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Egypt’s mega projects from rhetoric to reality

Egypt's plan to fund a host of huge infrastructure projects is risky and puts an even tighter squeeze on the economy.

The Suez Canal at Port Said. Demotix/Valentina Perniciaro. All rights reserved.

Several weeks ago, the Egyptian government, headed by Prime Minister Ibrahim Mehleb, announced the launch of a series of mega projects with the aim of improving Egypt’s economy, which is in dire straits. 

These projects include but are not limited to: the Suez Canal axis development, the north coast development project, the golden triangle and, last but not least, infrastructure and road renovation projects. Previous governments either ignored such projects as they unrelentingly pursued speculative neoliberal economic policies, or failed to implement them as a result of poor planning and a lack of executive decisions. 

Either way, such projects have been postponed for more than 60 years, since Nasser’s era. And with the Egyptian economy failing, an economic overhaul is necessary on all levels. The three most vital ingredients for this much needed economic renovation are: a stable source of foreign currency inflow, geographical redistribution of the main economic and business hubs (which will eventually help with population redistribution), and a total renovation of the country’s infrastructure.

It is hard to disagree that this is what Egyptian ministers should be working on, but one can objectively remonstrate about the way such projects are planned, funded, and implemented. Indeed, the projects have great potential in terms of both success and failure. If the government can make accurate plans, find creative funding methods, and is realistic with regards to the implementation time frame, these mega projects could be a great success.

But they come with serious risks. Revenues will not be realised for at least ten years; large levels of funding are required; and on an operational level, it is usually too late to fix mistakes that might arise because of inaccurate estimates or out-dated studies.  

The chances of success are limited. The government would have to keep the economy up and running at the same time, by investing in micro projects, the private sector, and labour intensive sectors (to encourage employment), through funding by public and private banks. In other words, in the current economic context, the mega projects are caught in the economic paradox that the government cannot pursue them for lack of available resources of effort, time, and money. No government of an emerging economy with such limited resources is able to move in all directions at the same time, and Egypt is no exception.

This dilemma is clear when we have a detailed look at Egypt’s liquidity position. Total banking assets (local currency only) have reached almost EGP 1.53 trillion as of July 2014, distributed as follows: EGP 416 billion as credit facilities (loans, 26.50 percent of total assets), EGP 720 billion as securities portfolios (government treasury bonds and bills, 45.8 percent of total assets), EGP 112 billion as reserves (7.14 percent total assets), with the remaining 20 percent distributed between cash and other assets.

These figures explain the ‘liquidity squeeze’ that the banking sector is currently suffering. Almost 73 percent of total banking assets are already occupied in credit facilities and securities portfolios, leaving only 27 percent of banking assets free for investment.

Banks are already staggering under the huge burden of the government budget deficit (EGP 250 billion), of which they funded 50 percent for the previous fiscal year (2013/2014), with the Central Bank of Egypt funding the rest. The total loans to deposit ratio for local currency reached 38 percent, which is a significant decrease from 50 percent in 2009. This drop is partly due to the credit tightness that banks are enforcing, but mostly due to the continuous increase of the budget deficit, which consumes a large part of the loans that should be directed to the private sector.

In the upcoming period, banks should aim to attract more deposits, whether by volume (value of deposits) or by increasing the number of bank accounts (currently 10 million). Part of this will be an increase of investment in the private sector, through an investment in businesses and projects to help drive economic growth in the short term. On the other hand, the government must try to decrease the budget deficit, mainly by widening the tax base so that budget deficit funding through banks decreases.

Any further allocation of deposits into long-term revenue projects would negatively affect the liquidity position of the banking sector. This was evident in the funding of what was supposed to be only one phase of the Suez canal project, when bank deposits witnessed a decrease of EGP 32 billion during September, of which EGP 26.5 billion were invested. This denotes that almost 42 percent of the canal project was funded through individuals’ and institutions’ investments.

The government has said that it is trying to attract money outside the banking system and that this should not overly affect the bank deposits. But this safe zone amounts to only EGP 285 billion according to CBE figures, which is considered minimal compared to the size of the mega projects. Even if the projects succeed in attracting the whole sum, the additional funding must be absorbed from the bank’s deposits sooner or later, which will prevent the country from reaching the economic growth that is desired in the short run.

Given the scenario outlined above, I believe that mega projects planned by the current government should not be funded internally; in fact domestic funding of such projects should be the last resort and only considered when all other options fail. This is not only because our liquidity status is tight, but also because any domestic funding will not require feasibility studies or due diligence, which exposes the projects to more risk.

The question we should ask ourselves here is why put Egypt’s economy in a possible critical situation when there are other alternatives? One of those alternatives is Export Credit Agencies (ECA) funding. For example, the Egyptian government could apply for the accreditation of the Suez Canal project from Germany’s ECA, Hermes, which would then ask for feasibility studies to guarantee (at least to a certain extent) that it can be successful. The ECA can accredit such projects regardless of the country's credit rating. Once it does, it calls for funding agencies and foreign contractors to implement the project at considerably low interest rates.

There are numerous types of funding that more or less work in this same way. Having a watchdog ensures that the government and people are paying for something with a well prepared study, increasing its chances of success. In addition, it results in more transparent accountability, aiding public governance as well as helping to fund projects without squeezing domestic liquidity.

Without such carefully considered measures, Egypt increases the possibility of larger government debt, in the event that the project does not yield its potential, while misdirecting our domestic liquidity into pools unsuitable for the current situation. If this happens, the upcoming generation will face suffering similar to the one our generation is witnessing, a debt expense that encompasses 25 percent of government expenditures. Hopefully, on an economic level, this regime will not repeat the same mistakes as previous regimes.

This illustrates the importance of civil society in Egypt, for civil society in advocating this idea could put pressure on the government to redirect its vision in the upcoming period – with the hope that for once, the right tools will be developed for the renovation of Egypt's economy, which strives towards a balanced plan that would cause the least burden on future generations. 

Note: figures mentioned in this article exclude the Central Bank of Egypt assets, and are only in local currency. There might therefore be minute discrepancies, since the aggregate financial position of banks is only available with the inclusion of both local and foreign currencies, and some calculations had to be made in order to exclude foreign currencies.

About the author

Noaman Khalid is an economist at CI-Capital Asset Management, as part of the fixed income and money market strategy team. He has a degree in economics from the American University in Cairo, where he was president of the Corporate Governance Club. He worked part-time as a junior economist at CI-Capital Research in 2012.


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