Every era is characterised by a prevailing economic trend. The 1950s and 1960s is remembered as the period of nationalisation and socialism. The 1970s witnessed the return to a market economy with the Open Door Policy. The 1980s saw a search-for-an-identity phase, followed by a privatisation wave and later, in the 1990s and 2000s, a shift to local monopolies and foreign investments.
As we look at the new phase, which started three years ago, a clear trend is government-launched national projects referred to as mega-projects. The projects are national in terms of impact and span various sectors; transportation and logistics in the case of the New Suez Canal and Suez Canal Development Zone and the ambitious plan to build thousands of kilometres of highways.
They also include an ambitious plan to reclaim millions of acres for agricultural use. Besides being national, the projects are humungous in size and will cost the government billions of dollars: $8 billion for the New Suez Canal, $9 billion for electricity generation, and $25 billion for nuclear power plants. In a $300 billion economy, the projects are huge for Egypt.
The launch of the mega-projects was cheered by many economists who viewed them as necessary for the revitalisation of the economy, stagnant since 2011. These supporters saw in such projects a way to boost the economy without incurring a huge financial burden as they believed the country’s Gulf allies would finance the projects. But, as usual in Egypt, reality has turned out to be very different from rosy expectations.
The stagnant economy grew very quickly in the last fiscal year to achieve 4.2 per cent growth, compared to around two per cent for the previous few years, but then it slowed down this year to around 3.5 to four per cent, compared to expectations of around five per cent.
The gap between reality and expectations can be looked at from six different angles. First, mega-projects are long-term in nature as they take a few years to be completed. It was not reasonable to expect them to yield quick results. The seeming recovery in 2014-2015 was misleading because growth then was compared to the very low base of the previous year. After that it would have been very hard to sustain such a high growth rate.
Egypt is also not new to mega-projects since we have experienced a few before. Some, like the Aswan High Dam, turned out to be successes, but others, like the Toshka Project, have been disappointing. Many such projects are launched with huge national enthusiasm but minimal technical and financial studies, and thus a few years down the road reality appears and the projects get shelved.
Moreover, the financing needed for such projects is huge compared to the size of the economy and the country’s banking assets. The Gulf allies did not contribute as much to the mega-projects as had been expected. Raising around LE60 billion ($8 billion) through investment certificates for the New Suez Canal was a great achievement for the project, but it also affected access to financing for other business interests: the mega-projects, and the government in general, has become a major competitor to the private sector in seeking financing.
The ailing Egyptian economy has also had major financing needs for the support of basic infrastructure and public services. Investments in these sectors could have resulted in significant improvements in quality of life, as well as a more sustainable growth model created from the large pool of money invested. Assuming huge growth just because huge funds are invested is not realistic — what matters is how the funds are invested.
There has also been a clear dependence on foreign companies to deliver some of the mega-projects, including foreign dredging companies in the New Suez Canal and large European companies working on electricity generation. This has resulted in large outflows of foreign currency from the economy and a limited spillover effect on the rest of the economy, as compared to delivering such projects using local developers and contractors, thus creating jobs.
Lastly, because of the large amount of funding required the government has borrowed to finance the projects. This borrowing has taken place locally, driving local debt upwards, but also externally to finance the energy deals, resulting in significant increases in the country’s external debt. This has put more pressure on the pound and on our capacity to borrow further from global markets.
So despite the great zeal for the mega-projects a couple of years ago, and the rosy expectations about growth such projects can create, the reality has been disappointing. It seems like a paradox that with billions of dollars invested in national mega-projects the economy has not achieved a sustainably high rate of growth.
Instead, growth spiked for a year and then retreated back to what is believed to be the new normal growth rate of three to four per cent annually, as compared to the five to seven per cent range that was forecast for the current, as well as future, fiscal years. The above factors offer an explanation of this paradox.
Despite the concerns about the mega-projects, they have still had some positive effects that can be seen in four main aspects. First, the projects created some growth, even if was not sustainable. After four years of an average of two per cent growth, the economy recorded more than four per cent growth in the last fiscal year. It now seems to be settling into a new normal growth level of three to four per cent, which is expected to continue for the coming few years.
Second, the projects helped improve the country’s infrastructure, especially the road network, which will pay back at one point, even if it is in the long term. Third, the projects have managed to solve critical issues such as the shortage of electricity, which used to be a major concern but is now getting under control.
Fourth, the projects have created potential for development in distant areas, such as is the case of the agricultural developments. These could change the demographic map of the country, though in the very long term.
Looking to the future, the determination to launch mega-projects will exacerbate the crowding out that the private sector is facing in competition with the government in seeking finance and thus increase interest rates and reduce private-sector activity.
In addition, such trends will further increase the country’s external debt, which, though still at safe levels, has markedly increased over a short period of time, putting pressure on the pound and the credit rating of the country and making it harder and more expensive to borrow externally.
30 June 2016
This article was published in "Al Ahram Weekly"