Egyptian Prime Minister Atef Ebeid has announced a nine-month deadline for the government to repay LE25 billion in accumulated debts to the public and private sectors. An average sum of LE2.5 billion will be repaid every month starting in May, Ebeid said in a statement after a series of high-level meetings headed by President Hosni Mubarak this week. "The government will take steps to end stagnation and to stabilize the financial and credit markets," Ebeid said after a meeting with a visiting International Monetary Fund [IMF] delegation.
The action came after recession and a liquidity squeeze forced market transactions to grind to a near halt.
President Mubarak has formed a task force representing the National Investment Bank, the Central Agency for Mobilization and Statistics and the Ministry of Planning and International Cooperation to determine the full volume of government debt. "Real resources" - mainly privatization proceeds, taxes, custom tariffs and oil revenues - will be used to repay the debt. The 2000-2001-state budget, which is currently being debated by parliament, will make specific allocations needed for debt repayment.
Although these specifics have not yet been announced, state revenue will presumably account for the larger part of the repayment allocations. Ebeid is predicting an increase in the annual income from oil to around LE3 billion. The government is also expected to speed up the privatization process, starting with the partial sell-off of the telecommunications sector and internal trade companies.
As a result of launching development projects over the past years, the government accumulated a large debt volume owed to private and public sector construction companies as well as the national electricity companies. Government debts to the contracting sector alone amount to LE22 billion, causing this sector to fall into a vicious circle of borrowing from banks in order to fulfil commitments and meet payrolls.
The banking sector has been blamed for over-extending credit to construction and non-productive projects. As part of the government plan, the banking sector will reschedule the debts owed by the private sector and decrease interest rates. The lack of liquidity has been compounded over the past years by a high demand on the US dollar and Egyptian pound exchange difficulties, forcing the government to draw on its hard currency reserves which have fallen from over $20 billion to the current $15 billion.
Inter-bank rates had risen two months ago to an unprecedented 17 percent, leading the Central Bank of Egypt (CBE) to reinforce liquidity by re-purchasing treasury bills (repos). The intervention of the Central Bank in the financial market through repurchasing agreements has exceeded LE10 billion during the past year. The liquidity squeeze and subsequent recession have been attributed to the government's sluggishness in injecting money into the economy. "It is normal for any economy to have fluctuations in liquidity," Hassan Abbas Zaki, a board member of the Central Bank and former minister of the economy, told Al-Ahram Weekly.
"When the volume of money in circulation falls or rises, the Central Bank must inject the needed money or retract the excess. It is a question of timing. The matter was exacerbated because it was not dealt with at the right time."
The recession is exacerbated by stocks of inventory accumulated by the private sector, estimated at approximately $8 billion, and which will have to be sold at low prices in order to activate the market. The government announced that it is looking into ways of encouraging the private sector to market its inventory. The banks had extended large amounts of credit to the private sector to fund real estate construction and the import of cheap Asian products, resulting in over-supply. Demand for expensive real estate in the new cities has not met investors' expectations and, as a result, constructing companies are
defaulting on their loans, compounding liquidity problems for the banking sector.
But although the liquidity problem is the most pressing in the short run, there are other deep-rooted causes for the current recession. The government and private sector have opted for large-scale, rather than medium and small, enterprises. According to Minister of Economy and Foreign Trade, Youssef Boutros Ghali, Egypt has repaid LE8.4 billion of debt owed to domestic companies. The government has said it would spend LE2.5 billion a month on debt repayment in an attempt to boost liquidity. The government owes LE25 billion to Egyptian companies.
The liquidity squeeze peaked in April and was the most serious problem faced by Prime Minister Atef Ebeid's government. Conditions have eased since then, with the depletion of the country's foreign exchange reserves slowing down. The year-old shortage of pounds intensified in April when interbank rates peaked at 17 percent. Since April the rates have stabilized at between 8 percent and 12 percent. Many analysts have blamed the pound crunch on big businessmen defaulting on debts. An Egyptian court in June convicted several bankers for lending funds to clients without proper guarantees. In 1994-95, loans of $370 million were made by the five banks, of which only $115.6 million was repaid. —(Albawaba-MEBG)
© 2000 Mena Report (www.menareport.com)
