Fears mount in Egypt as foreign debt keeps rising

Sunday 12/06/2016
Economy contin­ues to slow down

Cairo - A Russian loan for the con­struction of Egypt’s first nuclear power plant will increase Cairo’s foreign debt by 50%, cripple the state budget and leave future gen­erations with debts they may be un­able to pay off, economists said.

“Despite all rosy statements about this loan, it will do nothing but add more pressure on our economy and budget,” said Sherin al-Shawarbi, a professor of economics at Cairo Uni­versity. “This is easy money com­ing to us today but it will only be returned by our children who will inherit this heavy burden from us.”

The loan, whose details were dis­closed to the public on May 19th, was agreed between Egypt and Rus­sia in November 2015. It amounts to $25 billion. Before this loan, Egypt’s total debts amounted to $47.7 bil­lion.

The nuclear power plant is to be built by Russia in El Dabaa in north-western Egypt. It will include four reactors, each of which will produce 1,200 megawatts of electrical power a year. This is energy badly needed by Egypt, which has been working to increase electrical power genera­tion capacity to end power cuts and fuel the operation of thousands of factories.

The $25 billion will cover 85% of the costs of establishing the power plant. The Egyptian government will contribute the remaining 15%. It will pay an interest rate of 3% annually, according to loan details published in local media. The loan will be used by Egypt for a period of 13 years as of this year. Egypt will pay back the loan over 33 years. The first instal­ment will be paid in October 2029.

This is a low-interest loan but Shawarbi said cash-strapped Egypt, which is facing tough economic challenges, may find it difficult to repay both the loan and the interest.

“Our government prefers such loans to real economic reform, which at the end cripples the na­tional budget and leaves future gen­erations with a burden too heavy for them to bear,” she said.

Egyptian President Abdel Fattah al-Sisi has repeatedly complained that foreign debt interest eats up almost one-third of Cairo’s budget every year.

Despite this, Sisi has been build­ing the country’s future on credit, as one economist put it. Since he became president in June 2014, Sisi has signed huge deals dependent on lavish loans from other countries, apart from the more than $20 billion in loans and aid from Gulf allies.

The deals include one with Ger­many for the construction of an electrical power plant in Beni Suef in central Egypt, another for the purchase of 24 Rafale fighter jets from France and a third for the pur­chase of two helicopter carriers with France. On June 1st, Hungary said it would finance its $1 billion sale to Egypt of 700 train carriages.

This is too much for Egypt to pay back, economists said, given that forecasts for economic growth might not be accurate. Whether the predicted growth materialises also depends on regional and interna­tional economic conditions, they add.

A senior Finance Ministry official refused to comment on whether the Russian loan would be an extra bur­den on Egypt’s budget but Ashraf al-Arabi, a member of parliament’s Economic Affairs’ Committee, said the loan would not cripple the econ­omy.

“On the contrary, the nuclear power project will generate money when it starts operation,” Arabi said. “This means that revenues from the sale of electricity generated by the plant will pay back the loan and its interests.”

The nuclear power plant is ex­pected to be completed in 2022 and start producing power in 2024. The project is indispensable if Egypt is to meet the energy needs of its people and development, experts said.

Egypt has an electricity genera­tion deficit of almost 30%, according to the Electricity Ministry. Special­ists say this gap must be bridged — apart from reducing consumption — by diversifying energy sources and also establishing more electrical power projects.

Economists, meanwhile, said Sisi can do nothing but keep on borrow­ing while Egypt’s economy contin­ues to slow down and foreign cur­rency reserves drop. Egypt had $36 billion in foreign currency reserves in 2011 but $17.5 billion now, accord­ing to the Central Bank of Egypt.

“The Russian loan should not be cause for worry because it will be used in launching a project that will generate income when it becomes operational,” economist Rashad Abdo said. “I think such loans are the only thing we can get under the current economic conditions.”