In his book “General Economics Jurisprudence”, first edition issued in 1990, the author Youssef Kamal mentioned the most prominent points of the International Monetary Fund’s prescription for countries to float the exchange rate, raise interest rates and cancel subsidies, and in view of the statement of the Fund’s Board of Directors regarding the approval of lending to Egypt issued on December 16 / Last December, 32 years after the book was published;
We find the same demands from Egypt: a permanent flexible exchange rate, raising the interest rate, and reducing subsidies in all its forms.
In addition to some other demands related to selling assets, reducing the role of the state in economic activity, facilitating growth led by the private sector, reducing expenditures in the budget, increasing social spending, disclosure and transparency;
All of these are demands previously made in the previous seven agreements with Egypt, which began in 1962, and in which the devaluation of the Egyptian pound against the dollar was a common denominator in all of these agreements.
If this is the fund's prescription for treatment, what are the chronic pains of the Egyptian economy?
Here, the deficit in the commodity trade balance comes first as a difference between imports and exports as a result of weak self-sufficiency rates of food, intermediate and finished commodities, a disease that extends from 1940 until now, and did not stop throughout those decades except in 1969 and 1973 for reasons related to equal deals.
Given the large size of the trade deficit, the surplus was absorbed by the services trade balance, the flows of expatriate remittances and foreign aid, to achieve a semi-permanent and large deficit in the current account balance, as well as a real deficit in the total balance of payments.
This was reflected in the increase in external debt, and this led to a continuous decline in the exchange rate of the Egyptian pound against foreign currencies.
Local saving is less than domestic investment
The second chronic problem is the clear deficit between domestic saving and domestic investment, a problem that extends for decades since the seventies of the last century - according to the available data - until now, although its severity has increased during the last ten years, after the gap between the ratio of domestic saving to GDP The ratio of domestic investment to GDP during the first decade of the new millennium ranged between 1.6% as the lowest rate and 6.9% as the highest rate;
The rate increased during the second decade to between 4.1% as the lowest rate and 13.3% as the highest rate, and here the gap reaches in the fiscal year 2020-2021 to 9.2%, as the difference between the domestic saving rate of output of 3% and the domestic investment rate of output of 12.2%. This also indicates that both rates are low compared to many developing countries.
The third main problem is the continuous and increasing deficit in the budget, which has continued uninterruptedly since the fiscal year 1991-1992 until now, which resulted in a continued rise in domestic public debt, and an increase in the relative share of its interests and installments in public spending until it reached 54% in the current fiscal year.
This was reflected in the weak spending on public services, which resulted in a deterioration in the level of health and education services and facilities, and an increase in poverty and unemployment rates.
Raising interest is a cure for a disease that does not exist
If we had mentioned the most prominent chronic problems in the economy and the most prominent features of the fund's treatment prescription, what happened and do we expect to happen with the repetition of the same treatment components with the same chronic problems?
Let's start with raising the interest rate, as the fund sees it as an effective way to withdraw liquidity from the market, to reduce demand;
Thus, facing high inflation rates, which is a remedy that may be suitable for Western societies such as the United States, which provided grants to the public during the Corona virus crisis, caused an increase in demand after the decline in infection rates with the virus, but the Egyptian case is certainly different.
Instead of the Egyptian government providing grants to the masses during the Corona crisis, it compulsorily deducted a percentage from the wages of government workers and pensions, under the name of contributing to facing the repercussions of Corona, just as the Egyptian markets suffer from stagnation before the emergence of Corona, and of course that stagnation intensified with corona.
This was followed by the emergence of other factors that exacerbated the recession even more, including the rise in global prices in 2021, the repercussions of the Russian-Ukrainian war on fuel and food prices, the repercussions of the Central Bank of Egypt’s decision last February to reduce imports, and the dollar shortage crisis.
From here, the fund described the wrong remedy, as the rise in interest rates accompanied by forcing the Central Bank to cancel some of the reduced lending initiatives and transfer the rest of the initiatives to other ministries at higher interest rates;
This made the productive sector suffer from several complex problems, including the shortage of raw materials and production requirements, the dollar shortage, the emergence of the black market on which many price their products, and the high interest rate.
With some banks issuing certificates of deposit with interest ranging between 22.5 and 25%, this has increased the burden of the financing cost that is charged on final products, which raises commodity prices and increases inflation, in a situation opposite to what the fund aimed to raise.
In addition to the preference of some producers to reduce production and direct their money to those high-interest and risk-free bank deposits, which reduces production and opens the way to compensate for that consumption shortage through imports, which are imports coming at high exchange rates, which also leads to an increase in inflation.
Allegations of benefiting exports and investment did not materialize
There are many negative effects of raising interest rates on many sectors, such as non-bank financing, monetary investment funds, the real estate sector, and others, as the frequent increase in interest, which is expected to continue in the coming months, will affect the types of non-bank financing, starting from consumer financing, real estate financing, small and micro financing, financial leasing and factoring. .
Indeed, the value of real estate financing activity declined during the past October and November compared to the same two months of the previous year, and fixed-income cash investment funds witnessed the exit of many individual investors to switch to higher-yield certificates.
As for the permanent flexible exchange rate, it has been associated with a recurring decline in the Egyptian pound against foreign currencies, which increases the cost of imported goods in a society where the industrial sector imports more than 60% of its needs of raw materials, intermediate goods, and investment goods such as machinery and equipment, in addition to the oil that is processed. Importing a third of the country's needs from it, which raises the cost of products and reduces their competitiveness at home and abroad, which contradicts the fund's claims that the depreciation of the Egyptian pound and subsequent licenses for Egyptian products will contribute to an increase in exports.
After the devaluation of the Egyptian pound in 2016, exports did not increase significantly, and their increase in the past year and the previous year was due to the rise in international prices. Egyptian exports also benefited from the repercussions of the Russian-Ukrainian crisis, which increased the prices of natural gas and fertilizers.
The same applies to the fund's claims that the depreciation of the pound's exchange rate will attract foreign direct investment, which was not confirmed by the years following the devaluation of the pound in 2016, with incoming direct investments focused on oil and natural gas.
This is a natural matter, as foreign investment will find an investment climate in front of it that caused a contraction of private sector activity, due to unfair competition with sovereign companies, business figures are imprisoned without trial, and banks compete with the government for its funds to bridge the budget deficit, and the imposition of national fees. Uninterrupted local, high inflation rate, non-investment credit rating, and a negative outlook by Moody's and Fitch.
The increase in the interest rate and the decline in the exchange rate also cause an increase in the budget deficit, as the increase in the relative share of government debt interests and installments of budget spending causes a decrease in the share of the rest of the spending chapters, especially government investments, and the purchase of goods and services necessary for various government agencies, which delays the government’s payment of what it owes. Obligations of the companies dealing with it.
An Egyptian reform program that violates the fund agreement
As a result of all of the above, a number of experts called for a new Egyptian reform program, in parallel with the program agreed upon with the fund over the next four years.
A program that focuses on structural reform and not only on monetary and financial reform. It pays attention to the productive sectors, especially industry and agriculture. It bestows incentives on them and directs them the necessary resources as a societal priority, to provide a tangible aspect of imported products, in a way that reduces imports, increases exports, and reduces the chronic deficit in the trade balance. ;
Which strengthens the position of the local currency against other currencies.
With a review of the national projects that have depleted the country’s dollar resources and increased its external and internal debts, and the gathering of all agencies operating in the country under the umbrella of the state’s general budget in order to achieve the principle of budget unity, and for all agencies – whatever their affiliate – to perform their tax obligations and fees, including It increases the revenues that help increase social spending and support the poor segments, as the budget of a European country is not devoid of subsidies among its expenditures.
A program that targets a low interest rate to encourage producers, just as the euro countries did by reducing the interest rate to zero for years to confront recession and the repercussions of Corona, and encourages local products and gives them preference through government purchases that represent the largest buyer in the markets, and increases sufficiency rates of agricultural products, which reduces imports and increases exports, which is what It will affect employment and unemployment.
This will necessarily help improve incomes and the possibility of increasing savings in the event of price stability, thus providing banks' liquidity to finance local investment, and aims to confront the chronic problems of the economy, thus reducing the numbers of the poor, in contrast to the Fund's programs that practically caused an increase in poverty rates.