October 08, 2017

Egypt’s growing debts cause for concern

Major concerns. People and vehicles are seen in front of the
headquarters of the Central Bank of Egypt in downtown Cairo. (Reuters)

Cairo - Egypt’s growing debts are turning into a major eco­nomic concern amid fears that the country could de­fault on interest payments if borrowing continues at current levels.
“The debts have reached a stage that should be a wake-up call for everybody in economic decision-making circles,” said former Egyp­tian Prime Minister Ali Lotfy. “These debts will make it difficult for the government to make any invest­ments or bridge the yawning budget deficit.”
Egypt’s central bank said that by the end of the fiscal year 2016-17, which ended last June, foreign debts totalled $79 billion, a 42% ($23.2 bil­lion) increase from the previous fis­cal year.
The bank said the debts were within appropriate limits because they do not exceed more than 45% of Egypt’s GDP. However, econo­mists expressed concern, particu­larly given that Egypt’s combined foreign and domestic debt is 130% of GDP.
Egypt is channelling almost one-third of spending in its budget to servicing debt. This is having a clear effect on development and welfare programmes amid cutting of state subsidies.
With another one-third of the budget allocated to salaries of Egypt’s almost 6 million civil serv­ants, economists warned that Cairo is facing major constraints to devel­opment plans.
Cairo is relying on a $12 billion loan from the International Mone­tary Fund (IMF) to keep it afloat over the next three years. However, the loan term requires that Egypt enact a stringent economic reform pro­gramme. Egypt has received the first two instalments of the loan, with a tranche of approximately $2 billion expected before the end of the year.
While this has helped Cairo bank­roll development plans and bridge the budget deficit — now at 10.2% — it also adds the IMF to the list of Egypt’s many creditors. As the credit and creditors increase, so too does the fear that Cairo could col­lapse under the burden of repaying the loans. Some economists said Egypt could reach a point at which it would have to borrow even more to repay loans.
“This is why it is very neces­sary for the government to stop borrowing and start searching for other methods to bankroll its pro­grammes,” said Farag Abdel Fattah, an economics professor at Cairo University. “These loans come at the cost of the living standards of the people because, instead of spending money on development, the gov­ernment will have to spend money to repay the loans.”
Egypt has been in debt for dec­ades but in May 1991 it missed an opportunity to restart its economy after the United States and 17 other creditor countries forgave half the $20.2 billion it owed following Cai­ro’s participation in Operation De­sert Storm.
However, corruption, economic mismanagement and regional tur­moil meant, rather than building on this debt relief, Cairo accrued addi­tional debt.
By the time long-standing Presi­dent Hosni Mubarak left office in January 2011 following a popular up­rising, Egypt’s foreign debts stood at $36.5 billion. In 2014, Egyptian Pres­ident Abdel Fattah al-Sisi inherited a foreign debt of $46.1 billion, which increased massively following ma­jor economic, political and security challenges.
Egypt’s tourism sector, which contributes approximately 4% of GDP, was depressed through that period, specifically after a Russian passenger plane was bombed in flight over Sinai on October 31, 2015.
The Russian plane bombing, which was claimed by the Islamic State, led many countries to sus­pend flights to Egypt, depriving the country of revenue and much-need­ed foreign currency.
Egypt has pointed to an uptick in tourism in 2017, with revenues ($3.5 billion) up 170% in the first seven months of the year compared to the previous year. The number of tourists visiting Egypt this year rose 54%, reaching 4.3 million, after European countries lifted flight sus­pensions to Sharm El-Sheikh.
“The tourists are coming back and economic reforms are paying off, which will contribute to attracting investments and bringing in foreign currencies needed by the economy to grow,” said Deputy Finance Min­ister Mohamed Moeit. “If this means anything, it means that we should not feel afraid of the debts as long as our economy stands on its feet and is able to keep moving forward.”

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