Egypt seems to have no choice for the moment but to borrow from abroad to fulfil its financing needs, writes Niveen Wahish "Nobody borrows unless they have to," professor of economics Sherine El-Shawarby said commenting on the Egyptian government's intention to borrow from international financing institutions. In fact, Egyptian Minister of Finance Samir Radwan has said time and again during the past two months that he is facing a shortage of some $10 to $12 billion in his financing needs from now until the end of fiscal year 2011/12. The shortages in financing stem from the slowdown in economic activity in the months following the revolution. This week the Higher Council of the Armed Forces sounded the alarm. It said that lately the Egyptian economy has been receiving "zero" FDIs. And that Egypt loses around $40 million on a daily basis in the tourism sector. Furthermore, international reserves have dropped by $8 billion falling from $36 billion in January to $28 billion in April. Public debt reached 90 per cent of GDP. And the losses of the industrial sector are estimated to range between LE10 to LE20 billion. To make ends meet, taking external loans are being sought. According to Abdel-Fatah El-Gebali, deputy manager of Al-Ahram Centre for Political and Strategic Studies and advisor to the Minister of Finance, due to the fact that foreign direct investments (FDIs) have dropped drastically and domestic borrowing is becoming expensive and is crowding out the private sector, external borrowing is the most suitable option at this stage to provide the needed financing. This week, Radwan said that Egypt is about to close a deal that enables it to borrow $2.2 billion from the World Bank. He also said that a mission from the International Monetary Fund (IMF) is shortly to arrive in Cairo to discuss the details of an arrangement between the Egyptian government and the international financial institution. IMF spokeswoman Caroline Atkinson said late last week that the request for financial assistance from the IMF comes as part of a request to a number of bilateral and multilateral partners. She did not specify a number, but Radwan had previously been quoted as saying that he would request between $3-4 billion from the Fund. El-Gebali says these loans and credit facilities would go towards filling a gap whether in the balance of payments or in the budget. "How the money will be spent will undergo a process of negotiation," he said. But what worries Cairo University's El-Shawarby is that the need to borrow stems not only from the emergency situation Egypt is finding itself in after the revolution, but also because of structural faults in the budget. She pointed out that Egypt has always suffered a deficit and although it had dropped to around eight per cent before the revolution, that was still high. But the worst is yet to come. The 2011/12 budget that is in the making, Radwan announced, will reach as high as LE509 billion and will carry a deficit of LE149 billion representing between 9.1 to 10 per cent of GDP. "Borrowing will not solve structural problems," El-Shawarby pointed out explaining that these problems manifest themselves in either misallocations in spending or the inability to collect enough revenues to cover expenses. Foreign borrowing to El-Shawarby is a cause of concern because of the fear of exchange rate fluctuations on the long run which could bloat the debt. Egypt's external debt currently stands at around 14.7 per cent of GDP. She does not find the conditionality that comes with loans outrageous; "any creditor wants to make sure they are getting their money back," she said explaining that it all depends on how the government negotiates the terms since "no government will agree to terms that may harm it." She also believes that no Egyptian government has ever agreed to terms it does not want. El-Shawarby added that the fact that some policies, such as privatisation, were not implemented efficiently does not mean they were wrong in the first place. Doha Abdelhamid, professor of finance at the American University in Cairo is not too happy about the borrowing. She says that borrowing from the IMF gives worrying signals to investors and will mean a further downgrade in Egypt's sovereign credit rating. She says when countries revert to the IMF for quick assistance, this means they are in deep trouble. She thinks these loans will go to funding basic needs such as wages and wheat imports, in other words "down the drain". But Egypt does not have much of an alternative. The government cannot borrow from the international financial markets because it will be paying much more in interest rate and it will take much longer to conjure the money. Nevertheless, El-Gebali argues differently saying that investors will feel more secure entering the Egyptian market knowing that the IMF for example is in the picture. "It gives investors reassurances that Egypt is still on the reform track and is not doubling back." He added that the government will also soon be announcing a new reform package to kick-start the economy. This is exactly what Abdelhamid wants to see. So far she is apprehensive because the government has not yet shown a clear action plan for reform and the situation keeps deteriorating. She laments the fact that all the attention has so far been directed to political issues overlooking the economic aspects. "Buoyancy measures must be announced as well as a reform programme." This, she says, is needed because investors come on expectation of return. "If they see a clear path where things will pick up, they could return," she said. Abdelhamid wants the government to restrain itself from using up the reserves "they should be there to lean on. If we continue withdrawing from the reserves at the rate that we have kept since the start of the revolution, we will be bankrupt before the end of the year which would obviously be a negative signal to the world," she said. The safe reserve levels are believed to range around $20 billion, enough to cover four or five months of imports.
