Targeting sustainable growth

Niveen Wahish , Friday 13 May 2022

Caught between the impact of the seemingly endless war in Ukraine and the US Federal Reserve’s tightening of monetary policy, the Egyptian economy is in desperate need of lifelines.

Egyptian economy


Egypt’s annual urban inflation rose to a three-year high of 13.1 per cent year-on-year in April, from 10.5 per cent in March, the Central Agency for Mobilisation and Statistics (CAPMAS) said on Tuesday.

Not that anybody was waiting for the CAPMAS announcement. It merely confirmed what the public already knows, that prices are rising on a day-to-day basis. Meat now costs anything between LE160 to more than LE200 per kilogram depending on where you buy it. Chicken is being sold for more than LE40 per kilogram for a whole bird, compared to LE28 last year. The cost of fruits and vegetables is also skyrocketing.

“Prices are crazy,” says Batta, who makes a living as a cleaner. This Eid she could hardly afford to bake the traditional Eid kahk and biscuits, she said, because even cheaper unpackaged flour and ghee cost almost double what they did last year.

This week’s inflation rate reflects the depreciation of the pound since 21 March when the Central Bank of Egypt (CBE) allowed it to move against the dollar. The Egyptian pound now trades at LE18.5 compared to LE15.75 on 20 March. The rate is also being driven upwards by the war in Ukraine which has led to higher commodity prices, as well as lingering supply chain disruptions caused by Covid-19 closures.

The government’s 2022-23 budget, announced on Monday, had to take into account the increase in commodity prices: it is calculated on the basis of oil costing $80 a barrel instead of last year’s $60, and wheat costing $330 per ton rather than $255.

Inflation will continue to rise over the rest of this year, London-based research consultancy Capital Economics said in a note on Tuesday, leading to the CBE hiking interest rates further.

On 21 March, the CBE raised interest rates by one per cent, the first increase since 2017. Capital Economics expects a 3.5 per cent rise by the end of the year, to 12.75 per cent, significantly more than the two per cent increase predicted by other economists.

The CBE’s tightening monetary policy is being prompted not just by rising domestic inflation but by global interest rates rising on the back of the US Federal Reserve’s own tightening of policy. As the Eid holiday was being celebrated in Egypt, the US Federal Reserve raised interest rates by 0.5 per cent, the largest increase in two decades. While many commentators expected the CBE to follow suit immediately, it says no decision will be taken before the regular meeting of the Monetary Policy Committee on 19 May.

In theory, higher interest rates have a two-fold benefit: they serve as a stop gap against dollarisation, and maintain foreign investment interest in financing government debt. But as many economists point out, they are a short-term policy fix, and it will be difficult to keep up with the Fed which is expected to increase rates six times this year.

To set the economy on the right track, President Abdel-Fattah Al-Sisi has asked the government to devise plans to attract investments, revive the stock market, and assist the industrial sector to spur growth. In its 2022-23 draft budget, the government has targeted a growth rate of 5.5 per cent.

Industry is the engine of growth, the main driver of the economy, employment, and exports, says Sherif Fahmi, chief operating officer of N Gage Consulting, and Egypt’s industrial policy must focus on solving the obstacles manufacturers face, not least the massive amounts of red tape they must negotiate.

Investment advisor Khaled Hamza agrees, emphasising the role of the industry in boosting exports and earning hard currency given other sources of hard currency such as tourism are far more vulnerable to shocks than industrial products.

According to Hamza, what is needed to stimulate industrial growth has been known for 20 years. Industry needs access to land at reasonable prices: “Manufacturers need land to build plants, create jobs, and attract investment. They are not going to trade in it,” he says. Yet between corporate, sales, real estate taxes, and other commitments, they must shoulder a huge financial burden which can reach up to 50 per cent of revenue and is inevitably reflected in the end price. This means many production inputs are imported because they are cheaper, though local inputs could replace them with the right incentives in place.

Among the measures Fahmi believes necessary to facilitate industrial growth are tax reforms, expediting litigation and arbitration processes and customs procedures, reducing energy prices, improving the supply of skilled labour, and increasing private sector involvement in decision-making over changes to regulations and policies.

Government plans to revive the economy also include attracting $40 billion over four years by allowing private sector participation in state-owned assets, something which Fahmi says could help revive the stock market and, if properly managed, boost public finances through minority offerings on the stock exchange.

“It will support the stock exchange by increasing the pool of offered companies, increasing the market’s attractiveness and trading sizes,” says Fahmi. He adds that accelerating the offering of state-owned companies will incentivise private sector firms to be listed.

Attracting foreign direct investments is just as important to secure hard currency, argues Hamza. He is against raising interest rates to continue to attract investors in the carry trade, pointing out that they are the first to leave the market when there is a crisis. In March, Egypt’s hard currency reserves fell by $4 billion, much of which covered “substantial foreign investor outflows” according to the CBE.

Transparent dialogue with existing investors is key to attracting new investments, stresses Fahmi. Current investors are the ambassadors for future investments in Egypt so listening to their concerns, attending to their requests, simplifying procedures, and building trust and sustainable long-term business policies is important.

Fahmi also argues that continuing the momentum of structural reforms, coupled with serious efforts to make the private sector the engine of growth, is integral to any attempt to lure investments into the country.

In the meantime, he says, investment in national infrastructure projects remains crucial to sustainable economic growth. But while public infrastructure investment continues to contribute to driving growth, it is important to engineer a shift towards the private sector which has the potential to lure more investments into the country, provide more job opportunities, and develop and deepen local industries. A greater role for the private sector in infrastructure projects would also help bridge the infrastructure gap in Egypt that the World Bank has estimated at $230 billion over the next 20 years.

*A version of this article appears in print in the 12 May, 2022 edition of Al-Ahram Weekly.

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