- Paying the Ministry of Finance’s overdrawn account, totaling EGP 2 trillion, is an urgent imperative to control inflation rates.
- Hedging against hot money swings and their impact on foreign reserves and liquidity surpluses.
- The exchange market stability signals the start of a battle labeled ‘Providing self-generated income sources for the Egyptian state.’
- I hope we can analyse Egypt’s economic situation avoiding exaggerations that damage the legitimacy of true improvements.
So, let me begin this week’s post by appropriately summarising the recent financial and monetary gains, the most significant of which is the restoration of international organisations’ and foreign investors’ trust in reform efforts.
I think that these achievements are merely the start of a long sequence of difficult shifts aimed at achieving the necessary economic stability. A challenging road that begins with the primary objective of generating revenue sufficient to pay all commitments.
The kiss of life ends when life returns to the patient’s body, determining his health efficiency beyond this point based on procedures undertaken by the patient himself to offer a more stable life.
This directly pertains to Egypt’s economy. The “Ras El Hekma deal,” with its pros and cons, is the miracle that has revived the Egyptian state by quickly providing the liquidity required to undertake a “thoughtful currency flotation” based on targeted future results, topped off by the concept of “making foreign currency available” through official channels.
The closing of this deal prepared the door for significant cash flows from a variety of sources. It has numerous significant implications, one of which is the invitation of foreign investors to acquire state assets worth more than $6.5 billion this year.
I believe that this path will see increased activity in the coming phase, given the strong message sent by the Ras El Hikma deal, which has an initial value of $150 billion, about the magnitude of the gains that investors can achieve in the Egyptian market, whether through the acquisition of existing assets or the launch of new investments and expansions.
The second of these tracks is that the agreement served as the principal catalyst for the implementation of the economic reforms required to activate a number of funding agreements with foreign institutions that had been stagnant for many months.
It began by announcing a $8 billion agreement with the International Monetary Fund (IMF), as well as $1.2 billion from the Fund’s Resilience and Sustainability Facility, a $3 billion loan from the World Bank, in addition to an expected $8 billion arrangement with the European Union.
These agreements are significant not just because they are concessional financing with more flexible terms and a lower cost, but also because they demonstrate confidence that the economy is regaining equilibrium.
The third track stems from the central bank’s bold decision to raise interest rates by 600 basis points all at once, making the pound yield very appealing for hot money (indirect foreign investments in Treasury bills and bonds). We began to see successive strong flows, over the past few days, to exceed offers on the recent auctions of one-year Treasury bills worth EGP 400 billion compared to the value of the offering of only EGP 30 billion.
Also, remittances from Egyptian expatriates have gradually returned to normal levels and are now being processed through official channels after being leaked to the black market by crisis brokers.
The previous tracks, along with the Ras El Hikma deal, will give Egypt more than $50 billion, enough to cover the funding gap for the next four to five years.
‘Egypt is lucky’
All of the aforementioned criteria constitute paths formed by the Ras El Hikma deal. This is not a personal opinion. Rather, it is a vision provided by one of the world’s most influential think tanks, the Chatham House (formally known as the Royal Institute of International Affairs), the British equivalent of the US Council on Foreign Relations. This institute attributed the latest successful steps undertaken by Egypt to “luck,” which played a significant part, noting that “when it comes to financial crises, the intervention of luck is a precious commodity, and Egypt has a lot of it.”
The Institute added that a $35 billion investment from the UAE, combined with a $5 billion increase in the IMF loan, will account for roughly 10% of Egypt’s $400 billion GDP, addressing the dollar shortage in the short term and preventing Egypt from defaulting on its foreign currency obligations.
Meanwhile, in the long run, the Institute sees these factors as insufficient to improve the country’s standing unless officials are smart rather than just lucky. Despite the government’s commitment to some important reforms in exchange for all of the dollar liquidity that has gone in, it is an exaggeration to expect the momentum behind the reform programme to continue, because the Institute believes it is more than just the idea that “a stable currency is an effective way to show a stable country.”
This leads us to the article’s core question: how will we utilise all of the present positive paths, that exist in the short term “kiss of life”, in the transition to a sustainable economic recovery in the medium and long run?
This is exactly what I hope to be implemented immediately. The reform programme’s impetus should extend beyond the bounds of exchange rate liberalisation, ensuring that the US dollar is consistently available through the state’s own capacity.
Twelve objectives
This target is difficult to articulate since it necessitates a major shift in the Egyptian economy’s hierarchy of priorities, which is topped by the following objectives:
First, target inflation with a comprehensive strategy that involves all governmental entities. Inflation is the primary opponent of economic growth, investors, and savers. I do not want to overlook the importance of giving the Ministry of Finance full priority in benefiting from foreign exchange earnings, whether from the Ras El Hikma deal or other sources, to repay the overdraft account in favour of the Central Bank of Egypt, which amounts to approximately EGP 2 trillion and is the primary reason for Egypt’s current high inflation rates, as it is used to cover the budget deficit.
Second, granting the central bank complete independence and liberating it from the restraints of the budget deficit and the incapacity of monetary policymakers to act freely.
Third, rebuilding trust in foreign direct investment by allowing it to transfer earnings in real time, which is the most critical component of any country’s foreign investment policy. This issue should not be overlooked in favour of other considerations.
Fourth, prioritising the availability of foreign exchange required to import production inputs and the requirements for the completion of industrial projects with export potential, while deferring the channeling of any new cash liquidity into infrastructure projects while only completing the existing incomplete projects to benefit from their investment returns during the economic recovery.
Fifth, develop hedging policies against the risks of hot money, the most important of which are entry and exit controls, without any sudden negative consequences that cause the country to fall into crises that would obstruct the course of reforms, while keeping in mind the limitations of using these funds as a component of foreign reserves.
Sixth: Using all of the state’s resources to promote exports, developing an integrated plan that addresses all challenges, and eliminating any bureaucracy that impedes the effectiveness of exports as a key source of revenue for Egypt.
Seventh, adopting a way of thinking that results in immediate economic benefits by completely supporting programs to replace imported goods with local products.
Eighth, hire excellent employees and experts in different government positions and departments, as well as implement new administrative methods for monitoring, control, and assessment.
Ninth, open all sectors to new private investment, from MSMEs to entrepreneurial ventures, as well as medium and large-sized firms, and ensure that the processes necessary to develop these investments go smoothly.
Tenth: Requiring the tourism industry to double the number of tourists in order to generate foreign currency revenue commensurate with Egypt’s status as one of the world’s most important tourism destinations, with one-third of the world’s monuments, the longest beaches, and religious and therapeutic shrines.
Eleventh, adopt all supportive policies to encourage Egyptian expats to transfer their remittances through lawful economic channels.
Twelfth: A complete commitment to applying economic principles to regulate markets, protect consumers, and resist monopolies and greed. Citizens cannot accept these concerns right now.
Finally, education and health are at the top of the priority list since they are essential not only for economic development but also for maintaining political power.
As a result, prioritising human capital investment is critical.
Restoring confidence in the economy’s ability to self-fund and provide the sources of income required to achieve the well-being of its members is a difficult task, and we should not expect it to be accomplished solely through important decisions such as exchange rate liberalisation, the clearance of imported goods stalled at the ports, or even raising wages in all sectors of the state to meet inflation.
Rather, it is done through a long-term struggle led by highly skilled decision-makers and driven by an economic strategy with clear goals and outcomes that seeks to keep the wheel turning without stopping or suffering. The Egyptian people have been through a lot in recent decades, and now is the time for them to reap the rewards without additional delay or new waiting lists.
