A time of reckoning

Niveen Wahish , Tuesday 9 Jan 2024

The government started off the year by announcing a new strategy and a set of subsidy reductions, reports Niveen Wahish



Egyptians woke up on the first day of 2024 to a set of new price hikes: metro and train tickets rose by 20 per cent, Internet packages are up by around 30 per cent and electricity is set to increase by up to 20 per cent.

The hikes,according to Prime Minister Mustafa Madbouli,will reduce pressure on the state budget.In a public statement on 3January, Madbouli said the price increases had been postponed several times in the past two years to shield citizens who were already struggling with inflation caused by the pandemic and the war in Ukraine, but they could not be put off indefinitely.He noted that the subsidybill had reached LE342 billion compared to LE100 billion two years ago.

Allen Sandeep, director of research at Naeem Brokerage,told Al-Ahram Weekly that the measures will add one per cent tomonthly inflation once they come into effect.

December inflation figures are scheduled to be announced on 10 January.Headline inflation came in at 34.5 per cent in November 2023. Inflation has been cooling since October and had been expected to cool further, says finance expert Khaled Hamza.

Now, Hamza told the Weekly, with these wide-scale price hikes inflation will take an upward trend. Knowing this, the National Bank of Egypt and Banque Misr have already offered certificates of deposit (CDs) at between 23.5 and 27 per cent. It is hoped the move will encourage maturing 22.5 per cent and 25 per cent certificate holders to keep their money in the banks.

Randa Hamed, managing director of OKAZ Portfolio Management, has called for stricter monitoring proceduresto ensure that inflation is not made worse by greedy traders. Steps already taken to control the market, she noted, include clampdowns on traders hoarding goods and a requirement for producers to print recommended retail prices on packaging to prevent arbitrary pricing by retailers, but more is needed.

Madbouli said the government is coordinating with the Central Bank of Egyptto bring inflation down to below 10 per cent by 2025 and that it is no longer sustainable for the government to borrow to cover its expenditure.

The government is targeting an 80 per cent debt to GDP ratio in five years. Before 2021, government debt was on a downward trend, with 75 per cent of GDPthe target in 2021. Now, debt is close to 95 per cent of GDP, said Madbouli.

The spike in interest rates has added fuel to the inflationary fire. Two years ago, borrowing was cheap at around 10 per cent. Today it is more than 25 per cent.

While Hamza agrees with the need to cut subsidies to relieve the budget, he wants clearer projections of the impact of the latest moves on public debt servicing and is worried thatincreasedinterest rateson CDs will eventually mean higher interest rates on treasury bills, inflating government debt.

The measures, he argues, must be accompanied by a deceleration of public investment spending given the scarcity of foreign exchange revenues.

The government is seeking to attract $300 billion annually by 2030, three-fold current levels, according to a strategy released this week by the cabinet’s Information and Decision Support Centre (IDSC). The strategy is based on boosting exports and increasing tourism receipts, remittances, foreign direct investments and Suez Canal revenues.

It targets GDP growth of between 6-8 per cent— in December Planning Minister Hala Al-Said said GDP growth would be 3.5 per cent in the current fiscal year— and reiterates the government’s intentions to broaden the role of the private sector and boost its contribution to the economy to 65 per cent. The strategy also foresees the sale of 25 to 60 per cent stakes in a number of state-owned assets by June 2024 which will generate $5 billion.

It is an ambitious and optimistic plan, says Hamed of OKAZ Portfolio Management. While she hopes the situationwill improve by 2030 and the government attains its goals, she remains worried that the plans could be derailed by a volatile geopolitical situation.

A source who preferred to remain anonymous said that “a clear roadmap to achieve these goals is needed,but talking about 2030 when we cannot forecast where the exchange rate will be next week does not make sense.”

The source stressed that dealing with the parallel market must be the priority since no economy can run on a duel foreign exchange rate. The gap between the official and parallel rate is 66 per cent, he noted, and while many may not believe the parallel rate reflects the fair value of the pound, “in the enda fair value is where you have a willing seller and a buyer.”

After two years of indecisiveness, the market is expecting a radical shift, including a new cabinet, noted the source, a view echoed by the Egyptian Centre for Economic Studies (ECES).

“There is,” insists the ECES,“a need for new blood commensurate with the new phase.”

* A version of this article appears in print in the 11 January, 2024 edition of Al-Ahram Weekly

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