There are five crucial elements for Egypt’s sustainable economic development which should replace “Egyptians’ misplaced obsession with the IMF, size of debts, and value of the pound”, according to Mohamed El-Erian, Chief Economic Adviser at Allianz SE.
Talking to Daily News Egypt on the sidelines of the Economic Summit in Sharm El-Sheikh, El-Erian said the goal of economic growth should be engraved in the nation’s DNA, as well as making sure of its inclusivity, as both are necessary elements of success.
El-Erian’s five key points include: generating high economic growth; confirming its inclusivity; engraving it in the DNA of the country; establishing strong institutions oriented towards entrepreneurship and dynamism; as well as taking care of the most vulnerable segments of the society.
He confirmed the government is giving “very high attention” to these factors, and has “very high awareness” on their importance.
El-Erian, who is member of President Abdel Fattah Al-Sisi’s Council of Researchers and Experts, said reaping the fruits “will not be overnight”.
“There is an understanding among the government that economic growth does not happen on its own,” he said. “We see this happening before our eyes through the adoption of a serious, economic plan with realistic and objective goals; the significant attention paid to sector issues to achieve inclusive growth that ensures empowering segments of the population that have not benefited from previous growth – which is a goal of the revolution – and taking care of issues like health, education, sanitation etc.”
A third indicator was the complete change in the approach of “Egypt’s friends”, which he said is indicated in their participation in Egypt’s development.
He said: “They’re no longer sending cheques, but have a stake in improving the welfare of Egyptians.”
The UAE, Saudi Arabic, Kuwait have thrown their weight behind Egypt’s post-30 June government, injecting billions of dollars in aid, Central Bank of Egypt deposits and investments. The three countries together have announced an additional $12bn during the first day of the summit, and Gulf investors signed multi-billion worth of agreements with the government, in all sectors.
“This conference is not about the numbers”
El-Erian, who spoke with Daily News Egypt a day ahead of the conference’s inauguration, said that relying on the investments money to be announced as a measurement of the Summit’s success is “the easy measurement of success”.
“This conference is different. This is not about announcing one big number, which is meaningless. This is about lots and lots of initiatives coming together,” El-Erian said. “The success of this meeting is the sharing of information. It’s in the partnership between the government and the private sector, the partnership between the domestic and foreign businesses, and the role of the civil society. This is success, and it will be very hard to measure, but it can be felt in the investors’ engagement.”
He stressed on the importance of “completing the process and not making the summit a one-off event”. He added that the “Egypt 2020” outline provides Egypt with a goal that should “be repeated over and over again by everyone in the country, starting from its head to the people on the street”.
Asked about his forecasts for the Egyptian pound’s value, El-Erian said this issue is one of a “few misplaced obsessions Egyptians have in the economy, which also includes state debts, and IMF talks”.
He explained that the pound’s value is affected by domestic and international developments, and that with the ongoing global currency war, it is normal for the Egyptian pound to decline.
“South Korea reduced its interest rate to 1.7% and when it did, it clearly said it was to reduce its currency. The Euro declined 26% against the US dollar,” he said. “There is an ongoing war, in which everyone is resisting appreciation, except one economy, the US. The Europeans want to grow faster, and in this world, if you can’t create economic growth, you steal, and the way to do so is by depreciating the currency.”
He added: “But in Egypt, we think of the pound in a totally different manner. There is an obsession with it, even though it was never the problem nor the solution.”
El-Erian also said that if Egyptians modernise their thinking towards the economy, these obsessions would move to the bottom of the list. They would be replaced by the five criteria necessary to achieve inclusive, sustainable economic growth.
Sequence of development
El-Erian said it was normal that Egypt’s projects and investments at this point should focus on infrastructure, as opposed to manufacturing and industrial sectors.
“Think of it as a war. What we learned from the 1967 war is to control the air first. Before you send the troops into battle, you secure the air. You secure the environment,” he said. “There is a sequence and the first step towards Egypt’s economic transformation is enabling the investment environment, and creating the conditions for which business can start building more factories, produce more goods and hire more people.”
He added that it was also important to start with improving the infrastructure because it is the sector in which PPP projects succeed best. These kinds of projects are essential at this stage.
He noted that there must be a “hands-off” approach, in which mega projects such as the new Suez Canal would lead to PPP projects, which then inspire and lead to small- and medium-sized enterprises.
“Ultimately, the success of Egypt is going to be in the start-ups”, the increase of which is the result of the Egyptian revolution which inspired young entrepreneurs to take risks, he said.
Investors care about growth
El-Erian said that there is no concern about Egypt’s debts, which he said are low compared to the GDP.
“In fact, if the economy is well-managed, we still have a capacity”, he said, adding that there is no threat of defaulting.
He added that neither rating agencies, nor investors are concerned about debts, nor the value of pound. “They care about economic growth figures,” he said, stating that a growth of 7%-8% would be great.
A turbulent political scene has drastically rocked Egypt’s economy, which is slowly recovering, reaching a 3.5% economic growth last year. This is an increase from a record low following the 25 January Revolution. Economic growth reached 5.6% in the first half of the current fiscal year.
Commenting on Egypt’s bond market, he stressed the need to establish a yield curve, through the issuance of benchmark securities with longer maturities.
“Investor’s look at the curve for two reasons: it’s indicative of the risk medium and the local cost of money,” El-Erian said. “Therefore, building the yield is very important.”