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IMF loan to help Egypt absorb shock of global economic crisis, attract FDIs: Head of parliament’s budget committee - Daily News Egypt

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IMF loan to help Egypt absorb shock of global economic crisis, attract FDIs: Head of parliament’s budget committee

IMF loan negotiations, Gulf investments, and debt reduction are main axes of recovery, says MP Fakhri Al-Feqi

 Uncertainty still dominates the global economic scene and, by extension, the Egyptian economy, since the spread of the Coronavirus pandemic, and the turbulent events that followed as a result of the Russian-Ukrainian war that cast a dark shadow on the world, increasing threats to food and energy security, and causing high inflation rates.

The Egyptian government’s expectations indicate the possibility of the continuation of the negative repercussions of the Russian-Ukrainian war on the Egyptian economy this year, as the government has incurred about EGP 465bn, direct and indirect effects, since the outbreak of the Russian military operation in Ukraine in February 2022.

Daily News Egypt interviewed Fakhri Al-Feqi, head of the parliamentary planning and budget committee, to get acquainted with the government’s plan in this regard, and the expectations of the direction of the crisis.


Successional crises

Al-Feqi said that the coronavirus and Russian-Ukrainian war crises were contrary to one another, where the first crisis was related to the closure and the contraction of activity. With the start of the recovery from the crisis and the return of life to normal and the continuous activity and compensation businesses for their losses, a global supply chain crisis, then the drums of war sounded, which exacerbated that crisis with the disruption of trade movement due to the war, especially the crisis of food commodities.

He explained that the supply chains are not related to the delivery of products, but to the manufacture of products, especially since the products have become transnational and not multinational, as one product is manufactured in several countries extending from China, Taiwan, America, and others, which exacerbated the crisis.

He pointed out that inflation is accelerating, as it recorded about 8% last January, jumped to 10.1% last February, and escalated last March, recording about 12.1%, and 14.9% in April, to reach its peak last May, recording 15.3%, and began in to decline in June when it recorded 14.7%.

The Central Bank of Egypt was targeting an inflation rate of 7% (±2%).

Al-Feqi added that the rise in inflation rates, coinciding with recording record levels in America, prompted the US Federal Reserve to adopt a policy of raising interest rates, which directly affected emerging markets, which prompted the Central Bank of Egypt to raise interest rates by 3% during the current year, explaining that each 1% increase In interest rates and its continuation for a year, it is offset by an increase in the interests of the domestic debt, estimated at EGP 28bn, and thus an increase in the overall budget deficit.

He pointed out that inflation in Egypt has three components, the first being imported, and the second resulting from an increase in production costs. The two represent about 50-60% of the general inflation rate and are outside the control of Egypt’s monetary policy, especially since Egypt is an importing country for petroleum and raw materials. The third component is resulting from the increase in monetary liquidity in the body of the economy, i.e. the aggregate demand for goods and services, which prompts the Central Bank to increase interest rates to absorb inflation.


Financing gap

Al-Feqi pointed out that Egypt’s financing gap amounts to about $25bn, of which $15bn are instalments and debts due during the current year, and the rest is from the deficit in the balance of payments, which is largely due to the weakness of domestic saving, which represents only 13% of GDP, explaining that the financing gap is the difference between savings and potential investments for Egypt, which represents 16% of GDP.

He explained that the deficit in the current budget is due to the fact that saving is fixed in exchange for expenses that are increasing, especially since the average per capita income in developing countries is weak compared to developed countries, noting that 12.5% ​​budget deficit previously, and currently it amounted to about 6.1%, and at the end of last year, it was about 6.7%.

With a quick look at the increase in the population against the annual growth, we find that the population increase reaches 2.2%, while the state is achieving a growth rate of 2%, which means that the current growth does not keep pace with the population increase in Egypt, stressing that Egypt needs ambitious investments in the plan to achieve a growth rate double the population growth rate, so as to be able to improve the standard of living.

Al-Feqi pointed out that investment in Egypt represents about 16.5% of GDP, according to the plan and budget, compared to 18% before the current crisis, and Egypt’s GDP represents about $440bn.

He added that the funds provided by the government from the support are redirected to the Decent Life initiative, which represents about EGP 18bn from the general budget, which is scheduled to be increased to EGP 21bn after increasing the number of families to 4.1 million. And with the presidential directives to increase families to about 5 million families, the budget will bear an additional EGP 6bn.

The Ministry of Finance set EGP 133bn as a reserve for the budget, Al-Feqi explained that the budget took into account developments on the global scene, especially since the law provides for the budget discussion in Parliament at the end of March, and the collision occurred between Russia and Ukraine at the end of February and with the uncertainty of the scene pushed the Ministry of Finance to increase the reserve in the general budget by increasing the precautionary amount to about EGP 130bn in view of the acceleration of developments on the global scene, pointing out that the coronavirus crisis prompted the ministry at the time to raise the cash reserve in the budget to about EGP 100bn, bearing in mind that the Russian-Ukrainian war is fiercer.

Al-Feqi added that the Russian-Ukrainian war threatens a severe crisis in wheat prices and oil prices due to the consequences of the war, pointing to the rise in global prices of all grains and food commodities, but Egypt was able to provide a stockpile of local wheat for eight months, coinciding with the harvest at that time.

The second axis that the IMF is negotiating is the flexibility of the exchange rate, which is important for reaching an agreement with the IMF in order to obtain financing to bridge the financing gap, which raises Egypt’s credit rating, which in turn pushes the international credit rating houses to reconsider their future outlook, especially since reaching an agreement on a loan serves as a certificate of confidence for the country’s economy.

Al-Feqi stressed the need to cooperate with development partners on obtaining funds for the Decent Life initiative to fill part of the financing gap, so that their financing becomes an insurance guarantee before the IMF in order to obtain the loan and carry out economic and structural reform, especially since Egypt is the largest contributor to the European Bank for Reconstruction and Development and a contributor to the International Bank for Reconstruction, and one of the founders of the International Monetary Fund, and it is possible for Egypt to obtain funds from development partners worth $10bn and it is also possible to move towards issuing sovereign sukuk.


Regional economic situation

Regarding his vision of the regional economic situation at the present time, Al-Fiqi indicated that 3 important events have occurred in the recent period, the first of which is the visit of US President Joe Biden to Saudi Arabia – the largest oil producer in the world – which produces about 11 million barrels of oil per day, which confirms the stability of relations between the largest oil exporting country and America, which pushed oil prices to drop below $100 per barrel.

He pointed out that Egypt’s general budget sets an initial price for a barrel of oil at $85 during the current fiscal year, and with prices rising to about $130 per barrel of oil, Minister of Finance Mohamed Maait put a reserve in the budget worth EGP 130bn in anticipation of continued high oil prices.

The second event is the United Nations Secretary-General Antonio Guterres’ visit to Turkey to attend the signing of an agreement that will open the way for large volumes of commercial food exports from three major Ukrainian ports to ease the burden on developing countries that are on the verge of bankruptcy and the population

Al-Feqi explained that the third event is the meeting of central bank governors and finance ministers of the Group of Seven in Bali, fearing that the current crises will lead to more disruption in natural gas supplies to Europe and push many economies into recession and trigger a global energy crisis, which requires these countries to seek to reduce high inflation rates, in order not to enter into an inflationary stagnation.

He stressed the importance of fiscal policy helping the central bank’s efforts to reduce inflation, and countries facing high levels of inflation would need high debt will also lead to a tightening of its fiscal policy, and this will help reduce the increased borrowing burden and complement monetary efforts to curb inflation.

He identified the third axis in the IMF negotiations, which is the government’s exit from some sectors in favour of the private sector, and the government has already started a plan to sell assets, as well as the state’s document for partnership with the private sector.


Three solutions

Al-Feqi identified three solutions to the current crisis, the first of which is the necessity of negotiating with the IMF and obtaining the loan in order to confirm the positive outlook for Egypt, as well as successful negotiation with development partners from major international institutions to finance development.

The second is to attract foreign investments, especially those Gulf investments, especially that Egypt was able to attract about $3.2bn from the Abu Dhabi sovereign fund, and the Saudi fund through selling government-owned assets in companies listed on the Egyptian Exchange, and is waiting to receive about $5bn from the Qatar Investment Authority.

He stressed that investment through establishment requires advanced infrastructure, fourth generation networks, and fibre cables so that the investor can reach around the world from one place, pointing to the readiness of the new administrative capital to receive investments due to the advanced technological infrastructure.

Al-Feqi stressed the need to activate the government’s proposals program, especially since the government announced a long time ago its intention to exit from the Safi and Watania companies, as well as the intention to offer Banque du Caire, which are strong proposals capable of attracting investments, but a clear time frame must be set for the implementation of the proposals prospective.

He pointed out that the fund needs guarantees to grant a large loan, as it grants the loan on terms and periodic review every 6 months, explaining that the mechanisms for exiting the crisis are currently represented in attracting foreign investments.

The third solution is related to debts and the need to reduce the current debt level, either by converting debt into bonds that are sold in the secondary market and traded globally, or by converting debt into shares in projects through exchanging debt with equity.

He explained that Egypt’s external debt is still within safe levels, representing about 30-35% of the gross domestic product, as the size of Egypt’s external debt is about $157bn, explaining that as long as it is less than 50% of the gross domestic product, it remains at safe levels..

Al-Feqi concluded that Egypt’s expected foreign exchange earnings during the year will reach about $105bn, of which $45bn are commodity exports, including natural gas exports, and about $30bn are remittances from Egyptians abroad, $12bn from tourism, and $8bn from the Suez Canal, and finally, $10bn in foreign direct investment.

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