News Analysis: Egypt keen to revive economy along with tough reforms

The Egyptian economy is hopeful and likely to rise after the 12-billion-USD initial loan deal with the International Monetary Fund (IMF) despite the expected tough economic reforms that will include subsidy cuts and extra tax, said Egyptian economic experts.

Egypt has been struggling to survive a sharp economic recession that developed over the past five years of political turmoil and relevant security issues, leading to the decline of tourism, exports, foreign investments and foreign currency reserves.

CURRENCY CONTROL

The foreign currency reserves at the Central Bank of Egypt (CBE) declined since the 2011 uprising that toppled former president Hosni Mubarak from 36 billion U.S. dollars in early 2011 to 15.5 billion dollars as of end of July 2016 after the country recently paid about 2 billion-dollar foreign debts.

The country is currently witnessing the largest dollar hike and the biggest exchange rate gap in its modern history after one dollar reached about 8.87 Egyptian pounds in the official market and varied from 12 to 13 pounds in the black market.

"I believe Egypt does not have an economic problem, but it has a basic issue of efficiency in running foreign currency affairs that created the black market and raised the inflation rate," said Rashad Abdo, economics professor at Cairo University and also head of the Egyptian Forum for Economic and Strategic Studies.

He argued that the dollar shortage led importers to buy high rate dollars from the non-official market and to raise the prices of their goods, noting the IMF loan is expected to help filling in the gap and controlling the currency exchange market.

"The IMF loan will definitely help, first by providing the 12 billion dollars needed to boost the economy and supporting other loans from the World Bank and the African Development Bank, and second by giving a testimony that Egypt adopts a good economic reform program," the economics professor told Xinhua, adding this will encourage investments in Egypt.

Despite economic hardships, Egypt has been working over the past couple of years on simultaneous mega infrastructure projects seen by experts as necessary for future investments, including new power stations, new tunnels at the newly-expanded Suez Canal, a siphon carrying water from the Suez Canal to Sinai for the development of the peninsula, the reclamation of 1.5 million acres of lands, the construction of one million apartments for the youth and the establishment of 7,000-km new roads.

"A country with an ailing economy cannot work on all these national projects at the same time. We just need to adopt efficient currency policies and to maintain a social safety net to protect the vulnerable during economic reforms," the professor said.

TOUGH REFORM

Although tough, most economists believe that cutting subsidies as an integral economic reform procedure is a step in the right direction that has been delayed by Egyptian governments for decades to avoid public anger amid expected price hikes.

Egyptian Finance Minister Amr Garhy said in late July that the economic reform program was solely set by the Egyptian government, noting that Egypt has been challenging a budget deficit varying from 11 to 13 percent of the country's gross domestic product over the past few years due to higher expenditures and lower revenues.

The country's budget deficit exceeded 35 billion dollars in the outgoing fiscal year 2015/2016.

"There is no disagreement on the necessity of the economic reform recipe. However, some mistakenly believe the subsidy cuts are related to subsidized foodstuffs, while they are mainly concerned with fuel and energy subsidies," said Gamal Bayoumi, head of the Arab Investors Union.

The economist explained that the energy subsidies, which consume two-thirds of the total subsidies in the country, represent a burden to the general budget and that cheap fuel for example should not be provided to diplomatic missions, vehicles with over 2,000 CC, intensive energy-consuming businesses, etc.

"If accurately implemented, the reform procedures will not include harm to the poor. Meanwhile, we hope that part of the IMF loan will be used to support the programs of the Social Solidarity Ministry that reached so far about 1.5 million poor families, i.e. about 6 million persons, which is a good thing," Bayoumi told Xinhua, adding that providing social protection for the lower-income people will contain the social effect of reforms.

In order to limit the budget deficit and to increase revenues, Egypt introduced a value-added tax that Bayoumi explained as a better and fairer copy of the sales tax as it is paid for each stage of production instead of getting the tax after the end of production.

Bayoumi, also chief of Egypt-Europe Partnership Unit at the International Cooperation Ministry, pointed out that the reform program could be domestically done, but doing it through the IMF guarantees will have two advantages.

"First, it shows that the reform policies are made according to consultation with the world's largest financial institution. Second, this institution will provide 12 billion dollars that will be followed by around 10-billion-dollar loans from the World Bank and the African Development Bank," he told Xinhua.

Egypt received over 20 billion dollars in aid and investment as well as oil supplies from friendly oil-rich Gulf States led by Saudi Arabia, excluding Qatar, following the military removal of former Islamist President Mohamed Morsi in mid-2013.

"We surely face a crisis, but it is largely manageable if taken earnestly. There's hope in the economic reform program provided the social dimension is considered. I am optimistic about it," the economist concluded. Endit