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Living on borrowed time: mixed reactions as Egypt eyes foreign loans

'Borrowing is the solution for now' says the finance minister as Egypt announces a $2.2 billion World Bank loan, but analysts doubt it alone can alleviate deep-set economic problems

Bassem Abo El-Abass, Michael Gunn, Saturday 23 Apr 2011
Economy
Egyptian street vendors display fruits for sale in the Bolaq neighborhood in Cairo, Egypt.(Photo:AP)
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When Samir Radwan went to Washington last week his 'to do' list was short but daunting.

With Egypt's economy tottering, the country's Finance Minister had flown out as part of an Egyptian financial delegation in search of US$10 billion of funding to shore up tumbling tourism and export revenues.

He was at least partially successful, yet no-one was celebrating when he returned to Cairo. Loans may be necessary but they're rarely popular.

A request for the US to wipe Egypt's estimated $3.5billion debt was quashed by wrangling between Congress and an embattled Obama administration, but negotiations with the International Monetary Fund (IMF) and the World Bank were more fruitful.

Radwan announced on Tuesday a $2.2bn World Bank loan at an interest rate of 3 per cent to be repaid over 18 years. Earlier in the week he reportedly requested up to $6.2bn in soft loans from the two global bodies.

"Borrowing is the solution for the current problem," he said in an interview with Egyptian daily al-Shorouk, painting a worrying picture of an economy smashed by monthly losses of $3bn to the balance of payments and $1bn to tourism.

The news brought mixed reactions from economic commentators who spoke to Ahram Online, many of whom agree with Radwan on the necessity of further loans but worry about adding to Egypt's escalating foreign debt.

"It's necessary, but we shouldn't solely rely on borrowing," said Mahmoud Abdel-Fadil, a professor of economics at Cairo University.

"This will negatively affect our foreign reserves when we pay back these loans with interest installments, putting one more burden on our balance of payments."

Figures from the Central Bank of Egypt for early 2011 show the country's total external debt at $34.992bn, its highest level in more than five years.

Loans from international and regional organisations currently top $10.528bn, a figure that has risen almost without interruption for the last half-decade even as the total debt figure has fluctuated.

Now, however, both are rising. Between 2009 and 2010 alone, foreign debt climbed 7 per cent, partly due to slippage of the Egyptian pound. Every year $1bn goes to the European Union to pay annual debt service -- interest plus installment -- and $350m is paid to the US.

Given this backdrop it's scarcely surprising some are uneasy over additional burdens.

There were initial worries over the stringent conditions the World Bank and IMF have previously set for loans, but these appear to have been calmed with Radwan's announcement loans will be "unconditional".

Academics and analysts interviewed by Ahram Online were clear about how loans should be spent and also suggested a raft of extra measures -- from aid programmes to shifts in subsidies -- they believe may be healthier for Egypt's economy.

"If we really need money then we have to ask for non-repayable grants and financial aid from foreign countries," said Abdel-Fadil, adding that Egypt "needs to look like Japan" in terms of investments and its attraction to international funding bodies.

Others see a reworking of subsidies and current export deals as key to freeing up funds.

"As an Egyptian I think the government cannot rely only on borrowing, there are different options available," said Omneia Helmy, lead economist at the Egyptian Center for Economic Studies (ECES).

She pointed to a recent TV interview with Egypt's Prime Minister Essam Sharaf where he said the country could gain $4 billion by reviewing prices on natural gas exports to two other countries.

The Mubarak-era sale of natural gas to Israel at rates far below market value has long been a bone of contention with Egyptians. Former energy minister Sameh Fahmy and five ex-officials were detained on Friday for 15 days, pending investigations into the sales, which opponents claim harmed national interests and sapped over $714m.

Another sticking point comes in the form of government subsidies, a vital lifeline for a country with deep poverty and inequalities. Radwan has previously called subsidies "untouchable", but there are increasing calls for them to be applied more intelligently, targeting foods and essentials while lifting them from less vital sectors.

"How come the government hands subsidies to '95' car petrol?" asked Helmy, repeating a long-held complaint. Poorer Egyptians -- and indeed the majority of the country -- don't own cars. Why then, critics ask, should standard petrol be subsidised?

Borrowed funds should be used more effectively too, says Helmy, who thinks massive investment in infrastructure and agriculture will be key.

"I don't mind borrowing the funds, but only if production and investments revenue double as a result," she said. "According to the figures Egyptian foreign debts are not as large as internal ones. The government has to restructure the state to encourage external help."

Nadia Belhaj, a senior economist at the Economic Research Forum, agrees that borrowing should be used to encourage foreign investment and rebuild infrastructure "especially in remote areas and slums" to help alleviate poverty.

"The dark side of the loans will be if the country doesn't use them to encourage foreign investment and the export sector but only to fill financial gaps in its budget," she said.

Belhaj, a Tunisian, also thinks that geopolitical considerations make this a time for the US and Europe to give unfettered aid to Egypt.

"I have a political view in this problem - it's the proper time for [the West] to give aid to help halt a growing Islamist threat," she said. "These movements benefit from bad economic situations and gather more followers, especially if they become a source of financial help."

For now Egypt awaits news of further loan agreements.

"There's no real relation between aid from foreign countries and the current transitional government. People will give help to Egypt because they believe it is a great country," says Abdel-Fadil.

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