Patrick Werr: Egypt’s economy has seen better days – and worse

It has been a quarter-century since the 1991 crisis, and once again Egypt is on the brink of financial disaster. Will another white knight come along to rescue it?

The Egyptian economy, bad as it may seem now, has seen much, much worse.

In one of my first round-ups on the Egyptian economy, soon after Reuters transferred me to Cairo in 1990, I quoted the Egyptian head of a joint venture bank as saying:

“We’ve been hearing for 20 years that Egypt had reached the end of its rope, but something always came along to save it. This time I can’t see anything coming along.”

It was true: the economy at the time was a complete disaster. As of July 1990, Egypt had US$50 billion in foreign debt, its budget deficit was more than 8 per cent of GDP and banks were refusing to lend the government more funds. Plus, Egypt faced a cut-off of aid from its main backers, the United States and France.

Under a 1975 amendment to the US Foreign Assistance Act, countries more than a year in arrears on military and economic loans would lose all further American aid, except for food assistance. Egypt had missed a $140 million debt repayment to America in September 1989, and aid was due to be cut off in two months.

Egypt was also behind in debt repayments of up to $200m a year to France, its second-biggest creditor, which also threatened to cut off aid.

The president Hosni Mubarak was forced to fly to the Arabian Gulf every few months to ask for help to import wheat. Just a month earlier, he had persuaded Saudi Arabia to donate another 200,000 tonnes so Egypt could keep its subsidised bread programme afloat. At the time, $1 fetched 2.92 Egyptian pounds at the official rate and 3.10 pounds on the black market, a gap of about 10 per cent.

But then something did come along, almost miraculously, to save the economy.

The Egyptian banker’s quote was published on July 17, 1990. Sixteen days later, Iraq invaded Kuwait. Cairo agreed to send troops to help liberate the invaded country, and the US quickly cancelled $7bn in military debts and Arabian Gulf states cancelled another $6.5bn in debts.

The Paris Club of creditor nations agreed to reduce the remaining $36bn still owed by about half over three years, provided that Egypt reach an agreement with the IMF to straighten out its finances, and on January 28, 1991, Egypt committed itself to the classical IMF remedy of privatisation, liberalising trade and freeing up currency and interest rates. It also implemented a sales tax. For the next seven years or so the economy boomed.

It has been a quarter-century since that crisis, and once again Egypt is on the brink of financial disaster. Will another white knight come along to rescue it?

The economy is now in one heck of a mess. The country’s main foreign exchange earners continued to collapse in the first quarter of this year, or barely hold their own, according to the balance of central bank payments data released this month.

Tourism revenue plunged to $550m from $1.4bn a year earlier, petroleum exports fell to $1.1bn from $1.5bn, and remittances from workers abroad slipped to $4.2bn from $4.8bn. Suez Canal revenue, non-petroleum exports and foreign direct investment all edged up, but not by much. In the meantime the country is importing about $1bn in natural gas a month to keep the lights on.

The domestic economy is not doing well either. According to the purchasing managers’ index, private business activity has contracted in every single one of the past nine months. The budget deficit in the year that ended on June 30 was 11.5 per cent of GDP, one of the highest among the world’s larger economies.

The government has been relying on Gulf aid, borrowing from banks and pure monetary creation to finance the deficit, but these options seem to have run their course.

The economy is on the brink of disaster, but as in 1990, it has come along with a credible solution. The cabinet on Tuesday evening revealed that the white knight will be none other than the IMF.

Under an agreement the government is finalising, Egypt will receive $7bn a year over three years, with an annual $4bn coming from the IMF and another $2bn to $3bn from the World Bank and international bond issuers. A preliminary IMF agreement could be signed within weeks, according to press reports.

The agreement will involve an economic restructuring package that will include reducing energy subsidies, a value-added tax, limits to civil servants’ pay and the complete or partial privatisation of state-owned banks and holding companies. And eventually it will almost certainly entail a substantial devaluation or even flotation of the Egyptian pound.

If this comes to pass, it will be the best economic news the country has had in years. Perhaps even a quarter of a century.

Patrick Werr has worked as a financial writer in Egypt for 26 years.

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