CAIRO: Egypt's trade deficit widened 42.6 percent in the year to October 2010 compared to the previous year, according to figures released by the state statistics agency CAPMAS. The deficit stretched to LE 17.6 billion, representing an increase of LE 5 billion or 42 percent. Exports in October 2010 grew 22.2 percent over 2009 to LE 12.8 billion, while imports grew by 33.2 percent, bring the total to LE 30.2 billion compared to the previous year, the state-run Al-Ahram reported. Experts say that the growing deficit can be imputed to higher demand of imports for consumption and investment, depreciation of the Egyptian pound and higher international prices of basic items, such as food. Mohamed Rahmy, analyst at Cairo-based investment bank Beltone Financial, told Daily News Egypt that following a drop in both exports and imports in the aftermath of the global financial crisis, imports began to rebound in contrast to exports, especially for non-oil imports, a strong indicator for how the economy is boding in terms of industrial output. The growing gap in the trade deficit will have an impact on the country's public finances, which are heavily enmeshed in what Rahmy characterized as a “big” subsidy system, especially concerning petrol and food items, goods that are often imported locally. Relying on imports so heavily, especially with regard to energy, drives prices upward, he said. The result of which is a “pick up in prices [that affects] the subsidy bill,” he said, which obliges the government to dig deeper into its coffers for spending purposes. He noted that with regard to energy, diesel and butane being the main energy imports, it is a major target for the subsidy system, taking up 60 percent of funds available. In light of such a heavy draw on public finances, since 2005/06, he explained, the government has taken measures to phase out energy subsidies and better target those that have been kept in tact. Magda Kandil, executive director and director of research at the Egyptian Center for Economic Studies, explained in a note: “A wider trade deficit would be a drain on growth, and would result in a wider current account deficit that requires larger financing, which would require higher capital flows or borrowing.” She continued by stating that without sufficient financing, “deficiency would require drawing down international reserves or external borrowing.” Should external borrowing be required, it would increase the risk of depreciation on the Egyptian pound if the central bank were to refrain from curbing its continued fall, Kandil noted. In Rahmy's view, the trade deficit trend will likely continue not just until the end of 2011, but well into 2012 as well, he said, adding that this would invariably impact the Egyptian pound, which will further see its value decline. He added that the pace of devaluation would largely be contingent upon the relationship between the greenback and the euro. Both Kandil and Rahmy indicated that as the cost of imports climb, consumers would feel the pinch. Kandil added that a slowdown in growth “would reduce the potential to decrease unemployment” — an issue the country is seriously struggling to tackle, “and improve the standard of living.” To rectify Egypt's trade deficit trend, which could derail economic progress, Kandil recommends a twofold strategy: On the one hand, boost exports “to mitigate the effect of higher imports on the balance of payments and economic growth,” while on the other hand, regarding the exchange rate policy, “it should consider the structure of imports with an aim to ease supply-side constraints in the domestic market and increase the elasticity to reduce imports with respect to higher prices.”
