The obvious success of Egypt's economic reform programme has been in fiscal and monetary stabilisation, and a strong macroeconomic performance over the past seven years. But Egypt -- now recognised by international monetary institutions as an emerging market -- must do more in order to compete effectively in a global market. In particular, economic experts suggest, it must further liberalise the financial sector, lift outstanding trade barriers and adopt more competitive policies for the private sector. Egypt's poor export performance -- a major obstacle to its capacity to compete globally -- is also one deficiency which economic reform has not so far adequately addressed. To improve this situation, it is being suggested, non-oil exports must be increased, more foreign direct investments solicited and the level of domestic savings boosted, in order to ensure long-term economic growth. This one major problem notwithstanding, the current position of the Egyptian economy is stronger than it has been for a long time and should qualify it for better performance once these weak points are addressed. "If you look at the medium term evolution of the Egyptian economy, over the 1990s, the improvements are very clear," says Mauro Mecagni, resident representative of the International Monetary Fund (IMF) in Egypt. "At the beginning of the decade, the economy could not service its external debt, it had a major, very severe fiscal problem, and very high inflation. Right now, we are looking at an economy that not only has a strong external position, but the indicators of this external position point to great strength, relative to many emerging markets." Stressing the fact that one of the reform programme's strengths has been its comprehensive approach to the economy's problems, Mahmoud Mohieddin, adviser to the minister of economy, says, "The stabilisation programme embarked upon by the government in 1991 consisted of a series of measures aimed at reducing the country's high budget deficit and, from 1996 onwards, a series of structural reforms whose aim was to effect greater liberalisation of the economy." The rescheduling of Egypt's external debt has led to a marked improvement in the country's budget and balance of payments. "We are talking about a country that has a very modest debt service obligation, around nine per cent," says Mohieddin. "The net present value of external debt is around $19 billion, while we have $20.4 billion of international reserves. So we are creditors, not debtors to the rest of the world," he adds. Mohieddin says that the economic reform programme undertaken is a "remarkable story as far as the macroeconomic discipline is concerned: concerning the fiscal deficit, even the public deficit. If you put Egypt's external debt and domestic debt together, they are less than 60 per cent of GDP. And now, we are also close to reducing the inflation rate to the Maastricht criteria." Former Minister of Planning and member of the left-wing Tagammu Party Ismail Sabri Abdallah concedes the fiscal success of the reform programme, which has been "reflected in good performance in a number of indicators such as inflation, interest rates and in exchange rates. Although our growth rate is still lower than projected levels, that is due to the fact that any reform programme depends on deflationary measures -- and this is reflected in low growth rates." But Abdallah expresses a reservation in principle regarding reform programmes devised by the World Bank and IMF, whose approach is governed by ideological factors more than economic facts. "They proceed from the perception that the market economy is more efficient than central planning, regardless of different circumstances in different countries worldwide," he adds. According to Abdallah, reform programmes advocated by the IMF do not have economic development among their objectives. "The IMF's main concern is to tighten the gap between production and consumption on the macro level, regardless of whether or not, and how, low-income groups are affected." A different view is offered by Ali Lutfi, former prime minister and professor of economics at Ain Shams University. "Some people think that the economic reform programme begun in the early 1990s was drawn up according to the agreement with the IMF. I completely disagree with this view. The Egyptian economic reform programme in fact started in the early 1980s when President Mubarak took charge. The programme dates from the decisions taken at the economic conference in February 1981. We agreed then to implement a series of five-year plans and projects to develop the economy's infrastructure and enhance its efficiency," says Lutfi . According to Lutfi, it is not true that the IMF forced Egypt to take certain economic measures which went against the country's own independent economic policies. "I believe that the programme was 100 per cent Egyptian, and that it was Egyptian-made for the benefit of the Egyptian people." Underscoring the success of fiscal reform in the 1990s, Lutfi adds, "The reform programme succeeded in decreasing the budget deficit from 20 per cent to less than one per cent. As for monetary reform, inflation dropped from 20 per cent to four per cent. We achieved a surplus in the balance of trade. Moreover, the Central Bank of Egypt (CBE) achieved a surplus in foreign reserves which now stands at about $20 billion. And now, we are putting the stress on completing the implementation of the mega-projects started in 1991, such as the projects for developing Sinai and the South of the Valley (Toshka). The importance of implementing these projects and others is to increase the rate of GDP growth to at least seven per cent -- that is, three times the rate of population growth, which is currently 2.1 per cent." But now that Egypt's macroeconomic credentials are sound, what the economy needs if it is to grow is an increase in the rate of domestic savings and investments, which still fall short of the necessary levels. Ismail Sabri Abdallah says that for reform to lead to economic growth, there should be a government-backed development plan in which both the private and public sectors are involved, with industrial development at its core. "Investment in the industrial sector is easy and low cost, as we can now rely on importing raw materials whose prices are plunging worldwide." Egypt should take advantage of its richest resource, its labour force, by investing in labour-intensive high-value-added industries. According to Abdallah, industrial development will also lead to an improvement in Egypt's export performance. "Upgrading our industrial base will solve the growing trade deficit problem." Abdallah stresses that one chronic problem of the economy is the shortfall in local savings and investments. "To build upon its current stable situation, Egypt should raise its savings rate to 25 per cent of GDP, while the local investment rate should be increased to 27 per cent. In this way, we can reach a growth rate of seven to eight per cent. That is the only way to deal with the persistent problems of unemployment and poverty." The economy ministry's Mohieddin said: "Egypt's domestic savings are low because of low incomes, and the lack of a savings culture, as well as the lack of the mechanisms needed to mobilise savings from idle uses, such as real estate, inflation hedges and high consumption." He believes that, "in order to encourage savings, the financial sector should make available all sorts of instruments -- bonds, shares, and insurance policies -- and even cater to low-income groups." One remedy which the government has embraced is to liberalise the insurance sector, whose current contribution to domestic savings is meagre, says Mohieddin. "There is quite a long way to go still to implement the structural reform agenda," says the IMF's Mecagni, adding that fiscal policies must now put more emphasis on developing human capital, in particular through expenditure on education and health. "This is a huge challenge, because it involves, essentially, a major effort to widen the tax base and reduce tax evasion, and to find resources that can be spent on basic education and improving the literacy rate." More competitive policies towards the private sector are called for as well. According to Mecagni, "You need to establish a competition policy in the economy. Production and distribution are basically done by the private sector, and so regulation should be conducted by strong agencies empowered to do their jobs which are autonomous in relation to the government." Ismail Sabri Abdallah says that the government has not developed policies to encourage real competition. In particular, he criticises the performance of the Egyptian private sector, whose patterns of investment are simply not conducive to economic growth. "A World Bank report recently expressed reservations on relations between Egyptian businessmen and the government, [with government policies] giving a high level of protection to their industries, and minimising the importance of competition. This contradicts the principles of a market economy, which depend on increasing efficiency and competition, a continuous increase in productivity, and a consequent decrease in costs," says Abdallah. Another shortcoming, according to Abdallah, is that the shares of most private sector companies are not traded on the stock exchange, thus depriving the economy of an important means of access to savings. Abdallah is also critical of the role played by some Egyptian businessmen, "who do not concentrate on one industry which they really want to develop. All they do is strike lucrative deals across a range of different activities." Abdallah says that the World Bank report "condemns" the fact that the greater part of the Egyptian private sector's resources is channelled into non-tradeable investments, such as real estate. Accelerating and widening the scope of privatisation in the coming phase is also a high priority. "There are initiatives under way giving the private sector a decisive role in management changes within the privatised companies. It remains to be seen what fruit these efforts will bear," says Mauro Mecagni. And he adds that privatisation in Egypt is now entering into a second phase, thanks in part to a realisation of the importance of anchor investor sales as a means of effecting management changes. Yet privatisation has also involved laying off thousands of employees in former state companies. It will be important in the next phase to try and redress some of the negative social and economic consequences of liberalisation. According to Lutfi, the economic reform programme has led directly to higher unemployment, an increased deficit in the balance of trade and inequitable distribution of national income. "In the coming period, we have to emphasise economic policies which can address these negative side-effects." But according to Mohieddin, the positive effects of economic reform should ultimately be reflected in higher real income across the board as a result of reduced inflation. "There will be more small and micro-enterprises, more medium and large enterprises and more mega-projects. We will have more jobs, and more income will be generated," he gushes. Priorities for the coming period include fostering greater competition in the financial sector and improving the quality and productivity of services. "Greater competition in the banking sector and exposing the sector to more foreign participation are crucial," says Mecagni. "A menu of assets, in particular government securities, can lead to a domestic yield curve that could act as a benchmark for the development of a corporate bond market, and the process of privatising the banking and insurance sectors will create more competitive conditions in this very important segment of the financial sector." According to Mecagni, progress in trade liberalisation is also crucial to ensure that the growth rates targeted by the Egyptian government are achieved. "Two areas where a lot of work needs to be done are the dismantling of non-tariff barriers and the reduction of tariff barriers," he adds. "It is important to recognise that foreign direct investment is discouraged by costly customs clearance procedures," Mecagni cautions. "From the investors' point of view, this is a source of uncertainty, a source of costs and of discouragement. In an era of globalised enterprises, the benchmark that is relevant is not the history of a country, but how fast Egypt is making progress compared to possible alternative locations." Reported by the Economy staff ------------------------------------------------------------------------ --See Charts--
