It is not Moses’ staff or a feast from heaven, it is a debt to Egypt that is obligatory…
A serious deterioration in the foreign exchange market in Egypt, the continued free fall of the pound without any brakes, an increase in inflation to almost double the target rate in the current budget, a drop in remittances from Egyptians working abroad, an increasing current account deficit and an increase in the burden of public debt. All of them are manifestations of an integrated economic crisis. The most dangerous of all these indicators is the lack of confidence in the government’s intentions to take the reform measures that were agreed upon in the expert-level discussions with the International Monetary Fund.
A delay in implementing the necessary reforms mentioned in the statement of the International Monetary Fund on the 27th of last month would increase the costs of the reform later, complicate the crisis and worsen the economic suffering, which is currently manifested not only in the rise in prices, but also in the scarcity of goods and the disappearance of some of them from market, due to the near cessation of imports by the private sector in recent weeks. The lack of confidence in reform intentions is much more dangerous than the crisis of the pound, the shortage of goods and the shortage of the dollar.
Eliminating the crisis of distrust requires taking serious and urgent measures on three main issues: the first is the reduction of public debt, the second is freeing the market from government control, the initiation of economic growth led by the private sector, and the third is ending the mismatch between fiscal and monetary policies. Both go in the opposite direction from the other. Fiscal policy adopts the expansion of state spending, claiming to finance what is called “central projects”, through the expansion of public debt, while monetary policy uses all possible tools to withdraw liquidity from the market, which means paralyzing the possibility of financing the private sector. sector. The government will not be able to convince the International Monetary Fund or development partners to provide funds to support an economic reform program that does not exist on the ground. The price of the dollar on the market is still administrative, which is why a black market has emerged that is expanding every day, and there is also a clear delay in offering state-owned companies and their equipment for sale on the market, with the exception of shares that were sold to investment funds owned by other countries. In addition, the Egyptian private sector itself began to lose confidence in its ability to compete in a state-controlled market with little liquidity, so it took the shortest exit route by selling to paying Arab investors.
The loan and its conditions
The IMF loan to Egypt is expected to be on the agenda of the Fund’s Executive Committee next month. The loan, according to the initial agreement at the level of experts, is divided into two parts: the first is according to the mechanism of expanded possibilities worth 3 billion dollars, and the second is according to the new financing mechanism approved by the Fund to increase the ability of developing countries to withstand external shocks, and is a billion dollars. The extended loan is linked to prescribed reforms and is subject to periodic review, after each tranche, to assess the government’s commitment to implementing the agreed reform programme. The fund also promised to facilitate Egypt’s access to $5 billion in loans from development partners, such as the World Bank, the African Development Bank, the European Bank for Reconstruction and Development, and other countries and multilateral international institutions for financing and development. All these loans are debts that must be paid back, in addition to existing debts. The terms of the new credit can be summarized as follows:
First: fiscal policy reform to achieve fiscal discipline to ensure the sustainability of public debt and its low share of GDP in the medium term, strengthening the social safety net, ensuring transparency of the state budget and public finance components, and increasing economic resilience and dealing with external shocks.
Second: Monetary policy reform to achieve goals that include controlling the inflation rate within the declared target rate, achieving exchange rate flexibility, effective operation of monetary policy, and rebuilding foreign exchange reserves with sustainable real resources.
Third: Implementing reforms in the structure of the economy and market relations, in such a way as to raise the level of competitiveness by limiting the role of the state, reducing its share in the economy, achieving equal opportunities for the private sector, strengthening competition and transparency, and improving the business climate, with a gradual transition to a green economy .
The market is currently suffering the negative effects of higher inflation than the target rate of 7 percent in the budget for the current year, with a margin of change of 2 percent, up or down. The reported inflation rate for last month was 16.2 percent, while the inflation rate for food products reached around 24 percent. This month’s data will likely show a further rise in inflation. The market is also suffering from a reduction in international monetary reserves, which has affected Egypt’s credit rating, although it remains at B, but its future outlook has turned from stable to negative. This causes great concern for the government, which wants to raise the value of the reserve at all costs so that Egypt’s national debt rating does not fall to a worse state than it is. And if the central bank can control the flow of dollars in the country, by reducing the financing of imports, then it cannot refrain from servicing the existing external debt, because of the danger it poses to the credit rating of the national and guaranteed national debt. .
High servicing of public debt
The government estimated the average interest rate on treasury securities in the next fiscal year at 14.5 percent. According to a mathematical model used by the Treasury, every one percentage point increase in yields or interest on Treasury bills and bonds costs the Treasury around £30 billion, which is an increase in interest on the public debt. The average yield that the government pays on securities to finance the public debt has risen to more than 18 percent, with a strong focus on financing treasury bills, whose maturities range from 91 days to 364 days. This means, firstly, that the government is now paying interest on a public debt that is roughly £120bn more than estimated in the draft budget, and secondly that refinancing the bill over the course of the fiscal year is likely to result in a higher cost. An increase in the cost of government borrowing and an increase in public debt as a percentage of GDP would increase concerns about the state of the economy and lead to distrust in fiscal policy, because instead of managing to reduce public debt, the state sinks deeper and deeper into the debt quagmire.
Taxation of all economic entities
The IMF calls on the country to prepare a strategy for public revenue management in the medium term, in order to try to reduce the gap in domestic and external financing needs. However, the Ministry of Finance, which cannot now commit to the goals of the public debt management strategy in the medium term, is also in a state of paralysis regarding the possibility of increasing public revenues through taxes on economic activities. Therefore, the expansion of the tax community is resorted to, in order to increase tax revenues by 0.5 percent of GDP per year. Financial administration has so far failed to integrate economic activities and entities that are not subject to corporate laws, taxes, fees and various labels, and that enjoy a wide range of exemptions, to be within the framework of the regulated formal economy under control. What’s worse, the government is guaranteeing the payment of the debts of economic public bodies, a debt that amounts to 21 percent of GDP, and a virtual outflow of tax revenues.
The economy has deteriorated since the beginning of the fiscal year
In recent months, growth indicators show a decrease in production in kind, an increase in unemployment, a decrease in exports and imports, an increase in inflation, a drop in remittances from Egyptians working abroad, a drop in export prices of natural products. gas and oil derivatives, and the evaporation of exceptional sources of foreign currency that Egypt has acquired since April. fertilizer companies, chemical and aluminum companies, shipping companies, port services and others. The profits from the sale of these investment assets were probably used to finance debt service and general government current spending, which meant that the wealth of previous generations was squandered for almost nothing. Now, it seems, the same fate threatens the outcome of the new loan in the event of a final agreement.