Chief financial officers and heads of treasury sectors at banks (dealers) are facing the economic crisis more than anyone else. Thanks to the nature of their work, they realise what is happening in the global economies and the challenges facing them.
In Egypt particularly, dealers play an important role in employing banks’ liquidity in local and foreign currencies locally and abroad. Moreover, they are the main drivers behind most of banks’ profits. Therefore, their role is significantly affected by the successive crises facing the Egyptian economy since January 2011, and even earlier.
Thus, the importance of polling dealers emerged to give us a better viewpoint on the challenges facing the Egyptian economy, as well as their opinions about the solutions that could be developed to counter their impact, on top of which are the exchange rate problems and the scarcity of foreign reserves.
For the dealers, achieving sustainable growth and solving the shortage of foreign reserves are the most important challenges facing Egypt in the current, and even the coming, period. In addition, Daily News Egypt in this report sheds light on several other challenges, such as tackling corruption, which discredits investments in Egypt.
Achieving sustainable growth is the main challenge facing Egyptian economy: Youssef
The main challenge currently facing the Egyptian economy is how the economy could pursue a pathway towards self-sustained growth, said Tamer Youssef, head of treasury at a foreign bank operating in the Egyptian market.
This challenge requires a structural adjustment that will result in changing several policies that directly affect citizens, such as restructuring the subsidy system and tax and tariff reforms, among others, explained Youssef.
Youssef said that economic restructuring and its success are linked to several economic, social, and cultural factors.
“Egypt’s economy, like the economies of all developing countries, suffers from relative scarcity of resources and inefficiency managing them, whether allocative inefficiency or productive inefficiency, in addition to population growth, which represents a fundamental problem for development and the growth process,” Youssef said.
He pointed out that the demographics have a direct impact on the growth process, which has come to rely more and more on culture, creativity, and innovation away from traditional methods.
The investment atmosphere in Egypt suffers from bureaucracy, corruption, and numerous cultural barriers, in addition to investment-repulsive practices in the absence of legal legislation that attracts investment, according to Youssef.
Moreover, Egypt also suffers from low domestic savings rates—which are necessary for finance growth— increasing domestic debt, and a widening budget deficit, as well as up surging trade and the balance of payments deficit and erosion of the state’s foreign exchange reserves. Collectively, these issues drive the value of the national currency to lower levels.
“Approaches to restructuring economies worldwide have changed over the last century,” Youssef noted. He explained that the 1945-1980 approach was the dominant approach; the policies were inward looking and interventionist. This was followed by a new different approach during the 1980s, which adopted more market-based policies, before the Asian Tigers experience emerged.
Finally, Youssef adds that there is the Washington consensus, which describes the conditions that are believed to be necessary for the economy of developing countries to take off.
These conditions were widely accepted by the World Bank and the International Monetary Fund (IMF).
The main elements are adopting sound fiscal policies and avoiding large budget deficits. In addition, they relied on adopting sound monetary policies with the goal of maintaining low and stable inflation, exchange rates to be determined by market forces, and targeted protection for specific industries, said Youssef.
“However, there is the signing of the IMF loan, reforming the subsidy system, the passage of the Civil Service Law, applying the value-added tax, and leaning towards a more flexible exchange rate policy, in addition to regulating the import process and supporting small- and medium-sized enterprises. But would this be enough to achieve sustainable growth in Egypt?” Youssef asked.
Youssef answered his own question, saying that no doubt that these bold measures will lead to a positive improvement in economic indicators, as happened in the 1990s. “However, they will not result in launching the economy towards sustainable growth,” he said. “The decision-maker should observe Egypt’s experience in the 1990s.”
Sustainable growth needs economic measures alongside policies to control population growth, focus on population quality, change the prevailing culture, and develop it, as well as raising management efficiency of state resources and promoting the citizen for active participation of state-building, Youssef stressed.
“We can only achieve this through a clear vision, transparency, and political reform towards further democratisation,” he said, “High-quality education would meet the current and future growth requirements.”
Lack of foreign currency resources, administrative corruption are biggest challenges facing Egypt: El-Menilawy
Osama El-Menilawy, the assistant general manager of the financial sector at a private bank operating in Egypt, believes that the lack of foreign currency reserves and the rampant administrative corruption in state agencies are the most dangerous challenges facing Egypt.
He added that other problems and obstacles facing various sectors in the country can be solved easily, but the economic problems are different due to their complexity and seriousness that could affect the state as a whole.
El-Menilawy pointed out that the state should adopt procedures to reduce unemployment, the state budget deficit, and local debt, as well as face administrative corruption. We should also be aware that these procedures would be “painful”, but it is inevitable, so applying these reforms will require a wide partnership between the community and the government.
Every Egyptian citizen is aware of the current crisis facing Egypt due to the exchange rate between the US dollar and Egyptian pound as well as other foreign currencies against the local currency. In addition, the US dollar exchange rate has reached about EGP 13, and possibly even more, on the informal market, which has led to a high inflation rate and the increase in prices on all goods and services.
Regardless of the news circulated by the media about the high foreign exchange rate against the Egyptian pound due to external plots or US dollar holders’ reluctance to sell their money, the law of supply and demand remains the overriding fact, which is not in favour of local currency, according to El-Menilawy.
He said that restoring foreign currency resources needs two solutions in parallel. First, we should launch an industrial and agricultural revolution to increase exports and enter new foreign markets, and this should be a long-term plan. Second, we should attract more foreign direct investment.
He noted that the industrial and agricultural revolution requires great effort and strategic planning and should be a national goal that needs government and popular support, regardless of the ministers and presidents. This goal should extend to future generations.
According to El-Menilawy, attracting foreign investment requires easing investment procedures and laws that have became unsuitable for the current period. Only one authority should be entitled to make decisions regarding investments, he said, adding that in the UAE it takes less than a week to establish a new company.
We should also give enough guarantees for investors to provide them with foreign currency, both in case they want to transfer their profits abroad or exit from the Egyptian market, he said.
Building confidence needs a long-term strategy, said El-Menilawy.
He said that the tourism and petroleum sectors are considered the fastest sectors in the provision of foreign currency for Egypt, but they both need a lot of effort to ensure security in its comprehensive sense.
El-Menilawy added that those working in the tourism sector should be aware of the importance of improving services so as to ensure the constant flow of tourists and the longevity of their stay.
With regard to the petroleum sector, we should increase contracts with foreign companies to explore more oil fields, but we should also consider the rights of future generations in the country’s wealth.
El-Menilawy also stressed the importance of reconciliation with exchange companies, adding that only the violators should be punished. This sector is considered the second state source for foreign currency after banks. He suggested forming a protocol that ensures full transparent cooperation between the exchange companies, banks, and the government. This protocol would prevent speculations and ensure maintaining the real price of the Egyptian pound against foreign currencies.
In regards to administrative corruption, which has affected all economic and political aspects of life in Egypt, El-Menilawy said we should take immediate and definitive procedures to punish all corrupted officials and replace them with trained cadres to prevent an administrative vacuum.
Corruption affects not only citizens, but also harms the reputation of investment in Egypt, he said. It also harms the evaluation of the economy as every piece of information is evaluated and translated into numbers, which helps investors choose the countries that have elements of success, according to El-Menilawy.
He noted that the disclosure of some of the corruption cases recently, like that of wheat corruption, gives a glimmer of hope for the elimination of corruption in Egypt.
Adjusting exchange market, rebuilding reserves, controlling inflation are continuing challenges year-to-year
A full year has passed since the Euromoney conference of 2015, and challenges are still facing the Egyptian economy, the Central Bank of Egypt (CBE), and the banking sector.
These challenges are growing more severe while the economic situation has hardly improved, especially with the continued scarcity of foreign reserves, according to analysts.
The Egyptian market witnessed a large devaluation of the Egyptian pound against the US dollar on the informal market in the period between September 2015 and September 2016. The price of the US dollar on the informal marked reached EGP 13, although it declined in the past few weeks to about EGP 12.5 after the announcement of an initial deal with the International Monetary Fund (IMF) to receive a loan of $12bn to finance the Egyptian economic reform programme.
According to Ezz El-Din Hassanein, a banking and economic expert and general manager at an Arab bank in Egypt, the decline in foreign exchange reserves limits the CBE’s ability to intervene in the market to support the Egyptian pound against the US dollar. It also extends the CBE’s role in meeting the importers’ needs of US dollars, which has led to a significant increase in the informal market presence and increased the US dollar’s price against the Egyptian pound.
This rise in the price of the US dollar led to a wave of successive increases in commodity prices. The overall inflation rate rose to about 14.8% by the end of June 2016, which is the highest level of inflation seen in recent years.
This high inflation rate is one of the biggest challenges that face economic growth, and has placed a large burden on monetary policy makers in Egypt, especially with the presence of higher inflation expectations with the application of the value-added tax happening in October.
It is known that controlling inflation is the main objective of the CBE’s monetary policy, according to the head of the money management sector and foreign branches in one of the state banks.
He explained that the CBE has the tools that help it achieve this goal, such as interest prices that allow the CBE to control the size of liquidity available in the market. He added that the CBE is doing everything in its power to contain inflation, but it has to be supported by the government.
The government is responsible for the discipline of goods prices in the market. It is also responsible for taking decisions and actions that help the CBE manage its monetary policy and implement its objectives, according to the source.
Foreign exchange reserves witnessed a significant decline from September 2015 to July 2016, and fell to about $ 15.5bn. This was before the UAE deposit of $1bn in the CBE in August to support reserves.
According to the head of treasury at a bank operating in the Egyptian market, rebuilding the foreign exchange reserves is not the responsibility of the CBE but rather that of the state.
The source explained that the CBE manages the reserves and takes actions to help develop it; however, it is not responsible for providing foreign exchange resources that build reserves. Also, the CBE is not responsible for the decline in reserve balances, which are used for adjusting to the foreign exchange market, covering import demand, and repaying the state’s debts and expenses in foreign exchange.
It is known that Egypt’s foreign exchange reserves are built from foreign exchange resources of the Suez Canal income, remittances of Egyptians working abroad, and tourism. This is along with foreign direct and indirect investments in the Egyptian market.
According to the source, the CBE will not be able to build foreign exchange reserves once again unless foreign currency resources return to the same level as before January 2011. This depends on the state’s status in the coming period, especially after the completion of parliamentary elections and the return of economic activity.