Egypt has announced its budget deficit of EL13.761 billion will be financed through loans from local and foreign markets, fueling pessimism triggered by the country's recession.
The announcement was made when the government submitted its new budget for 2000-2001.
Economists in Cairo fear that borrowing from the local market will worsen the existing liquidity problem. Fears of rising domestic debts, however, were dwarfed by the reaction to announcements that the government would borrow from international markets.
Foreign debts have diminished as a result of an economic reform program. Egypt's support for the U.S.-led fight against the Iraqi occupation of Kuwait, led donor countries (including the United States and Gulf countries) to write off 50 percent of Egypt's debt.
Since 1991, when Egypt signed the Paris Agreement with donor countries, debts were reduced as a reward for regular repayment and the government refrained from borrowing.
But government officials now claim that foreign borrowing — as stipulated in the new budget — will not burden taxpayers. Instead, it will be channeled into social and economic development projects needed to realize an annual growth rate of 7 percent.
Minister of Finance Medhat Hassanein recently said that Egypt's domestic debt and foreign debt together account for less than 50 percent of GDP, the accepted level worldwide. Domestic debt stands at EL147 billion and foreign debt is EL35.5 billion while GDP is EL362 billion, according to the ministry.
Hassanein said Egypt must make use of the fact that it is a shareholder in international lending institutions such as the World Bank and the African Development Bank, which provide concessionary loans with extended maturity dates and low interest.
This will not exacerbate the servicing of foreign debt, according to financial experts. Egypt's debt service expenditure stands at EL1.5 billion annually and it can cope with new loans.
The government is also planning to enter the international debt market with the issue of EL500 million ($125 million) in Eurobonds. These bonds mature after 10 years and bear coupons at lower than the interest rates the government would have to pay if it borrowed from the local banks.
"In addition to filling the persistent gap between investment needs and limited funding resources resulting from low savings rates, the expansion in issuing government bonds will help revive the capital market and become the medium by which the Central Bank of Egypt [CBE] will control liquidity," according to a report by the Al-Ahram Center for Political and Strategic Studies.
A percentage of the planned foreign borrowing will be used to settle the debts of public companies. The government has already repaid EL4.5 billion to cotton companies.
Moreover, by tapping the international debt market, the government will encourage Egyptian companies to follow suit in securing similar long-term means of finance, especially since these companies will use interest rates paid on government bonds as a benchmark, said Nashaat Abdel-Aziz, managing director of Egyptian Anglo for Fund Management.
While expressing reservations about the structure of domestic debt, the Al-Ahram Center report warned against the risks of relying heavily on treasury bills as a means of short-term finance, since this would in turn be a burden on the budget, ultimately leading to restrictions on public spending.
Investors' increasing interest in buying government bonds also means the government is acquiring these savings rather than having them directed to productive investments.
While one disadvantage of foreign debt is that economic resources are diverted to international markets, a disadvantage of domestic debt is the imposition of a burden, seldom borne equally by taxpayers.
Concerned about the distribution of debt burden, Sami El-Sayed, professor of economics at Cairo University, said that since the interest rate paid on domestic debt, (an average of 8 percent in the case of treasury bills and 11 percent for treasury bonds) is higher than GDP growth rate— which is 6 percent—this will redistribute national income in favor of subscribers in these papers.
Since no ceiling is placed on the number of bonds to which investors can subscribe, it is those enjoying higher incomes that accrues the interests on those bonds, which the government will have secured through taxpayer money. Thus lower-income groups will be bearing the brunt of this strategy.
While the restructuring of domestic debt is inevitable, it cannot be the final recourse by which the capital market can be activated, nor can liquidity be controlled mainly through open-market transactions.
Out of the EL52.1 billion worth of treasury bonds in 1998-99, only EL11.1 billion worth are currently being traded on the market.—(Albawaba-MEBG)
© 2000 Mena Report (www.menareport.com)
