CEO and Deputy Chairman of the investment bank CI Capital, Mahmoud Atallah spoke with Daily News Egypt to discuss the country’s economic performance under recent local and regional developments.
Atallah speculated as to how these developments would affect the country’s budget and how the state’s ability to provide a suitable environment for the private sector suits the government’s goals of reducing the budget deficit and create jobs. What follows is an abridged summary of Daily News Egypt’s conversation with Atallah.
Four hindrances to growth rate
CEO of the investment bank CI Capital Mahmoud Atallah said that 2016 will be a significant year for Egypt’s economic growth. That is because the last year witnessed a good economic performance supported by political stability and the aid that came from Gulf countries. This is in addition to registering high rates of investment and consumption, and a growth of 4.2%. After these positive factors, 2016 comes with some challenges that may hinder the budget’s targeted 5% growth rate.
Atallah noted four challenges facing the Egyptian economy; first among them is the negative performance of the tourism sector. The suffering sector is expected to lose EGP 2bn in revenues, further impacting unemployment rates.
The second factor Atallah mentioned is the deficit of the balance of trade because of the decline in exports by approximately 27%, according to the data of the first quarter (Q1) of the current fiscal year (FY) 2015/2016. In addition, the negative effects caused by the lack of dollar liquidity on the private and foreign investments contributed to a slower growth rate in investment and employment gains.
Atallah mentioned as well the investors’ concern about the political and security circumstances in the Middle East. Due to these factors, the government will be under more pressure to make important changes to face these challenges.
According to Atallah, the most prominent change the government could implement is lowering the pound’s exchange rate against the dollar by approximately 20%, at minimum. Past experience has proven that the 10% annual decrease that Egypt has implemented has not restored investors’ trust in the pound.
He sees that this step would contribute to increasing direct and indirect foreign investments, which were affected in the past period, waiting for a decrease in the exchange rate.
Exchange rate is at the forefront of the private sector’s challenges
Atallah said there are several challenges facing the private sector. At the top of these challenges is the issue of the exchange rate. Attallah said the Egyptian state must alleviate the restrictions imposed on all kinds of foreign capital. He noted that without this step, Egypt will not be able to restore the trust of private or foreign investors, even if the exchange rate against the dollar is reduced by 20%.
He added that there is another challenge represented in the lack of a clear direction for the state’s economic programme.
Atallah speculated that the election of the parliament, after being absent for three years, will provide political support to many decisions that have been delayed in the past years. He expects the parliament to support the decisions on the value added tax, the new labour law, and to liberate the energy prices from government regulation.
He argued that economic reform requires encouragement from the private sector. The state should complete the laws related to improving the investment environment, in addition to enabling opportunities for partnership with the private sector to resolve any conflicts between the state and the private sector.
Atallah suggested implementing a partial privatisation programme for some of the state-owned assets, as a step toward encouraging investment in the vital sectors.
He further noted that the private sector expressed concern over the lack of energy supplies to the industrial sectors. Although the country has recently begun to handle this crisis through the liquefied gas imports, on the ground, these sectors suffered heavy losses that will limit their production in the medium term.
Deficit expected to be at 10.7% in 2015/2016 budget
As for reducing the deficit to 8.9%, EGP 251bn, the CI Capital CEO believes it will be difficult for the government to achieve this goal. He expects the budget deficit to reach approximately 10.7% this year, in light of delaying the financial reforms that would have increased the country’s tax revenues.
Atallah mentioned that the past FY registered a deficit of 11.5%, compared to the target that was 10% of the gross domestic product (GDP).
He added that when looking at the final account of the budget, there will be a gap between the targeted and the already registered deficit, mainly as a result of making less revenues than planned, rather than a result of a significant increase in the expenditures. For example, the government was supposed to collect EGP 30bn through the value added tax; however, the enforcement of the tax was delayed.
EGP 10bn expected decrease in the energy subsidy bill because of oil prices
Regarding the impact of the fall in oil prices on Egypt’s economy, Atallah said the state will work to reduce the allocations of energy subsidies to 30% by 2019. The first increase in the energy price took place in 2014. However, the decline in the international oil prices encouraged the state to delay imposing further cuts to energy subsidies.
He added that Egypt registered a EGP 28bn decrease in the past FY in the energy subsidy bill, where it recorded EGP 72bn instead of the EGP 100bn allocated in the budget for this purpose.
According to Atallah, the current FY will be completely different because the decline in the international oil prices is expected to lead to a limited decrease of approximately EGP 10bn maximum, out of the approximately EGP 61bn allocated in the budget.
He however said this expected decrease is not enough to bridge the budget deficit. Consequently, the state should continue in reducing the energy subsidy. This would contribute to reducing part of the budget deficit and improving the sector’s revenues in general, and would consequently encourage foreign investment in the energy field.
As for the state’s trade balance, Atallah said the decline in oil prices will not have a positive effect on Egypt’s economy in general, especially in light of the local energy crisis.
He noted that the fall in oil prices led to losses of $12bn in the country’s petroleum exports value, 44% of the total export value, while the petroleum imports value declined with by approximately $12bn, as well. Consequently, the decline in international prices has not led to any gains.
EGP 7bn in aid for Egypt this year
Atallah sees that the government worked in the last period to acquire as much foreign aid as possible. The $8bn provided over the next five years by a Saudi fund is the largest of these agreements. Atallah ruled out that the Saudi support would be affected the decline in oil prices, given that the political relations between the two countries have a key role in guaranteeing this aid.
He added that Egypt has succeeded in diversifying foreign funds and aid sources away from a singular reliance on the Gulf. About 60% of aid to Egypt, initially estimated at approximately $24bn over the next five years, will come from international institutions and European and Asian countries.
Atallah stated that the World Bank remains one of the most important sources of these foreign funds, as it increased its aid level to Egypt to $8bn in the next five years, in addition to $3bn to support the budget in the next three years.
The World Bank’s aid is contingent upon continued economic reform that would increase the private sector’s activity.
Atallah expects Egypt to receive approximately $7bn out of the total expected aids this year. However, this number is only enough to cover Egypt’s international dues and some other commitments. It is not enough to build foreign exchange reserves that would support the exchange rate.