Financing is needed to help cushion the Egyptian economy through the transition, reports Niveen Wahish "Our economy is intact but our finances are drying up. We are like a patient with anemia who badly needs a blood transfusion," said Minister of Finance Hazem El-Beblawi, in a description of the Egyptian economy's current status. "Our problems have nothing to do with the core economy; they are all about financial pressures," he told participants in a seminar organised this week by the Ministry of Finance, the International Monetary Fund (IMF) and the Economic Research Forum on "Prospects and challenges for the Global Economy and the MENA region". "Timing is critical," said El-Beblawi, adding that there are ways to free up budget funds, but that these would need between six months and a year to materialise, while the money is needed much sooner. The government has been under strain for the past nine months to meet increased social spending in the form of subsidies and wages. The initial deficit for the 2010/11 budget stands at LE134 billion. "The future is promising, but before it comes true we must first cross a short but very dangerous tight spot," the minister said. "Succeeding will open enormous potential and failure will mean regression." Financing needed now may either come by borrowing from the domestic market, borrowing from abroad or a combination of the two. "We are almost at the point where our domestic borrowing could be very harmful," said El-Beblawi. He added that the government has often had to cancel auctions for treasury bills, because the asking price was too high. Indeed borrowing costs have risen to their highest levels in almost three years over the past nine months, with yields reaching almost 14 per cent. Domestic government borrowing, added El-Beblawi, could encourage banks to refrain from fulfilling their prime function: lending. After a while, that could cause structural damage to financial institutions. Other available funding includes support from Gulf Arab countries. Saudi Arabia, Qatar and the United Arab Emirates have made pledges that range from $500 million to $3 billion. But some of that funding may take up to three years to come through, said El-Beblawi, while it may not even necessarily be directed to budget support. Such support, according to El-Beblawi, is what matters right now. The only solution, in El-Beblawi's view, is external borrowing. That, he said, will mean a sound budget, while it would ease pressure on the balance of payments. "Sometimes one has to swallow the bitter medicine to avoid death," he said, acknowledging domestic reservations against external borrowing. "External and internal borrowing are a bitter medicine." Egypt's financing needs come amidst an increasingly difficult global and regional economic situation. The coming year is not going to be the year of recovery some had previously hoped for. The downside risks have increased, and the best performers are moving sideways at best, said Andreas Bauer, IMF division chief of the Middle East and Central Asia department. Bauer showed that growth forecasts have been marked down across the globe, even compared to the first half of the year. The IMF projects global growth to oscillate around four per cent through 2012, from over five per cent in 2010. In addition, the MENA region is witnessing "unparalleled uncertainty and economic pressures," according to the October Outlook for Middle East and Central Asia region. It projects growth in the region at about four per cent in 2011 to slow down to 3.6 per cent in 2012. Bauer was in Egypt as part of 2011 Article IV Consultation which regularly reviews the status of the Egyptian economy. Yet the IMF mission visit to Egypt is also an opportunity to discuss a $3 billion loan that Egypt turned down earlier this year. The Supreme Council of the Armed Forces (SCAF) had refused to take the loan for fear of burdening future generations, and opted instead to cut spending and so limit the budget deficit. But since then, the situation has deteriorated and it may be reconsidering its position. Nonetheless, Egypt has not made any official requests for loans. Bauer stressed, "it is way too early to talk about money." In fact, El-Beblawi also stressed that no decision has been taken yet in the matter. "It is important not to rush all these issues," Bauer told seminar attendants, highlighting that a debate has to take its course. In such a debate, the government must create a coherent strategy to undergo this difficult time. Further, the extent to which foreign funding can help now that liquidity is short, must also be discussed. Bauer stressed that in the end "the IMF will do what Egypt wants it to do," adding that the IMF has come to understand that programmes that work are those that are owned by the countries. Bauer also believes that debate is also positive in developing an economic strategy. "It is important to lay out a certain framework that will help bring confidence," he said, adding that once medium- and long-term targets have been set, a short-term detour may be understandable. But developing that strategy may not be an easy task. Minister of Social Solidarity Gouda Abdel-Khalek and the minister of finance appeared to be at odds during the seminar. To Abdel-Khalek "free market policies are to blame for where we are today: lacking of social justice." He added that across the world people are revolting against the principles of the free market. "The free market may achieve efficiency but not justice." But El-Beblawi seemed to believe that the market economy could be reined with a bigger government role, preventing the market from pursuing self-destructive practices. He also said that there isn't just one version of the market economy, and that what governs each country is its own reality and not its intellectual affiliations.
