Egyptian economists worry for 2013, skeptic about 'Islamic' bonds

Engy El-Refaee, Thursday 17 Jan 2013

Economists at an AUC roundtable offer bleak forecasts for the Egyptian economy in the short to medium term

Egyptian economists worried about 2013
Galal Amin (far left) doubted the actual benefits of Islamic Bonds (Photo: The American University in Cairo)

Prominent economists expressed their predictions on Egypt’s economy in 2013 and the possible turns it could take in a roundtable at the American University in Cairo (AUC) on Wednesday, .

Inflation is predicted to surge on the back of further drops in the value of the Egyptian pound, while economic growth is predicted to face difficulties picking up.

Stable for the past two years, the Egyptian pound saw a more than six per cent devaluation since the beginning of 2013, after the Central Bank of Egypt stopped directly supporting the currency.

Inflation threat, falling growth

The economists at Wednesday’s roundtable discussion agreed the weakening pound would exact a toll on inflation in 2013.

“Inflation is expected to increase in 2013, especially because Egypt depends heavily on imported commodities, most of which are energy products," said Samer Atallah, economy professor at AUC.

A price surge will also affect government expenses, causing them to rise, further adding to an already burgeoning budget deficit. The troubles in government finance have a direct negative impact on economic growth.

“The government budget deficit necessitates austerity measures that would in turn lower consumption and investment, thus affecting economic growth,” AUC economist Ahmed Kamaly explained.

The Egyptian economy is expected to grow by 2.6 per cent in the current fiscal year which ends 30 June 2013 according to the latest World Bank forecast. Growth is expected to pickup in the following fiscal year, 2013/14 — starting 1 July 2013 — to 3.8 per cent.

“Egyptian exports have started to decline [in this fiscal year], while the volume of imports remains fixed,” Kamaly noted.

Egypt’s government is expected to make increasingly aggressive cuts in its expenditure to make up for apparent weak economic fundamentals, depletion of foreign reserves and the weak currency.

Along with spending cuts, increases in indirect taxes on goods and services would negatively affect consumption, weakening growth, the experts agree. The manner through which the government austerity drive is to be implemented was criticised by the roundtable speakers.

“Austerity measures could be done in a way that would serve social justice through direct taxation schemes such as progressive taxation and property taxation that would result in more social balance,” Kamaly said.

Difficult to predict

Galal Amin, a veteran and renowned economist, explained the complexity of forecasting Egypt’s economy, saying there is neither transparency nor credibility in the government’s decision making.

“Take the IMF loan. There is no official declaration to the public showing the criteria that Egypt has to abide by to get the IMF loan,” said Amin.

Egypt recently started another round of negotiations with the International Monetary Fund following the postponement of the loan in December amid clashes centred on the new constitution.

Islamic bonds: a lifeline?

Much hype was made on the new introduction of Islamic bonds (sukuk) to Egypt. Members of the ruling Freedom and Justice Party have marketed the concept as a possible savior for the Egyptian economy.

Speakers on Wednesday were more cautious than optimistic about the benefits of Islamic bonds.

Amin explained he was worried that the new financial tool would allow for the sale of public enterprises at their lowest value (through sukuk) to foreigners, who would consider this a gateway to help them pull out of their respective economic downturns.

“I fear that sukuk would be a mere replacement of ‘popular bonds’ introduced by ex-Minister of Investment Mahmoud Mohieldin.” Amin added.

"Popular bonds" was considered in 2009 a financial tool to get rid of inefficient public sector companies through setting up a bonds market to mobilise savings and convert them into investment. The scheme had the same official aims of stimulating growth and curbing the budget deficit as the proposed Islamic bonds.

Other speakers saw potential benefit in the sukuk tool. “Gulf countries will manage and try to mobilise worldwide economy to invest in Egypt through the new sukuk Islamic bonds [tool]” Atallah said.

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