Egypt's options narrow as money runs out
Cairo, February 27, 2013
By David Stamp
Egypt seems to realise the money has nearly run out and it must turn to the IMF or a willing friend in the Gulf, where it now has just one, Qatar.
After months of delays, the Islamist government has produced a new plan to reverse a slide in its foreign currency reserves and tackle a budget deficit that could overwhelm a stable wealthy nation, let alone a country riven by political conflict.
This plan relies on someone else stumping up to keep the Arab world's most populous nation afloat. Any hope that the government can hold out until after parliamentary elections due to finish in June and delay highly unpopular cuts seems slim, with signs of extreme economic stress all around.
That narrows Cairo's immediate options to the International Monetary Fund, which will demand the kind of austerity measures that could provoke yet more street violence in the middle of an election campaign.
The other option is Qatar, the only wealthy Gulf nation truly sympathetic to the Muslim Brotherhood government. Doha has already provided help but in amounts that have failed to prevent Egypt's currency reserves from falling worryingly low.
"The authorities have little margin of manoeuvre left without fresh capital flows into the Egyptian economy," said Alia Moubayed, an economist at Barclays.
Above all, economists believe, Egypt needs a political consensus on reforms to stabilise its finances. However, this seems a forlorn hope as the Islamists of President Mohamed Mursi struggle with the liberal and leftist opposition over the future character of Egypt following the 2011 revolution.
On Monday the government released some details of a revised economic reform programme and Investment Minister Osama Saleh announced that talks with the IMF would resume early next month on a $4.8 billion loan.
This suggested a new sense of urgency over a deal which officials from both sides agreed in principle as long ago as November, only for Cairo to request a delay the following month when Egyptians took to the streets in violent protests.
PROBLEMS PILE UP
Since then the problems have piled up. The central bank, which spent $20 billion trying to defend the Egyptian pound during and after the uprising that overthrew Hosni Mubarak, accepted the inevitable. In late December, it began regular dollar auctions, allowing the pound to fall more than eight percent under the new system and taking its total loss since the revolution to 14 percent.
Defending the pound helped to curb a rise in the price of imported goods on which even the poorest Egyptians often depend, but it has been enormously costly for the state.
Foreign currency reserves, which were $36 billion in the last days of Mubarak, dived to $13.6 billon in January. This is less than the cost of three months' imports, and economists get nervous when any country falls below that level.
Like so many governments in trouble, Egypt has solved one problem only to deepen another. While the central bank is now auctioning a relatively modest $120 million or so each week, the accompanying fall in the pound pushes up the state subsidy bill.
Military-backed governments of Mubarak and his predecessors tried to win public acceptance by heavily subsidising energy and bread prices. This system relies on the state buying wheat and oil on international markets for dollars.
Markets believe the pound has much further to fall. Forward contracts imply it will drop to at least 7.95 to the dollar a year from now, 15 percent below the current rate.
Businesses and individuals outside the priority areas of food and energy are struggling to get hold of dollars at all, forcing to them into the black market where rates are 6.90/7.25, much weaker than the official 6.7375.
Already the pound's fall is adding to the budget burden. According to the government plan, the deficit will hit 10.9 percent of total economic output this financial year, assuming the Mursi administration starts reforms. Without action, the deficit soars to 12.3 percent of GDP, the programme predicts.
Investment Minister Saleh professes optimism that the nation will rally behind the programme of austerity and reform that is bound to be the price of an IMF deal. "We don't see any reasons why the Egyptian people should reject the programme. They will eventually realise that the benefits they will get will outweigh the load they will carry," he told investors in Dubai on Monday.
Few analysts and economists share his optimism. Even after the parliamentary elections - which will drag on from April to June in four stages - radical change seems remote.
"It is hard to see how Egypt will be able to sustain a consistent reform programme in line with the IMF deal that would be needed to bring the economic house in order," said Anthony Skinner of Maplecroft, a political risk and advisory company. "I don't realistically see how that can be achieved, considering the current state of finances and negative political dynamic."
Perhaps tellingly, the government released only a summary of its programme. It detailed how better off Egyptians will play their part, such as a levy on share transactions, a tax on stock market flotations and a flat 25 percent corporate tax rate abolishing a 20 percent rate that had also been applied.
Egyptian businesses, many of which are struggling for survival, reacted with horror. Greater horrors may await the nation's poor - two-fifths of Egyptians live on less than $2 a day - but the summary had little to say on how they will suffer.
Egypt cannot overcome its budget problems without tackling the bill for subsidising energy, which soaks up at least a fifth of state spending. On this the summary is silent, along with the equally sensitive issue of bread, for which Egypt imports wheat to sell loaves for less than a U.S. cent.
The strains are clear. Egypt's wheat imports and stocks are sharply down so far this year.
Last week the government announced new prices for fuel oil in the official gazette. What the announcement did not give was the size of the increase - 50 percent.
Sensitive parts of the economy, such as bakeries, electricity producers and food manufacturers, were exempt from the increases. Nevertheless, this could be a sign of what is to come in other areas, and the fact that the government announced such a radical step two days before Mursi called the parliamentary elections suggests it has to save money fast.
Desperation may force the government into other actions it finds distasteful. It is allowing convicted businessmen who fled after the revolution to negotiate an end to corruption charges - an attempt to lure back the expertise and capital of people close to Mubarak whom it may detest.
Finance Minister Al-Mursi Hegazy said on Tuesday the reform programme would go to parliament within two days. However, this does not assure rapid progress on an IMF deal. "Political consensus is a more important sticking-point and something that needs to be resolved prior to an agreement being signed," said Anthony Simond of Aberdeen Asset Management.
Consensus is in short supply. The National Salvation Front, which groups liberal and leftist groups, decided on Tuesday to boycott the elections. Mursi may instead push ahead with reform to satisfy the IMF without the opposition, as he did with a fiercely-contested constitution produced by an assembly dominated by Islamists late last year.
An IMF deal could open the way for up to $12 billion in help from other hesitant sources including the World Bank, the European Union, United States and Gulf Arab countries.
Only one Gulf state might be forthcoming without an IMF deal - Qatar, which has already provided $5 billion in a gift and deposits at the Egyptian central bank. Few people believe that Qatar alone can arrest the slide.
"It may be the case that Qatar comes forward, but even then that would have to be an incredibly high figure in order to be able to achieve this." said Maplecroft's Skinner. "Even with Qatar's previous injection, it didn't stop the currency from sliding. Foreign exchange reserves are down."
Moubayed at Barclays said bilateral help "can only help in buying time and not bring Egypt's external and fiscal position towards a sustainable path".
Relations between the Muslim Brotherhood and the Gulf's heavyweight, Saudi Arabia, are markedly cooler. One top Egyptian official said a number of Gulf states had helped Egypt while it was under direct military rule after Mubarak's fall. This has dried up since Mursi became president last June, even though he made his first foreign visit in office to Riyadh.
"Now it's only Qatar that has really been helping the Egyptian economy," the official said, but added: "We expect there will be followers." - Reuters