Category Archives: Finance

Egypt’s Misguided Liberals

Questions were already being raised about Egypt’s new liberals and whether they really were as democratic as they claimed to be.

But, as Sharif Abdel Kouddous wrote in the Nation recently, “the turning point came on August 14, when the military and security forces brutally cleared the two mass sit-ins in Cairo that formed the epicenter of support for the ousted president”.

For critics of Egypt’s liberals, the killings of hundreds of people confirmed that this collection of non-Islamist groups were out for blood and their sole objective was to suppress the Muslim Brotherhood and banish them from the political sphere.

Effectively, these groups turned their back on the very morals that defined their movement: political pluralism, or the idea that power should be dispersed among a variety of ideological and economic groups.

For the defenders of the liberal movement, the group has simply lost their way. Pulled between the strong desire to oust an ineffective and unpopular president and the severity of the crackdown against mostly innocent civilians, leading members of the liberal movement have found themselves questioning their political direction.

Hussein Gohar, the international secretary for the Egyptian Social Democratic Party voiced the conflicting emotions of the actions that led to the downfall of Islamist president Mohammed Morsi. Speaking to Abdel Kouddous, he says:

“I think the army was forced to what it did on July 3 and August 14, with the breakup of the sit-ins. But I think the whole thing was handled in the wrong way. And if you say you’re against what has happened, you’re branded a traitor.”

No doubt, the right way would have spared the lives of the protesters. But you can’t have it both ways especially when the motive is to dispose of a president by military coup.

Now the question is, if Egypt’s so-called liberal groups have lost their political compass, how will they approach the challenge of an economic recovery?

The interim government has already shown it is unlikely to brave any sweeping changes to the budget and has instead played a populist card reminiscent of the Mubarak era, by calling for more spending even at a time when expenditure (particularly on public sector jobs and food and energy subsidies) needs to be reigned in.

Some shady characters are also making their way back to the economic decision making scene. Hassan Heikal, who this week formally resigned from Egyptian investment bank EFG Hermes, (though he was quietly replaced as CEO earlier this year, as Rebel Economy reported in February) simultaneously announced his intention to “focus on public service” by “helping devise economic initiatives in Egypt”.

Mr Heikal faces charges of insider trading, along with eight other defendants including the Mubarak sons. Even if he is cleared of any wrongdoing, his reputation has been tainted and is the reason the bank gave him the boot (of course the official statement says otherwise and describes him as “an architect of EFG Hermes’s regional expansion”).

But more worrying is the extent to which the liberals’ connection and reliance on the state will impact economic decision making.  

As Samuel Tadros, an Egypt expert and a fellow at Hudson Institute’s Center for Religious Freedom, points out in this Time magazine piece, liberalism has a long history with the state:

“In Egypt, liberalism didn’t start as it did in Europe with the emergence of an independent bourgeoisie that sought to limit the powers of the state and other entrenched institutions.

In Egypt, liberalism was born with the rise of the civil-servant class in the mid–19th century. Since civil servants are a part of the state, this liberalism is not at all interested in limiting the role of the state.”

Even at the height of the revolution, when the Islamists combined forces with the liberals, the state could not be broken completely.  And of course, the security apparatus is again acting with impunity.

That is already impacting political decisions that will undoubtedly have economic ramifications.

For one, Kamal Abu Eita, a longtime unionist turned politician (he’s now minister of manpower and migration) appears to have been co-opted by the military to the detriment of an already struggling labour movement.  

After first applauding the armed forces’ move to overthrow Morsi, he has since taken steps to sack key members of the country’s trade union federation reportedly because they were Muslim Brotherhood members.

And Mr Abu Eita has already displayed his alliance to the military, by doing little to protect labourers from security crackdowns against two strikes in August, at the Suez Steel Company and at the Scimitar Petroleum Company.

Of course, labour unions were tossed an olive branch when the government decided to raise minimum wages for all state employees from 700 Egyptian pounds ($102) to 1,200 pounds ($174) as of January 2014, but that wasn’t good enough for many local and international trade unions. Plus, with spending on public sector jobs already soaring, Egypt officials may struggle to stick to their promise to pay for another increase.

The military did the liberals a favour by wiping out the Islamist presidency, and now they’re the paying the price for it by returning the favour through watered down economic policies that adhere to the state and the military.

Could Egypt see a return of Mubarakesque policies that prioritise subsidies on heavy industry (that have not yet been successfully removed), instead of subsidies for the poor?  Will officials continuously promise impossible levels of investment or development in state projects that will inevitably stall, rather than actively implementing economic legislation designed to improve Egypt’s competitiveness?

So far, the liberal interim government has shown it will take the course that the state and the military determines at the expense of the ideology that it stands for and the people it serves.

The Wrap: Egypt Factories Shutdown, Syria War Economy Thrives

  • EGYPT 

– Egypt’s central bank held a bumper auction on Wednesday, selling $1.3 billion from its foreign reserves to cover strategic imports such as wheat, meat and cooking oil.  As the country grapples with an economic crisis, the central bank’s foreign currency sales are an attempt to keep the pound strong and reassure the nation that the government can afford basic commodities.

But as Patrick Werr, economics reporter at Reuters writes:

Despite the sales and a more expensive dollar, businesses have racked up hundreds of millions in unfulfilled requests for foreign currency, forcing them to turn to a black market that has mushroomed in recent months.

The pound has depreciated on the black market, showing that a strengthening pound on the official market isn’t as accurate as the central bank may want to convey. 

More than 600 factories have shut down in Egypt in recent months, the country’s trade minister said in an attempt to correct a statement from the minister of manpower Kamal Abu-Eita, who announced a few weeks ago that more than 4,500 factories had closed in Egypt. The latter figure had come from a Centre for Trade Union and Worker Services report released earlier this year, but the methodology was questioned.

The fact that the new trade minister Mounir Fakhry Abdel Nour is trying to downplay the number of closures is not a very good sign, but it’s an even worse signal that he’s questioning the figures of his colleague. 

Either way, even at just 613 factories, that is a big blow to Egypt’s industrial sector, one of the major backbones for the economy. Though the Morsi administration and the caretaker government before that had discussed investing money to re-open factories, nothing ever came to fruition.

Many of these factories are hit by multiple problems including power cuts, strikes, poor security, and difficulty securing loans in credit markets where they are squeezed out by an indebted government.

  • SYRIA 

– Syria’s war economy has created a thriving underground black market, this fascinating Reuters report explains.

As state buyers face growing problems trying to purchase food from foreign suppliers because funds are frozen in bank accounts abroad, middlemen and small companies working with shipping agents are finding ways to do profitable business, operating from neighbouring countries such as Lebanon.

That is even more important at a time when Damascus has had to cancel a number of tenders to buy wheat, sugar and rice. It’s part of a growing shift in the way Syria trades with neighbouring economies, especially rewarding for those willing to take the risk. 

– 400 litres of mazut (or heating oil) are promised for each Syrian citizen as regime insists it has enough fuel to cover domestic demand, Syrian News reports. 

Though Syria doesn’t produce a lot of oil, it relies on imports to keep up with demand. But the war has severed ties with many of its fuel providers including oil traders in the European Union and dramatically impaired the ability to buy fuel because of dwindling reserves. Rolling power cuts and oil shortages now plague Syrians, forcing many to turn to the expensive black market.

Unfortunately, promises by the Assad regime that it will provide more fuel to Syrians are rarely fulfilled.

Why Egypt’s Pound Isn’t Strengthening

Take a look at this chart, which the Central Bank has been proudly parading this month:

[caption id="attachment_1917" align="aligncenter" width="552"]Bloomberg Bloomberg[/caption]

It shows how the pound’s official price, controlled by the central bank, has been appreciating slowly since the overthrow of Islamist president Mohammed Morsi. 

If we were to take this graph at face value, we might conclude that the pound has strengthened as the interim government (and military) took over, and billions of dollars worth of Gulf aid is helping the country’s currency stabilise.

However, traders on the black market tell a very different story, and say the Central Bank is ensuring the pound strengthens just to give the impression that the economy is stable and improving despite the turmoil.

Here, where the pound is traded illegally, the domestic currency has actually weakened to LE7.20 (from LE7.10 a few days earlier, according to Reuters) reflecting Egypt’s volatile economic and political situation.

The pound actually fell as low as around LE8 per dollar at one point earlier this year on the black market, prompting the central bank to turn to a few different measures to reduce pressure on the currency and revive the economy:

  • It put the currency up for sale a few times in December 2012 to prevent a currency crisis and let the pound lose more than 11% of its value on the official market
  • It cut interest rates for the first time since 2009 to revive economic growth
  • The government accepted $12 billion of Gulf aid from Saudi Arabia, Kuwait and Abu Dhabi. $5 billion of that has already arrived.

But none of that is working. This graph puts the currency’s performance in context, showing how the pound has rapidly fallen in value this year:


And as the pound depreciates further, the more foreign currency reserves are drained and the less the central bank can support the official rate for the currency. This is why the country is spending foreign currency at a rate of about $1.5 billion a month.

Add to that, the few foreign investors left are moving to withdrawals but currency controls are making it difficult to convert Egyptian pounds to dollars. Earlier this month, Emad Mostaque, a strategist at Noah Capital Markets in London told me around half a billion dollars worth of investment is trying to leave Egypt at the moment. 

So the picture isn’t as rosy as the interim government may want you to think.

In fact, the volatility we see on Egypt’s currency cycle will be another black mark to add to the nation’s problematic currency history, marked by the Central Bank’s repeated efforts to keep the pound’s value elevated, sometimes at the expense of the country’s precious foreign reserves.

The people at Dcode, an Egyptian business consultancy, put together a comprehensive graph detailing just how volatile the Egyptian pound has fared in the last three decades:

[caption id="attachment_1907" align="aligncenter" width="650"]Dcode Dcode[/caption]

As long as the central bank and government refuse to accept that massive political turmoil and violence on the streets alarmed investors and traders, the pound will continue to fall, foreign reserves will bleed faster and the Gulf will have even more power over Cairo as it comes to the rescue once more with billions of cash. 

Why Offshore Matters

Guest post by Bradley Hope, The National newspaper’s Cairo bureau chief.

Phrases like “nominee shareholders” and “chains of offshore companies” are enough to make most people’s eyes glaze over. But that is on purpose.

Much like the financial wizards who created complicated financial instruments to conceal the risky bets they were making before the financial crisis, the lawyers and accountants behind offshore banking want their world to become low-profile and unimportant when the truth is quite the opposite. 

Half of all global trade passes through offshore tax havens, as this video below explains in what is a good primer for those unfamiliar with the topic:

But why do these tax havens matter?

A telling glimpse into why businessmen and women are so keen on keeping their secrecy came in April with “Offshore Leaks”, a huge investigative journalism project involving dozens of reporters around the world that showed how the high and mighty use offshore banking to conceal assets, evade taxes and pay bribes.

The leaks have shaken the foundations of a financial edifice that is believed to hold as much as $32 trillion.

So far, the elites of the Middle East have been saved of any exposure.

But that may soon change because journalists are still digging through the 2.5 million secret records obtained by the International Consortium of Investigative Journalists from a whistleblower.

The authoritarian regimes of the Middle East have long understood the power of offshore banking. Without the mechanisms provided by offshore banking, the countries of the Arab Spring would have been sitting ducks and vulnerable to exposure, long before they were hit by political change.

That’s why post-Arab Spring countries are struggling to recover assets they believe to have been the product of corruption: bribes, kickbacks and outright thefts.

For example, when Egypt’s Illicit Gains Authority – one of the main groups investigating corruption cases against the Mubarak regime and cronies – checked the bank accounts of Hussein Salem, a major tycoon, they found 45,379 Egyptian pounds, US$4,091, 18,730 Euros, 4,170 Saudi Riyals, 370 Swiss Francs and 30 British pounds.

In all that amounted to about $37,444.36 in cash. They also found properties, jewels and other valuables, but nothing close to his real estimated wealth of more than a billion dollars.

Salem, like many of Egypt’s political and business elite, did not keep his money in Egypt because it wouldn’t be safe from scrutiny.

Instead, he held bank accounts in Switzerland, Paris, Abu Dhabi and Hong Kong. He owns companies in the British Virgin Islands, Guernsey and Panama.

Likewise, Ahmed Ezz, the steel tycoon and former National Democratic Party bigwig, held accounts in Liechtenstein. Authorities there told Egyptian investigators that money funnelled into the country from Cairo promptly disappeared into a web of other companies, many of them believed to be used by Ezz to buy property in London.

Gamal and Alaa Mubarak, sons of the former president, hold more than $300 million in a joint bank account in Switzerland. They also owned a Cypriot company that they used for investments.

But in all of these cases, it is physically impossible for the average person to trace the assets and beyond the capabilities of many countries.

Remember when the protesters in Tahrir were chanting about Mubarak’s $70 billion? Egyptian investigators have only found two assets in Mubarak’s name: a villa in Sharm el Sheikh and another on the North Coast. In total, Egypt has not found more than $1 billion of assets belonging to members of the old regime around the world.

Even if it did find assets, it would have the challenge of proving they originated from corruption. That may be impossible without years of exhaustive inquiries, following each transaction from each offshore company to the next.

The Phillipines is still trying to figure out where the Marcos family stashed all their money (on cases that began in the late 1980s).

This explains why the government of Mohammed Morsi is trying reconciliation negotiations, allowing those accused of corruption to turn over some assets in exchange for cases against them to be dropped. But that is a bad idea for another reason: it only perpetuates a system where those accused of corruption can buy their way out of legal cases.

None of this even begins to touch on an even bigger problem: tax evasion. Offshore banking has helped created a situation where economic growth does not filter down to people in developing countries. Even as countries get richer, the elite use offshore accounts and companies to avoid paying taxes.

[caption id="attachment_1687" align="aligncenter" width="640"]Locations of Offshore Tax Jurisdictions, Grant Thornton Locations of Offshore Tax Jurisdictions, Grant Thornton[/caption]

Egypt estimates it is missing about 66 billion Egyptian pounds from tax revenues – enough to fund gas cylinder subsidies for a year and $1 billion worth of wheat. 

Libya and Tunisia are also grappling with similar problems. And should the government of Bashar Al Assad fall in Syria, the next government, too, will struggle to find the family’s assets.

Here’s hoping that the crack forming in offshore banking rips all the way across. The world needs to fast put an end to an era where bankers and multi-national companies, mafia dons and kleptocrats can build up secret fortunes with no accountability.

Will Egypt Restructure its Debt?

Yesterday, much to the surprise of investors and bankers, Egypt’s ministry of finance said it was considering restructuring its local and foreign debts to reduce pressure on the general state budget, according to Zawya.

Egypt’s total debt, according to Zawya figures, stands at EGP1.29 trillion or around $185 billion, yet there were few details provided on how this restructuring could play out.

According to the finance minister, Fayyad Abdel Moneim:

“We are considering loans from the Central Bank of Egypt (CBE) at the announced rate, instead of resorting to the Treasury bill [T-bill] mechanism at 13%, which will ultimately alleviate the general debt. This would also restrict monetary printing operations, which could result in the exacerbation of inflation”. 

The term ‘restructuring’ always implies default, or imminent default, so the fact the minister of finance has gone on the record with a statement that the country is considering this move is worrying, especially considering the big question today is whether Egypt will collapse or not.

But perhaps the terminology used is just wrong.

Let’s give Mr Abdel Moneim the benefit of the doubt. Perhaps he actually meant “refinance”, which means replacing old debt with new debt and using the proceeds from the new debt to pay off the old debt’s principal (restructuring is more drastic, and normally leads to a reorganisation of capital structure by exchanging current debt for other types of securities, waiving defaults, raising capital by selling assets and perhaps even…..going through bankruptcy!).

This means, according to his statement, Egypt’s government would borrow from the Central Bank at the cheaper interbank rate of around 10%, rather than sell government securities to banks, which would usually cost at least 13%.  This would be a welcome relief for Egypt, where debt service payments on bonds and bills it sells make up at least 20% of the budget – a huge weight alongside energy subsidies.

So what’s wrong with that?

The move is likely to jeopardise the independence of the Central Bank. Not only would it appear like the Central Bank is subsidising sovereign debt by offering cheaper rates to the government, but it creates governance issues because the Central Bank starts to function like the ministry of finance – taking funds from investors (in this case banks) to finance government spending.

In the worst case scenario, if the government needs more money (which is very likely considering its spending habits), it may prompt the CBE to raise reserve requirements (basically the amount of funds banks are asked to hold to make loans with).

This could ultimately compromise the position of the CBE, anger the banking community which has been supporting the government for the last two years through buying T-bills and bonds (albeit at a fairly high return), and further undermine the Morsi administration and its economic decisions.

That’s not to say Egypt is safe from default.

Egypt’s sovereign credit rating is very low at the moment and that means the risk of default is high. But, because most of the country’s debt is technically “domestic”, Egypt can roll-over repayments. It needs to print more money to do this, however, and that would cause serious inflation.

But whether Egypt is refinancing or restructuring, there is a fundamental flaw here that has left bankers puzzled: details are scarce and there are no plans being discussed openly.  Egypt’s ministries must streamline, work together and stop announcing random potential plans, that may or may not come into fruition.

This story even surprised members within the finance ministry itself.

Mr Abdel Moneim may be new to his job (he became finance minister just a few weeks ago), but it’s high time there was some coherence in one of the most important ministries in Egypt. 

Why Egypt Can’t Rely On Sukuk

A law that better regulates sukuk issuance has been mooted for several years, but the move to enforce a clear law became a priority after the revolution, especially considering the economic climate is increasingly being shaped by Islamic political parties.

So finally the “troubled passage for a bill” ends, Reuters reports and Egypt’s President Mohamed Morsi has approved a law allowing the state to issue Islamic bonds, or sukuk.  Here’s the full bill in Arabic.

There are high hopes for sukuk to shore up Egypt’s flagging finances.  Officials have thrown out figures to the public that signal these instruments could raise as much as $15 billion from domestic and foreign investors.

Well, I’m sorry to burst your bubble Mr President, but that’s not happening. Read More

INFOGRAPHIC: Egypt’s Bond Addiction

This is PART 2 of an excellent two-part series by Isabel Esterman on government securities: treasury bonds and bills, and other debt instruments sold by a government (including Egypt) to finance its borrowings. Here is Part 1

This time we’re looking at the impact of relying on these financial instruments to cover borrowing needs.

We all know that Egypt is in really bad shape, but if you start paying attention to bond issuances and yields, you can watch (in horror) as this vicious circle of debt continues. As long as Egypt’s debt grows much faster than its economy, things are going to be rough.

As to how to solve this, one possible route is for Egypt to get its accounts in order, by cutting spending (restructuring energy and food subsidies is the obvious place to start) and raising revenues (increasing taxes, and possibly bringing military and ministerial funds into the treasury). Unless this is done very well, though, it’s hard to avoid hurting the vulnerable or angering the powerful, and it’s difficult to see how the current administration has the political capital to do either.

In theory, Egypt could also come up with a comprehensive stimulus plan, and convince lenders (domestic and foreign), that a big enough infusion of cash will get Egypt’s economy back in gear without the need to resort to austerity measures. For this to work, it would have to be a whole lot more detailed and credible than what we’re seeing come out of either the ruling party or the opposition.

Disclaimer: In the course of the research for this graphic, it was discovered that the proportion of government spending on debt servicing (to cover the repayment of interest and principal on a debt) was actually much larger than the figure  extensively used in the media. It stood at 35.7% rather than the “25%” often quoted in mainstream media.

We have consulted bankers and financial analysts to confirm this, but there is still controversy over  how it the figure should be calculated. It is a matter of terminology, so for number geeks out there, we have chosen to look at entries (sources below) for “interest” and “loan repayment” as a percentage of total budget outlay, rather than “interest” as a percentage of “expenditures”, which yields the more widely-cited figure of 25%.

infographicPart2Figures come from the following sources:

Public Debt/GDP

Budget allocation

Debt service payments

SPECIAL REPORT: After Arab Spring, Islamists Test Religion In Economics

With the rise of political Islam across North Africa in the wake of the Arab Spring uprisings of 2011, Islamic finance is being touted as the solution to decades of unemployment and economic inequality.

“We’ve tried socialism, we’ve tried capitalism, now we’re trying Islam,” cried supporters of Mohammed Morsi, when he was elected as Egypt’s first Islamist president last June. In Libya and Tunisia, new political movements have pledged to use Islamic principles to right their wayward economies.

But some critics – including advocates for the greater use of Islamic finance – believe that a sudden and rigid adherence to Islamic law, known as Sharia, could dramatically slow down economic recoveries across the region at a time when governments are already struggling to establish stability.

With rising unemployment, growing deficits and continued protests, anything less than a quick-turnaround for post-Arab Spring economies could be disastrous, economists warn.

“Governments have to prioritise getting economies back in shape before introducing Islamic finance,” said Douglas Johnson, chief executive of Codexa, a New York-based investment bank that creates Sharia-compliant financial products.

Egypt, where the Muslim Brotherhood is positioning itself as the most powerful political group in the post-Mubarak era, has become an important test for whether the marriage of Sharia with a 21st-century country can ameliorate financial and social hardship.

[caption id="attachment_1455" align="aligncenter" width="580"]Economist, Global Sukuk Economist: Global Sukuk, and by country[/caption]

The Islamist government has focused on passing new laws to allow the issuance of sukuk, or Islamic bonds, and pledged to centralise zakat, a mandatory charitable giving from Muslims, to better target poverty.

While a shift to Islamic finance could bring an economic boost by giving countries access to a huge pool of Islamic investment funds from the oil-producing countries of the Persian Gulf, such as Saudi Arabia, Qatar and the United Arab Emirates, some say Sharia is out of sync with modern economics and cannot work in today’s world without extensive updating.

“What passes as Islamic finance is anything but interest-free,” said Timur Kuran, a professor of economics and political science at Duke University. Mr Kuran is the author of “The Long Divergence,” a book that argues that Arab countries have failed to keep up with the economies of the West because of the rigidity of Islamic law around business and finance.

Sharia, which is “out of date” and has not played an important role for almost two centuries, only serves to add an “Islamic veneer [which] will not improve an economy in any measurable way,” Mr Kuran said.

Egypt’s long-winded negotiations with the International Monetary Fund for a $4.8 billion loan have shown how an uncompromising adherence to Sharia can slow down much-needed injections of funds. Clerics and Islamists have dithered over the loan, in part, because the loan comes with a 1.1 per cent interest rate. Sharia prohibits usury.

After an initial reluctance, the Muslim Brotherhood’s Freedom and Justice Party recently endorsed the IMF loan and called it Sharia-friendly. They describe the interest rate as “an administrative fee”.  But the IMF has distanced itself from any claim that the loan is Sharia-compliant, saying instead that the terms of the loan are “favourable”.

Without the funds, Egypt has had to allow the currency to gradually devalue and risk higher inflation, especially for food, provoking a backlash from protesters who believe the government has relegated demands for social justice.

The careful deliberations of the Brotherhood and its political arm reflect the group’s more pragmatic views of religious doctrine, but also what they see as a tremendous opportunity.  About 65 per cent of Egypt’s mostly Muslim population do not have bank accounts. By increasing access to Islamic finance, they believe Egypt could gain billions of dollars in new deposits.

“Islamic Finance is a realistic option especially with demand coming from those who by nature prefer ‘Islamic’ solutions regardless of the sector and domain,” said Ashraf Serry, one of the Muslim Brotherhood’s top economists.

North Africa 

Governments across North Africa are also shifting to Islamic finance as a way of reducing deficits.

[caption id="attachment_1456" align="aligncenter" width="580"]African Development Bank: North African Shariah compliancy African Development Bank[/caption]

The Tunisian government is trying to diversify and increase its sources of revenues by tapping into Islamic finance and issuing sukuk.

Tunisia’s newly elected Islamist movement Ennahda, which has led the government after the overthrow of president Zine al-Abidine Ben Ali last year, said the government would ensure that Islamic banks were able to compete on a level playing field with conventional banks and wants Tunisia to become a regional center for Islamic finance.

Critics in Tunisia believe the strategy is more about playing to Ennahda’s fervent constituency than wise economic policy. Tunisia’s economy has long been a hotspot for foreign investors, especially from Europe, because of its Western-influenced political, economic and legal system.

Since protests broke out in 2011, Tunisia’s unemployment rate has risen to 18 per cent from 13 percent, with about 750,000 people out of work. The worsening situation has fuelled arguments that what the country needs is stability, not Sharia-compliant financial products.

[caption id="attachment_1457" align="aligncenter" width="580"]African Development Bank: African Development Bank[/caption]

For many Arabs living in the Middle East, however, Islamic finance is a welcome relief.

“Libya is 100% Muslim so there is a willingness to adopt islamic banking solutions and this will definitely have a significant impact on retail and personal banking in Libya,” said Alaa El Huni, an investment banker based in Tripoli, Libya.

Libya’s government has indicated it will further enshrine Sharia in laws and approved an Islamic banking law in May to stimulate its private sector following a civil war that ousted Muammar Gaddafi.

Here, in a country devastated by lengthy battles between rebels and Gaddafi’s supporters, the opportunity for restructuring the Libyan economy is larger.

But Mr El Huni’s warned that moving from one extreme to another will negate any efforts.

“A country run wholly on islamic finance would to some extent alienate itself or at least create barriers to an effective relationship with the rest of the world.”

CARTOON: The Economics Of Egypt Central Bank’s Interest Rate Hikes

Last week, Egypt’s Central Bank decided to hike interest rates to slow down inflation and curb a sliding pound. 

But what are the economics behind the move? What does it really mean to raise interest rates and what impact does this have?

Contributor Isabel Esterman has drawn up a genius cartoon to explain all.

She says that this is, of course, hugely over-simplified. In order to keep it at a manageable length, the cartoon glosses over things like how fractional reserve lending actually adds to the money supply, repo and discount rates (we don’t need to get that technical anyway…), as well as examples of when these theories don’t work – all topics for another day.

Still, we hope this is enough to make people feel more confident tackling something like the CBE Monetary Policy Committee’s most recent press release.


Breakfast Wrap: Egypt “Quickie Court Cases” Must Stop, South Korea Eyes Egypt, KSA Jobless

A case against Egypt’s former housing minister Ahmed El-Maghrabi has been overturned, Ahram Online cited the state news agency MENA as saying.  El-Maghrabi, like many of his Mubarak-era colleagues, had been charged with squandering and profiteering from public funds.

Though a culture of corruption had been allowed to fester under Mubarak, increasingly there has been a criticism of the speed at which post-revolution trials took place. Lawyers say that though there is a case against some of these former politicians, the “witch-hunt” that has ensued against some people has led rushed cases where evidence is flimsy.  That’s not to say all these people are innocent, but more an indication of how the need to satisfy the public’s demands for justice has led some public prosecutors to become compromised and rush through cases without care of presenting valid evidence.

Cases involving large companies such as Talaat Moustafa, the property company, have also seen cases rushed through then overturned.

If Egypt is to have a reborn culture of transparency and communication, these cases must be addressed in the way they deserve; painstaking analysis and extraction of foolproof evidence. These cases are often complex and convoluted and more often than not, money is hidden in various offshore vehicles that are hard to track.  A quickie court case is not going to address and eradicate the crime in the way the public would want.  


South Korea plans to invest US$583 million in Egypt, South Korean ambassador Young-so Kim said on Tuesday, according to Egypt Independent. The ambassador said that the trade exchange volume between the two countries has reached $2.4 billion.  In October, Samsung, the South Korean electronics giant, said it would build a LE1.7 billion plant in Beni Suef (it’s first plant in the Middle East and North Africa) in a move that will create 1,400 new jobs.  Similarly to the Chinese, countries like South Korea benefit enormously from Egypt’s cheap land and relatively cheap labour.



Egypt plans to raise LE10.5 billion ($1.7 billion) over the next week from Treasury bill sales as it prepares for the second round of a referendum on a new constitution, Bloomberg reported.  Egypt continues to offer government securities to predominantly domestic banks to plug its budget deficit. What is more worrying however, is that interest payments that the government must pay on these bills. Remember last year’s yields on bills that reached almost 16%? Well those yields are now coming to maturity, and the interest payments on those make up about 15%-16% of the budget, economists have told me. What’s more, the rate at which the government is having to pay those interest payments off, is actually exceeding the rate at which the government pays for energy subsidies. That is a huge additional burden on the budget. Luckily for the government, yields have now eased off so the securities Egypt sells today won’t cost as much when they mature.


Talking of energy subsidies (as is often the case on Rebel Economy), it is becoming more apparent by the day that Egypt’s fuel crisis is going out of control. Egypt is becoming increasingly dependent on fuel imports as it uses oil to pay off debts instead of refining the crude at home, Reuters reports, in a downward spiral that is piling pressure on its deteriorating finances. Rather than refining crude at home and selling it at a reasonable price, for years Egypt has been selling on very expensive fuel at very subsidised prices.

Egypt spent around $9.7 billion to import oil products in the year to end-June 2012, about $2.8 billion more than in the previous year, data from the Central Bank of Egypt shows.  However, David Butter, a long-time Middle East journalist then pointed out that the Central Bank appeared to have significantly modified their oil trade figures:


Whether or not the Central Bank corrected their figures or fudged them to appear more favourable is not clear.


Meanwhile, imports are chronically higher than exports leading to a continuous trade deficit. Today Egypt, the world’s biggest importer, is seeking to buy at least 60,000 metric tons, Nomani Nomani, vice chairman of the state grain buyer, told Bloomberg. Bread subsidies, though not as severe as energy, are also a drain on the budget, but so far the government is loathe to make any changes for fear of riots.


Unemployment figures from Saudi Arabia reveal two long-running problems for the oil-rich state has: a large number of unemployed women (who are gradually being accepted into the workforce) and an unemployed immigrant workforce.  As a result, jobless numbers reached almost 2 million, according to Ahram Online’s report. Unemployment among women is exceptionally high in Saudi Arabia surpassing that of men by almost 30%, to reach a total of 1.7 million. Almost half of those women hold university degrees, the Saudi labour ministry indicates. Meanwhile, recommendations are being made to employ these people in the private sector, rather than the public sector, where saturation is already very high.


In Dubai, Al Habtoor Group, the conglomerate with interests in  hotels, property and car dealerships, has called off plans for an initial public offering next year that could have raised up to $1.6 billion, The National newspaper reports. The company had been considering an IPO on the Nasdaq Dubai market, and a foreign stock exchange, next March or September.  It’s another blow to the Dubai financial market and the wider UAE financial community, which has seen almost no new listings since 2008.