Cairo strategy worries banks




By Mark Huband in Cairo

Financial Times, 24 April 2000

Growing unease among foreign and local bankers over the Egyptian government’s policy of tightening liquidity to redress a $12bn trade deficit has intensified fears of bankruptcies and exposed economic reformers to mounting criticism.

Tight restrictions on the allocation of foreign exchange to importers, imposed more than a year ago, have brought a liquidity crisis in local currency owing to demands that importers provide up to 110 per cent in local currency cash collateral before receiving foreign exchange.

Despite a relative easing of restrictions on foreign currency allocations in recent months, requests for foreign exchange are taking up to six weeks to process, according to bank officials. This has increasingly led to foreign exporters demanding prepayment for goods, leading to bank provision of letters of credit and raising the cost of trade. “We are in a situation where we have an economy that needs to be put back on track,” said a leading Egyptian banker. “After a year of these measures we would have expected to see the results. But we haven’t, and we are expecting a marked rise in bankruptcies.”

Both foreign and local analysts and bankers are increasingly concerned about the cost of large-scale construction projects, which are the single main cause of the liquidity shortage. Currently up to 60 per cent of imports are of capital goods being used to construct the Toshka canal in southern Egypt and other projects, in which the government invested $3.7bn last year, and which will cost $120bn over 20 years.

Detailed costing of the projects to the state did not appear in the 2000 budget, despite mounting criticism of the deterioration in the capital account. The lack of transparency on issues of growing controversy has added to disillusionment with the six-month old government of Atef Obeid, prime minister.

“What the government is doing now is telling the investor community that some mistakes have been made in the past two years, and that we have drifted away from reform. But Atef Obeid is not in a position to decide things on his own,” said a government official.

High expectations that the government would accelerate reform and inject new life into the banking and financial sectors have been largely disappointed, despite long-overdue moves to sell off the remaining government stakes in two banks.

Distracting ministers from decisive action is the prospect of legislative elections due in November, the first since 1995. While the political stranglehold of the ruling National Democratic Party is secure, ministers concerned to safeguard their portfolios are likely to avoid controversial initiatives.

© Financial Times