Monday, October 23,  2017

Economy

Egyptian Aid: An Economic Vision

BY Khaled Mamdouh

What Sheikh Hassan is basically proposing is to increase the amount of funds that the government owes its citizens; even though the government has previously failed in investing the money it has borrowed from its citizens.

 


Recently, there has been much debate about the initiative put forward on Egyptian TV by Sheikh Muhammad Hassan. The initiative, which aims at doing away with US aid, was called "Egyptian Aid".  The Sheikh called for contributions from Egyptian citizens in the amount of the total value of US aid to Egypt and he vowed publicly on a “Studio 27” broadcast: "I swear by God and it is my responsibility before God that the Egyptian people will collect a hundred times the trivial aid that the U.S. has been giving us." 



 

Sheikh Hassan’s proposal is no more than a transfer of funds from the accounts of individuals to the account of the government, with no added value whatsoever to the economy and no addition of new capital into the market

In the brief discussion below I will try to provide a simplified economic perspective on this initiative, which would be classified as economic mumbo jumbo by any student of economics who has studied principles of macroeconomics.



 

First, what Sheikh Hassan is suggesting is simply a redistribution of the savings of Egyptians. Egyptians' savings are in principal either deposited in banks or invested in small projects. Sheikh Hassan’s proposal basically transfers and places part of the savings of Egyptians under the control and at the disposal of their government. Therefore, he provides nothing additive to the Egyptian economy since, from the perspective of macroeconomics, his proposal is no more than a transfer of funds from the accounts of individuals to the account of the government, with no added value whatsoever to the economy and no addition of new capital into the market.



 

The Egyptian economy is in dire need of foreign currency through foreign aid, assisted loans, and direct foreign investment; a matter Sheikh Hassan does not consider in his initiative to replace US aid

Second, the Egyptian economy is in a highly critical stage of stagnation. In such conditions, governments are required to reduce taxes in order to increase liquidity in the markets and get the stagnant economy moving forward. What Sheikh Hassan’s initiative is essentially proposing is similar to a tax hike, with the difference that in this case it is an optional tax, but it will have the same economic impact as a tax hike in the sense that it will exacerbate the problem due to the withdrawing of liquidity from the markets and transferring it to government to cover the budget deficit.



 

Third, among the most critical problem currently facing the Egyptian economy is the massive decrease in foreign currency reserves. The reserves slumped to $18 billion in November 2011 after having reached $36 billion in December 2010. Hence, the Egyptian economy is in a dire need of foreign currency, which can only be supplied by foreign aid, assisted loans, and direct foreign investment; a matter Sheikh Hassan does not pay any heed to in his initiative to replace US aid; which the Egyptian economy needs mainly to cover the deficit in foreign reserves.



 

[Asking] Egyptians to collect an amount equal to US aid, [is] in fact exacerbating the problem of low liquidity because [the] initiative is simply reducing the capital in the market that is available to finance spending and investments

Fourth, in December 2010 the liquidity surplus exceeded the hundred billion pound mark. It then dropped to less than half a billion in December 2011; therefore, the Egyptian economy mainly suffers from a massive decrease in liquidity. When Sheikh Hassan steps forward to ask Egyptians to collect an amount equal to US aid, he is in fact exacerbating the problem of low liquidity because his initiative is simply reducing the capital in the market that is available to finance spending and investments on new projects. Instead, he is diverting these funds to plug budget deficit and to support a failed government. This will lead to higher interest rates, a decrease in investments, and a deficit in the financing of, and investment in, projects, and will lead to an increase in inflation.  



 

Fifth, it is known that the rate of domestic savings during the last ten years ranged between 18-19% of the gross domestic product (GDP). In order for Egypt to achieve the significant economic growth necessary to create enough jobs for the populace, the investment rate needs to be between 30-35% per year for at least the next ten years. This means that Egypt suffers from an investment gap of about 15% of its GDP, a gap that can only be bridged through loans, aid, and direct foreign investment. The initiative of Sheikh Hassan, since its scope is confined by the same rate of national savings, therefore does not present any added value to the Egyptian economy.



 

I surely do not wish for my country to survive on favors and leftovers from the West. There must be instead an institutionalization of the process of proposing such important initiatives, particularly if they pertain to the national economy and foreign policy

Sixth, Egypt’s domestic debt amounts to about 1.043 trillion EGP, which represents more than 84% of the total public debt. What this means is that the government owes its citizens more that 1.043 trillion EGP. What Sheikh Hassan is basically proposing is to increase the amount of funds that the government owes its citizens; even though the government has previously failed in investing the money it has borrowed from its citizens. However, the difference is that this time the government will be borrowing at zero cost to the state. This explains Prime Minster El-Ganzouri’s welcoming of the initiative because it presents a way out of the current financial crisis through the increase of domestic debt at a cost of zero percent interest rate to the government.



 

Seventh, the call of Sheikh Hassan to forego foreign aid sends a message to the international community that Egypt refuses foreign aid or foreign loans, and this is exactly the problem former minister of Finance, Dr. Hazem Beblawi had to deal with when he was in office.  Dr. Beblawi bore the brunt of similar statements made by his predecessor, Samir Radwan, who had proposed that Egypt should refuse any form of foreign financing, aid, or loans. These statements resulted in many countries cutting off their aid. The notion that Egypt is not in need of aid is completely incorrect, and these statements also send a troubling message to investors regarding the direction Egypt is taking in the coming period and it’s of stance on foreign investment. Surely, this will affect both the flow of foreign currency and the withdrawal, or at least the freezing of foreign investment - at least until Egypt’s stance on these issues is made clear.

 



I would like to draw attention to another issue that is not related to the economic impact of the initiative, but rather to the manner in which it was presented. 

The initiative was presented in a television program without Sheikh Hassan providing any statistical figures or evidence that he had studied the initiative or that he even discussed it with specialized economists. It’s as if the initiative occurred to him while he was on the TV program, which reflects the level of arbitrariness the Egyptian mentality has reached, that such an important initiative is proposed by a man of religion who has no connection to economics or politics and yet it is covered to such an extent that not one television station didn’t cover Sheikh Hassan statements on this initiative.

Finally, I do not wish to give the impression that I am a supporter of US aid. I surely do not wish for my country to survive on favors and leftovers from the West, or to be subjected to US hegemony, or to lose its political and economic independence. However, I do object to arbitrary decision-making and initiatives, and I am also against political and economic initiatives being launched on talk shows. There must be instead an institutionalization of the process of proposing such important initiatives, particularly if they pertain to the national economy and foreign policy. 

 



READ MORE BY:  Khaled Mamdouh

 

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