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Short-term path of reform satisfying, more work needed to reach desired targets: deputy minister of finance - Daily News Egypt

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Short-term path of reform satisfying, more work needed to reach desired targets: deputy minister of finance

Insuring commodity imports to avoid budget imbalances remains possible, says Kojak


Egypt’s deputy minister of finance for monetary policies, Ahmed Kojak said the government has released some data of its state-owned companies in agreement with the International Monetary Fund (IMF).

Daily News Egypt sat down for an interview with Kojak, whereby he revealed that Egypt has a total of 200 state-owned companies and they are distributed over different sectors, such as oil and electricity. These companies are either wholly owned by the government or it has controlling stakes in them. The transcript for which is below, lightly edited for clarity:

According to the IMF, the Egyptian government pledged to publish a report on all state-owned enterprises, whether it has a minority or majority stakes in them, over two phases in June and December 2018 to improve transparency and accountability of public enterprises.

Kojak pointed out that this step was included in the government’s agreement with the IMF, and it generally aimed at improving the conditions of the state-owned enterprises, structuring their ownership, developing their financial positions through opening the door for competition for the development of these companies without borrowing.

The IMF said the government’s report on its companies should include a full list of the state-owned enterprises, sorted by sector, policy objectives and the type of ownership, as well as their financial performances in 2017/2018.

The report should also provide an overview of how the government practiced its management authority in the appointment of these companies’ board members, profit distribution, and regulatory and administrative arrangements.

In addition, the report should present information on the state-owned companies’ condensed financial statements, financial performance indicators, list of directors, managers and auditors, and the size of budgetary subsidies received during the financial year (FY) 2017/2018, if any.

On the other hand, Kojak did not rule out that the government can resort to paying insurance on its imports of commodities similar to petroleum imports in anticipation of global price fluctuations.

“The government likely to pay insurance on other imported commodities which comes in line with our development goals and utilization of other experiences,” Kojak said.

He added that the general budget includes various items of goods and services and this procedure will protect the government of any increases in the prices of petroleum products, which will increase fuel subsidies in turn.

“Global price hikes will lead to increasing subsidies or increasing local prices which will cause added financial burden for citizens, therefore paying insurance on imports represents a budget protection and ensures its sustainability against any negative effects,” Kojak continued.

The Ministry of Finance said in the preliminary statement of the state general budget for the current fiscal year that every dollar increase in oil prices cost the general budget about EGP 4bn.

Kojak expressed his hope that world oil prices would not increase in the coming period, especially, that import insurance is a long-term preventive mechanism currently applied in some countries.

The general budget for FY 2018/2019 has estimated the price of oil at $67 a barrel, while the petroleum products subsidy reached EGP 89bn.

According to the Central Agency for Public Mobilisation and Statistics (CAPMAS), Egypt’s oil imports reached $4.024bn from January to April 2018, compared to $3.9bn during the same period last year.

In 2017, Egypt’s imports of petroleum products increased to more than $5.220bn compared to $4.218bn in 2016.

Egypt imports about 32%-35% of its fuel needs monthly to bridge the gap between domestic production and fuel consumption, estimated at about 2.1m tonnes per month.

Kojak revealed that the Ministry of Finance has established a new department to manage insurance on importing, and it started training its employees on these procedures, noting that they will adopt the best global insurance measures.

He noted that Mexico has paid insurance on oil prices for 15 years despite being an oil exporting country.

He added that his ministry has paid insurance against the risks of exporting petroleum products, in coordination with the Ministry of Petroleum in 1998.

In July, the cabinet commissioned the ministers of petroleum and finance to start contracting with one or some banks or international financial institutions to insure the country’s petroleum imports against the risks of international oil price fluctuations as a protective measure.

A government committee was set up to follow up the insurance of oil imports, and to invite investment banks and international financial institutions to participate in a global tender for insuring Egypt’s oil imports against price hikes. The government will also invite legal advisers to draft contracts between the two parties.

This will be the first phase of the liberalisation of oil prices domestically, in accordance with the IMF programme.

Kojak presented an overview of the economic reform programme, which has been adopted by the Egyptian government two years ago, saying that the government will only be satisfied with the economic situation when it improves by 100%.

“We are satisfied with the short-term path of reform, but still need more work in the long run to reach the desired targets,” he said.

He pointed out that the Egyptian economy currently is much better in terms of multiple economic indicators.

Kojak added that the average growth rate reached 2.3% from 2011 to 2014, and increased to 4.4% in FY 2014/2015, but fell to 4.3% in FY 2015/2016 and 4.2% in FY 2016/2017. The average growth rate rose again in FY 2017/2018 to 5.2%, and the government targets to bring it to 6% during this fiscal year.

“The development of growth is acceptable in light of large-scale economic reforms,” he said.

The Egyptian government has signed an agreement with the IMF two years ago to borrow $12bn over three years and implement an economic reform programme, which includes floating the exchange rate of the Egyptian pound and rationalising petroleum subsidies.

He believes that the increase in economic growth rates coincided with the implementation of the reform programme, which indicates the success in the implementation of the reform measures.

Kojak added that growth rates in the past fiscal year were the highest in years, because 16 out of 17 economic sectors contributed positively to the country’s growth.

eMoreover, he explained that a number of these sectors had suffered negative rates in the previous years, especially, gas, oil and industry sectors, but they turned to growth eventually, not to mention the positive contributions of investment, consumer goods and net foreign trade.

The consumer goods sector used to be the main element in the country’s growth, but the situation has changed by increasing the contribution of investment to 2.5% of total 5.3% of growth rate achieved in the previous fiscal year, he added.

“For the first time, the investment’s contribution to growth is higher than consumer goods sector which accounts for 2.4%, while net exports account for 0.4%,” he said.

The increased contribution of the investment sector came as a result to the improved outlook of investment in Egypt which attracted investors looking for long-term projects, Kojak added.

The social protection programmes accompanying the reform measures also contributed to improving the growth rates, noting that the government aims to achieve sustainable growth rates of 7% over four fiscal years, he elaborated.

Kojak pointed out that the reform was reflected in the increase in job opportunities, as the government managed to provide 800,000 jobs from March 2017 to March 2018, as well as the decline in the unemployment rate to 9.9% in June 2018 compared to 11.98% in June 2017.

The application of harsh economic measures required the provision of a large amount of employment through national projects, stressing the need to support infrastructure projects being one of the most investment attracting sectors, especially, as the government does not aim to compete with the private sector in its projects, Kojak explained.

He added that the government wants to avoid repeating mistakes of the past, therefore it resorted to increasing government investments in the current general budget to reach $100bn, to be the largest expenditure item benefiting from reducing the deficit rate and achieving surplus.

Kojak said that investment in infrastructure is a priority for this government in the coming years because it helps in attracting the private sector.

He also noted that the temporary employment in current national projects have gained large experience over the past two years, which will enable them to find sustainable opportunities in the private sector, which limits the negative effects of economic reforms on citizens.

The restructure of subsidies led to the pricing of production inputs properly without interference from the government, noting that the economic reform has made some sectors more attractive to investors, such as transport and energy, he also explained.

“Inflation rates are still higher than the targeted, but its decline course is very good, recording 13.5% in July compared to 35% in July 2017,” he said.

Kojak pointed out that it is better to rely on basic inflation rate, which excludes services, food, drinks, and seasonal factors.

Moreover, he mentioned that Egypt’s basic inflation was 8.5% in July, the lowest in the last three years, suggesting the success of the government’s monetary policy to reduce inflation.

He pointed out that these good indicators do not mean that citizens have not suffered in the last period, though they show a gradual improvement.

In regard with the budget deficit, Kojak said that the Ministry of Finance began to use the preliminary surplus of the budget because it is under the ministry’s control, while the Central Bank of Egypt (CBE) uses the interest rate to limit inflation.

In addition, the general debt to the GDP declined from 108% in FY 2016/2017 to 98% in FY 2017/2018, a decrease of 10% within one year.

“The decline in the general debt indicates the improvement of the debt situation as a result of the decline in deficit, and the increase in growth rate, foreign exchange reserves, and employment opportunities,” Kojak said.

He added that the government seeks to reduce the ratio of general debt to the GDP to 70% in the coming period through achieving high sustainable growth rates, creating new jobs, increasing the contribution of the private sector, and reviving the secondary bond market.

As for the external debt situation and its components, Kojak said, “we expect the ratio of foreign debt to the GDP will reach 37% for June compared to 41% in June 2017, which promises of further declines in the coming years.”

He explained that Argentina has raised the interest rate on local currency from 40% to 45%, while the Turkish lira started to fall against the dollar because they did not increase the interest rate as expected.

The government had recently adopted short-term domestic borrowing policy through issuing treasury bills an avoiding long-term commitments with high interest rates, with expectations that the interest rate will reach 12-13% in coming years, he elaborated.

Kojak added that the government relied on treasury bills because they are renewable short-term debt instruments, thus the structure of external debt will be short-termed.

He further explained that the improvement of economic conditions in the coming period will lead to a decline in debt rates, as well as the ratio of external debt to the GDP, which will contribute to the issuance of long-term bonds.

Kojak pointed out that his ministry has issued only 2% of local bonds in the last fiscal year, while it issued 5.5%-6% in the first month of the current fiscal year, noting that the ministry will continue adopting this approach if interest rates continue to decline.

Additionally, he said that the ministry aims to increase the maturities of local debt over the coming three years to reach four and a half years compared to three years now, while the external debt structure is good, and they only work on reducing it.

He revealed that the government had received requests for issuing up to 100-year international bonds with very high interest rates, but this would have been a long-term commitment, so the ministry refused.

“Egypt is one of the emerging countries that are affected by global changes, the most important of which was the increase in US interest rates and the rise of the dollar against other currencies,” he said, adding “many investors will transfer a part of their investments in emerging markets to the United State.”

He elaborated that the changes in the US market have led to an increase in interest rates in a number of European countries, accompanied by conventional and commercial conflicts among the different countries of the world.

Kojak asserted that Egypt should adopt rapid reforms to keep pace with such changes and make the outlook of the Egyptian market positive, noting that the recent structural reforms have contributed to absorbing the global changes.

“What we have to do is to provide clear attractive and competitive procedures for investment to assure investors that what is happening in Egypt is sustainable, which means attracting additional investments,” he said.

Kojak pointed out that the international bonds market depends on the US interest rate and the margin of safety, and Egypt’s situation is much better than other countries.

“For the mid-term bonds, there has been an increase from 60 to 70 basis points, because of the increase of US interest rate by 0.5%,” he said, pointing out that it was a reasonable increase compared with other countries.

Kojak said that the coming phase of the economic reform programme will be easier, and will focus on the industry sector to increase exports.

He added that the government looks forward to communicating with Asian investors during the coming period to present the Egyptian reform experience.

“They may have a desire to invest in traditional markets or other financial instruments that we can provide,” he said, adding, “we have been also committed to the legal limits for overdraft since December 2016, which is estimated at a maximum of 10% of the average revenue of the last three years, while it used to be five times the maximum rate.”

Regarding the cooperation with the Asian Investment Bank, Kojak said that Egypt received the approval of the bank’s board last April to treat Egypt as an Asian country in terms of financing operations, to allow financing sustainable infrastructure projects. 

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