Egypt: The right gamble

The interim government is trying hard not to alienate the poor … but more daring actions are needed to revive the economy – Published on Al-Ahram weekly online, by Sherine Abdel-Razek, Sept 25, 2013.

“High expectations are one of the problems facing the cabinet of Hazem Al-Beblawi,” says Sherine Al-Shawarby, professor of economics at Cairo University. “The public seems to think that a cabinet appointed after the second revolution in three years can work miracles overnight.”  

Egypt’s economy has faced turbulent times since the 25 January Revolution. Economic indicators have headed south, except for prices and unemployment. With foreigners shying away from visiting or investing in the country major sources of foreign currency have dried up, draining foreign reserves to the extent that Egypt’s ability to cover imports of basic food commodities is now threatened.

“Two months after the cabinet was sworn in it is clear the government is struggling to meet expectations yet it continues to flirt with the people, adopting policies that while they may sound popular in most cases make no economic sense,” says Al-Shawarby.

Last week the cabinet decided to raise the minimum wage for public sector workers to LE1,200 starting from January 2014. Currently it stands at LE700. Two weeks ago officials were hinting that it could be raised to LE1,000, trailing a figure that many expected would be endorsed. The extra LE200 took everyone by surprise.

There have been other socially friendly moves. All additional school fees for students in government schools have been scrapped. State owned cooperatives are offering staples at discounted prices.

“Why are we burdening an already ailing budget with more expenses?” asks Al-Shawarby. She had expected, instead, that the cabinet would make use of the patriotic spirit in the streets by persuading people to increase productivity, linking any pay increases to increased output. “It was a golden chance to do so,” she says.

A leading Egyptian industrialist who employees thousands of workers argues that politically-driven policies will inevitably backfire.

“Employers will recruit less people as the cost becomes higher. Instead of recruiting two workers at the current LE700 level they will employ one,” he says.

The latest available figures put Egypt’s unemployment rate at 13.2 per cent compared to 9.8 per cent in early 2011.

Inflating wage bills by LE15 billion would have been understandable if the payroll then included more workers or better qualified ones able to increase productivity, says the industrialist, but “what is being done is not a means to realise social justice, it is an indirect way of providing unemployment benefits to healthy young workers.”

“Wages are not like pensions. They must be linked to productivity. If there is to be a minimum wage there must also be a minimum level of productivity level per worker.”

Whether the minimum wage should be applied to the private sector is currently being studied.

Hany Genena, head of research at local investment bank Pharos, believes that meeting the aspirations of workers is essential. “The number and frequency of sit-ins and protests organised by workers has reached record highs. The cabinet had to absorb this rage by promising better salaries.
In doing so it has headed off further losses caused by work stoppages.”

Al-Beblawi’s cabinet has announced that LE22.3 billion has been earmarked to stimulate the economy. It plans to inject short-term liquidity into the economy by paying arrears owed by the government to contractors, and stimulate growth in the medium term by investing heavily in infrastructure. The strategy is to pump in money to create jobs which will then stimulate both private and public spending and push growth rates.

“Such expansionary policies will widen the budget deficit if there is no increase in revenues to compensate for increased public spending,” warns Al-Shawarby.

Tax revenues, she points out, have suffered because of the economic slowdown, making the government’s deficit reduction target — from 14 per cent in 2012/2013 to nine per cent in 2013/2014 — impossible to achieve.
“How are they going to finance all these plans?” she asks. “ I am worried that they might start printing more money. Already I get my salary each month in new bank notes. If this is the case, the effect will be disastrous.” She added.

The CBE, says Genena, has been printing money to cover the deficit for a while now. He estimates that an additional LE126 billion has been put in circulation. “This is not a scary scenario. Lots of countries resort to this approach. Inflation is not going to be a problem. The inflation rate is under control and the timing was on Egypt’s side. Prices worldwide have been falling since the beginning of the year.”

Indeed, the inflation rate fell in August to 9.74 per cent from 10.28 the previous month.

Genena disagrees with Al-Shawarby’s assertion that the government lacks a clear plan or set of priorities. Its actions have made it clear that the government is determined to support the pound and reduce the budget deficit. The stimulus plan, combined with reduced interest rates, will encourage investment, reducing cost of borrowing in an attempt to push growth and increase revenues.

The government has lowered interest rates twice since August, cutting deposit rates to 8.75 per cent and lending rates to 9.75 per cent. As a result the after tax borrowing costs of Treasury bills and bonds fell from 15 per cent to 10 per cent on average.

“This alone will save LE40-45 billion in the coming fiscal year, more than enough to cover both the LE22.3 stimulus plans and the LE15 billion cost of the increased minimum wage,” says Genena.

Genena also approves government moves to limit demand for the dollar. “Together with the flow of Gulf financial this policy has succeeded in pushing down the dollar exchange rate to LE6.9,” says Genena. The dollar rate reached an all-time high of LE7.9 on the black market in the month before Morsi’s ouster.

The industrialist is far less happy. With 60 per cent of his production targeting US and European markets, a strong local currency is not even a mixed blessing … //

… (full text).

Links:

Mid-East peace talks: is there hope? on Al-Ahram weekly online, by Al-Sayed Amin Shalabi, Sept 25, 2013;

Hidden reasons, on Al-Ahram weekly online, by Amany Maged, Sept 25, 2013;

NSA’s Spying On Metadata Violates Our Freedom of Association, on Washington’s Blog, by blog owner, Sept 28, 2013;

The Ultimate Financial Security: 18 Steps You Can Take to Prepare Yourself for the Next Economic Meltdown, on Wealth Daily;

The Big Picture, Barry Rithholtz’ economic blog;

(see also: Welcome to our new blog: politics for the 99%).

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