Improvements amid uncertainty

Niveen Wahish and Sherine Abdel-Razek, Monday 20 May 2024

Many economic indicators are improving against the background of an uncertain regional scene.

Improvements amid uncertainty


The government is committed to expanding the participation of the private sector in the economy, Prime Minister Mustafa Madbouli said this week.

Speaking at the International Finance Corporation (IFC) in Cairo on Sunday, Madbouli said that continuing consultations with the IFC confirmed the clear desire of the government to divest its stake in state-owned companies in targeted sectors and to increase the contribution of the private sector to the economy to 65 per cent.

He thus reiterated a commitment the government made in its renewed agreement with the International Monetary Fund (IMF) in March this year.

At the same time, Planning Minister Hala Al-Said told Asharq Business news website that the Sovereign Fund of Egypt (SFE) would tour the Gulf in June to promote investments in the fund’s portfolio.

A pressing objective of the government’s structural reform programme is to enhance the business environment, the ease of doing business, and overall governance, said Maha Rashied, an economist at Dcode Economic and Financial Consulting.

She said that with the elimination of preferential taxes and exemptions received by state-owned enterprises, the stage is set for private-sector-led economic growth, allowing it to compete with the public sector on equal terms.

In January this year, the cabinet passed regulations abolishing several tax and fee exemptions for state-owned companies.

“Egypt needs a vigorous private sector,” Charlie Roberston, head of Macro Strategy at FIM Partners, told Al-Ahram Weekly.

He said he hoped “the privatisation story happens,” but thought it too early to tell and expected it to take longer than first expected because the government has said it is reviewing the privatisation programme to ensure optimal conditions.

 In doing so, the government has been backed by IMF Managing Director Kristalina Georgieva, who said in February that Egypt should not rush to sell state assets under the current circumstances, referring to the war on Gaza.

Since early March, which saw Egypt signing the Ras Al-Hekma deal worth $35 billion and its inking an augmented $8 billion agreement with the IMF and receiving pledges of billions of dollars from other financial partners like the World Bank and EU, things had started to look less gloomy on the economic front.

“The benefits of the IMF programme (with the unification of the exchange rate being a prerequisite) have been most witnessed in the monetary and the external sectors. Inflation rates are easing after the misalignment was corrected, and the tightening of monetary policy has helped to curb them,” Rashied said.

Egypt’s annual headline inflation rate slowed from 33.3 per cent in March to 32.5 per cent in April on the back of easing food and beverage inflation, which slowed from 44.9 per cent in March to 40.5 per cent in April, its slowest pace since late 2022.

Rashied added that Egypt’s building of its reserves and recovering portfolio investments and inflows of foreign direct investment (FDI) had led positive sentiments among international investors.

Net foreign reserves at the Central Bank of Egypt (CBE) increased by $696 million to reach $41.1 billion at the end of April, their highest level in more than four years.

 “The return of international investors through portfolio investments has been imminent, intense, and prompt after prolonged turmoil,” according to Rashied.

The demand for short-term bonds has increased dramatically as a result of double-digit interest rates and a liberalised exchange rate. In March, investors bid $21 billion for an offer of $2.4 billion in one-year treasury bills, with the falling yield indicating a decline in the risk premium, Rashied noted.

“The latest devaluation makes the Egyptian pound very cheap on our real effective exchange rate model,” Robertson said. “We have seen it this cheap in 2003-04 and briefly in early 2017, and both times were good times to invest in Egypt. It is just that portfolio investors who invest in equities or bonds are quicker to respond than foreign direct investors who take longer,” he added.

The hard currency influx has enabled the government to pay down its debt, he said. The biggest problem for Egypt now, according to Robertson, is that roughly 65 per cent of budget revenues are being spent on interest payments.

“Anything to reduce the debt is a good idea,” he said. Egypt’s gross debt stands at 96 per cent of GDP in 2023-24 with the external component counting for 43 per cent.

It was announced on Tuesday that the government has received the remaining funds from the Ras Al-Hekma deal in the form of $14 billion in cash and $6 billion of previous deposits at the CBE to be written off.

The funds will be utilised to close the remaining deficit in the net foreign assets of the banking system, which stood at $4.2 billion as of March, said Noeman Khaled, an economist at the National Bank of Kuwait.

This means the government will use part of the money to repay its foreign debt as the net foreign liabilities (NFA) indicate whether a country is in a net position of being owed money by, or owing money to, foreign entities.

Additionally, according to Noeman, the CBE will give priority to clearing the remaining import backlog ($3 billion) and international oil companies dues (close to $5 billion). Finally, the remaining (around $6 billion) could be utilised to further build foreign-exchange reserve buffers.

He expects Egypt’s international reserves to reach $45 to $46 billion by the end of this month, together with some slight appreciation in the pound against the US dollar in the near term “triggered mainly by the arrival of the new tranche of Ras Al-Hekma funds but assisted by speculation of a land/tourism-development deal with Saudi Arabia similar to the one struck with the UAE over Ras Al-Hekma.”

However, “the economy is going to have a tougher time in the second half of this year because the government is not spending so much on investment projects. They could not afford to, so this is understandable, but that is a challenge,” Robertson said.

The IMF agreement with Egypt stipulates that overall public investment, including that of the government and of other economic authorities, does not exceed LE1 trillion in 2024-25.

As for the geopolitical risks presented by the tension on Egypt’s eastern borders as well as the disruption in the Red Sea, Robertson said he does not think regional tensions are a major problem for Egypt.

“This has always been a somewhat difficult neighbourhood,” he noted.

A report issued last week by the UN Development Programme (UNDP) on the effects of the Gaza war on Egypt noted that to date these have been primarily manifested in the decline in tourism and Suez Canal revenues.

Combined, these account for around 20 per cent of the country’s foreign-currency receipts, said the report, adding that the decline in these revenues has multiplier effects on all sectors and on overall GDP.

Such secondary effects include a deterioration in economic expectations, an increase in transportation costs for imports, and potential trade disruptions. Finally, while not yet fully realised, another potential risk looms in the form of an increase in energy prices in international markets.

The UNDP presented three conflict scenarios and three levels of impact on the economy.

According to UNDP estimates, the total decline in tourism and Suez Canal revenues over the course of the two fiscal years 2023-24 and 2024-25 could reach approximately $3.7 billion under the assumption that the war would last for another six months.

Meanwhile, the losses would increase to $9.9 billion if the war lasts for nine months. The figure jumps to $13.7 billion under a high-intensity scenario, which assumes an intensification of the war to last for one year.

The total economic cost of the war to Egypt’s economy, including the multiplier impacts, could reach $5.6 billion, $14.6 billion, and $19.8 billion in the three scenarios, respectively.

* A version of this article appears in print in the 16 May, 2024 edition of Al-Ahram Weekly

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