Source: Los Angeles Times
Egypt: Foreign Debt Constrains Economic ChoicesThe first six months of this year have not been easy for the Egyptian economy. The political unrest that ousted the president and uncertainty over the country’s direction triggered a drop in tourism revenues, low levels of domestic and foreign investments and scarce employment opportunities in the formal private sector. Economic growth is expected to drop from an early forecast of 5.5% to a maximum of 2% for the 2010-11 fiscal year, the country’s lowest growth rate during the past decade.
Meanwhile, government expenditures are steadily rising, following a 15% hike in civil servants’ wages and a budget increase in food subsidies to soften the burden of high prices in global markets. The government’s budget deficit for the 2010-11 fiscal year could exceed 10% of GDP, up from 7.6% projected before the unrest began.
As a result, the Egyptian government is struggling to fund a gap of around $20 billion and to budget confidently for the coming fiscal year, which begins next month. There are ongoing negotiations with international institutions — primarily the International Monetary Fund (IMF) and the World Bank — as well as talks with Egypt’s traditional partners: the United States, the European Union and the Persian Gulf states.
In his recent speech on the Middle East, President Obama announced several measures to support the Egyptian economy, including the conversion of $1 billion of Egyptian debt into investments, and loan guarantees up to $1 billion to assist Egypt in entering global financial markets. Egyptian debt to the United States now amounts to $3 billion of a total of $32 billion in foreign debt. Saudi Arabia has also announced a program of loans, grants and support for investment programs in Egypt with a total value of $4 billion.
Other negotiations are underway with the IMF to obtain loans that could be worth an additional $4 billion. The G-8 has also announced a forthcoming support package of loans and investment partnership projects, which could pump nearly $10 billion directly into Egypt’s economy within one year.
Although the race to secure more foreign loans and conditional grants can boost Egypt’s economy in the short term, its potential burden and influence on the democratic transition process should not be overlooked for several reasons.
First, the current interim government is a technocratic Cabinet intended to manage the transition period before legislative and presidential elections, scheduled for September and November, respectively. This Cabinet should not, in principle, make unnecessary commitments that go beyond the transition period.
Second, Egypt should set its social and economic priorities — as part of its democratic transformation — before signing any trade and investment partnerships. The priority-setting process needs to be homegrown and requires broad consultations between political parties, associations, labor unions, and the private sector. It cannot be left to the Cabinet’s technical advisors and international experts.
Third, available foreign exchange reserves at the Central Bank are estimated at $28 billion. Despite their decline by $8 billion since the beginning of this year, they can still fund six months of imports, which can be seen as relatively comfortable and does not point to any immediate insolvency threat.
Fourth, deficit financing in Egypt has depended largely on domestic sources over the last few years. Such financing should not cause undue trouble during this year and the next due to existing liquidity in the banking sector, as confirmed by a recent report by the Institute of International Finance.
The race to create large foreign debt programs and investment partnerships — which put burdensome conditions on Egypt to meet the terms of external donors’ reform agenda — is not a wise option. The interim government should focus on domestic sources to finance the deficit and seek to reschedule existing loans or swap them for investment in Egypt’s economy. It also needs to center its attention on emergency funding and postpone money-consuming reforms that require consensus-building and popular political support. Accumulating billions of dollars in loans can only burden the Egyptian economy in the long term and squeeze the elected government’s ability to select its reform agenda.