#Egypt faces long-term risk as it props up economy with aid

Egypt is engaged in a high stakes gamble, using billions of dollars from Persian Gulf allies to stimulate the economy and keep its streets calm in the hope that investors and tourists will return.

The country’s finances are in a precarious state with a massive deficit but the government, armed with billions of Gulf petrodollars, has rejected the conventional wisdom of austerity measures prescribed by the International Monetary Fund (IMF).

If the plan fails, a new government expected to be elected early next year could find itself deep in debt, its currency overvalued and its economy in crisis.

“Now we are living on a ventilator, [with] aid from neighbouring countries and that is understandable in the midst of a meagre tourism industry and reluctance of direct foreign investment,” said Sherif Samy, the head of Egypt’s Financial Supervisory Authority.

Saudi Arabia, Kuwait and the United Arab Emirates pledged more than $12 billion (R123.7bn) in aid to Egypt after the army toppled president Mohamed Mursi of the Muslim Brotherhood on July 3 after mass protests against his rule.

“Nobody can live, in the long term, on aid,” Samy said. “It is not sustainable.”

Since the 2011 uprising that toppled Hosni Mubarak, Egypt has burned through $20bn in foreign reserves, borrowed billions from its allies and racked up billions in debt to foreign oil firms to prop up its currency.

The Mursi government worked out a deal with the IMF that included austerity measures, higher taxes and a reduction of subsidies that eat up a quarter of the budget. It was never implemented.

The army-backed government, well aware that IMF conditions could cause a huge popular backlash before elections, has avoided austerity measures. In a country where protests have forced out two presidents in three years and sent the economy into a tailspin, the interim leaders, appointed after Mursi’s ousting, have internalised this risk.

“The government is faced with a big challenge, especially as it faces coming elections within months,” Samy said.

“They must not be excessive with the social subsidy programmes and wage and pension increases that might titillate the feelings of ordinary citizens in the short term but have a severe impact on the state budget and on the deficit.”

The government says it is on track to rewrite the constitution and hold parliamentary and presidential elections early next year, part of a political roadmap the army announced after it removed Mursi.

Some businessmen say there are signs that investors and tourists will return once the political turmoil subsides. However, many investors are worried about security and the way Egypt has treated businessmen since the uprising.

State companies that Gulf investors bought under the Mubarak administration have been renationalised and property sales renegotiated after private lawyers challenged the transactions in court.

The interim government has been taking steps to reassure investors.

“We are revising all economic legislation,” Investment Minister Osama Saleh said. “The bids and tenders law, which resulted in many complaints against investors, has been amended so that those who sign contracts with the government will be safe.”

Egypt’s tourism minister said last month that the government planned to launch a marketing campaign to attract 13.5 million tourists next year.

If the measures fail, Egypt could find its finances in even worse shape than before Mursi’s ousting, forcing it to turn to its Gulf benefactors for more aid. But Egypt may not be able to count on its Gulf allies forever.

When an Egyptian delegation visited the Gulf last month, the United Arab Emirates Deputy Prime Minister Mansour bin Zayed al-Nahayan said Egypt could not live on Gulf aid alone to fix its economy.

http://www.iol.co.za/business/international/egypt-faces-long-term-risk-as-it-props-up-economy-with-aid-1.1605015#.UoJGEvlmhcZ

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