In the eye of the storm: Shoring up the economy

Niveen Wahish , Friday 29 Jul 2022

Al-Ahram Weekly reviews ongoing efforts to shore up the Egyptian economy amid global crises.

photo: AFP
Global economic crises are weighing down on household budgets, limiting demand, and stripping companies of much-needed profits. Like many countries, Egypt is finding it difficult to import essential commodities, such as wheat. Meanwhile, Egypt is working on multiple fronts to overcome the current challenges by attracting more foreign investments and forging new deals. (photo: AFP)

 

On Monday, 12 projects worth $3.4 billion were agreed between Egypt, Jordan, and the UAE as part of the $10 billion industrial partnership signed in late May with the aim of creating jobs, securing supply chains, and replacing imports in the three partner countries.

The projects, which include the food and agriculture, fertiliser and pharmaceutical sectors, are to be implemented immediately, said Minister of Trade and Industry Nevine Gamea. Other sectors, including chemicals, textiles, clothing, plastics, and metal manufacturing, will be the focus of future agreements.

The partnership, which Bahrain joined this week, will bring much needed investments into the economy. Egypt is targeting $10 billion in foreign direct investments annually in an attempt to spur growth, create jobs, and improve the balance of payments, alongside 5.5 per cent GDP growth in the current fiscal year. Earlier this month the Ministry of Planning reported that GDP grew to record 6.2 per cent in 2021-22.

Last week President Abdel-Fattah Al-Sisi, in Germany to co-chair the Petersberg Climate Dialogue, highlighted investment opportunities in Egypt, an emphasis that continued during the rest of his European tour which took in Serbia and France. The president reaffirmed Egypt’s readiness to export natural gas to Germany and Europe as part of “Egypt’s ambitious vision to transform itself into a hub for the production and export of clean energy, especially green hydrogen and solar and wind energy.”

In France, President Al-Sisi met with French Minister of Economy and Finance Bruno Le Maire to discuss economic cooperation and ways to boost French investment in Egypt, especially in renewable energy. In Serbia he inaugurated the Egyptian-Serbian Business Forum and called for greater trade and economic cooperation between the two countries.

The European tour was also important politically, says expert in international relations Eman Zahran. It showed that Egypt is keen to maintain balanced relations with European countries regardless of their position on the Ukrainian crisis.

According to Zahran, President Al-Sisi highlighted Egypt’s “political neutrality” in the management of international conflicts and during the various stops of his tour, which came on the heels of Egypt’s participation in the Jeddah Summit for Security and Development. Al-Sisi acted as a mediator, conveying possible solutions between the various parties and creating common ground that can be built on to end the Ukrainian crisis and the threat it poses to food and energy security.

As foreign reserves fall and the import bill rises amid a febrile international situation, President Al-Sisi used his tour to underline the budgetary pressures Egypt is facing.

Egypt’s international reserves came in at $33 billion at the end of June compared to around $40 billion in May 2021. Egypt has been in talks for a new loan agreement with the International Monetary Fund (IMF) since March, but to date no details have been released.

On 7 July, an IMF mission to Egypt, led by Mission Chief for Egypt Celine Allard, concluded its visit to discuss the new loan programme. “In the period ahead, we are continuing our close engagement with the authorities towards reaching staff level agreement,” Allard said.

Following defaults by countries like Sri Lanka, international financial institutions are being extra careful about disbursing further loans and are demanding severe reform measures upfront, American University in Cairo adjunct professor Hani Genena told Al-Ahram Weekly.

Like many other emerging markets Egypt is in the eye of the storm, with the war in Ukraine affecting much needed hard currency income from the tourism sector as well as disrupting wheat supplies and pressuring the balance of payments. Egypt, one of the world’s top wheat importers, has imported an average of 12 million tons annually in recent years but aims to trim that down to 10 million tons this year on the back of a bumper domestic crop.

Genena believes the IMF wants to see the government increase diesel and bread prices, which would explain the recent hike in diesel prices, the first in 30 months. On 14 July, the Fuel Automatic Pricing Committee which meets quarterly to review fuel prices, decided to raise the price of fuel products by up to LE1 per litre. The biggest hike in three years will cut state spending on diesel subsidies to LE55 billion, a 13 per cent reduction, Prime Minister Mustafa Madbouli said in a speech following the decision.

The IMF also wants to see a free-floating currency, analysts believe. Since the government devalued the currency by 16 per cent in March it has been letting the pound slide slowly but steadily against the dollar. It has now lost 20 per cent of its value since March, a sign of the widening balance of payments deficit and growing pressure on the Egyptian economy.

According to Genena, President Al-Sisi’s meeting with two G7 members Germany and France aimed in part to encourage them to put in a good word with the IMF on behalf of Egypt.

Genena estimates the IMF loan will range between $15 and $20 billion given the length of the negotiations and the size of Egypt’s obligations. According to Reuters, Egypt is facing foreign debt payments of almost $16 billion in 2022-23.

Egypt’s foreign debt has been much scrutinised by domestic and foreign analysts. It rose to $157.8 billion in the first quarter of 2022, up from $145.592 billion three months earlier. Debt servicing is eating up around 45 per cent of total government revenues.

The solution, according to Genena, is to focus on export-oriented, hard currency earning sectors. Egypt has recently expanded domestic production, creating added value and jobs but also increasing demand for imports. With hard currency sources hard hit, the momentum will be hard to maintain, he says.

While lauding government efforts to attract investments into the industry, Genena is concerned that the focus so far has been on commodity-based industries, such as petrochemicals, hydrogen, and fertilisers.  He would like to see investments in areas such as textiles, where Egypt has a relative advantage and the best way to go about it, he argues, is to invite firms that are already exporting to set shop in Egypt, much like the Turkish and Moroccan model. While the global economy may not be ready for exports now, Egypt must be ready when it rebounds.

Securing wheat is another crucial task Al-Sisi’s tour aimed to address. France is among the world’s top 10 wheat producers, harvesting 30 million tons annually. Serbia is also a wheat producer, and though it produces a modest 2.9 million tons annually, it is nonetheless important to Cairo’s policy of diversifying its wheat supplies.

Last week Reuters reported that the General Authority for Supply Commodities (GASC), Egypt’s state grain buyer, is in direct negotiations with trading houses to purchase Russian and French wheat. Given no international tender has been issued, GASC is not officially announcing the result of the talks, Reuters said. Earlier GASC had rejected offers in an international tender because of high prices.

*A version of this article appears in print in the 28 July, 2022 edition of Al-Ahram Weekly.

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