Egypt’s growing debts cause for concern
Major concerns. People and vehicles are seen in front of the headquarters of the Central Bank of Egypt in downtown Cairo. (Reuters)
2017/10/08 Issue: 126 Page: 19
The Arab Weekly
Cairo - Egypt’s growing debts are turning into a major economic concern amid fears that the country could default on interest payments if borrowing continues at current levels.
“The debts have reached a stage that should be a wake-up call for everybody in economic decision-making circles,” said former Egyptian Prime Minister Ali Lotfy. “These debts will make it difficult for the government to make any investments or bridge the yawning budget deficit.”
Egypt’s central bank said that by the end of the fiscal year 2016-17, which ended last June, foreign debts totalled $79 billion, a 42% ($23.2 billion) increase from the previous fiscal year.
The bank said the debts were within appropriate limits because they do not exceed more than 45% of Egypt’s GDP. However, economists expressed concern, particularly given that Egypt’s combined foreign and domestic debt is 130% of GDP.
Egypt is channelling almost one-third of spending in its budget to servicing debt. This is having a clear effect on development and welfare programmes amid cutting of state subsidies.
With another one-third of the budget allocated to salaries of Egypt’s almost 6 million civil servants, economists warned that Cairo is facing major constraints to development plans.
Cairo is relying on a $12 billion loan from the International Monetary Fund (IMF) to keep it afloat over the next three years. However, the loan term requires that Egypt enact a stringent economic reform programme. Egypt has received the first two instalments of the loan, with a tranche of approximately $2 billion expected before the end of the year.
While this has helped Cairo bankroll development plans and bridge the budget deficit — now at 10.2% — it also adds the IMF to the list of Egypt’s many creditors. As the credit and creditors increase, so too does the fear that Cairo could collapse under the burden of repaying the loans. Some economists said Egypt could reach a point at which it would have to borrow even more to repay loans.
“This is why it is very necessary for the government to stop borrowing and start searching for other methods to bankroll its programmes,” said Farag Abdel Fattah, an economics professor at Cairo University. “These loans come at the cost of the living standards of the people because, instead of spending money on development, the government will have to spend money to repay the loans.”
Egypt has been in debt for decades but in May 1991 it missed an opportunity to restart its economy after the United States and 17 other creditor countries forgave half the $20.2 billion it owed following Cairo’s participation in Operation Desert Storm.
However, corruption, economic mismanagement and regional turmoil meant, rather than building on this debt relief, Cairo accrued additional debt.
By the time long-standing President Hosni Mubarak left office in January 2011 following a popular uprising, Egypt’s foreign debts stood at $36.5 billion. In 2014, Egyptian President Abdel Fattah al-Sisi inherited a foreign debt of $46.1 billion, which increased massively following major economic, political and security challenges.
Egypt’s tourism sector, which contributes approximately 4% of GDP, was depressed through that period, specifically after a Russian passenger plane was bombed in flight over Sinai on October 31, 2015.
The Russian plane bombing, which was claimed by the Islamic State, led many countries to suspend flights to Egypt, depriving the country of revenue and much-needed foreign currency.
Egypt has pointed to an uptick in tourism in 2017, with revenues ($3.5 billion) up 170% in the first seven months of the year compared to the previous year. The number of tourists visiting Egypt this year rose 54%, reaching 4.3 million, after European countries lifted flight suspensions to Sharm El-Sheikh.
“The tourists are coming back and economic reforms are paying off, which will contribute to attracting investments and bringing in foreign currencies needed by the economy to grow,” said Deputy Finance Minister Mohamed Moeit. “If this means anything, it means that we should not feel afraid of the debts as long as our economy stands on its feet and is able to keep moving forward.”