After the tumultuous events that led to the ouster of Hosni Mubarak from the presidency of Egypt in February 2011, the country remains amidst a protracted transition with significant economic ramifications. There are a number of uncertainties on the political front, the most important of which is the new constitutional setup that will formally define the division of power between the Parliament, the government, and the president. At the moment, tensions stem above all from the ongoing presidential campaign and the standoff between the elected Parliament and the military-led government.
But as much as the political disputes dominate the headlines, equally thorny challenges exist in the economic sphere. Economic growth is expected by the IMF to stall from 1.8 percent to an almost anemic 1.5 percent this year while the budget deficit is expected to reach some 10 percent of GDP. The political situation has resulted in an enormous strain on the country’s foreign reserves as tourism has taken a major hit and trade flows have been adversely affected. Since the ouster of Mubarak, the country’s reserves have plummeted by more than 50 percent to a total of$ 15.1 billion as of March. This is barely enough to cover three months of imports, a figure regarded by many as the absolute necessary minimum. By contrast, the Central Bank has spent an estimated $ 21 billion to defend the exchange rate since the onset of the crisis. This has not been sufficient to prevent persistent downward pressure on the Egyptian pound which is currently subject to a managed exchange rate regime. Although actual depreciation has been limited to 4 percent since the beginning of the year, market expectations are pointing to a far sharper plunge of close to 20 percent.
One of the main near-term challenges for Egypt comes from likely delays to a proposed $ 3.2 billion loan facility from the International Monetary Fund which was expected to be signed by May 15. The package is widely viewed as an essential step in stabilizing Egypt’s economy, partly because a number of other bilateral support measures likely hinge on its successful conclusion. The current government has put the country’s needs for external funding at $ 11 billion over the coming two years. The government’s ability to raise a significant proportion of this on market terms is in doubt as the yields on Egypt’s US dollar bonds are nearing 7 percent and the overnight deposit rates stand at 9.25 percent. Moreover, Moody’s and Standard & Poor’s have over the past year and a half lowered Egypt’s credit rating four times to B2 and B, respectively. Beyond this, the ability of the country’s banks to absorb more debt is also being questioned. In spite of the tightening constraints, concrete assistance has been very limited, although Saudi Arabia has reportedly begun to transfer the funds for a $ 1 billion deposit. Egypt has also secured a $ 1.2 billion three-year facility from the International Islamic Trade Finance Corporation.
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NOTE BY THE EDITOR: If we are talking only about interest bearing loans, of course we need to worry.