The economy has been victimised in the aftermath of the 25 January Revolution that toppled Hosni Mubarak. All the economic indicators have been faring badly for the last two years with both the trade and fiscal deficit ballooning, international reserves drained and the local currency following an almost free-fall pattern. The American rating agency Standard & Poor's (S&P) cut Egypt's credit rating saying Cairo had yet to come up with a plan to control its finances, leaving the country vulnerable to a balance of payments crisis. With a CCC+ rating, Egypt is now in the “Junk” territory on S&P's creditworthiness measure, seven notches lower than the good performing economies' “investment” grade where it had been in 2010. According to the rating agency, “the Egyptian authorities have yet to put forward a sustainable medium-term strategy to manage the country's fiscal and external financing needs.” Hani Genena, senior economist at Pharos Holding, a local investment bank, points out that the timing of the downgrade is far more important than the action. “It immediately followed the cabinet reshuffle, which suggests that S&P analysts have been disappointed by the cabinet composition and hence reduced the likelihood of concluding an IMF deal in the short-term,” Genena wrote in a note. Nine new ministers joined the government still headed by Prime Minister Hisham Kandil among whom the ministers of planning and investments who were directly involved in the talks with the international donor. Moreover, the online financial news service Mubasher quoted an anonymous Central Bank of Egypt (CBE) official as saying that the credit rating downgrade is expected to further weaken Egypt's chances of reaching an agreement with the IMF and may increase the cost of foreign borrowing. Indicators from the IMF's side validate their point. Gerry Rice, director of the Communications Department at the IMF, stated on Thursday that the date of the next mission to Cairo has not yet been fixed. Responding to a question if the fact that no mission is scheduled to go to Cairo means the agreement continues to be in limbo, Rice said it should be interpreted as discussions which are continuing in light of “evolving economic conditions”. And while the newly appointed minister of finance stated earlier in the week he is confident about the deal, he added no changes will be seen in the economic reform programme presented to the IMF, saying the main condition of the IMF is to reduce the budget deficit to 9.5 of GDP, which is already included in the draft budget presented to the upper house of parliament. The IMF is calling for a number of reforms, top of which is tightening the budget deficit, rationalising fuel subsidies and increasing taxes. Egypt is set to start a fuel subsidies system based on smart cards in July. Meanwhile, the new fiscal year will also witness the introduction of a property tax and a rumoured sales tax increase by 20-25 per cent. And while Kandil's governments have been promoting the idea that acquiring the IMF loan, and the linked financial facilities from other donors, as the panacea for the country's economy's woes, S&P sees it differently. “Ad hoc bilateral loans and deposits are serving to support Egypt's international reserve position at current low levels, buying Egypt a limited amount of time to deliver more sustainable public finances and avoid a balance of payments crisis,” Standard & Poor's said. Foreign currency reserves jumped by $1 billion in April to $14.43 billion, due to a large deposit by Libya. However, analysts ruled out it would stop the decline in local currency value in exchange for the dollar. The Egyptian pound lost almost 12 per cent of its value since the beginning of the year to hover around LE7, its lowest value in 10 years. Egyptians feel the brunt of the loss in the local currency value through the always-on-the-rise inflation rate. Urban inflation increased to 8.1 per cent in April on an annual basis from 7.6 per cent in March. “The monthly developments in inflation since the beginning of the year are largely driven by broad based increases in food and non-food prices on the back of the recent movements in the exchange rate and diesel distribution bottlenecks across the country,” said Beltone Financial in its morning note on Monday. Economists expect inflation will rise to 10.1 per cent in 2013/14, ending June 2014, from 8.3 per cent this fiscal year, according to a Reuters poll taken last month. The CBE is trying to contain inflationary pressure by keeping interest rates at their current level. The CBE's Monetary Policy Committee decided to keep the overnight deposit rate and the overnight lending rate unchanged at 9.75 and 10.75 per cent, respectively. “Because managing inflation risks are more likely to be on the back of local supply bottlenecks rather than on the back of global food prices, and because of still weak GDP growth rates, the MPC decided that keeping interest rates unchanged is most suitable at this juncture,” noted a CBE statement. “The rationale behind the decision was mainly not to add further pressure to the already soaring budget deficit,” Moncef Morsi, an analyst at Pharos, commented on the move in a Pharos' daily report. “Nonetheless, [Pharos] still expects the CBE to raise interest rates in the second half of 2013, if no major foreign currency inflows were secured.” Egypt has been financing the deficit by issuing treasury bills and bonds with yields jumping to all-time highs. Any increase in the interest rates leads to a hike in the rates paid to those who invest in the treasury instruments. The yield averaged between 14 and 16 per cent during the last six months.
