Egypt: Capital injection

To help offset a rising budget deficit – amid falling foreign investment resulting from recent political upheaval – Egypt is looking for international funding. The economic effects of events of early 2011, though predictable, have prompted some short-term concerns over public financing.

There is no doubt that the long-term benefits of the uprising in February have the potential to provide a tangible boost to Egypt’s socioeconomic indicators. However, the temporary disruption to the economy nonetheless had an impact on forecasts for 2011. While the low levels of foreign investment and underperformance of major economic earners such as tourism were widely anticipated, inflation is also on the rise, linked to the weakening Egyptian pound, higher oil prices and imported inflation at a time of globally elevated commodities prices. With food staples out of the reach of a growing number of Egyptians, the government is asking for international assistance in filling its coffers to stave off additional social unrest.

In mid-May, the IMF announced that Egypt was looking for $10bn-12bn in financing from international lenders up to mid-2012. “They’ve approached bilateral and multilateral partners, including the IMF, to provide the financial support for what is their home-grown programme,” Caroline Atkinson, a spokeswoman for the IMF, told international press.

She added that an IMF team will soon go to Cairo to discuss lending options but declined to cite a figure the agency would be able to lend. “The size and scope of fund support will be defined as discussions progress,” Atkinson said.

In late April Egypt’s finance minister, Samir Radwan, indicated that the country was seeking $3bn-4bn from the IMF to cover the gap caused by the budget deficit, which is likely to reach some 10% of its total national output in the coming fiscal year. Egypt is also expected to seek financial assistance from its neighbours, including the Kuwait Fund for Arab Economic Development, media reported.

Social welfare concerns were one of the main drivers for the political upheaval of early 2011, but with Radwan saying that the budget deficit is likely to increase to 9.4% of GDP in 2011-12, up from 8.5% this fiscal year, the slashing of social programmes may be necessary if significant international funding does not materialise.

Foreign investors withdrew en masse during the unrest, and the government has dipped into its coffers to offset capital outflows. Between December 2010 and April 2011, international reserves dropped $8bn to a three-year low of $28bn, although the September parliamentary elections and November presidential elections may help reassure investors.

Speaking to international press, John Sfakianakis, the chief economist at Saudi investment bank Banque Saudi-Fransi called the drop in reserves a wake-up call for the government but predicted, “Now that there is a little bit more clarity due to the announced parliamentary elections, there should be a little bit more moderation in capital outflows.”

The Egyptian economy, which had seen strong expansion in recent years, proved resilient through the global slowdown. GDP growth fell to 4.7% at the height of the crisis in 2008-09, then rebounded to 5.1% in 2009-10. The revolution, however, has dealt a more severe blow: between January and March 2011, the economy contracted by 7% over the same period in the previous year, and the IMF has predicted that the annual growth rate will slow to 1% this year. The Egyptian government forecasts that growth in 2010-11 will be 2.5-3%, compared to a projection of 6% before the upheaval, and that it will see a 4% expansion in 2011-12.

Tourism – traditionally a major breadwinner, accounting for 11% of GDP in 2010 – is one area that has taken a hit. Local press reported the minister of tourism, Munir Fakhry Abdel Nur, as saying in May that the country had lost LE13.5bn ($2.3bn) since January 25 and that hotel reservations in the main tourist areas had dropped by 15%.

According to the Central Agency for Public Mobilisation and Statistics, consumer inflation reached 12.1% year-on-year (y-o-y) in April, up from 11.5% in March. Food and drinks were the greatest source of inflationary pressure, with prices for these commodities rising 21% y-o-y in April, up from 20.5% the preceding month.

Given the low winter crop output of the US and China, the UN’s Food and Agriculture Organisation has forecast global food prices will rise this summer. This could be bad news for Egypt, which imports nearly half of its food supply. Luckily, the domestic wheat crop has proved strong this spring, with the US Food and Drug Administration (FDA) predicting a record harvest of 8.7m tonnes for Egypt in 2011-12. “The agricultural sector has provided a ray of sunlight in a generally poor, post-revolution economic environment,” the FDA’s Cairo attachés wrote in a May report.

Strong fundamentals propelled the Egyptian economy in the years leading up to 2011, and should continue to do so as the country returns to normality. A capital injection from international donors and upcoming elections would provide the signs of stability needed to woo back foreign investors.