Is Egypt moving towards an economic renaissance? Following the two years of implementation of economic reform programme adopted by the authorities, and supported by the International Monetary Fund (IMF).
To answer these questions, in the wake of the upcoming Euromoney conference, which plans to tackle such questions, and discuss the different opportunities and challenges facing Egyptian economy, Daily News Egypt sat down for an interview with Burkhard Hinz, head of KfW Office Cairo of KfW Development Bank, to review his insights on such matters, and the bank’s evaluation of the economic situation. The transcript for which is below, lightly edited for clarity:
Can you walk us through future cooperation between you, Egyptian Government in 2018?
The development cooperation between the Arab Republic of Egypt and the Federal Republic of Germany are annually being discussed between the two governments. Presently, the cooperation focusses on renewable energies and energy efficiency, water supply, waste water, irrigation, and solid waste, as well as on creation of job opportunities. The latter basically means support for vocational training and microfinance.
Do you intend to participate in purchase of shares in government companies that will be privatised?
KfW promotes programmes and projects that particularly involve state actors. Thus, it is not intended to purchase shares of privatized companies.
What has size of your loan portfolio to Egypt reached?
KfW’s international activities consist of three segments. First, KfW Development Bank which on behalf of the German government has provided around €6bn to projects in Egypt by now and has an active portfolio of €1.8bn. The second segment is KfW IPEX-Bank, which offers tailored financing for German and European exports and investments. KfW IPEX Bank for example, together with HSBC and Deutsche Bank, was the Coordinating Initial Mandated Lead Arranger for the three gas power stations built by Elsewedy, Orascom, and Siemens with a total debt financing volume of €3.5bn. And the third segment is DEG, which caters to private companies operating in emerging markets, with a current portfolio of about €32m in Egypt. All in all, the current total loan portfolio is in a range of about €2.4bn.
How could you see Egypt’s economic position now? And what type of challenges lurk in our economy?
It has been a very brave decision of the Egyptian government to implement fundamental economic reform measures. Positive results are obvious with economic growth, the first primary budget surplus in 15 years, as well as with foreign currency reserves and foreign direct investment picking up. Simultaneously, inflation levels and—to some extend—unemployment rates are dropping. At the same time, recent external debt increases were substantial and are best to be kept at moderate levels. Moreover, stimulation of the private sector remains crucial. A major, more general challenge remains job creation, especially for the youth. At the same time, as outlined by President Abdel Fattah Al-Sisi, the current population growth of more than 2% poses a big challenge to public and private sectors with permanently increasing need for investments in infrastructure, such as schools, roads, health services, water supply, and energy. In addition, and probably equally challenging, is the creation of jobs for about 1 million youth entering the labour market each year.
However, there is no doubt that Egypt will do better once the adjustment period of the structural reform is over. As mentioned, indicators already point to a success of the reform. This is particularly important for all those who currently have to bear the sometimes heavy burden of structural adjustment. There is light at the end of the tunnel—and it is already visible.
How can this issue be resolved?
The Central Bank strongly emphasises that macroeconomic factors and indicators are being followed with particular attention. There is also a great potential for job creation and innovativeness, since a certain entrepreneurial mindset is deeply rooted in Egyptian culture. With the government’s approach to promote small and micro enterprises, eg with improved vocational training and the opening up of financing opportunities for micro-entrepreneurs, this challenge can be turned into one of the assets of the Egyptian economy.
How do you see investing opportunities in Egypt now?
With its impressive domestic market, improved macro-economic indicators, relatively fair labour cost, the New Investment Law, a now secure energy supply—just to name a few—the investment climate looks increasingly favourable. The already announced modified education system (Education 2.0) will with its focus on quality and life skills, as soon as it is implemented, further promote the investment climate in Egypt.
What thoughts do you have regarding Economic Reform Program with IMF?
The decision to implement the Economic Reform Program with the IMF was seen to be inevitable. Only very few governments find the courage and the foresight—although obviously needed—to improve the future prospects of an economy at the expense of swallowing the bitter pill of a major economic reform. However, if the Egyptian government is consistently implementing this comprehensive reform programme, it is likely that people look back one day and realise that the current hardships were a temporary phenomenon followed by economic growth and employment.
What kind of reforms Egyptian government needs to implement at this advanced stage?
As stressed by the IMF, the positive impact of the private sector for job creation, economic growth, and innovation is essential. In addition, subsidies for energy are setting the wrong incentives and are an extremely high burden on the state budget—particularly in case that the oil price will increase even further. In the case of large scale projects co-financed by KfW, such as the Asyut Barrage or the three Gas Power Stations build by Elsewedy, Orascom, and Siemens, all parties involved proved that complex projects can be implemented in an impressively short period of time. If these positive experiences could be transferred to other projects as well, Egyptians would benefit from improved state services with significantly less delays.
Does Egypt need to increase duration of programme with IMF another year?
This decision lies with the government of the Arab Republic of Egypt, which implements the programme—supported by the IMF.
How do you see infrastructure situation in Egypt? How much does Egypt need to invest to develop it?
Quality infrastructure is essential for economic growth. Egypt has significantly improved its energy supply over the last few years and the formerly common blackouts are a thing of the past. In the future, it will be important—in addition to the further expansion of renewable energies—to mobilise the considerable potential for energy efficiency. With the gradual reduction of subsidies for electricity, energy efficiency measures are becoming increasingly attractive as the cheapest kWh is the one you do not need. Moreover, in a water-stressed country measures, which increase the efficiency of water use and reduce pollution are important—and forward-looking. Like in the energy sector, achieving cost coverage for operation and maintenance will be crucial to provide the people with sustainable and adequate services.