Crisis costs Egypt $301m a day

The study said foreign director investment (FDI), which topped $13 billion in 2008 from below $one billion pre-2004, would be impacted given that investor confidence is expected to fall precipitously. (AGENCIES)

Egypt is losing more than $310 million a day because of the current crisis, which is expected to depress foreign capital inflow, fuel inflation and cut growth forecasts, a French bank has said.

Credit Agricole said the economy is at the heart of Egypt’s problems and that Hosni Mubarak’s regime is facing the specter of collapse due to the lack of economic trickle-down, rising inequality, high incidence of poverty, soaring unemployment, and underemployment, and very high and sticky inflation.

“The current political crisis is costing Egypt at least $310 million a day. Tourism is the first industry that is being impacted. Prolonged political uncertainty and perceived violence could have a destructive impact on tourism earnings this year,” said the study, authored by John Sfakianakis, chief economist at Banque Saudi Fransi (BSF).Its figures showed tourism accounted for about six per cent of Egypt’s GDP in 2010 and provides one out of eight jobs in the country with important multipliers for the economy as a whole.

“In view of the political and economic conditions currently prevailing, we are lowering our real GDP outlook for 2011 from 5.3% to 3.7% with additional downside risks lingering in the short term.”

While remittance inflows should not suffer a setback since there are no systemic crises abroad and the Gulf economies are returning to growth, the volume of such remittances is set to shrink.

According to the study, sent to Emirates 24/7 on Saturday, this is a very different picture from the early 1990s when remittances sharply decline after the departure of Egyptians from Kuwait and Iraq. It said the crisis could compel Egyptians abroad not to remit as much as anticipated. It expected the flows to drop from an expected $7.7 billion to a little over 2005 levels at an estimated $5.4bn.
“Any government which comes to power will have to revert to some form of additional short-term subsidies. More importantly, Egypt’s budget deficit is bound to increase as the cost of borrowing rises and the government embarks on additional distribution tactics,” it said.

“Our base-case scenario for the next three years was for Egypt’s gross public debt to GDP to remain around 70 per cent. We now think this scenario is no longer viable and we expect that public debt will revert to 85 per cent this year and 97 per cent by 2014.”

The study considered fiscal policy as another major challenge for the government. “In all likelihood there will be no rationalisation of fuel subsidies and improving tax-evasion mechanisms will not be carried through this year. Replacing the sales tax by a comprehensive VAT is expected to be postponed and measures to close loopholes in the income tax system will not be addressed this year.”

It said the proposed property tax would also not be enacted, restraining the revenue options of the state. ‘We expect that the budget deficit this year could reach 12.3 per cent from an estimated 8.2 per cent. Infrastructure expenditure by the government to help kick-
start the economy, hinted at by the new minister of finance, would place an additional burden on the budget and fiscal consolidation,” the study said.

It expected Egypt’s banks to be under pressure to finance the budget, but risk – due to private sector output falling due to a decline in investments – will create unavoidable short-term challenges.

Over the short term, Egypt’s currency, the pound (EGP) could fall by around 20 per cent, which would require the central bank to intervene on several occasions, according to Sfakiankis.He said the main factor in the currency fall will be the decline in capital inflows and rise in outflows.

The report noted that the forecast decline is more than the six per cent the EGP depreciated between September 2008 and March 2009. It subsequently appreciated due to resumed capital inflows.

It said the drawdown in reserves would be a crucial factor in supporting the EGP, but increased political tensions, a run on local banks as well as expected dollarisation of some of the deposits, will impact the short-term currency outlook.

“The government will be caught ‘between a rock and a hard place’ as it could fast exhaust its foreign currency reserves to pre-2002 levels. A significant depreciation of the EGP and falling service receipts, tourism and remittances would expose current account risks over the short to medium term as growth is expected to fall,” it said.

“A small decline in demand-driven imports could offset some of the current account pressures but it will not be enough.”

The study said foreign director investment (FDI), which topped $13 billion in 2008 from below $one billion pre-2004, would be impacted given that investor confidence is expected to fall precipitously.

Turning to inflation, the report said it would continue to be the “untameable beast” that the government failed to stabilize despite concerted efforts. It noted food inflation of around 17 per cent – which accounts for nearly 44 per cent of the inflation basket – is a major issue for the government.

It recalled that the 1977 bread riots that broke out in Cairo when the government tried to stop subsidizing it led to the army’s intervention. It said the government refrained from instituting a cut to the subsidy, adding that food riots broke out yet again in Cairo in 2008 and the army once again played a crucial role in reinstating order.
 
“The government would not be able to combat inflationary pressures effectively as high fiscal deficits would only add fuel to an existing fire. Food inflation will remain a considerable worry as supply shocks could occur in several food categories due to the ensuing crisis. The government will have to address inflation, which remains at elevated levels,” it said.

 

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