IMF officials in Washington, DC met with an Egyptian delegation in January to discuss a “financial support program” to close Egypt’s ever-widening deficit.

Some US policymakers were rattled by a blatant attack on the pro-democracy groups and suggested suspending funding to Egypt. Egypt, which is the second-largest recipient of US assistance after Israel, according to US Department of State and USAID data, received $1.7 billion in aid from the US in FY2011.

Nonetheless, US President Barack Obama expressed his country’s support to Egypt during its transition to an elected government as well as during its talks with the IMF.

A White House statement released on January 20 summarized the details of Obama’s phone call with Field Marshal Mohamed Hussein Tantawi. “The President reinforced the necessity of upholding universal principles and emphasized the important role that civil society, including non-governmental organizations, have in a democratic society. He underscored that non-governmental organizations should be able to operate freely,” according to the statement.

This came after 17 NGOs, including pro-democracy groups with ties to the US, were raided by Egyptian authorities on December 29. While Washington did not condone the raids, it blamed holdouts of the former government for the actions.

“The two leaders discussed Egypt’s economic situation and the ongoing discussions between Egypt and the IMF on an economic program that can garner the broad support of the Egyptian people.”

The Central Bank of Egypt (CBE) is also looking at ways of bridging growing debt, while propping up the pound, which has fallen to around LE 6.05 per dollar as of press time. Analysts expect it will continue to drop in value throughout 2012 and perhaps even into 2013.
Discussions in Washington and Cairo were set to continue until the teams reached an accord on a recovery plan. IMF Middle East Director Massoud Ahmed said Egypt’s economy still had sound fundamentals, but that conditions required immediate action to ensure recovery.

He also stated that these plans would include newly elected officials and a working plan that would unite the parties in Egypt’s first parliament since the ouster of Mubarak. Last year, Egypt’s salvation government turned down more than $5 billion (LE 30.19 billion) from the World Bank and IMF in a bid to avoid taking on more debt.

Almost a year ago, Egypt refused joint funding from the World Bank and IMF to avoid taking on more foreign debt and conditions that come with such economic aid. The nation’s net foreign reserves totaled $18.12 billion (LE 109.41 billion) as of December 2011, according to the CBE. The country is currently paying upwards of 15% on short-term loan payments, while its budget deficit for the fiscal year ending in June 2012 is approximately LE 134 billion or about 8.6% of GDP.

Mubarak defends Israel gas exports
The defense of deposed President Hosni Mubarak closed with a few memorable moments. Along with the murder of protesters, Mubarak is charged with exporting natural gas to Israel below market rates. But last month, Farid Al-Deeb, the strongman’s lawyer, claimed Mubarak was innocent and that all deals had upheld Egyptian law and that he had not squandered public monies by handing responsibility of the deal to a businessman named Hussein Salem. Al-Deeb said the fact that further investigations into dealings of former petroleum ministry officials, including the minister, had not pointed to Mubarak’s involvement proved his innocence.

Mubarak’s defense claims that the deposed dictator is still technically president.

Al-Deeb also claimed Mubarak had discussed the matter with former Vice President Omar Suleiman and had asked to amend pricing and contract reviews to better benefit Egypt. The lawyer then stated that Suleiman, who had also headed Egypt’s intelligence body, had negotiated the contract, which included elements of national security to keep the peace between Egypt and Israel.

He called on evidence from the Supreme Administrative Court, which Al-Deeb said had ruled that Mubarak had approved what was, in effect, a “sovereign decision” designed to improve the nation’s bargaining power over Israel, since Egyptian natural gas exports account for 40% of Israel’s electrical power generation.

FJP reveal key economic points
Media are calling the Islamist Freedom and Justice Party’s (FJP) economic policy “flexible” in the wake of their significant win in the lower house of parliament. Its key strategies include poverty reduction, protecting tourism and private property rights, promoting the stock exchange and working with other parties to come to a consensus on the economy’s next steps.

So far, members of parliament seem to agree that their strategy should involve seeking international aid from a variety of donors, reducing the budget deficit, boosting the business climate and markets and job creation, particularly for small and medium-sized companies.

The FJP have told media that they are working to develop meaningful contacts with the other parties to discuss Egypt’s finances. Al-Wafd leaders have made similar claims, stating the parties have fostered positive ties with the Muslim Brotherhood over economic planning and strategy.

Others ideas on the table include early and new tax payments, dipping into ministry reserves, raising natural gas export prices and delaying infrastructure projects in the works.

The emerging policies and commitment to working together are a breath of fresh air for investors, businesses and everyday Egyptians that have watched several successive lame-duck governments bowing to populist demands versus creating sound economic strategies to promote growth and stability. The political uncertainly has also caused foreign investors to pull out, leaving the Egyptian Exchange reeling in bearish territory.

However, even this newfound sense of hope could soon come to an end if the military does not give up power as promised with the onset of June presidential elections, particularly since reducing military spending is one way of cutting back on spending. Trouble may also be brewing on the horizon if parties cannot agree which sectors should be pumped full of donor funds, which may yet come with restrictive conditions including reducing subsidy spending on energy.

Boosting the markets
The Egyptian Financial Supervisory Authority is working on a series of ways companies can start raising cash in the capital markets again. The plan includes new issuances of stocks and bonds under more progressive regulations, but authority chairman Ashraf El Sharkawy admitted to media last month that the plans would be unlikely to bear fruit any time soon due to ongoing unrest.

The EGX is also still hampered by restrictions put in place after the market was closed during the January 25 Revolution. El Sharkawy said the limitations could be repealed soon, but did not specify the date.

But even lifting restrictions and easing red tape for bond issuances may not be enough to entice wary businesses that are content to wait out the presidential election and military power transition before they seek to raise new capital. Last year, benchmark index the EGX 30’s value fell by almost 50%.

Tourism down over 30%
New figures from the tourism sector show revenues dropped more than 30% in 2011 versus the year before. In January, tourism minister Mounir Abdel Nour told Al-Ahram newspaper that only 9.8 million tourists had visited last year, down from 14.7 million in 2010, a drop of 33%.

The country recorded $8.8 billion (LE 53.16 billion) in revenues, which also declined sharply compared to the same period two years ago, when it hit $12.5 billion (LE 75.49 billion).

The government and analysts blame the decline on unrest during and after the January 25 Revolution that toppled the National Democratic Party and then President Hosni Mubarak.

Sharia stock exchange
Al-Nour Party member Mahmoud Abbas sought to reassure investors with a press conference amid worries over economic growth under an Islamic-majority parliament. He said Egypt’s economy would be safe and that he had been investing in the EGX as a private investor since 1996.

During the press conference, Abbas also announced possible plans to add an Islamic index to the exchange. The index would include companies that use Shariah-compliant financial and business models. Some prohibited activities under Shariah-compliant banking and business include banning interest payments and disallowing profits from the sale of alcohol or pork products. It could also include restrictions on advertising and programming that sexualizes individuals.

Members of the Freedom and Justice Party (FJP) said the regulatory body overseeing this industry could be formed under the auspices of Egypt’s biggest religious institution, Al-Azhar.

Abbas did not elaborate on other possible changes to Egypt’s economic drivers, including tourism. Insiders and political analysts have raised concerns an Islamist-dominated government may impose restrictions that could affect Egypt’s already embattled tourism industry, including alcohol bans and gender-segregated beaches.

Islamic banking and Shariah-compliant businesses are popular in the region, particularly in countries such as Saudi Arabia and the United Arab Emirates. But Islamic Banking has lagged behind more traditional banking in Egypt and only represented between 3% and 4% of an industry worth millions of Egyptian pounds.

In related news, sources close to the government told media that officials are planning to offer an Islamic bond, or sukuk. Currently the government is analyzing the legalities required to do so. While the source did not reveal the number of bonds set for sale, he said the issuance will likely use a murabah structure or cost-plus-profit structure common in Sharia-compliant investment.

Beltone Financial sale
Last month, Aladdin Saba, chairman of investment bank Beltone Financial, announced he would be selling his 20% stake in the company to Arabiyya Lel Istithmaraat (AI). According to local media, the deal was worth LE 26.8 million at LE 16 per share.

The bank announced that Saba was in talks to sell his stake in November. AI has publicly said it plans to buy shares in the bank from other stakeholders as well.

Reuters reports show Beltone’s current market capitalization is around LE 117 million.

US bailout
Minister of Industry and Foreign Trade Mahmoud Eissa announced that emergency funds to bolster Egypt’s faltering economy are in the works. Last month, Eissa told media that the US is looking to increase trade, double US investments and put an emphasis on small and medium-sized companies and has already approved an emergency fund to get the ball rolling.

The economy-boosting partnership could also include an invest-in-Egypt conference helping US investors take advantage of Egyptian incentives for international firms, giving the nation more preferential, duty-free trade on exports into the US as well as boosting Egyptian agriculture exports and negotiating the expansion of Qualifying Industrial Zones here.

Details on just how the multifaceted plan would be implemented over the next six months were not available as of press time.
Also last month, US Ambassador Ron Kirk told media that the US was committed to growing relations with Egypt.

IMF loan negotiations
Egypt is in talks with the International Monetary Fund (IMF) to seek financial aid. IMF officials in Washington, DC met with an Egyptian delegation in January to discuss a “financial support program” to close Egypt’s ever-widening deficit. Local media say the loan could be up to $3.2 billion (LE 19.32 billion).

Discussions in Washington and Cairo were set to continue until the teams reached an accord on a recovery plan. Massoud Ahmed, IMF Middle East Director, said Egypt’s economy still had sound fundamentals, but that conditions required immediate action to ensure recovery.

He also stated that these plans would include newly elected officials and a working plan that would unite the parties in Egypt’s first parliament since the ouster of Mubarak. Last year, Egypt’s salvation government turned down more than $5 billion (LE 30.19 billion) from the World Bank and IMF in a bid to avoid taking on more debt.

Import regulations tightened
The Central Bank of Egypt (CBE) is placing new regulations on import transmit funds. The plan is to prevent businesses from transferring cash without bringing products into the country.

Analysts say the move could also help stabilize its reserves, which have declined sharply over the last year as the CBE attempted to balance its payment deficit and support the sagging pound.

Now importers will have to provide all “original import documents” to their commercial banks and sign a document stating the documents will not be given to other banks. If business owners fail to do this, they could be reported to the CBE, which could then stop other banks from conducting similar transfers with those customers.

The CBE stated that some businesses were failing to provide proper import documents, which made it difficult to track their financial transactions.

Petrol crisis eases slightly
Last month saw major petrol shortages in Sinai, the capital and many other communities, sparking long lines at gas stations and the temporary closure of some stations. One person was killed and scores of others were injured and another person was killed in fights as frustration boiled over, according to local media.

Supplies have returned to some areas, there are problems in outlying communities, where cheap petrol is almost impossible to find, said state newspaper Al-Akhbar.

Insiders told media the shortages, caused by distribution shortages and fears of inflating prices, are being addressed, albeit depending on the fuel and location. The government blamed the rumors of jumping prices on speculators and black market smugglers who take advantage of the subsidized gas for profits across Egypt’s borders.

Vimpelcom to sell Algeria stake
Russia’s Vimpelcom agreed to sell its majority stake in the Algerian Djezzy to the Algerian government on January 9, according to Reuters. The company signed an MoU with the Algerian government to sell the company if the price is right.

The company was acquired last year as part of a $6 billion (LE 36.2 billion) merger deal with Sawiris’s Weather Investments, parent company of Orascom Telecom (OT). Djezzy was a part of dispute prior to the deal where the Algerian government had charged Djezzy with hefty back-taxes that OT claimed were unjust. The government blocked Djezzy from transferring its profits abroad and publicized its aim to nationalize the company.

This complicated the merger deal, which was strongly opposed by Vimpelcom’s Norwegian shareholder Telenor. The Norwegians were concerned that the merger would inflate the groups’ debt and that the Algerian dispute would deprive it of the cash flow of Orascom’s biggest earner.

The Algerian government appointed Shearman & Sterling LLP law firm to valuate the company and is now offering to acquire a 51% stake in Djezzy but has yet to name a price. Anna Lepetukhina, an analyst at Troika Dialog was quoted by Reuters as saying, “The consensus would be about $4 billion (LE 24.16 billion). Vimpelcom originally wanted $7 billion (LE 42.29 billion), but I think now $4 billion (LE 24.16 billion) is more likely.” Proceeds from the sale would help Vimpelcom reduce its $20 billion (LE 120.8 billion) outstanding debt.

NBE profits
The National Bank of Egypt, the country’s largest public-sector bank, recorded revenues for the year of LE 4.2 billion and a net profit of around LE 2.1 billion, according to a Reuters report.

The bank extended loans totaling LE 71 billion, an increase of LE 22 billion over the previous year. Meanwhile, its bad debts were halved to 9%, down from 20% last year. Its total foreign currency deposits climbed LE 900 million since the breakout of the January 25 Revolution, settling at LE 5.3 billion in June.

Railway losses
The Egyptian Railways Authority lost LE 70 million from January 28, 2011 to January 10, 2012 according to Al-Masry Al-Youm. Since the revolution, people have disrupted train services as a way to force authorities to make concessions.

The authority published a report detailing the impact of railroad strikes and sit-ins since the revolution began, citing that the number of trains delayed reached 1,720 with an average delay time of 45 minutes.

Queues formed at gas stations amidst rumors of price hikes.

The authority’s head Hany Hegab was quoted on Al-Masry Al-Youm as saying that disruptions cost the authority time and money. “The total time wasted due to the trains being suspended was 2,580 minutes in [less than] 350 days, which is equivalent to 108 days, the highest percentage of wasted time in the history of the railroads.”

Gas reshuffle
After repeated bombings of the natural gas pipeline supplying Egyptian gas to Israel and Jordan, the Jordanian government has opted to source its natural gas from Qatar instead.

According to a report by Al-Ahram, Jordan and Qatar have named a joint committee to study the import of liquefied natural gas from Qatar and the upgrading of Jordanian infrastructure and storing facilities to house the incoming supplies.

Jordan originally sourced 80% of its energy needs from Egyptian natural gas, but after the supply route was bombed 10 times in 2011, mainly due to popular anger over exports to Israel, which uses the same pipeline, the Jordanian government was forced to resort to the more costly diesel fuel and heavy oil to meet its electricity needs. Al-Ahram reported that the shift in fuel cost the Jordanian authorities $5 million (LE 30.2 million) a day from its treasury.

The CBE is seeking to prevent companies from transferring cash without importing in products.

In related news, the Sudanese government sent a formal request to their Egyptian counterparts to supply Sudan with natural gas. The Sudanese daily Sudan Vision reported that talks between the countries’ oil ministers had began and the authorities are discussing supplying Sudan with natural gas through a pipeline in Wadi Halfa. bt