What the foreign debt trap means for Egypt

Wael Gamal , Friday 19 Apr 2013

Egypt is descending deeper into the trap of borrowing and repaying debt. This trap is not only an economic one, but also a political one, with consequences for Egyptian national sovereignty


“Qatari funds are a short-term boost because of Egypt’s current economic condition, but will they help it recover?” That is the question Bloomberg news agency, specialising in financial and economic issues, put to Said Hirsh, the financial analyst and expert in London, who has a PhD in economics from Bristol University, right after Qatar announced it is buying Egyptian government bonds worth $3 billion and sending natural gas to Egypt. Hirsh’s response was definitive: “I don’t think so. It is entirely unclear what the Egyptian government is trying to do.”

The impact of Qatari loans was quick (and I do not use the term Qatari assistance because it is buying government bonds — a news scoop for Al-Shorouq quoting a source at the Ministry of Finance who said it will be for 18 months with an interest rate of 4.6 per cent). Alongside a loan worth $2 billion from Libya without interest for five years and a grace period of three years (meaning Egypt would not begin paying back the loan for another three years), these funds directly propped the Egyptian pound after it lost 10 per cent of its value in four months, and about one quarter of its value since January 2011.

The rate of the dollar began to retreat on the black market, perhaps after traders felt the Central Bank now has liquidity and can use it, as it did in the past, to undercut them on the open market. This is a very positive development because it curbs, even if only temporarily, sudden price hikes resulting from imported inflation (since Egypt imports basic commodities such as fuel and food from monopoly markets, any drop in the value of its currency is immediately deducted from living standards, especially of the poor).

It also gives the Central Bank some breathing space after its reserves of foreign currency dropped to less than three months’ worth of imports, which is an average level. Meanwhile, Qatari gas with lenient conditions could help relieve the fuel and electricity crisis (compounded by scarce foreign currency) ahead of the months of summer and Ramadan.

But are these loans without cost? And what is their impact a little further down the road? Was Hirsh correct in saying they would not resolve Egypt’s current economic crisis?

Not for free

Before and during the October 1973 war, Arab states provided Egypt with direct political and financial assistance (such as Algerian aid and the ban on oil exports). Therefore, Arab support is not unusual, but it is different today.

In its analysis of the Qatari loan, the Intelligence Unit of the British news magazine The Economist (EIU) reported the Qatari prime minister’s statement that his country “has asked nothing of Egypt in return”. But the prominent EIU linked the timing of the new loan with Qandil’s government eliminating taxes on stock market mergers and acquisitions, which exempts Qatar National Bank’s acquisition of NSGB Egypt that would have immediately given the Egyptian treasury $200 million.

The EIU noted there is also a deal whereby Qatar Investment Bank (QInvest) would purchase 60 per cent of shares of the Egyptian Investment Bank EFG Hermes (currently a defendant in ongoing cases of stock market manipulation in favour of Alaa and Gamal Mubarak) that has a 3 May deadline at the Financial Supervisory Authority. We have yet to see if this will move or not (this deal would have also pumped millions of dollars into state coffers from the same cancelled tax).

By adding Qatari loans to previous ones ($4 billion), Qatar’s share alone of Egypt’s official foreign debt (currently at $38.8 billion and will reach $41.8 billion once the new loans are added) has risen to more than 16 per cent. The impact of this on Egypt’s economic and regional policies cannot be ignored.

We should also note the Libyan loan was announced by Egypt’s official news agency shortly after the arrests in Cairo of several figures in Gaddafi’s ousted regime, and a cooperation agreement being signed between Libya and the Egyptian Armed Forces. This too is politics.

We cannot view the policy of borrowing from abroad under Qandil’s government other than an extension of the same policies under the Supreme Council of the Armed Forces. On 29 July 2012, when President Mohamed Morsi’s term began, Minister of International Cooperation Fayza Abul Naga estimated “the funds the ministry secured between January 2011 and July this year amounted to $5.8 billion; $5.5 billion of these are loans.”

The research unit at EFG Hermes estimated the value of foreign loans over the past two years (before the new loans) at around $10 billion, “but little action on the political stage and partisanship has not helped transfer these loans to boost the economy.”

As soon as the new loan was announced, the government quickly asserted it would not delay negotiations on the IMF loan, which is now expected to be more than $4.8 billion, perhaps through a third party. But does this mean stability for the pound and restoring its value? Perhaps to undercut traders, but only for a short period. But if we consider the conditions of the IMF it may not seem so because then devaluing the pound becomes deliberate policy.

On 18 January, in his usual honest way, Hassan Malek, chairman of the Egyptian Society for Business Development and a leader in the Muslim Brotherhood business sector, denied President Morsi’s government claims that the IMF loan is unconditional. Malek told Reuters: “Egypt began to devalue its currency to revive the economy and meet the conditions of the expected IMF loan.”

He personally (but what is his public capacity?) believes further devaluation will occur: “The government began taking steps to reduce the budget deficit and achieve the country’s financial stability. More extreme measures will have to wait until after parliament elections in April (he said this before elections were postponed). The man on the street now understands there is a price and the country must pay it to close a deal with the IMF.”

Even if the IMF did not insist on devaluating the pound, this inflow of money (most of which the next president will have to pay back) will be consumed, just as previous billions in loans and remittances from Egyptians abroad, etc, had been. Also, as long as the Central Bank and government don’t block the intense and ongoing flight of wealth through the stock market and transferring profits of foreign companies and others, under false pretense of the free market and reassuring foreign investors.

Concluding a deal with the IMF (in the range of $6 billion plus another $14.5 billion the Europeans, US and Arabs attached to it) would raise foreign debt by the end of the year or mid-2014 to $63 billion. This is about double the foreign debt when Mubarak was overthrown, which is problematic, especially since we do not know how these funds will be used. If we add other funds expected to be collected after the bonds law passes, the figure could jump even more.

This borrowing fever continues unchecked and without oversight by the people Malek is talking about, since borrowing via securities does not require prior approval of elected legislative councils.

Leaked reports say that the IMF loan will be deposited with the Central Bank, which will exempt it from the constitutional requirement of approval by the new parliament. Then, we will never find out the real conditions.

There is for example, the Turkish loan of $1 billion which we only found out about in the official newspaper on 22 November 2012, after it was issued by presidential decree because he has legislative power, although it was signed as early as 30 September. Until today, no one knows if it was deposited or not, and what public projects it will be spent on.

The trap

In his important book Your Money or Your Life, Éric Toussaint, who is president of the Committee for the Abolition of Third World Debt, estimates the size of foreign debt of developing countries in 1980 was $580 billion. Over 22 years, developing countries paid $4.6 trillion in interest and payments, which is eight times the amount of money they had borrowed. Meanwhile, the size of the debt multiplied fourfold to $2.4 trillion.

Mubarak’s Egypt after 1986 was very conservative about foreign debt, and the US and its allies dropped half the country’s foreign debt in return for Egypt’s participation in the US intervention to liberate Kuwait. When Mubarak was overthrown, the debt from was where it was before it was halved ($35 billion), despite the fact Egypt continued to pay an average $3 billion annually in debt fees and payments.

Between 2000 and 2009, Egypt’s debt rose by 15 per cent, although we had already paid $24.6 billion during that period. This is called the debt trap, made of mostly opaque debts with negligible impact on development because of absence of transparency and public oversight. The debt trap allows major world capitalist countries and companies unlimited intervention in our economic affairs forever.

Thus, the IMF will come and stick its nose into every detail; it will decide how much the next civil servant is paid and how he will live, who will pay taxes, and to whose advantage the wheel of production will turn. All this under the pretext of guaranteeing that Egypt will make its payments to lenders, whether banks or countries.

This is the trap being set for us now.

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