24 August 2016
Egypt is looking for short-term solutions to its foreign currency crunch including launching new residency laws for foreign investors and privatising state assets while the government waits for much-needed international financial assistance to jumpstart the economy.

The cabinet has submitted to the State Council, a judicial advisory body, a draft law granting investors five-year residency permits if they make a foreign currency deposit into Egyptian banks and the chance to apply for Egyptian nationality after five years of living in the country, according to local media reports. The law would still require approval by parliament.

The Arab world's most populous state is certainly in need of hard cash and the figures do not make easy reading for those sitting around President Abdel Fattah el Sisi's cabinet table. Foreign reserves have fallen to $15.5 billion as of July 2016 compared with about $36 billion before the 2011 uprising that overthrew Hosni Mubarak and ushered in years of political turmoil that has hit the vital tourism sector and driven off investors.

"The government needs 476 billion pounds ($53.6 billion) in the 2016/2017 fiscal year to save the economy," a finance ministry official told Zawya. The official said that the funds are needed to cover a budget deficit estimated at nearly 220 billion pounds and to service internal and external debts.

The government, which is also struggling with double-digit inflation levels, said in July that it needs $21 billion to finance its economic programme over three years. The country recently secured initial approval from the International Monetary Fund (IMF) for a $12 billion lending programme, which is linked to reforms including subsidy cuts, the introduction of value-added tax and exchange rate reforms.

Chris Jarvis, the IMF mission chief for Egypt, had told Reuters that the deal would go to the IMF board for approval only if the government secures $5-6 billion in bilateral financing for the first year. He said Cairo might get the first $2.5 billion instalment of the three-year loan package in September.

However, Abdel Nabi Abdel Mottaleb, undersecretary of research at Egypt's trade and industry ministry, said that funds expected from the IMF facility this year would only cover 10 percent of the budget deficit, and that the issuance of bonds and treasury bills to finance the public deficit was adding to the debt burden.

The government has turned mainly to the local money market to finance the deficit but it recently approved plans for international bond issuance of between $3 billion to $5 billion this year, according to Reuters.

Raising the stakes 

The government has said it plans to offer shares in public sector companies to help raise money and that the initial public offerings (IPOs) would take place before the end of the current fiscal year, which started in July.

Minister of Investment Dalia Khorshid told Zawya that the government hoped to raise 10 billion pounds over three years from the privatisation of some state-owned companies.  She said that the ministry is preparing a list of public companies to be listed on the Egyptian stock market, but did not disclose the names of the companies, the size of the flotations or the exact timeline.

"The IPOs programme will last from three to five years, and we expect to attract 10 billion pounds in the first three years," she said by email. "IPOs will be offered in the Egyptian stock market initially, but there is a possibility to have joint IPOs with other international stock markets."

The minister said that a tripartite committee, composed of the ministers of finance and investment and the vice-governor of the central bank, would select the companies eligible for listing.

In addition to the potential IPOs, the finance ministry official told Zawya that the government would also sell stakes in banking assets. United Bank, which is 100 percent state-owned, would be sold completely, while stakes of 20 percent stakes in Arab International Bank and in Cairo Bank would be offered to investors.

Egypt's stock market rose after news of the preliminary agreement with the IMF but foreign investors largely stayed on the sidelines to see whether the deal would go through and if the government would actually move on reforms, including plans to move to a flexible exchange rate system.

Dollar crunch 

Fitch ratings agency said that Egypt hoped to raise the $21 billion over three years from the IMF loan programme, additional multinational assistance from the World Bank and African Development Bank, and the international sovereign bond issuance.

"In our opinion, this could still fall short of Egypt's total financing needs, which we estimate could be closer to $10 billion annually, but a package would also likely stimulate some return of portfolio investment inflows," it said in a report issued at the start of August before the deal with the IMF was reached. It said the agreement could pave the way for further currency devaluation, speed up fiscal reform and boost confidence in the economy.

"But the Egyptian authorities could shy away from reforms at some stage during a three-year programme if faced with popular opposition. Even if implementation proceeds on plan, Egypt faces a testing period of fiscal, monetary and structural reform," it added.

Egypt devalued the pound by almost 14 percent in March, to about 8.78 a dollar, in an attempt to shut down a black market. The country's dollar shortage has hit trade and discouraged foreign investment. The timing of another devaluation is important since the government plans to introduce value-added tax (VAT) and further slash subsidies.

The finance minister has said he expects parliament to approve VAT by the end of August or early September, according to Reuters. Minister Amr El-Garhy said that once applied, the proposed VAT at 14 percent was expected to bring in revenues of between 20 billion to 25 billion pounds in the current fiscal year.

(Additional reporting by Mohamed El Agamy in Cairo; Editing by Shane McGinley)

© Zawya 2016