It never rains but it pours. This week the economy has been plagued with one piece of bad news after another. It is as if, following the completion of the referendum, officials have suddenly woken up to the gravity of the economic problems Egypt is facing. That, or they now feel able to come clean about the situation. Egypt's Finance Minister Momtaz Al-Said announced that the budget deficit for the first five months of fiscal year 2012/13 has reached LE80 billion, or 4.5 per cent of GDP, and is projected to reach LE200 billion by the end of the year. The deficit for the same period last year was LE58.4 billion. Net international reserves (NIR), currently at $15 billion, are expected to be further depleted this month. A report issued by Beltone Financial earlier this month predicts they will have slipped to $14 billion by the end of December, or the equivalent of 2.8 months of imports. This is the lowest since the 25 January Revolution and is the first time NIR has slipped below three months' worth of imports, signalling a threat to the pound. Food shortages may be possible, and a hike in prices is certain, given rising international prices and a depreciating currency. Officials say stocks of basic food items such as wheat, corn, rice, sugar and cooking oil — are enough to last three months. Standard & Poors' (S&P) cut Egypt's long-term rating to B- placing it in the junk category. The rating agency said the negative economic outlook and recent developments had weakened Egypt's institutional framework while an increasingly polarised political discourse could diminish the effectiveness of policy-making. S&P warned another downgrade was possible if political turbulence worsened. In the midst of all this, rumours — later denied — that the Central Bank of Egypt's (CBE) governor, Farouk Al-Okda, the man behind Egypt's relatively stable monetary policy, was about to leave left economists, as well as laymen, holding their breath. Some panicked and rushed to withdraw their deposits, prompting the CBE to issue a statement assuring the public that all local and foreign deposits were secure. This is the backdrop against which both Al-Said and the Minister of Trade and Industry Hatem Saleh have said bankruptcy is a possible scenario should the International Monetary Fund (IMF)-backed reform programme remain unimplemented. While some analysts believe the government is blowing the threats out of proportion to prepare the public for stringent austerity measures and tax hikes, others argue that the economic situation is reaching tilting point and requires immediate attention. Hani Genena, head of research at Pharos Securities Brokerage, says the problems facing Egypt's economy are grave. He points out that there are already government-related entities — the Egyptian General Petroleum Corporation is one — that are unable to settle financial obligations as scheduled, the result being repeated fuel shortages. While it is difficult for a government to default on local currency debt because it has the ability to print money and tax, Genena believes the likelihood of default on foreign currency debt is high in the absence of sufficient foreign currency inflows. Egypt's hard currency inflow has been eroded by lower tourism numbers and the collapse of foreign direct investments. Former minister of finance Samir Radwan sees things differently. “Official statements about nearing bankruptcy are not new. The threat has been raised several times since the revolution and now appears to be the default option when the government wants to decrease protests and anger in the streets,” said Egypt's first post-revolution minister of finance. Egypt's economic woes are not the making of economists but of politicians. The polarisation prompted by the new constitution is a major obstacle to building the broad consensus on tax reforms needed to acquire the $4.8 billion loan from the IMF. A week before the referendum on the constitution the government imposed sales tax increases on a variety of goods and services only for President Mohamed Morsi to put the new taxes on hold in the wake of public discontent. Genena points out that the referendum gave Morsi “statistical support” but hardly a ringing endorsement. “To be able to secure support for reforms that will affect the population he needs to reach out to the opposition. If he does not Egypt will be caught in a vicious circle that could undermine the regime.” Politicians, says Genena, appear to have lost touch with what matters most to the public — their bread and butter. People have had it with a political process that is dragging on interminably, something made clear by the low referendum turnout. Only around 30 per cent of the voting population actually went to the polls. But a constitution is now in place and with legislative powers in the hands of the Shura Council things should start moving. If the Shura Council approves the tax increases and this is not accompanied by public discontent, Genena predicts negotiations with the IMF will resume. The IMF has repeatedly stipulated that there must be broad consensus on Egypt's economic reform programme for it to approve the loan. It has also said that the reform should not negatively affect the most vulnerable groups. Concluding the IMF deal or any other loan will be a very good signal that the Egyptian economy is moving “out of the woods”, says Genena, while any delay will be negative and make a further depreciation of the pound inevitable in February or March. The Beltone report provided two scenarios for the pound in fiscal year 2012/13: with an IMF loan and associated funding the exchange rate should stabilise around LE6.2 to the dollar. Without the loan the rate could hit LE7 towards the second half of the fiscal year and would average LE6.5 in the preceding months. More pessimistic scenarios include the reappearance of a flourishing black market on which the exchange rate could jump to LE8. Amid worries over pressure on the pound and possible smuggling a law was passed this week limiting the amount of cash travellers can carry in and out of the country to $10,000. As former minister of finance Hazem Al-Beblawi has said on television: “This is a situation that economists will not be able to fix; it is all in the hands of politicians.” Additional reporting Sherine Abdel-Razek
