Buying time

International donors and creditors have just promised Egypt more than $10 billion. But will all the cash pull the economy out of the doldrums? Ahmed El-Sayed El-Naggar has his doubts
International donors congregating in Sharm El-Sheikh last month promised Egypt a total of $10.3 billion in grants and loans to alleviate its economic problems. The money is to be disbursed over three years and Egypt is to receive $2.1 billion before the middle of this year.
But are these loans really Egypt's ticket out of its current economic malaise? Before answering the question, we must bear two things in mind. First, Egypt's problems started long before 11 September. Second, the loans in question are linked to a number of conditions, some of which may interfere with Egypt's domestic priorities. The Sharm El-Sheikh financiers have asked Egypt to accelerate its privatisation process, deregulate the bank and telecommunications sectors, make the exchange rate more flexible and ratify the EU partnership agreement.
Let us now take a closer look at Egypt's economic crisis and see if external loans, extended under the above-mentioned conditions, are the answer to our troubles. According to official data, Egypt's real GDP growth rate reached 4.9 per cent in the fiscal year 2000/01, compared with about 5.1 per cent in 1999/2000 and 6.1 per cent in 1998/99. These data confirm that the economy began to slow down before 11 September 2001. According to IMF figures, real GDP growth in Egypt was no more than 3.3 per cent in 2001, and is unlikely to exceed this rate in 2002.
Egypt's reserves of foreign currency are at their lowest levels since the mid-1990s. Total reserves stood at $14.1 billion in March 2001, just before the government sold $1.5 billion-worth of dollar bonds and used part of the proceeds to swell its reserves to $15.4 billion in July 2001. But because the government raided its coffers to meet a subsequent surge in demand for foreign currency, (something it had promised not to do), reserves dipped again to $14.3 billion in October 2001, according to Central Bank figures.
Better news is that inflation has been going down. In the fiscal year 2000/2001, inflation was 2.4 per cent, down from 2.8 per cent in 1999/2000. But the devaluation of the Egyptian pound and the ensuing rise in the prices of some local products and of imported goods (which account for somewhere between one fifth and one sixth of the country's GDP) are bound to reverse this trend.
Other indicators are equally worrying. Domestic debt, which stood at LE199.2 billion in September 2001, is alarmingly high. Foreign debts rose from $26.1 billion at the end of March 2001 to $28.5 billion by the end of September 2001. The trade deficit remains steep: $9.4 billion in the fiscal year 2000/2001, and $2.4 billion in the first quarter of 2001/02, according to Central Bank figures.
The Egyptian foreign exchange market is reeling. The past 18 months were the worst since liberalisation began in 1991. Dealers are slipping back into pre-reform habits. Some money exchange companies are said to engage in unscrupulous under-the-table dealings and black market chicanery is already undermining the stability of the pound.
All this turmoil is the result of years of structural imbalances. Egypt, as everyone knows, produces and exports far less than it imports and consumes. The result was a trade deficit of $34 billion in the three years from 1998 to 2000. The problem is compounded by the widespread smuggling of contraband, including narcotics, into the country; money earned through corruption and drug-trafficking tends to gravitate to havens abroad. Elsewhere, the rise in foreign travel for tourism, pilgrimage, medical, or education purposes, is pressuring the pound. Even foreign-language schools have contributed to our problems, developing an irritating habit of charging tuition fees in dollars. Cell phone projects, implemented with full dependence on foreign expertise and equipment, have not helped.
Unemployment is rampant, though government figures tend to downplay the problem. The government estimated unemployment to be 7.6 per cent in the fiscal year 2000/2001. But when the government announced 170,000 new public-sector jobs, the stampede for application forms was a clear indication of how far things have fallen. Figures provided by the Higher Ministerial Employment Committee, headed by the prime minister, Atef Ebeid, suggest that there are some 3.4 million unemployed people in the country. This is 17.6 per cent of the workforce.
All these troubles run deep. Obviously, the money promised by Sharm El-Sheikh donors may help in some respects, at least in addressing some of the urgent 11 September-related troubles. But unless Egypt disburses these funds wisely, it will turn into a candidate for the international club of heavily indebted nations.
A glaring difficulty, as mentioned earlier, is that disbursement is linked to a set of conditions. Some of these conditions may benefit the economy, or consumers at least, such as the ratification of the EU partnership agreement and the deregulation of communications services. But conditions concerning the pace of liberalisation are ideologically tactless, to say the least. Egypt's legal framework already allows the private sector to operate in all fields.
There are, however, specific steps the government should take. Borrowing, in the end, is merely a palliative. Our trade deficit is the main source of our foreign exchange troubles, and it will not go away until the government redresses structural imbalances in the economy. The administrative apparatus also needs upgrading, red tape needs eliminating, and programmes to boost industrial competitiveness must be launched. The authorities must also get firmer on corruption, the black market and local money laundering. All this will not be easy: looming over these concerns are urgent social problems, such as joblessness and poverty, that the government must address. But at least the loans will have bought it some time. Now it must use that time well.
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