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Women buy bread from a Cairo bakery. Egypt’s interim government has raised the public sector minimum wage and pensions, and the central bank has lowered its key interest rates by a full percentage point since August to encourage growth. Shawn Baldwin / Bloomberg via Getty Images
Women buy bread from a Cairo bakery. Egypt’s interim government has raised the public sector minimum wage and pensions, and the central bank has lowered its key interest rates by a full percentage point since August to encourage growth. Shawn Baldwin / Bloomberg via Getty Images

Egypt plays debt card in economic gamble

Egypt is using billions from its allies to stimulate its economy and keep its streets calm, in the hope that investors and tourists return.

CAIRO // Egypt is engaged in a high stakes gamble, using billions of dollars from allies to stimulate the economy and keep its politically charged streets calm in the hope that investors and tourists return.

The country’s finances are in a precarious state with a massive deficit but the government, armed with billions in aid from Arabian Gulf countries, has rejected the conventional wisdom of austerity measures prescribed by the International Monetary Fund (IMF).

If the plan fails, a new government, which is expected to be elected early next year, could find itself deep in debt, its currency overvalued and with an economy in crisis.

“Now we are living on a ventilator, with aid from neighbouring countries and that is understandable in the middle of a meagre tourism industry and reluctance of direct foreign investment,” said Sherif Samy, the head of Egypt’s Financial Supervisory Authority.

Saudi Arabia, Kuwait and the UAE pledged more than US$12 billion (Dh44bn) in aid after the army removed Mohammed Morsi from the presidency on July 3 following mass protests against his rule.

Since the 2011 uprising that toppled Hosni Mubarak, Egypt has burnt through $20bn in foreign reserves, borrowed billions from its allies and racked up billions in debts to foreign oil companies to prop up its currency.

The Morsi government worked out an agreement with the IMF that would have included austerity measures, higher taxes and a reduction of subsidies that eat up a quarter of the budget. It was never implemented.

The army-backed government, aware that IMF conditions could cause a huge popular backlash in a country where protests have forced out two presidents in three years and sent the economy into a tailspin, has avoided austerity measures.

“The government is faced with a big challenge, especially as it faces coming elections within months,” Mr Samy said.

“They must not be excessive with the social subsidy programmes and wage and pension increases that might titillate the feelings of ordinary citizens in the short term but have a severe impact on the state budget and on the deficit.”

What happens in Egypt could affect the rest of the region, which has also had political and economic turmoil since the Arab Spring uprisings.

Supported by the Arabian Gulf aid pledges, the government announced a stimulus package worth Dh11.9bn in August. It later increased it by a third to Dh15.8bn and plans another Dh12.8bn package early next year.

But it has not spelt out details of any other long-term plans to strengthen the economy.

The interim government has raised the public sector minimum wage and pensions, and the central bank has lowered its key interest rates by a full percentage point since August to encourage growth.

In addition, the government has said it would focus on a series of labour-intensive infrastructure projects and unfinished public projects designed to quickly improve the living standards of Egypt’s 85 million citizens.

Some businessmen have said there are indications that investors and tourists, once its main source of foreign exchange, would return once the political turmoil subsides.

“Foreign investors are primarily concerned about stability, no violence, where they feel their investments are safe, where there is an ease of going in and out,” said Hussein Choucri, the head of Cairo-based HC Securities, a mid-sized investment bank.

However, many investors are worried about security and recoil from the way Egypt has treated businessmen since the uprising.

State companies that Arabian Gulf investors bought under the Mubarak administration have been renationalised and property sales renegotiated after private lawyers challenged the transactions in court.

The interim government has been taking steps to reassure investors.

“We are revising all economic legislation,” said Osama Saleh, the investment minister.

The tourism minister of Egypt, Hisham Zaazou, said last month the government planned to launch a marketing campaign in the hope of attracting 13.5 million tourists next year. Only 9.8 million tourists came in 2011, down from 14.7 million the previous year.

During Mr Morsi’s year in power, the budget deficit widened to almost 14 per cent of gross domestic product. The government hopes to reduce that to about 10 per cent this year.

It also hopes investors and tourists will bring foreign currency, taking pressure off the Egyptian pound, which has lost almost 16 per cent of its value since the uprising and even more on the black market.

The country may not be able to count on its Gulf allies for ever.When an Egyptian delegation visited last month, there was a stark warning from the UAE. Sheikh Mansour, the Deputy Prime Minister and Minister of Presidential Affairs , said Egypt could not live on Gulf aid alone.

“Egypt must think of innovative and unusual ways to boost the economy,” he said.

* Reuters

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