Egypt on a Mission to Restore Confidence in its Economy

Egypt will push ahead with plans to phase out a costly energy subsidy, the country’s finance minister says, as Cairo seeks to boost spending on social programmes and bring down its budget deficit.

Hany Kadry Dimian, appointed finance minister last year, said further cuts to fuel subsidies would be implemented “at the latest” during the fiscal year beginning in July, after the halving of oil prices since the summer provided “room to manoeuvre”.

Cairo aims to almost completely end fuel subsidies within five years and use the savings to raise spending on health and education. The 30 per cent cut to the energy subsidy in July saved an estimated $7bn, the equivalent to 2 per cent of GDP.

“Our main mission is to restore confidence in the Egyptian economy,” he said in an interview with the Financial Times.

“We are basing our economic policy primarily on structural reforms. That is why we started by front-loading our reform agenda to send a clear message to the international community and investors.”

The subsidy cuts are part of a package of reforms that also includes introducing a value added tax during 2015, aimed at widening the tax base and narrowing the budget deficit. Economists forecast a deficit of 10 per cent of gross domestic product in this fiscal year, which ends in June, down from 12.8 per cent in the previous 12-month period.

Egypt’s economy was deeply damaged by the prolonged turmoil that followed the 2011 revolution, which scared away investors and tourists, increased poverty and unemployment and led to a stalling of growth. However, in recent months — despite a renewed crackdown on dissent by the government of former general Abdel Fattah el-Sisi — businesses have reported a diminished perception of political risk and more optimism about a return to stability.

Gulf states extended billions of dollars to prop up Egypt’s economy after the 2013 ouster of Mohamed Morsi, the elected Islamist president. The cash injection helped prevent a financial crisis and gave Cairo breathing space to plan a turnround.

Officials now pin hopes for the revival of foreign investor interest in the country on a high-profile conference Cairo will host in March during which the government will present billions of dollars worth of infrastructure and energy projects.

“We are presenting well-packaged bankable projects in several areas, many of them under public private partnerships. The conference is an element in a broader and deeper vision to place Egypt on international investors’ map,” said Mr Dimian.

The central bank has allowed the Egyptian pound to fall to a record low against the US dollar in what is seen as a way of reassuring investors fearful that the currency is overvalued.

Rising confidence in the economy has allowed Egypt to consider a return to the international debt market with a planned issue of a $1.5bn eurobond, the first since the 2011 revolution.

“It is part of putting Egypt on the radar screen of investors. Plus there is a need to rebuild our yield curve which serves as a benchmark for Egyptian institutions,” said Mr Dimian of the bond, which is due to be launched after the March conference.

Economic growth rose to 6.8 per cent in the first quarter of the fiscal year compared with 2.2 per cent for the entire previous year. The improvement was driven by construction, telecoms, manufacturing and, “to a lesser extent”, tourism. The finance minister said he expected second-quarter growth of “north of 4 per cent”.

EFG Hermes, a Cairo-based regional investment bank, forecast growth for the current fiscal year of 4.7 per cent. In a note to clients, the bank said growth would be driven by fiscal stimulus initiated by the government, including the mega-project to widen the Suez Canal.

Mr Dimian said that apart from an arrangement with the United Arab Emirates for the provision of $8.7bn of petroleum products on easy terms, this year’s budget did not rely on financial support from the Gulf states.

“We can only restore confidence by building on reforms and not on debts grants and financial assistance,” he said. “But I do not imagine that if Egypt needed any extra help from Gulf states, they would be late in granting it.”

Source: The Financial Times