have competent exports," Al-Shenety said. "These sectors are chemical and food industries and furniture."

Also, upgrading small- and medium-sized enterprises (SMEs) should be an integral part of this plan, Al-Shenety said. In January, President Abdel-Fattah Al-Sisi announced that the Central Bank of Egypt would inject $25 billion into the banking sector to support SMEs and that loans for SMEs over the next four years would amount to at least 20 per cent of all loans issued.

Rearranging priorities of government spending comes next on the to-do list. While the reasons behind the government's involvement in mega-projects are understood, most observers believe that it should not be the current main priority.

"The main idea behind the government investing in such projects is pushing growth and creating a multiplier effect in different sectors," said Eman Negm, an economist at the Cairo-based investment bank Prime Holding.

The administrative capital, for example, will push production in all the building materials industries, Negm said.

 "No one is against a new capital or the addition of another one or even four million feddans of agricultural land. But projects of this size cannot continue without assessing their impact on the budget and weighing them against our needs for social spending, urban redevelopment, the renovation of existing irrigation, sanitation and transportation networks, and the development of informal areas inhabited by millions of Egyptians," Ziad Bahaaeddin, a former head of the General Authority for Investments, wrote in Al-Ahram Online last week.

Also, by default mega-projects absorb hefty liquidity and the return on investments is on the long term, which means they are not suitable for the current situation of the economy.

"What we need at this phase is fast yielding projects," Al-Shenety said, adding that Egypt's "bad history" with mega-projects like Toshka is also not encouraging.

Another ailment in the economy that needs to be worked on is the diminishing role of the private sector. Percentage of loans given to the private sector as compared to overall loans declined to 77.2 per cent in October 2015, compared to 85.3 per cent in 2011.The private sector's contribution to growth is also falling.

Moreover, the government is giving the military a wider role in the economy, crowding out the private sector, especially in construction. The Armed Forces Engineering Authority will construct all roads and bridges in addition to 457,000 economic housing units in the new administrative capital.

In a column published earlier this week, business tycoon Naguib Sawiris hinted that the government is against the domination of private money in certain sectors. Sawiris wrote that the way the government has been reacting to his deal to acquire CI Capital "gives a negative and harmful message to the investment climate, saying to investors 'Be warned if you wish to invest in Egypt because the state will enter and compete with you using public funds.'"

Sawiris' bid for the bank was challenged two months ago by a surprising counteroffer from the National Bank of Egypt, a state-owned bank. The move was unprecedented as public banks never show interest in investment firms. Moreover, another state-owned bank has withdrawn a loan offer to Sawiris to finance the deal.

CBE Governor Tarek Amer points out that the deal might not go through because Sawiris has no experience in this field and is borrowing money from local banks to finance it.

Amer's decision to limit the terms of senior bankers to nine years and threatening to push eight of Egypt's leading bankers into retirement was also seen as a threat to the independence of private-sector banks.

Dealing quickly with the repercussions of the planned reforms is also a must. While delivering the government's plan to parliament on Sunday, Prime Minister Sherif Ismail said: "It is up to us to take several hard decisions that have long been delayed [but] any economic steps will be accompanied by the requisite social protections."

While Ismail did not elaborate on these "hard decisions" it was instantly translated by observers as the introduction of a value-added tax, further reductions in energy subsidies and the resulting increase in inflation.

 The pressure on households due to the recent moves is huge and there is an underestimation of the magnitude of an upcoming crisis.

Given that many goods and services in Egypt are still heavily subsidised by the government, it is difficult to place a precise figure on expected inflation but most investment banks put it around 11 per cent for the rest of 2016. Annual urban consumer inflation eased for a second consecutive month to 9.1 per cent in February, down from 10.1 per cent in January. However, it increased month after month by 1.1 per cent due to food inflation.

"Maybe these policies have long-term benefits but their negative consequences are instant, so the government has to move quickly to cushion the effect of the current stagnation," said Al-Shenety.

Key social elements of the government's program rested on improving services, health and education. For services, the government increased funds for the Takaful and Karama social welfare program over the next few years. Takaful (Solidarity) gives cash to families on condition that their children attend school and have regular medical checkups. Karama (Dignity) covers the elderly and the disabled.

The government also promised to improve access and distribution of social housing, and agreed to improve and expand water and sewage infrastructure.

"The problem is that the government now, amid all these problems, does not have the luxury of adopting developmental projects as it embarks mainly on emergency plans to deal with temporary problems," Negm said.

© Al Ahram Weekly 2016

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