Dec 17, 2019

Egypt’s business community is keeping its fingers crossed that a recently launched funding initiative will prove to be a life raft for the country’s industrial sector. To help bolster industry, Prime Minister Mostafa Madbouly on Dec. 4 announced a program to make available 100 billion Egyptian pounds (around $6.2 billion) at a reducing balance rate of 10% to assist struggling businesses with their debt. While local industrialists welcomed the move, economists are urging authorities to proceed carefully.

“In principle, the initiative is a good move toward encouraging industrialists,” Amr Abol-Enein, managing director of CI Capital Asset Management, told Al-Monitor. “It will finance working capital for the defaulting factories, but each case of default should be well examined by the banks prior to being offered a lifeline. We should differentiate between firms that stopped loan repayment due to the country’s overall economic conditions and factories that are in default because of mismanagement.”

The initiative includes debt relief that covers interest in arrears totaling 31 billion pounds (around $1.92 billion) for 5,148 factories. The targeted industrial firms are defaulting on principal loans worth 6 billion pounds (around $373 million), according to a statement by the Central Bank of Egypt (CBE). The crux of the initiative is that defaulting firms pay off 50% of the original principal of a loan, receive exemption from interest past due and then pay the remaining 50% of the loan at the reducing balance rate, that is, an interest rate calculated on the outstanding loan amount on a monthly basis (as opposed to a flat rate, which is calculated on the original principal).

Abol-Enein said the repercussions of the 2011 uprising continue to affect Egypt’s business climate, and many factories have been hampered by the economic instability. “Higher interest rates following the currency float in November 2016 have also made it difficult for factories to get loans at low rates,” Abol-Enein asserted. The CBE floated the pound in November 2016 in accordance with obtaining a $12 billion loan from the International Monetary Fund.

Abol-Enein argues that the initiative should only benefit factories that have been affected by economic turmoil after 2011. “The economic instability has been a force majeure for many factories, but not all of them deserve a lifeline,” he remarked, emphasizing, “It would be a waste of money to reward mismanagement.”