CAIRO: Egypt's Prime Minister Ahmed Shafiq said Sunday that Egypt's “economic position is solid,” as analysts expect added stresses to raise the nation's debt and budget deficit. The prime minister spoke at a press conference after a Cabinet meeting to discuss the current situation in Egypt. Shafiq said that food supplies are sufficient and that supply chains are only disrupted by ongoing protests where they cut off transportation routes. Finance Minister Samir Radwan said he expected the country's economic growth rate to slow to 3.5 to 4 percent in the 2010/11 financial year, Reuters reported. According to Magda Kandil, director of research at the Egyptian Center for Economic Studies, the center has held GDP projections at around 6 percent while some investment banks lowered their growth forecast to 3.2 percent. "We think the revised growth is going to be somewhat higher than 3.2 percent but lower than previously projected, in light of easing the political tension. Further, the ongoing reform agenda, particularly on the political front, is likely to boost investors' confidence and increase growth potential going forward. “However, the full benefits of this scenario may not be realized fully until the second half of this calendar year,” In a finance ministry statement, officials said that the speed and extent of restoring economic activity will be determined by how long it will take for the current situation to be resolved. “The fundamentals of the Egyptian economy are strong and the economy will be able to weather the crisis.” Some sector, such as tourism and capital markets, may be negatively affected for a longer period of time until confidence is restored, the statement read. Preliminary reports on the second quarter outcomes reflected growth of 5.7-5.8 percent on the back of strong performance in the construction sector, which grew by 12.6 percent, tourism by 15 percent, telecom and Suez Canal by 10 percent each, and the manufacturing sector by 6 percent. “To a great extent, the recovery has been aided by global recovery, the rebound in oil prices and recovery in neighboring countries. Some recovery in private activity and robust domestic consumption has helped sustain growth momentum,” said Kandil. Mohamed Rahmy, analyst at investment bank Beltone Financial, agreed with the government's analysis about there being no indications of domestic asset bubbles, but disagreed partially with the assertion that as real growth is not progressing above potential, probabilities of demand driven inflation remain on the low side. Rahmy said that inflation may increase, mainly due to food price inflation and not any other exogenous factors. “Inflation is high and could surge even higher on account of depreciation in the exchange rate and supply-side shortages. This would require vigilance of monetary policy to contain inflation via exchange rate and interest rate policies, in addition to the supply-side structural agenda that addresses market distortions and inefficiencies,” said Kandil. Egypt's net foreign reserves fell to $35.01 billion at the end of January from $36.0 billion at the end of December, the central bank said on its website on Sunday, Reuters reported. The statement also pointed out that the budget deficit may deviate from the earlier deficit target of 7.9 percent of GDP in 2010/11. “While some budget lines will achieve savings, additional spending will be needed to meet higher international food and energy prices, ad-hoc measures in light of recent unrest, and accelerated wage increases,” the statement said. Incurring debt? While the Ministry of Finance believes that this should not reverse already improving debt dynamics and that budget financing will unlikely face bottlenecks in light of a liquid banking sector, Rahmy believes that deteriorating local sentiment after the recent events may force the government to seek external funding, thereby increasing debt. “It depends how fiscal management will proceed. At this point, the social agenda is taking precedence, without forward looking view regarding sustainability. We hope that the next phase will involve some planning to align social priorities in a comprehensive structure that manages government's resources to trim waste, and avail more revenues to address social priorities and the need to support productive activity,” said Kandil. The ministry promised that improving living standards and conditions for lower and middle income classes will gain broader and deeper policy focus. “Combating poverty and high unemployment and improving Egyptians' welfare are set as Egypt's highest economic priorities during this phase, including targeted transfers programs; accelerated implementation of unemployment protection schemes; tailored housing policies; effective private-sector led training programs to help reduce structural unemployment and mismatches in the labor market and introducing a new health insurance scheme.” According to Kandil, policy priorities should now focus on fiscal reform, vigilant monetary policy and a comprehensive structural reform agenda that addresses bottlenecks in the job market and articulates a vision to close the gap between supply and demand and sustain job-conducive growth. Kandil concluded her analysis on an optimistic note. “I think a new spirit is in the air. The drive to press ahead with the political reform agenda is likely to reflect itself positively on efficiency and effectiveness and to press ahead with the economic agenda for this economy to reap the benefits of the reform process and secure a better future in an environment that creates more jobs, rewards productive activity and targets better equity of wealth distribution.”
