News Analysis: Egypt economy still suffers despite decline of foreign debt

The Egyptian economy is still struggling with trade and budget deficits as well as upcoming unpaid dues despite the improvement of the country's credit rating and the decline of its external debts, said Egyptian economic experts.

The Central Bank of Egypt (CBE) has recently announced the decline of Egypt's foreign debts to 41.3 billion U.S. dollars in the second quarter of the 2014/2015 fiscal year compared to 44.8 billion dollars in the first quarter of the same year.

"The Egyptian authorities have recently paid off about three billion dollars of its dues to the external world (in the form of bonds and deposits), which affirms the commitment and ability of the Egyptian economy to pay off its foreign obligations when due," the CBE explained in a recent press release.

Egyptian economic experts, however, believe that the country's economy is still ailing as the payments of foreign debts mainly came from financial aids worth billions of dollars.

"The issue is that the payment of our debts came from interest-free deposits of Gulf states, not from real domestic resources made inside the country," said Ibrahim Nawwar, economic expert and former spokesman of the Egyptian industry and foreign trade ministry.

Payment of foreign debts would indicate real economic progress if it was made through real dollar resources, particularly direct foreign investment or extra exports, but the case is different because Egypt suffers insufficient foreign investment besides a trade deficit, Ibrahim told Xinhua.

TRADE & BUDGET DEFECITS

The most populous Arab country suffers a budget deficit of about 31.5 billion dollars for the 2014/2015 fiscal year, representing 10 percent of the gross domestic product, which the government attempted to minimize through economic reforms including large energy subsidy cuts that led to price hikes in oil products and electricity.

"Despite the economic policy based on austerity and subsidy cuts, the improvement of foreign debts is merely a number as it is based on financial aids rather than economic development," Nawwar told Xinhua, describing the general economic condition as "alarming."

The trade deficit, representing the gap between the country's imports and exports, has mounted in the first half of the 2014/2015 fiscal year to reach 20.2 billion dollars according to a recent CBE report.

Experts believe that the trade deficit "swallows" a large part of the foreign currency reserves and contributes to shortage of dollar resources required for investors and importers.

"We cannot judge the whole economic performance by improvement of one indicator like the decline of foreign debts," said Ehab al-Desouki, head of the Economy Department of Cairo-based Sadat Academy.

He added that Egypt's exports and its trade deficit have not improved, stressing that "real economic improvement should be reflected in improvement of the people's standard of living along with an economic growth connected with justice in distribution."

DOLLAR SHORTAGE & INVESTMENT

In 2011, Egypt had 36 billion dollars of foreign currency reserves at the central bank, but the country lost about 20 billion dollars of them over the past four years of political turmoil and instability.

Egypt has recently received six billion dollars of aid sent as deposits from the Gulf states to assist the country's ailing economy, raising the foreign currency reserves to exceed 20 billion dollars.

The Gulf states, including Saudi Arabia, the United Arab Emirates and Kuwait, had previously assisted Egypt with more than 12 billion dollars after the overthrow of former Islamist President Mohamed Morsi by the military in July 2013.

The CBE adopted a new policy to limit dollar trade in the black market, limiting dollar deposits to 50,000 per month, which crippled investors and importers who need foreign currency to maintain their businesses.

"The investment environment in Egypt is still not positive which affects the volume of foreign investments in the country," Desouki told Xinhua, noting that the recent improvement of investment laws is insufficient.

UPCOMING DUES

Egypt had to pay over five billion dollars of its foreign debts over the past few months, including a deposit of 2.5 billion dollars to Qatar and about 1.4 billion dollars to Paris Club as installments of Egypt's scheduled debts to creditor states.

The country is planning to pay back one billion dollars to Qatar by October 2015.

"The debts might increase again as Egypt has to pay next July and January about 1.4 billion dollars as installments to Paris Club and two billion dollars annually to Gulf states starting from 2018," said economic analyst and former assistant to International Monetary Fund (IMF) executive director Fakhry al-Fiky.

"The six-billion-dollar Gulf deposits the CBE got in July 2013 were all spent by January 2014 and will also be paid back with a 2.5 percent interest rate," Fiky told Xinhua.

The expert noted that 2019 will be the most difficult for Egypt as the country will have to pay its annual external dues besides the interests of about eight-billion-dollar investment certificates bought by Egyptians to invest in the national Suez Canal expansion project.

HOPE

After the Suez Canal expansion project is completed next August, and with more security and stability that might refresh tourism in Egypt, experts hope that dollar resources in the country will increase over the coming few years to be able to enjoy economic growth while paying off its external dues.

"We hope the annual revenues of the Suez Canal could rise from 5.3 billion to 13 billion dollars and tourism will be revived to get extra couple of billions in the near future," Fiky said.

According to the expert, the payment of foreign debts is very important as it led to the improvement of Egypt's credit rating testified by main institutions like Fitch and Moody's, which all add to the country's credibility worldwide.

"There is hope provided that Egypt sticks to a well-studied, transparent and detailed economic reform program, which the country is currently lacking," Fiky told Xinhua. Endit