While full of good intentions, the cabinet, in its first year in office, has left experts unsatisfied. Niveen Wahish reports It seemed like only yesterday when the new cabinet came to office promising aggressive reforms to the economy. Their top priorities were major and ranged from tax and customs reform to promises of restructuring the financial system, as well as strengthening monetary policy and better management of state-owned assets all with the broader intention of improving standards of living and job creation. Trying to make good on all these promises has kept the cabinet busy since they took office last summer. Two landmark reforms of this last year are those made to the customs and tax regimes. The first cut the average tariff rate from 14.6 per cent down to nine per cent and reduced the number of tariff bands from 27 to six. While this month's tax reform slashed taxes by half from 42 per cent to 20 per cent. Overall, indicators have also been positive. Recently announced figures show a 5.2 per cent growth rate during the first quarter of 2005 up from the four per cent growth rate in the first quarter of 2004. Also, the Central Bank of Egypt built up its hard currency reserves to some $18 billion in March 2005, compared to only around $14 billion for the same period of the previous year. The value of the pound has stabilised and has in fact appreciated slightly to about LE5.8 to the dollar, compared to approximately LE6.25 when the cabinet took office. But as Ahmed Galal, executive director of the Egyptian Center for Economic Studies put it, success is measured against what needs to be achieved, not where the economy was. He admitted that compared to the past, the Egyptian economy has come a long way. However, he said, the government's plans to achieve growth and a decent income distribution have yet to be realized. In fact, a recently released report by the International Monetary Fund on the conclusion of its Article IV consultations with the Egyptian government pointed out that "Notwithstanding the substantial progress attained since mid- 2004, (the IMF's executive board of) directors noted that the challenges ahead to build a dynamic, private sector-driven economy in Egypt remain considerable. They noted that output growth remains below the minimum required to absorb labour force growth, the financial sector is weak and government borrowing and debt are still high." Galal admitted that a lot of work has been done in the area of stabilising the foreign exchange market and the value of the pound and in streamlining monetary policy, however he added that an efficient inflation targeting system is not yet in place. In fact, according to the IMF report, monetary policy needs to "provide better guidance to the market, including a well-understood nominal anchor." These actions, the report said, "would enhance the credibility and transparency of the central bank and help anchor inflationary expectations while the monetary policy framework is being strengthened." In the area of fiscal policies, Galal commented, the reform to the tax and customs regime is a big credit to the government, but he added that very little has been done on rationalization of expenditure, pointing to the growing budget deficit and public debt. Total public debt according to the Ministry of Industry and Foreign Trade figures, stood at LE358 Billion in December 2004, up from LE333 Billion in 2003/2004. In the meantime, the budget deficit stood at 10 per cent of GDP in the 2004/2005 budget. He acknowledged the fact that the government's expenditures and revenues are currently rigid because of government commitments in such areas as wages and subsidies and meeting its public debt commitments. Moreover, he said, revenues are rigid mainly because the informal sector remains outside the system. These are all areas that must be worked on as well, he stated. Another area that needs to be worked on is administrative reform. He stressed the importance of dealing with the customs and tax administration to ensure that the reforms pass through to beneficiaries. Other areas which have seen much improvement, Galal said, include the entry of investments and the establishment of companies. However, according to Galal, the government needs to work on facilitating corporate operations and exit mechanisms. "Exit in Egypt is costly and may discourage firms from entering the Egyptian market in the first place," he pointed out. Sherif Delawar, management professor at the Arab Academy of Administrative Sciences, is also keen on seeing more administrative reform. "Bureaucracy persists," he said, adding that results continue to be meager in areas such as subsidies. However, he admitted that may be partly attributed to the fact that its an election year. Nonetheless it does reflect on the size of the budget. And the recent move to raise salaries by 30 per cent is going to augment the situation further. He lamented the fact that the government has mostly been addressing the elite with it reform discourse. "Officials must talk to the people to explain what is happening, not just to the elite. Officials have to convince people that drastic reforms will lead to sacrifices and they have to be ready to be role models for that in their lifestyles." Hanaa Kheireddin, economics professor at Cairo University, hailed the courage of the cabinet to carry out steps that had long been propagated but never executed. However, she did not believe that the slogan of "third generation reform," recently launched with the signature of the tax law is particularly fitting. "We are carrying out reforms that should have been done 10 years ago," she said. Delawar offered a similar opinion. He said that although the government claims that the first generation of reforms were in the 1980s, it was not a period of economic boom. The 1980s, he explained, were a period when Egypt rebuilt and improved its infrastructure. Real reform, he suggested, actually began in the 1990's but slowed to a near halt mid-decade. "We stopped at stabilisation at that time," remarked Delawar, "but we never really carried out the structural and institutional reform." Kheireddin stressed that "we should not label reform. It is a continuous process." She also said that the government has to set clearer priorities. While talking about maintaining subsidies for the poor, they have lifted subsidies on diesel increasing its price from LE0.4/ litre to LE0.6/litre. This touches the lives of the greater part of the population because they depend on it for transportation. She praised the management of the monetary policy in that it has led to stability in the value of the pound; however, she added that stability has not affected prices which have not dropped. But even the sustainability of that stability has come into doubt. Gouda Abdel-Khaleq, head of the economic committee of the left-wing Tagammu Party pointed out that a combination of factors which government had no hand in have helped the value of the pound. These include skyrocketing oil and gas prices and increased Suez Canal traffic. "The opposite could happen in the future and this could cause a reversal," he commented. Moreover, he pointed out that interest rates were raised to defend the value of the pound. He questioned whether the fiscal situation could afford that in terms of what it means for public debt as well as its impact on investment and the targeted growth rate. He believes that exchange rate stability has partially resulted from a correction of the overshooting in valuation of the dollar following the pound's depreciation in 2003. In the other two areas for which praise of the government has been sung, Gouda remained unsatisfied. He pointed out that the customs reform would only be fruitful if "we have a competitive market structure with effective anti-monopoly regulations, then the reduction on the price of components will reflect on the final price." And although the law has been issued, how it is going to be enforced remains unclear. As for the tax cuts, Gouda believes that the government has gone too far with the 50 per cent reduction. He pointed out that in the US the average tax rate ranges between 30 to 35 per cent. "By making these drastic reductions, the government is squandering resources." he stated. Gouda was not happy about government plans from the outset. The government's plan in December 2004 focussed on developing three main sectors: tourism, agriculture and contracting. He does not think that a strategy for job creation that centers around these three areas is valid. The absorptive capacity of agriculture is limited by water resources. Tourism is an import-dependent industry and it is prone to volatility in light of its sensitivity to regional developments or incidents which Egypt has experienced in the past. And contracting depends on the entire economy being active. Other areas on which the government is setting its hopes are the natural gas sector, but exporting "is not the most profitable use we can make of it," said Gouda, adding that it has great value added potential if it goes into the petrochemicals industry producing synthetic fibers, fertilisers and plastics. "We are losing $6 per cubic feet by selling it as a raw material. We are doing to natural gas what we did to cotton in the past." And from the point of view of income generation and job creation, he added, this is a very capital intensive industry. The plant costs $2-4 billion but only a small number of people work there. He believes that a clearer focus on promoting industry and the manufacturing sector is needed to provide the 700,000 annual new entrants to the labour market with jobs as well as those currently unemployed.
