Cairo -
Egypt is struggling to get rid of the debts that have accumulated rapidly over the past few years, after they reached unprecedented levels, and if they worsen and are not alleviated, they threaten to fall into the trap of defaulting on debt payments.
Egypt knocked on all doors to provide foreign currency to meet its obligations and avoid the possibility of default, including borrowing, but its costs have become exorbitant in light of the turmoil in global markets, which prompted it to sell various shares in state-owned assets, including companies, factories, banks and seaports.
Among those chapters is a proposal put forward by Egyptian Foreign Minister Sameh Shoukry during his speech before the United Nations General Assembly - a few days ago - in which he referred to the negative effects of the Russian-Ukrainian crisis, and the continuation of the negative effects of the Corona pandemic, which increases the burdens on developing countries, not Especially with regard to sovereign debt and the exacerbation of public budget deficits.
Shoukry called for the importance of the developed countries’ response to the demand of launching a global initiative between creditor and debtor countries, aimed at “debt swaps” and transforming the bulk of them into joint investment projects that create more job opportunities and contribute to achieving positive economic growth.
Although Egypt is not alone in conflict with debt - like most emerging countries - the probability of its failure to pay its debts rose to its highest level since 2013, which made the cost of insuring its default jump - earlier - to its highest levels ever.
In light of the delay in negotiations with the International Monetary Fund, investors are closely monitoring the economic situation in Egypt with the high risk of debt default, according to the Enterprise website, noting that warning indicators have begun to appear regarding Egyptian debt.
Economic experts and analysts summarize the reasons for the pressures that Egypt is facing with the exacerbation of the external debt in the following reasons:
Global commodity prices have risen as a result of the Russian-Ukrainian war.
The rise in the US interest rate to counter inflation and the rise of the dollar.
Investments worth $22 billion exit from the local debt market.
Widening current account deficit and increasing pressure on the local currency.
debt swap
To find out the term "debt swap", the economic expert Dr. Ibrahim Nawar explained that it means "the creditor obtains real assets of the debtor state in exchange for its debts or part of it, due to the debtor's inability to pay. This policy has been used and continues for decades with the aim of mitigating debt burden from developing countries.
However, he indicated, in statements to Al Jazeera Net, that this policy also has a negative aspect related to the decline in state resources;
Because it will lose part of the revenues it was getting from the assets that it exchanged for debts, and consequently the size of the national economy will decline.
Nawar believed that the Egyptian administration is trying to avoid falling into the trap of defaulting on debt payments.
Egypt has been involved in the debt swap mechanism, to a limited extent, with some European countries - such as Germany, Britain and Italy - since the beginning of the new millennium, and is still continuing, to provide financing for development projects in favor of some sectors such as education, environment, energy, water quality improvement and other priority projects.
Foreign Ministry Spokesman Ahmed Abu Zeid says in a televised interview that #Egypt is proposing a global initiative for debt relief and solidarity between developed and developing countries to help overcome the current economic crisis pic.twitter.com/pQRjNRNHKk
- Al Jazeera Egypt (@AJA_Egypt) September 28, 2022
For her part, Minister of International Cooperation, Dr. Rania Al-Mashat, announced that the German Development Bank made available 41 million euros within the debt swap program for the Ministry of Education and Technical Education, to implement the comprehensive technical education initiative in Egypt.
Minister Shoukry's call is consistent with Egyptian President Abdel Fattah El-Sisi's call for Gulf countries to convert their deposits with the Central Bank into direct investments, which some considered a shift in Egypt's economic policy towards maximizing direct investment opportunities instead of relying on deposits to secure cash reserves.
El-Sisi said - during his interview with a number of media professionals in Sadat City, north of Cairo - last June, "We are trying to make these deposits investments, and we have many projects. Egypt has 100 million people and many opportunities, whether as a joint investment or a single one."
direct investments
The lecturer at the Faculty of Business Administration at the American University in Cairo, Hani Genena, considered that “the introduction of the debt swap mechanism is an attempt by the Egyptian government to reschedule some debts by converting them into investments. and reduce the debt bill.
He explained - in statements to Al Jazeera Net - that there are financial benefits on Egypt estimated at about 40 billion dollars during the year 2022/2023, and indicated that the debt swap mechanism depends on the transfer of ownership of the shares of some companies in the country to the creditor countries - and this is considered a direct foreign investment - or By creating new companies.
Geneina expressed his belief that the debt exchange will be within the framework of selling state-owned assets, denying at the same time that there are fears of completing this initiative called for and urged by Egypt.
Because there are important sectors in the country that are owned or controlled in part by foreign companies, such as the cement and communications sector.
He expressed his belief that as long as the sale will take place in part, there will be no concerns, but he stressed that the cause for concern is that the sale process will take place at prices lower than the fair and real price, wondering what the new partners will do with the investment returns, whether they will be transferred abroad or re-injected. and exploited at home;
Because the weakness of this initiative is the transfer of profits abroad, as he put it.
How big is the debt crisis?
Egypt's external debt has increased fourfold over the past few years, reaching $157.8 billion at the end of last March, amid the continuation of the borrowing process in recent months from the World Bank, the European Investment Bank and others, as well as continuing negotiations with the International Monetary Fund to obtain a new loan.
The share of creditor countries in the total debt is not small, as its distribution according to the lending agencies is shown as follows:
$52 billion from regional and international institutions, most notably the IMF and the World Bank.
$36 billion from 22 countries.
$29 billion in bond issuances in foreign markets.
$12 billion from foreign and Gulf Qatari banks.
26 billion short-term debts from countries and regional institutions.
In order to know the size of the financing gap that Egypt suffers from, it needs to collect $41 billion to pay off the current account deficit and due debts by the end of 2023, and it faces the risk of declining its foreign exchange reserves if it does not obtain new loans, in light of a wave of investment flight worth 22 billion. dollars this year, according to government data.
The country's foreign exchange reserves have fallen by about 20% to $33.14 billion this year, due to higher commodity prices, capital outflows and rising borrowing costs.
Dramatic drop in the pound
On March 21, 2022, the Central Bank of Egypt allowed a new devaluation of the currency to about 18.15 per dollar from its previous level of 15.60 pounds against the dollar, a drop of more than 15%, before continuing to decline to levels of 19.60 pounds, with the continued devaluation of the pound gradually to Unknown number.
The shortage of dollars has caused a crisis for importers in Egypt due to import restrictions.
President Sisi touched on the crisis that afflicts importers, and confirmed in a speech - during the opening of some projects a few days ago - the government's intention to remove obstacles facing the local industry, including the problems of importing raw materials and production inputs, within a month or two.
The Egyptian government hopes to reach an agreement to obtain a loan from the International Monetary Fund within a month or two, and its size has not yet been decided, according to the statements of Finance Minister Mohamed Maait.
But regardless of the size of this loan, it gives a certificate of confidence to the Egyptian economy, and thus more direct and indirect investment funds can be attracted.
Alternatives Package
The Minister of Finance revealed that his country had held discussions with some rich Asian governments, such as Japan and China, on obtaining affordable loans as well as studying a package of alternatives, to try to obtain cheap financing.
Among those alternatives is offering stakes from 10 state-owned companies on the stock exchange, and raising up to $6 billion, before June of next year, by selling stakes in successful state-owned companies, according to the Ministers of Finance and Planning.
The government is counting on the success of the “Proposals” program to raise $40 billion over 5 years, which comes in the context of the state’s commitment to regulating its ownership in a number of sectors, providing a greater opportunity for the private sector in some projects.
Egyptian Prime Minister Mostafa Madbouly launched the "State Ownership Policy Document", on June 13, which includes sectors and industries that the government plans to exit or increase its share in in order to increase opportunities for private sector participation in the economy, as it represents a message of reassurance to the local investor. And an element of attraction for foreign investment, and also contribute to enhancing the confidence of international institutions.