Sunday, June 1, 2014

Underlying Strengths of Egypt's Economy

When the rating agencies rate an economy, they look at markers, many of which are evaluated on subjective terms such as the country's political stability, thus can be debated forever without reaching a resolution. But if we leave these notions aside, we can look at other markers that can be measured and assigned a number that means something. These new markers can then be debated on more concrete terms, but because they too need to be interpreted in a context that can lend itself to a certain degree of subjectivity, our debate must be carried on with a sense of humility.

The most telling of the numbers in the eyes of the rating agencies are the twin deficits, as they have come to be called. These are the trade deficit that the nation registers with the rest of the world, and the budgetary deficit that the government incurs. Of course, an accumulated deficit of either kind – called foreign debt and domestic debt respectively – will also become a concern when it goes too high due to a deficit that would have recurred for several years in a row. And this is precisely the twin problem that the rating agencies say is plaguing the Egyptian economy at this time. It is also a refrain that those who write about Egypt keep repeating even when they do not know what they are talking about.

The total debt of Egypt is now close to 80 percent of the GDP which is high but not a killer when compared to say, the USA whose debt has reached 100 percent, and Japan whose debt has reached 200 percent. But that's not the full story because a debt becomes the responsibility of future generations; a consideration that forces us to ask why Egypt incurred its debt in the first place, and what the demographic outlook of the country will be like when the future will be here.

Well, the situation with the Egyptian budget is such that two big items are causing the deficit. The first comes under the rubric of investment; the second under the rubric of subsidies. Having gone too far with the program of privatization, the people of Egypt have asked the government to stop selling public companies, invest money to expand the ones remaining in its possession, and establish new labor intensive companies that will hire some of the unemployed, many of whom are young people.

In addition to that, the nation whose population keeps increasing, is building new cities in the desert to ease the pressure on the agricultural land where the old cities were built long ago and where they keep getting larger by encroaching on arable land. Thus, investment in this area is without a doubt of the kind that will benefit future generations. It all boils down to the current generation doing the work and paying for it by borrowing from the future. This is the right thing to do because it is required; it is reasonable and it is absolutely fair.

How does that compare with the situation in America or Japan? Well, Japan has a population that is shrinking which means that an ever smaller number of people will be asked to pay for a debt that keeps getting larger. As to America, while the population may still be growing, a smaller number of people are participating in the workforce. In addition, the pay scales keep shrinking which means that the money borrowed by today's relatively well to do population will be paid for by tomorrow's poorer workforce; one that also keeps shrinking. This is required; it may even be reasonable but it is absolutely unfair.

Returning to Egypt, some of the money allocated to subsidies goes to reduce the price of food, and some goes to reduce the price of energy. That which goes towards food is infinitely small compared to that which goes towards energy. The problem the government is addressing is being solved in a way not done anywhere in the world. Having studied similar programs, including the Brazilian, the Indian and America's own food stamp program, the Egyptians have devised their own solution. It relies on the smart card through which the execution of the program is monitored with a high degree of reliability thus insuring that everyone in the program is served properly, and that no fraud is committed without leaving an electronic trace somewhere.

When it comes to energy subsidies, we have another story altogether. The truth is that Egypt has vast reserves of oil and natural gas in the ground that can solve the problem through market forces if the energy is extracted and marketed. However, as it happens everywhere in the world, including here in Canada, a tug of war has erupted between the foreign companies and the Egyptian government. It is that the companies took advantage of the political situation in the country to ask for a share of the revenues in the upcoming contracts larger than what they get now, and what they ever got before. Negotiations ensued, and the differences are on their way to be resolved as they always do.

In the meantime, however, the quarrel has alarmed not only the Egyptians but also the Arab Gulf States because of their closeness to their Egyptian “brothers and sisters” as they say, and also because the indications are all around to the effect that Egypt may have not only vast reserves of energy, but that it is floating on humongous pools of oil and natural gas beneath it.

What this means is that if, under the duress of the moment, the country is forced to sell its resources at a fire sale price, everyone in the region will be forced to reduce their prices so as to be in line with those of Egypt … or lose market share. And so, to save their own skins, the Gulf States rushed to support Egypt in its hour of need. Yes, they do it for brotherly love, as they say, but they also do it for self-interest.