Egypt has been getting gigantic loans right and left to help it finance its budget and current account deficits, which is great news – provided the government seizes the occasion to take long-overdue measures to restructure the economy.
Otherwise, it is simply kicking problems down the road.
Over the past two months, officials have circled the globe seeking funds from donors and governments, and they have been overwhelmingly successful, ostensibly at least. In the past two months they have pried tens of billions of US dollars in loans, and a few grants as well, from the World Bank, the African Development Bank (AfDB), China, Saudi Arabia and others. This month, the central bank governor Tarek Amer was in the UAE looking to persuade officials to buy Egyptian dollar-denominated bonds or lend dollars to Egypt directly, Al Mal newspaper reported last week.
But the terms of many of the loans so far have been sketchy, and in many cases the numbers are not as wonderful as they seem.
The most recent announcement was during the visit to Cairo last week by the Chinese president Xi Jinping, when 21 agreements and memorandums of understanding worth $15 billion were signed.
These included a $2.7bn contract with China State Construction Engineering to build a convention centre, parliament and government offices in Egypt’s new administrative capital and a $1.1bn contract with a consortium that includes China Railway Group for a rail project. They also included a $1bn loan to Egypt’s central bank and a $700 million loan to state-owned National Bank of Egypt.
The good news is that Egypt will get some new infrastructure in the long term. But since a significant chunk of the package will be used to import Chinese labour and construction materials, only part of it will translate into an immediate economic stimulus. There will be a price to be paid in terms of long-term debt.
Meanwhile, the collapse in the price of oil seems to have given Egypt’s formerly generous patron Saudi Arabia a certain amount of donor fatigue.
According to Al Mal, Egyptian officials visiting Saudi Arabia this month asked the Saudi government to buy dollar-denominated bonds or deposits dollars to bolster Egypt’s foreign reserves, but the Saudis refused.
They did agree to go ahead with $3bn in previously pledged development loans and grants and to provide financing for Egyptian petroleum products. This, according to Bloomberg, will involve providing finance with “easy payment terms” for Egypt to buy about $20bn in Saudi oil products over the next five years.
Also this month, Egypt received the first $500 million tranche of a $1.5bn AfDB loan, with the rest to be delivered out over three years, and a $1bn tranche of a $3bn World Bank loan to help the government plug its budget deficit.
But both the AfDB and the World Bank loans were conditional on reforms to Egypt’s civil service, and the government says that the additional tranches are now in doubt following the parliament’s rejection this month of a new civil service law.
In other words, the latest pledges of finance look like they will not go far enough to relieve Egypt’s chronic fiscal problems. The budget deficit was a whopping 12.5 per cent of GDP in the year that ended on June 30, according to the finance minister. Egypt’s foreign debt was still a relatively safe $46.1bn, or 12.7 per cent of GDP, at the end of September, but it has been growing rapidly.
The government is finding it harder to find finance domestically, with local banks having already lent most of their available funds to the government.
The government has enacted few austerity measures or fiscal reforms since July 2013, when it sharply increased the price domestic consumers pay for subsidised energy. A significant amount of that increase has already been eroded by inflation, which was 12.9 per cent last year.
The finance ministry said last year it would be relying on a new value-added tax to keep its budget deficit under 9 per cent of GDP in 2015-16, but with only five months left to go it has yet to put the tax in place. Economists now expect a deficit of 11.5 per cent of GDP.
The central bank has shied away from devaluing the pound, a move that would help to plug the drain on the balance of payments as well as entice foreign investors to buy Egyptian treasury bills, thus helping to finance the budget deficit.
It may not be the best time for unpopular austerity measures as the country passes through the politically charged fifth anniversary of the 2011 uprising, but let us hope that as passions cool in the coming weeks the government uses its prowess to put longer-term solutions in place.
Patrick Werr has worked as a financial writer in Egypt for 25 years.
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