airo / Dubai: After Egypt's new finance minister took office last month, one of
his first acts was to downgrade the government's assessment of its finances. Hany Kadry Dimian said this year's
budget gap would be about a third bigger than his predecessor estimated.
He was acknowledging what may become the
biggest threat to Egypt's economic recovery after years of political turmoil: a
rising public debt burden.
Since Islamist President Mohammad Mursi
was ousted last July, billions of dollars in aid from allied governments in the
Gulf have eased most of Egypt's pressing economic problems. Its currency has stabilised, fuel
shortages are less severe and the government has resumed spending on economic
development projects.
Investors are celebrating; stocks have rocketed
to levels last seen before the 2011 revolution while the yield on Egypt's $ 1
billion (Dh3.7 billion) sovereign bond due in 2020 hit 5.33 per cent this week,
its lowest level since December 2012 and down a whopping 5.8 percentage points
since mid-2013.
But Egypt's state finances are still
getting worse, and a Reuters analysis suggests they will continue deteriorating
into the second half of the decade, at the very least. In that time, the ratio of public debt
to gross domestic product may rise above 100 per cent, a level viewed as
potentially dangerous by many economists.
In the worst case, the debt could become
so large that servicing it eats up an ever-increasing share of government
spending, creating a vicious circle. At
a minimum, the debt could crowd out spending by the private sector, adding to
Egypt's political tensions by slowing job creation.
"Egypt is spending more than it can
borrow given the low gross domestic product growth rates," said Mustafa
Bassiouny, Cairo-based economist at Signet Institute.
"It's about having faith that you can
repay ... Egypt would have to grow around five or six per cent in the next
three years and that's highly unlikely. It
hasn't yet reached a dangerous point, but it's on a very dangerous trajectory.
"
The political turmoil has worsened the
situation by more than halving the GDP growth rate, hurting tax revenues. With private investment weak because
of political and economic risks, the government is having to try to revitalise
the economy with state spending packages - further adding to the debt.
Although Gulf aid is keeping Egypt afloat
and more is expected in coming months and years, it is adding to the debt, not
reducing it. Of $ 10.7 billion
received since last July, $ 6 billion was lending which will need to be repaid
rather than grants of cash or petroleum products.
A simple spreadsheet model of Egypt's
public debt, created by Reuters, suggests it will be several years before the
ratio of debt to GDP, which was 89.2 per cent in the fiscal year to last June,
levels off and starts to fall.
Dimian said real GDP would grow about 2.3
per cent this fiscal year. If the
economy keeps growing at that speed, and other factors such as the budget
balance and interest rate paid on the debt stay the same, the debt-to-GDP ratio
will rise above 100 per cent in the fiscal year to June 2017, the model shows.
Relying entirely on faster economic growth
to solve the problem doesn't look feasible. Even
if GDP growth jumped next fiscal year to 4.3 per cent - Egypt's average since
2000 - and stayed there, the debt-to-GDP ratio would keep rising through the
end of this decade, though at a slower rate.
That means state spending growth will have
to be slowed and revenue growth accelerated in coming years. But the structure of spending makes
cuts very difficult.
Out of 717 billion Egyptian pounds (Dh378
billion) of projected state spending in the current fiscal year, 25.4 per cent
is earmarked for interest payments on the debt.
While the government has succeeded over
the past nine months in bringing down the average interest rate it pays, by
conducting fresh borrowing at longer maturities and borrowing Gulf money at
preferential rates, there may be little room for further such savings - at
least while debt remains so high. dubai
debt recovery
