CAIRO: Egypt’s economy will continue to decline for the next fiscal year, but the country’s financial system has endured the global economic crisis fairly well, said the International Monetary Fund to Egypt in a report this week.
The findings by a recent IMF mission were released this week in a concluding statement by the organization after an annual visit to the country, and a full report will follow.
The IMF credited Egypt’s relative success to banking reforms which began in 2004. Reforms in banking, easing international trade restrictions and a more proactive Central Bank have all protected Egypt, it said.
Today the Central Bank of Egypt’s monetary policy committee is set to meet to discuss implementing a further interest rate cut. There have been four thus far this year. Prior to 2009, Egypt’s last interest rate cut was in April 2006. It was only in 2005 that the committee began conducting regular meetings.
In its findings, the IMF praised such cuts, saying the “Central Bank of Egypt (CBE) eased monetary policy appropriately, cutting policy rates four times by a cumulative 250 basis points since early 2009.
Egypt’s work to reform its banking system and clean up non-performing loans (NPLs) were also touted as crucial to Egypt’s success in mitigating the effects of the crisis.
The IMF warned however that the Central Bank must take into account its balance of payments when contemplating further interest rate cuts. It is also said that the quality of banks’ loan portfolios could deteriorate unless certain vulnerabilities are addressed.
Egypt fell from an inflation peak of 24 percent in August 2008 to under 10 percent in June 2009. It is projected that real GDP growth will hover around 4-4.5 percent this year, down from the 7 percent highs of the last few years. Economic activity in Egypt is likely to remain below potential in 2009/10.
Professor of economics at Cairo University Ola El-Khawaga said in a telephone interview with Daily News Egypt that the country “must continue to make reforms and improve its industrial and agricultural sectors, attract FDI (foreign direct investment) into the economy and stimulate investment.
El-Khawaga said the reforms, which started in 2004 and have entered their second round this year, must continue despite the crisis at hand.
She added, “the financial part of the economy was not really affected, but the real part of the economy, from exports, Suez Canal and [remittances] from abroad, that has been affected slightly more.
Egypt has been hurt by declines in foreign currency revenue, which it relies heavily upon. Tourism fell 17.3 percent in the first quarter and revenue from Suez Canal traffic went down 7.2 percent at end of this past fiscal year in June, according to Reuters.
Senior economic analyst at Cairo-based investment bank EFG-Hermes, Simon Kitchen, said that reforms made in 2004 partially spared Egypt but he added that “Egyptian banks haven’t been relying on international funding.
“During the last five years [since the reforms] it has been subdued. Eastern Europe had a lot of foreign investment and credit and consequently suffered more during the crisis and capital flows reversed at the end of 2008. Egypt on the other hand was not as affected.
With respect to the near-term macroeconomic policy the IMF indicated Egypt must focus on, Kitchen said the “priority for the government is fiscal reform. If you look at the fiscal deficit – it will worsen considerably in the coming year. And so, the government needs to think about how it can improve its fiscal balances. This could be through tax increases, the introduction of VAT [value-added taxes] or cuts to subsidies.
Al-Ahram Center for Political and Strategic Studies’ economic analyst Magdy Sobhy concurred about reform measures, saying, “I think one of the main things is that we have to actually adopt VAT. We have to think about income taxation again. We have to move to more than 20 percent as a maximum for the higher incomes.
“We have, at the same time, rising inequality with the income of Egyptians. I think we have to have a new system of taxing. I know some said it is not the right time because we have diminishing domestic investment and FDI, but I think it is the right time now.
Sobhy contextualized the effect of the 2004 reforms when discussing their role in protecting Egypt from the crisis. “We didn’t suffer as much in the crisis because of the reforms, he said, “But the reforms themselves took place because we had a financial crisis in the 1990s when a lot of businessmen took a lot of the banking money and transferred it abroad.
He said the Central Bank’s reforms were a response to this and not necessarily an action to shield Egyptian from global economic unrest. It was the previous government and governors at the Central Bank under whom the systematic reforms began.
Opinion was mixed when asked about speculation revolving around further interest rate cuts during the Central Bank of Egypt’s meeting today.
Kitchen said “the interest rate will probably be cut by 50 basis points. Growth has improved, but it is still below potential which leads us to expect a cut.
El-Khawaga said that another interest rate cut was possible. As for the efficacy of such an action, “we presume that diminishing the interest rate will encourage investors to invest more, but I think that this is not very effective because households will be affected by the decrease in these interest rates and there are a lot of people depending on them.
Magdy differed, explaining that “my guess is that they will actually fix the rate because the inflation rate is still high – it exceeds 9 percent … so, I think that they will fix it.
The results should be public later today.
The IMF completes visits annually under Article IV of its charter, which stipulates that states seeking financial assistance or those which are under staff review for economic development should undergo a full investigation.
To read the other stories in our monthly special focus on Egypt s banking sector, click here:
http://thedailynewsegypt.com/admin/article.aspx?ArticleID=23428
http://thedailynewsegypt.com/admin/article.aspx?ArticleID=23430
http://thedailynewsegypt.com/admin/article.aspx?ArticleID=23431
