(AFP Photo)
The continuous depreciation of the Egyptian pound, thinning foreign currency reserves, and shrinking revenue from tourism have plagued Egypt since President Mohamed Morsi assumed office one year ago. The Daily News Egypt examined the economic situation of the country, and spoke to leading financial experts to analyse the economic decisions of the Morsi presidency.
Since the president’s inauguration in June 2012, continued political instability damaged revenue from tourism and foreign direct investment (FDI.) June 2013 saw 2% economic growth, down from 5.1% in 2009/10 before the revolution.
This is in addition to continuous depreciation of the Egyptian pound against the dollar; which has reached EGP 7.6 on the black market and EGP 7.02 on the official market.
Economic expert Sherif El-Khereiby commented on the fluctuations, saying that “the continuous devaluation deepens the economic crisis, and leads to higher inflation rates, which reached 8.2% last May.
Financial expert Magdy Tolba, on the other hand, cites “lack of an economic vision” as the main reason behind the country’s inability to prosper and achieve real economic growth, saying that two main fundamentals must be present to achieve any growth, “political stability and a clear vision about the future economic projects”.
“Until now Egypt has lacked the economic path and direction that can lead to economic development,” Tolba said, explaining that the tension which exists in the political arena prevents necessary development.
“Political competition is hindering any economic progress,” he said.
When asked whether foreign aid were the best solution for the faltering economy, Tolba stated that aid was only a short-term solution, but it cannot work in the long-term, saying; “we require foreign aid only when we suffer economic emergencies, but not all the time”.
During his well-publicised trips abroad, the president managed to secure financial aid from neighbouring Arab countries, in an attempt to help boost the country’s economy; since his election, Qatar alone has deposited $5bn in Egypt, including a $1bn grant, with a further $3bn pledged to Egyptian treasury bonds at an expected rate of interest of 3.5%.
Saudi Arabia and Turkey deposited $1bn each, and Turkey announced last month intentions to increase its $1bn credit line by $250m. Libya, on the other hand, has deposited $2bn.
While the recent injections of foreign aid bolstered foreign currency reserves to $16.04bn, significant elements have been missing from the analysis, said Wael Zeyada, the head of research at EFG-Hermes.
He explained that the increase of foreign reserves cannot be considered as “evidence” to evaluate the economic development.
“The current standing of the country’s foreign reserves is not a method through which we can evaluate economic development. The composition of these reserves is the important factor,” he added.
Tolba stated that important factors like “imports and exports” have gone missing from the analysis.
In May, former planning and international cooperation minister Ashraf Al-Araby forecasted foreign reserves to increase to $19bn by the end of this year. Financial expert Alaa Moustafa said, however, that any increase is “unlikely as long as political instability remains.”
Moustafa continued that even though recent injections of foreign aid from Qatar, Turkey and Libya bolstered reserves, other calculations were not included.
“In order to not jump to any conclusions, we must first look at factors such as tourism revenues, production and exportation,” Moustafa said, adding that “we have a real problem in all these elements which are heavily influenced by political instability.”
Egypt’s net foreign currency reserves stood at $36bn on the eve of the 25 January Revolution and have depreciated by more than half since then.
Low foreign currency reserves cause Egypt to struggle to purchase basic imported commodities, including wheat and fuel. Egypt, one of the world’s largest wheat importers, was forced to cut back on purchases of the grain this year, and rely more on the domestic harvest.
The Central Bank of Egypt, however, published a press release in March in which it denied any significant decline in the country’s foreign reserves.
Among other main economic issues was the approval of the Sukuk Law, or Islamic bonds, in May 2013, resulting in controversial economic debates.
Sukuk provides a structured way for countries to generate income, in which investors have partial ownership in a country’s asset for a specific period of time.
The Sukuk Law, authorised in several countries such as Malaysia, Kazakhstan, Qatar, and Turkey, can be applied in Egypt “if applied correctly”, said El-Khereiby.
El-Khereiby stated that this law requires specific conditions that were not available when it was previously suggested by the government, emphasising that it cannot be applied “unless a series of step were taken into consideration, such as the need to find national projects and request international consultancy agencies’ opinions, then conduct feasibility studies, sensitivity analyses and IRR tests”.
“The idea itself is scientific and useful, but the conditions for applying this idea do not exist,” he said.
