Hussein Choucri, Chairman and MD, HC Securities & Investments, on the path forward for Egypt’s economy

Hussein Choucri, Chairman and MD, HC Securities & Investments

 

It was recently announced that a delegation from the IMF is set to arrive in Cairo to pursue negotiations regarding its expected loan to Egypt. A general consensus has recently emerged that the IMF is urging Egypt to implement a financial austerity programme, aimed mainly at controlling government finances and reducing the country's budget deficit. In addition, it is said that the IMF is encouraging Egypt to devalue the Egyptian pound exchange rate.

There is little disagreement that Egypt is suffering from a soaring budget deficit, which reached about 12% of the country’s GDP, according to the latest estimates, and is continuing to increase. It is also generally agreed that such a state of affairs cannot be sustained without the collapse of the nation’s economic system. So there is a pressing need to decrease the deficit.

The main question is how to accomplish this. In this respect, the government should demonstrate its commitment to implementing a plan to gradually lower the deficit by identifying a target deficit to be achieved over the medium term, for example 3% of GDP over seven years, and by identifying an annual target deficit. However, the sudden adoption of a tight fiscal policy poses great risks as it would lead to a period of general economic slowdown, reflected in low rates of employment, investment, income, and corporate profits at a time when GDP growth is less than 2%.

Globally, countries that have applied voluntary fiscal austerity, such as the UK, or others that followed the IMF instructions, such as Greece, have not yet managed to improve the state of their economies. Although these policies ultimately reduced the budget deficit, they also resulted in lower GDP and broadly worsened standards of living. A surge of public disapproval and dissatisfaction followed, bringing to mind the saying “the operation was successful but we lost the patient”.

The government should take financial austerity measures to rationalise its expenditures, such as reforming the subsidy programme (particularly petroleum products), introducing a progressive income tax (focusing on high-income brackets), increasing the sales tax (excluding consumables for low-income brackets), and implementing a real estate tax. However, as these policies will together cause overall demand to decline, it would be advisable to direct part of the surplus they generate to improving education and health services. Furthermore, undertaking new infrastructure projects will help to create new jobs and new businesses.

The announcement and implementation of such a plan would send a positive message to financial markets and investors that the government is serious about implementing rational economic policies to help restore economic balance. As for the Egyptian pound’s exchange rate, the devaluation of the pound was inevitable, given the continuous decline in foreign exchange reserves and the deterioration in the number of incoming tourists. However, had it not been for the increase of remittances of Egyptians working abroad, the situation would have likely been much worse than it turned out to be.

It is expected that the price of imports will rise as the value of the Egyptian pound drops, leading to a stop of unnecessary imports. I believe we are witnessing the beginning of a “currency war” between industrialised countries. Japan has reduced the value of the yen by close to 15%, while the US is pursuing the implementation of a quantitative easing programme and is keeping short-term interest rate near zero. Likewise, some EU countries are complaining about the rise of the euro, which adversely affects their exports. This is putting pressure on the European Central Bank to reduce interest rates, thus forcing the euro’s value down.

In reality, the exchange rate reflects a country's economic condition, but it is also a tool to stimulate activity and combat stagnation. Like any other economic element, it varies as long as the exchange rate achieves a balance between the rates of economic growth, employment, and inflation. Egypt must now organise and stabilise its internal affairs, and the government must embark immediately on economic reforms. This is one of our main responsibilities to future generations.

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Hussein Choucri

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The Report: Egypt 2013

Capital Markets chapter from The Report: Egypt 2013

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