Economy in a week: Slow growth, no problem, says finance minister

Finance Minister Ahmed Galal explains why the GDP scored a mere one percent in the first quarter, while Prime Minister Hazem al-Beblawi opens up on lowering government subsidies. On a positive note, Egypt’s current account turns positive after eight quarters, while tourism figures pick up in October after a sevem months downfall.

The drop in tourism and exports and tedious development of Foreign Direct Investment (FDI) has been affecting the growth of Egypt’s gross domestic product, although Investment Minister Ahmed Galal suggested in a statement published on Egynews on Wednesday that financial continuity and economic stability in the medium-term could be achieved through the pillars of the economic road map stipulated by Beblawi’s government.

The roadmap anticipates a reinvigoration of economic activity through the steady realization of security and political stability. Galal said in his statement on Wednesday that this alone is a guarantee for growth, and that increase in tourism will follow, alongside government expenditure mostly on construction.

He explained that the 1 percent GDP growth in the first quarter of fiscal year 2013/2014 is not indicative of anticipated growth in the remaining three quarters, as the stimulus package will require time to take effect.

Galal said he anticipates an annual growth for this fiscal year of 3-3.5 percent, affirming that this does not meet the government’s required minimum GDP growth of 4.5 percent, based on concerns of keeping up with population growth in consideration of the economic difficulties of the past three years. He added that although it will take time to achieve a growth rate of 4.5 percent, they have succeeded in putting the foundations in place.

Besides attempting to stabilize the country, the government is undertaking reforms to increase government revenue including property tax, value added tax (which will be put to the public in an opinion poll in January) creating a new law on mineral wealth, in addition to restructuring energy subsidies and reforming public finance management.

Subsidy cuts on the table, again

Beblawi confirmed in a recent interview with the Financial Times that state subsidies would not be removed altogether, but gradually decreased from 25 percent of the state budget to 8-10 percent over a period of five to seven years.

The prime minister emphasized the importance of building popular support and awareness regarding the rationale behind the subsidy cuts. To this end, his transitional government plans to launch a media campaign as the first phase of subsidy reduction commences, Beblawi told the Financial Times.

He also said the government is considering cash allowances to replace subsidies, to overcome the problem of subsidy misallocation.

The Financial Times quotes Galal on the topic, saying, “The problem is not theoretical, it’s practical. How can we find a trusted database to determine who truly earns the subsidy?” he was quoted telling the paper.

According to a study in 2012, the rightful beneficiaries of fuel subsidies in Egypt make up 80 percent of the population, but this group only receives 20 percent of the existing subsidy, while the remaining 20 percent of citizens who should not be eligible receive the lion’s share. Although businesses are major beneficiaries of subsidies, the 2012 study focused only on individual recipients.

Current account turns positive

Egypt’s balance of payments ran an overall surplus of US$3.7 billion for the first quarter in FY 2013/14 (July to September 2013), compared to last year’s deficit of $518.7 million for the same period.

The balance accumulated deficits in both 2011 and 2012, but saw a steep upturn in the fourth quarter FY2012/13 to close off the quarter’s balance at $2.3 billion, and the year’s balance at a surplus of $237 million. The increase mainly came on the back of an influx of $5.4 billion in the last quarter to the capital and financial account.

Between this quarter and the last, the main difference comes from a current account surplus of $757 million, compared to a deficit of $1.6 billion in the previous quarter. The last eight quarters have been registering a negative current account.

The positive current account resulted mainly from an increase in net official transfers from Saudi Arabic and the Emirates — cash and commodities — to $4.3 billion up from $40.4 million a year before.

A small 1.6 percent drop in the trade deficit over the past quarter was another factor contributing to the rise of the current account, as stated by the Central Bank of Egypt in its BOP press release, as imports dropped more than exports.

The nation’s trade deficit stood at $2.45 billion after the first eight months of 2013, a drop of 22.3 percent compared to the same period last year, as imports fell by 12.4 percent.

The Central Bank said that the current account would have presented higher figures if it were not for the dramatic fall in service surplus, which registered a relatively low figure of $135.8 million, compared to $1.6 billion in the same period last year. The driver behind this drop was the 64.7 percent decline in tourism figures, posting $931 million in overall revenue for the quarter compared to $1.6 billion in the first quarter of last year.

October tourism breaks a seven-month downtrend

About 559,000 tourists visited Egypt in October, marking an increase from the previous months of 2013, but with figures still 52 percent lower than the previous October on the back of violent protests that have been making international headlines.

Tourism has been dropping gradually since March 2013, reaching a low in September at 301,000 with average nights spent at 3.8. In that context, October broke the trend as both the number of tourists increased and the length of stay, which was up to 8.6 nights. 

The nights spent by tourists fell 70.4 percent to 3.9 million, compared to 13.2 million a year earlier.

Numbers have been fluctuating over the past three years, with FY2011/2012 marking the lowest at 10.9 million tourists flying in. Up until the end of October 2013, 8.1 million tourists visited the country.

Just days before Christmas and New Year’s, Tourism Minister Hesham Zaazou announced on Monday a campaign encouraging Egyptians abroad to spend Christmas and New Year’s Day in the country, saying it’s important for second and third-generation expatriates to reconnect with their roots.

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