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Huge debt and a shrinking private sector marked Egypt’s economy in 2021

January 5, 2022 at 11:25 am

A man counts Egyptian pounds at currency exchange shop in downtown Cairo on 3 November 2016 [KHALED DESOUKI/AFP/Getty Images]

The Egyptian economy slid into a foreign debt trap in 2021, and the country ended up borrowing in order to make repayments and cover the interest on existing loans. It also expanded domestic borrowing through treasury bonds while maintaining high interest rates in a bid to attract foreigners to purchase public debt instruments. This has led to an increase in the latter amounting to 40 per cent of public expenditure. Meanwhile, the Ministry of Finance is unable to fulfil its targets regarding the budget deficit, the value of which as a percentage of the GDP increased according to the results of the first five months of the current fiscal year.

Bank deposits continued to rise despite low-interest rates at local banks, especially in the Egyptian currency, whereas foreign currency deposits fell compared with what they used to be five years ago. Loans, especially to government and major companies, increased while bank investments continued to move in the direction of public debt instruments at the expense of venturing into real investments. The government continued to have the biggest share of domestic credit at the expense of the private sector.

The stock market performed poorly compared with the performance of Arab and European stock exchanges during the year. The number of companies registered at the Egyptian Stock Exchange fell to 218 compared with 222 five years ago. The Kuwait National Bank is preparing for its own voluntary delisting from the exchange. The same decline happened in the number of companies registered in the small companies’ stock exchange (Nile), down to 27 from 32. Private and public submissions contributed to a rise in the market value of registered stock.

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Foreign debt reached a record value of $138 billion last June when the release of official data ended. This represented an increase of $8.7 billion during the first half of the year. The second half saw an increase in borrowing, whether through the issue of international bonds valued at $3 billion, a deposit from Saudi Arabia and loans from Gulf banks, the European Bank for Reconstruction, the Korean government, the Japanese Agency for International Cooperation (JAICA) and Swiss and Italian banks, as well as from other parties.

The figures for domestic general debt remained frozen up to June 2020, when it was 4.7 trillion Egyptian pounds. There was an eighteen-month gap, whether by the Central Bank or the Finance Ministry, which continued to borrow by issuing treasury bonds in order to prolong the average time span of domestic debt at the expense of reducing treasury short term permits. Treasury dollar permits were also issued at the value of $1 billion.

Confidence in government data remains low in the shadow of the police state climate that prevails in Egypt. The state launched an attack against a prominent economist who cast doubt on the growth rates announced by the government by stating that they contradict the shrinkage endured by the private sector. He also criticised the continuation of high interest rates with the aim of attracting foreign funds at the expense of local investment. As a result, some people demanded his prosecution, which would have happened had he not been the brother of the current business minister. The same sort of attack was directed against some senior businessmen who criticised the unequal market competition between the army and the private sector, whereby the army does not pay taxes or custom duties and has access to cheap labour.

Hence, business associations, research centres and the economic media have refrained from commenting on the growth rates that were alleged to have reached 9.8 per cent during the third quarter of 2021, and the claim that unemployment rates reached 7.5 per cent during the same period despite market recession and the decline in purchasing power. It was also alleged that urban inflation rates reached 5.6 per cent in November. Yet, this is contradicted by the global rise in prices and the impact this has had domestically, prompting the government to put up the prices of many subsidised commodities; the price of petrol, for example, increased three times during the year. The government also put up the price of domestic cooking and commercial gas cylinders as well as the price of natural gas for car and factory use; the cost of diesel also rose, as did the price of electricity. Government departments continued to put up the cost of the services they provide, while continuing to levy taxes, not least on mobile phones. A value added tax is also to be imposed on a number of services.

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Even stock exchange data was used selectively by the media. The year saw a rise of 10.2 per cent in the performance index of the thirty most active stocks while another index comprising fifty companies went down by 6.2 per cent during the same year; another with seventy companies went up by 2.6 per cent. Yet another, more expansive index, with one hundred companies, went up by 5.1 per cent. The media focused exclusively on the index with the highest growth rate. No media outlet mentioned the index that fell despite the fact that the companies active in the market joked about the “thirty index”, which they call the index of the International Commercial Bank because this index offers a relative weight for the bank’s share equivalent to 38.6 per cent and an immediate share value of 5.8 per cent, while giving Al-Sharqiyyah Tobacco 4.9 per cent, and the Financial Group Hermes and Talaat Mustafa Contractors 4.7 per cent each. As a result, eleven of those companies included in the thirty index ended up with a share of less than one per cent each.

Of course, no one mentioned the government support for the stock exchange, as announced by the Central Bank, Al-Ahli Al-Misri Bank and Misr Bank, the biggest government banks. This is exactly what the business minister’s brother criticised and was attacked for by the media.

As such, shrinkage continued to dominate the private sector according to the purchase manager’s index, which is published by one of the UAE banks. The private sector maintained its reservation regarding the expansion of companies as well as new investments. In the meantime, a number of senior businessmen, including the former president of Juhayna Company, continue to be held in prison. Also imprisoned is the owner of Sinai University as well as the owner of Al-Tawheed and Al-Noor stores. This contributed to the decline in the value of foreign investment during the first half of the year, although it must be borne in mind that this is the most recent data available.

Perhaps this has been the reason why President Abdel Fattah Al-Sisi changed his tone when speaking about the private sector. After hailing the performance of the army, by virtue of what it enjoys in terms of discipline and speedy implementation, he commended the role of the private sector compared with the performance of the public business sector and called upon it to contribute to major projects. Amendments were made to the law to allow the private sector to undertake infrastructure projects.

One of the investors loyal to the regime was prompted to sell his shares in the army-owned Egyptian Steel Company to businessman Ahmad Izz, who owns a number of steel and ceramics companies. This followed losses incurred by cement factories which faced an increase in supply over demand and the decision by Al-Sisi to delegate the construction of a number of roads to private companies while speaking on air. The former general assigned the development of irrigation in Tushki to a private company in the same way, again without the usual tender process as required by law. He also offered a new licence for cigarette production and gave a USA-UAE coalition the job of developing the Tahrir Complex through Egypt’s sovereign fund. The sale of 76 per cent of the Arab Investment Bank to the Hermes Financial Group was also approved by the president.

Regarding foreign currency resources, performance improved to around $30 billion in nine months. Commodity resources also increased to $61 billion during the same period, allowing the trade deficit to rise during the same period of 2020 to $31 billion. A system for the early registration of imports was implemented by the customs service.

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Remittances by Egyptian expatriates also increased during the first nine months of 2021 to $24 billion. The revenue from the Suez Canal increased to over $6 billion for the first time in its history. In the tourism sector, Russia lifted the ban on its flights to Red Sea resorts after six years. The government also permitted hotels to work at full capacity, setting a minimum occupancy rate according to the standard of accommodation so as to put an end to price slashing situations. This has improved tourism revenue. Most tourists came from Eastern Europe. However, the spread of the Omicron coronavirus variant resulted in the cancellation of many flights. Experts expect its impact to continue up to February 2023.

The increase in the commodities trade deficit and the decline in foreign purchases of Treasury Permits by about $2 billion in October has been linked to the continuation of the negative net exchange of foreign currencies in commercial banks in September for the third consecutive month due to the rise in commitments in foreign currencies. This might have been the reason why one of the credit rating agencies called on the Egyptian government to conclude a new agreement with the IMF in preparation for the expected impact of the inclination on the part of a number of central banks, especially the US Federal Reserve, to raise interest rates in the New Year. This will drive some foreign investors out of emerging markets, including Egypt. Foreign purchases of Egyptian government debt instruments reached $34 billion up until last September.

Translated from Arabi21, 2 January 2022 and edited for MEMO.

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