Economy in a week: Power cuts and financial stimulus

Egypt has been experiencing another wave of blackouts throughout the country, caused by energy shortages and a deeply indebted Ministry of Electricity. Meanwhile, Finance Minister Ahmed Galal says the Gulf has got Egypt's back, and its aid is paving the way for economic development. Finally, Egypt's second stimulus package is soon to be revealed.

Egypt has been experiencing recurrent blackouts again, due to an increasing shortage of energy supplies to the electricity company. The blackouts were a regular occurrence over the last few summers, however, since 2012 the crisis has also extended into the winter months.

Relations between the Egyptian General Petroleum Company and the Egyptian Electricity Holding Company (EEHC) have deteriorated since 2011 due to the latter's inability to pay for energy. 

The EEHC has accumulated as much as LE120 billion debt, as recently announced by the company's president Gaber Dessouky. He clarified that the debt is the result of the company and its affiliates' inability to collect money owed, in addition to the increases in energy prices and the drop in fuel supplies used to generate electricity. This shortage in natural gas and diesel, used mainly in electric power plants, has substantially decreased supply.

A recent agreement had been reached to resolve the web of debt owed by the electricity sector to the petroleum sector. Finance Minister Ahmed Galal said LE1.1 billion in arrears has been paid to the Ministry of Petroleum to cover January energy expenditure. This brings the total amount paid by the Ministry of Finance to that of Petroleum to LE7.7 billion, between the period of July 2013 and January 2014.

Growing investments in the electrical grid and power generators have not been able to keep up with increasing demand. Dessouki said that the EEHC will continue to expand its energy production despite the debt, which he hopes will be diminished through implementing new technologies, such as LED lights that will increase the efficiency of energy usage. Despite his statements, there haven't been any national campaigns advocating energy efficiency or use of novel light-saving technologies.

However, recently the Egyptian government joined forces with Saudi Arabia to connect their electrical grids, in an effort to better serve both nations during hours of peak usage. Operational testing of the project is scheduled for the end of 2016.

Axis of Egypt's development: The Gulf... and some policies

Egypt has grown increasingly economically dependent on Saudi Arabia and other Gulf countries, such as the UAE and Kuwait, since the popular removal of Morsi’s Islamist government on July 3, 2013.

Egyptian Finance Minister Ahmed Galal said his government is betting the coffers on two main axes to achieve economic recovery: Gulf financing and internal policies, as reported by state-run news portal EgyNews.

Internal aims include decreasing the budget deficit, increasing growth rates and achieving social justice — a popular demand, Galal adds. The budget deficit, currently at 14 percent of GDP, is targeted to reach 10 percent by the end of this fiscal year, while Galal expects growth to reach between 3-3.5 percent due to fiscal and monetary policies adopted by his government, mostly following an expansionary path.

Talks with the International Monetary Fund (IMF) have ceased for the time being, Galal said, as Gulf financing has been sufficient to date for government needs.

It has been reported that Saudi Arabia will pledge another US$4 billion in aid in the form of Central Bank deposits and petroleum products, while the UAE will pledge around US$1.8 billion in the form of fuel shipments, state-run Al-Ahram daily newspaper reported on Thursday.

Since July 3, Gulf Arab states have given $12 billion in aid to Egypt, far exceeding the $4.8 billion that was negotiated with the IMF.

Second stimulus package

After the first stimulus package — introduced in late 2013, Ahmed Galal said that details of a second package would be announced soon, with the aim of boosting economic growth and reassuring investors.

The government introduced the first package in late 2013 at a total of LE30 billion, with the majority of the investment going into infrastructure projects, industrial areas and restructuring of state-owned companies. The second package, also totaling LE30 billion, will see two thirds of the amount dedicated to public investments, and the rest covering the newly introduced public sector minimum wage, which took effect in January.*

The second package should have little effect on the budget deficit, Galal said at an investment conference last Tuesday, according to Reuters.

Former deputy Prime Minister Ziad Bahaa al-Din said in January that the UAE had financed around LE20 billion of the second stimulus package.

Foreign Direct Investments remains timid

Net Foreign Direct Investments were at US$1.2 billion in the first quarter of the fiscal year, 2014, a slight year-on-year increase of seven percent.

Foreign investments have been gravely affected since 2011, totaling $9.2 billion between 2011 and 2013. In comparison, 2009 alone garnered a total of $8.1 billion.

Egypt has been keen to resolve issues with foreign investors — especially in Gulf countries — due to international arbitration against the government over the past three years. Most prominent was the confiscation of Noubaria Seed Production Company and Tanta Flax and Oils Company, which resulted in the owners seeking arbitration.

The Ministry of Investment is revising regulations that facilitate relations with investors, according to Osama Saleh, as reported by state news agency MENA last Tuesday. Saleh said the government is targeting US$4 billion in FDI by the years-end.

*This part has been corrected, which originally stated that the first stimulus package covered the increase in minimum wage. Apologies on any confusion it may have caused.