Egypt: Between IMF warnings and debt expansion

BY: Abdel-Hafez Al-Sawi*

The speech of David Lipton, the First Deputy Managing Director of the International Monetary Fund (IMF), during a recent conference on “Inclusive Growth and Job Creation” in Cairo on May 5, 2018, did not miss some diplomatic courtesies to the Egyptian government. However, the man’s speech also carried a number of warnings or rather a set of challenges.

Lipton’s most important compliments to the Egyptian government came in describing the Egyptian economy as being strong in the face of the economic challenges it had suffered before and during the implementation of the economic reform program signed with the IMF in November 2016. However, we do not know what the manifestations of such strength are: Is it in the 100 per cent devaluation of the pound against foreign currencies, or in the unprecedented rise in inflation to 34.7 per cent in July 2017, or in the continuation of recession over three years, or in the rise in poverty rates which the government insists on hiding their data after starting the IMF program procedures?

The declared poverty rate of 27.8% is that of the income and expenditure survey of the Egyptian family in 2015. This survey, which is usually conducted every two years, is supposed to have been conducted and announced during 2017. The survey’s results should be announced to show the negative social impacts of the economic reform program on one of the most important social indicators, i.e. the poverty indicator.

With only one indicator derived from the preliminary statement of the budget of the fiscal year 2016/2017, the number of households benefiting from “Interdependence and Dignity” pension program (a program to support the poorest families) was 1.7 million, while 3.2 million families had applied to benefit from this program, which is indicative of the extent of the decline in the standard of living of a large proportion of Egyptian households. It is noteworthy that the amount allocated for each family in this program is extremely low compared to the basic requirements of life; yet a number of 3.2 million families had applied to get it.

First: Crowding the private sector

Lipton spoke about the need for Egypt to strengthen economic activity led by the private sector and to promote openness to be able to increase investments and exports and create more job opportunities. “Broadly speaking, we all know the answer involves strengthening private sector-led economic activity and enhancing openness to be able to invest more, export more and create more jobs,” he said.

The government is going ahead with elimination of the public sector institutions through the privatization program, albeit a partial privatization, by adopting a planned ‘Initial Public Offerings’ (IPO) for a number of government-owned corporations (18-20) within three years as part of the government’s plan to increase public revenues from asset sales and hence improving public finances in line with the current economic reform program. The draft budget 2018/2019 even included amount LE 10 billion returns in the budget revenues this year. Last January, Head of the IMF mission to Egypt, Subir Lall, called on Egypt to speed up its planned initial public offerings (IPOs) for a number of state-owned companies – for increasing the capital of public companies through on the stock market or any other means that may include the sale of shares to investors, also leading to some forms of privatization.

On the other hand, the army is crowding the private sector in all sectors of the civil economy, especially those related to government investments or even government supplies, which the Ministry of Military Production almost monopolizes completely. Therefore, reliance on the private sector to increase its investment or its contribution in the creation of jobs will not be fruitful in light of the military expansion in the civilian economic life.

As for the government, it is still the largest borrower of the banking system. For years, the government has been contending the private sector has been. Also, the government will not back down from this negative behavior amid statements of Minister of Finance Dr. Amr Al-Garhi that the public debt has doubled five times over the past five years, and will continue to rise during the coming period. According to the data of the Central Bank of Egypt (CBE), the credit facilities for the government in 2017 amounted to about 373.8 billion pounds of the total facilities granted by banks other than the CBE which amounted to 1.46 trillion pounds, which means that the government acquired 25.5% of the total credit facilities granted by banks during 2017.

Second: Governmental uniqueness

One of Lipton’s messages was that effective economic policies are built on performance consensus and ownership at home, that is, economic policies are created by the government, the business community and the civil society – which has been completely absent since the July 2013 military coup. “Effective economic policies need to be built upon consensus and ownership at home. I hope we can advance a policy agenda that will be embraced by Egyptian society—government, business, civil society, and the population at large,” Lipton said.

The majority of economic policies, if not all, are made in the absence of the business community and civil society. Government ministers often do not even participate in this. The central bank has been leading economic policy since July 2013 until now. Therefore, there were complaints of lack of coordination between the government and businessmen in many things, such as raising fuel prices, or decisions to rationalize imports, and other economic decisions.

An evidence of the absence of coordination between the government and other institutions of society is that the government began implementation of its agreement with the International Monetary Fund (IMF) and devalued the Egyptian pound in November 2016, before the program was presented to the House of Representatives (HoR) for discussion although the HoR is one of the regime’s tools, but does not perform its supervisory role as required.

However, there was a constitutional necessity that required the presentation of the government’s agreement with the IMF to the House of Representatives before implementation, as this agreement would entail a financial commitment abroad, i.e. the IMF loan. Article 127 of the Constitution provides that “The Executive Authority shall not borrow, obtain funding or engage in a project – not included in the approved public budget – which shall entail spending from the State Treasury for a future period except after the approval of the House of Representatives.”

Another example for the government’s hegemony over economic policy decision making was the decision to reduce the rice growing areas and the enactment of legislation criminalizing violation of the resolution – without involving farmers, agricultural associations, or farmers’ union in discussing or making such policy.
Therefore, Egyptians do not feel that they are partners in the economic and social policies initiated by the government. In fact, the Egyptian people would have had a different response to these measures if the regime had eased up its political repression or softened its brute security grip.

Third: The injustice against the poor

In his speech, Lipton said that the reform of the Egyptian government’s reform of the subsidy systems since November 2016 has been positively reflected in the availability of some savings to finance social assistance – which is hard to confirm. “The subsidy reform has freed up some of the funding needed for targeted social assistance,” Lipton said.

According to the 2018/2019 budget, allowances of the social security and “interdependence and dignity” programs are at LE17.5 billion, with no increase to the current year’s allocations, although the budget includes reductions in fuel subsidies amounting to about LE 21 billion and an LE 16 billion reduction in electricity subsidies. However, allocations for the poorest sects, living on government aid ranging from LE 325 to LE 450 per month, have not been increased.

The most prominent item, which is witnessing a remarkable increase among the next budget allocations, is the interest on debts, which is estimated at LE 541 billion, which exceeds allocations for items like (wages: 226 billion pounds, education: 115.6 billion pounds, and health: 61.8 billion pounds). Thus, the allocations for the debt interest jumped from 380 billion pounds in the current budget to 541 billion in the 2018/2019 draft budget by 39% of the total expenditure (1.4 trillion pounds). Meanwhile, there was no extra allowances were allocated for the poorest families who receive social security pensions or those who are subject to the “interdependence and dignity program”, despite the expected surge in inflation on July 1, 2018 because of the reduction of government subsidies on fuel and electricity. So, how did Mr. Lipton conclude that “The subsidy reform has freed up some of the funding needed for targeted social assistance”?

Fourth: Short-term opportunity

Lipton called on the Egyptian government to seize the opportunity in the global space. He says the global economy is expected to grow by 3.9%, an increase of about 0.2%, which will be reflected on the improvement of international trade. Egypt could benefit from this by increasing exports and reviving tourism. “The global economy is improving as trade and investment show strength we have not seen in a decade. These forces are benefiting most countries, including Egypt. Our recent World Economic Outlook projects a continued expansion in the immediate future, with global growth of 3.9 percent this year and in 2019. That favorable external environment provides a good window of opportunity for Egypt to undertake reforms; a window that may not be open for too long,” Lipton said.
However, he warned that the expected negative atmosphere could limit Egypt’s benefits from this opportunity in the medium term, due to what may happen with regard to the increase in interest rates, the tight financial conditions, and the uncertainties that affect international trade. “That is because the medium-term outlook is more uncertain. We should expect interest rates to head higher and financial conditions to tighten. And we are all aware of the uncertainty hanging over the global trading system, which could mean less favorable conditions at some point,” he added. “In other words, now would be a good time for Egypt to shift growth and job creation into a higher gear,” Lipton said.

Lipton’s speech can be positively interpreted that he is urging the Egyptian government to do its best to increase production and improve its productive structure, benefiting from the positive global environment in the short term. However, this is not possible. By examining Egypt’s GDP growth rates in various sectors, we find that service sectors which have low value added or depend on imports in their infrastructure are in the lead of growth. According to 2016/2017 data, the telecommunications sector has the highest growth rate by 12.5%, the construction sector by 9.5%, the agriculture sector by 3.2%, and the manufacturing sector by 2.1% 8. Consequently, the government is not equipped to take advantage of the short-term outlook of the global economy.

Also, the words of Lipton can be interpreted as urging the government to speed up the pace of energy-saving measures and cut them altogether this year, exposing the Egyptian economy to a violent surge of inflation during the first six months of 2018/2019. Lipton’s words may be taken seriously by the government: as he pointed out that fluctuations in the oil market, which could lead to higher oil prices, could undermine efforts to reduce fuel subsidies and have a negative impact on the budget.

Fifth: Debt risks

Lipton stressed that the Egyptian public debt is very high, and that could be worse amid the unfavorable global circumstances. “There are several immediate reasons to press ahead with reform. Public finances certainly are on a firmer footing, but public debt remains very high,” he said.

It is regrettable that the government is not transparent about the size of the public debt (both domestic and external). The data on the external debt included in the Central Bank’s February 2018 bulletin, the latest bulletin on the bank’s website, stops at September 2017, although the government has received many loans from the World Bank, the IMF, Gulf countries, or the international bonds in dollars and euros during the first four months of 2018. The domestic debt data also stop at June 2017, amounting to only 3.16 trillion pounds, which does not reflect reality as it is the case for the external debt.

It was expected that the Egyptian government would respond through a series of policies to reassure Lipton and Egyptian society about the issue of the public debt. However, the statement of the Minister of Finance that the public debt has doubled over last five years, and that it is on the way to further increase, was shocking, and revealed the absence of programs to deal with an issue of this size, which threatens all the actions taken in the so-called economic reform program.
The reduction of the ratio of public debt to GDP is insufficient: Targeting the reduction of the public debt ratio to 80% of GDP in 2020 is in fact insufficient, as it is higher than the acceptable average rates of 60% of GDP. On the other hand, the persistence of the public debt at high rates, even if its rate in proportion with the GDP declined, yet it carries a heavy burden in due interest, In this case, it comes at the expense of the alternative opportunities that the society can benefit from: in the health, education, infrastructure. It is noteworthy that official statistics indicate that about 80% of Egyptian villages do not have a safe sanitary drainage service.

Sixth: The challenge of unemployment

One of the major issues in Lipton’s speech is the challenge of the new entrants to the labor market in Egypt, with the increase in population in 2028, 10 years later. Lipton predicted that the workforce in Egypt in 2028 will reach 80 million, and that providing jobs for these young people could push the Egyptian economy to achieve a growth rate ranging between 6%-8%. “By 2028, Egypt’s working age population will increase by 20 percent. That works out to a labor force of 80 million Egyptians just 10 years from now. Creating jobs for all those people has to be Egypt’s biggest economic challenge,” he said, adding that “But at the same time, your biggest challenge, employing the youth, is also your biggest opportunity. If this country can tap the potential of its young people—by bringing unemployment and labor force participation to the level of many other emerging market countries—their absorption into the economy could boost growth into the range of 6 to 8 percent.”

However, the IMF report on the regional economic outlook for the Middle East and North Africa (MENA) indicated that the growth rate in some countries, including Egypt, should not be less than 6.2% in the coming years, so that they can maintain an unemployment rate at no more than 10%.

The declared economic policies or programs of the government do not indicate that there are any plans to meet this challenge. Instead, Abdel-Fattah Al-Sisi, the military coup leader, only talks about the challenges of the overpopulation, and holding the poor and the Egyptian society the failure of government programs. In light of these obvious challenges, it was expected that the government would have at least a five-year program to deal with unemployment, especially the new entrants to the labor market.

In light of the poor performance of the Egyptian government in the employment issue, the informal labor market is expected to absorb these large numbers of labor force. This will expose them to many injustices and loss of their rights, and many of them will be forced to migrate abroad in search of a better environment for work and life.

There is an important remark between Lipton’s approach and the policies of the Egyptian government. While Lipton believes this human wealth is an opportunity to increase the growth rate, the government statements and practices show that they consider this wealth a burden that must be dispensed with.

*Abdel-Hafez Al-Sawi is an Egyptian economist. He has many economic writings, including: The Post-Revolution Balance, the Employment of Zakat Funds in the Muslim World, A Development Vision, and the Egyptian Economy between the Taxes and the Zakat. The article was first published on the Egyptian Institute for Studies (EIS)