Stopgap solutions

Niveen Wahish , Sherine Abdel-Razek , Wednesday 9 Aug 2023

The Central Bank of Egypt
The Central Bank of Egypt


Earlier this week President Abdel-Fattah Al-Sisi reiterated Egypt’s commitment to implementing structural reforms and allowing a greater role for the private sector. During a meeting attended by Prime Minister Mustafa Madbouli, President Al-Sisi underlined the importance of removing bureaucratic obstacles and creating a level playing field in order to attract domestic and foreign investments.

Attracting investments, especially in foreign currency, is necessary for Egypt to grow the economy and bridge its financing gap.

This week, the Egyptian General Authority for Investment and Free Zones (GAFI) announced a new approval system for projects under which permits will be issued within 20 days of application. GAFI also plans to launch an online platform for the registration of new companies.

The economy has been slowing down against a backdrop of high inflation, caused mainly by the depreciation of the Egyptian pound, according to Pascal Devaux, MENA region senior economist at BNP Paribas. The pound has lost 50 per cent of its value since February 2022 and is currently trading at LE30.9 to the dollar. Inflation, meanwhile, is hitting record highs.

In a BNP Paribas research note, Devaux said that in the absence of any improvement in foreign currency liquidity Egypt’s external financing requirement will remain high for at least two years, with the privatisation programme providing only partial relief. He added that international support has become increasingly conditional, leaving the government with little room for manoeuvre.

In an attempt to mitigate the consequences of the foreign currency crunch and attract hard currency, the government, and the Central Bank of Egypt have launched several initiatives. They include offering dollar-denominated certificates of deposit with an interest rate of up to nine per cent, allowing foreigners to buy real estate in Egypt provided they pay in hard currency, and allowing Egyptians abroad to settle their military status against a payment of $5,000.

While Khaled Al-Sayed, managing director of Synerjies Centre for International and Strategic Studies, applauds the government for being “innovative and thinking outside the box,” he told Al-Ahram Weekly that there is still a gap to fill.

According to Capital Economics, a UK-based economic think tank, the amortisation of foreign currency debt will continue to increase until 2025. “In fiscal year 2025, the IMF expects the external financing need to reach $30 billion a year,” said a Capital Economics note.

Hani Genena, of the American University in Cairo’s Department of Management, says existing initiatives are insufficient to engineer an exit from the current foreign currency crunch. They are temporary measures until the government implements structural reform and starts receiving large inflows, he told the Weekly, and “the initiatives need to be accompanied by structural reforms to amplify the effect”.

In the short term, efforts need to focus on restoring normalcy to official FX markets, says Mohamed Abu Basha, senior economist at local investment bank EFG-Hermes. This will allow more flows to pass through official channels, help restore foreign investor interest in local assets and “eventually allow inflows from international financial institutions”.

Wael Ziada, CEO of Zilla Capital, seconds Abu Basha on the importance of dealing with instability in the FX market as soon as possible since doing so will trigger foreign currency inflows not only from investors but from locals who have dollarised their holdings.

“This could generate significant flows, estimated at anywhere between $3-17 billion, an amount that can make a real difference once it enters the banking system,” he told the Weekly.

Ziada would also like to see the pace of selling state-owned companies accelerated, especially dollar-generating assets, the most appealing to investors.

At the beginning of the year the government announced that at least 30 public companies had been slated for full or partial privatisation, either via strategic investments or through the local equity market. The government hopes to raise $40 billion by 2026. Three weeks ago, the sale of $1.9 billion worth of stakes in five companies was announced with the bulk of sale receipts in dollars.

While it was a good step, Genena believes the pace of asset sales has been slow, due in part to global market conditions that did not favour emerging markets and in part to the fact that public companies still need to adjust their financial statements to comply with international accounting standards.

“Now could be a good time to sell assets at a decent price,” he argues, because sentiment towards emerging markets has improved and the US Fed is about to halt the rate hikes it began in March 2022. The Fed has raised interest rates 11 times since the war in Ukraine began, pushing dollar interest rates to between 5.25 and 5.5 per cent.

Analysts agree that completing the review of Egypt’s agreement with the IMF will enhance efforts to attract investors. The first review has been delayed because the IMF wants to see faster implementation of the asset sales programme and a free-floating currency.  

Genena thinks it likely that Egypt will complete the first and second IMF review in September. He believes a deal could emerge under which Egypt can move gradually towards a free float by next June but worries that, in the absence of a successful review, there will be further downgrading by credit rating agencies.

The fear is that a fully flexible exchange rate will push inflation to unprecedented levels. Egypt’s nationwide annual inflation already hit 36.8 per cent in June, up from 34.8 per cent in May.

Arguing that a free floating pound is likely to be less inflationary than many fear, Ziada points to the experiences of other countries, noting that whenever there is a parallel currency market commodity prices converge at the higher price. “This means that most of commodities included in the basket used to calculate inflation have already priced in the decline in the pound,” he says.

As well as resolving the hard currency crunch, there needs to be greater private sector participation in policy-making, argues Al-Sayed of Synerjies.

If the government wants to achieve its target of increasing foreign currency inflows by $70 billion per year to reach $191 billion by 2026, as announced by the prime minister recently, the government needs to become an enabler rather than a market player, says Al-Sayed. It must have the courage to do away with laws that do not work and provide far greater clarity.

* A version of this article appears in print in the 10 August, 2023 edition of Al-Ahram Weekly

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