Standard and Poor's (S&P), the American rating agency, lowered Egypt's long term credit rating to B-. This means that Egypt is now in the “Junk level” which is the rating agency's term describing borrowers with very high risk. This is six levels below the appealing and safer “investment level” where Egypt was before the 25 January uprising. When Bloomberg broke the news of the rating change, the headline of the story was “Egypt Rating Cut to Same Level as Greece at S&P amid Unrest”. Coupling the near-default Greece with Egypt mirrors a lot of fears in Cairo ignited by official statements on the gravity of the economic situation. Last week witnessed both minister of finance Momtaz Al-Said and Minister of Trade and Industry Hatem Saleh saying that Egypt might face that dreaded fate — bankruptcy if reform plans including tax hikes and austere public spending measures are not implemented. And while Greece has not yet gone officially bankrupt, which means failing to meet its obligations to its foreign lenders, it is facing severe problems in repaying these obligations and has so far been given 240 billion euros as a bailout from the IMF and EU. Greece's mounting public debt is expected to reach 190 per cent of GDP by next year and its economy, in recession for four years, is projected to shrink by 6.5 per cent this year and by a further 4.5 per cent in 2013. The case of Egypt, however, is different with the overall debt equivalent to only 85 per cent of its GDP while the economy is still growing at 2.2 per cent. “All the official statements about nearing bankruptcy are not new. This is a threat used several times since the revolution whenever the government wants to decrease protests and anger in the streets using the economic whip,” said Samir Radwan, Egypt's first minister of finance after the revolution. “Egypt never defaulted its debt even in the worst situations,” Radwan added. Khaled Zakaria Amin, assistant professor of public policy and finance at the American University in Cairo, seconds Radwan, saying the government is using this threat as a political manoeuvre to prepare the people to accept austerity measures and new taxes. The political uncertainty following the revolution left Egypt's main foreign currency resources like tourism, exports and foreign direct investments drained. Net international reserves are dwindling. The fiscal deficit is ballooning to as high as 11 per cent and the currency is on the slide. The government resorted to the IMF earlier this year for a $4.8 loan. Negotiating the loan was postponed earlier this month when the government decided to put on hold planned tax hikes for 50 commodities for fear it might ignite more anger in a politically-rifted society amid the unrest created by the referendum on Egypt's first post-revolution constitution. Nevertheless, it is expected that the reforms including the new taxes are to be imposed any time soon. While ruling out defaulting as a possible scenario, Amin does not deny that the economic situation, especially on the fiscal side, is bad especially that the imminent devaluation of the pound will bring more pressure. He explains that the further depreciation in the local currency versus the dollar will increase the dollar denominated debt and push up the real value of the subsidy bill in addition to the inevitable effect on food commodities inflation as Egypt is a net importer of food. Egypt's currency lost almost eight per cent of its value since the revolution. The gloomy economic atmosphere according to Amin pushes depositors to withdraw their money from banks. The resulting lack of liquidity leashes banks' ability to invest in treasury bills and bonds which is the main source of budget deficit financing. And this makes the situation more entangled. “If we don't deal with the problems with a set of fast, well planned policies it will get even worse,” Amin warned. It is the lack of professional management of the economy that is the main threat to the economy and not bankruptcy, from Radwan's point of view. He added that the government has to set its priorities, put an overhaul plan and present it to the nation “but the problem here is that there is no professionalism in the way economic decisions are made. Those responsible for taking decisions in the economy are mainly third grade bureaucrats.” Even if Egypt succeeded in acquiring the loan, its problems will not end. Both Amin and Radwan point out that the loan will be given in tranches, the first of which will range between $500 and $1 billion to be disbursed in the first year. The value of the tranche would not be able to help much and this is the mistake of those negotiating with the IMF, Amin said. Radwan recalls that when he, as finance minister, negotiated terms for acquiring a loan from the IMF he stipulated that the largest chunk of the loan be upfront. Also, the reform plan, according to Radwan, is flabby and lacks a lot of planning and clear objectives, a fact that means it will not result in a real solution for the economy. Radwan explains that the plan targets to employ 800,000 every year an aim that would not be fulfilled unless the economy grows by at least seven per cent which is impossible according to the current situation. “If the growth rate on average since the revolution hovers around 1.1 per cent and growth in the population is also 1.1 per cent, this means that the growth in population eats out any growth in the economy. “Does the current economic team have any plan to deal with this? I doubt it,” Radwan added. The problem crippling economic recovery now is that the government is using the economy as a means to flirt with the streets. “When you are desperate to secure both political consensus and economic policies that have societal consent at the same time, you are in a dangerous situation as you will never be able to fulfil either,” said Radwan. AUC's Amin said that if governments after the revolution have been realistic and honest with the people, Egypt would have escaped the current dilemma. “Back then, the government painted a rosy economic picture based on the possibility of regaining the money that the previous regime transferred abroad and writing off our debts. They also flirted with people in Tahrir by giving salary raises and appointing thousands of temporary workers, putting a huge burden on the budget.”
