Six months in office have not dampened Investment Minister Mahmoud Mohieddin's reformist zeal. He spoke to Niveen Wahish You've been in office for six months. How do you evaluate the investment climate, and has your vision changed based on facts on the ground? Instead of a grand design for reform, we simply started by addressing issues of concern for investors and traders, based on a good classification of the problems that was prepared by Finance Minister [Youssef Boutros- Ghali] when he was foreign trade minister. According to that categorisation, customs and tariffs were the number one problem, followed by tax rates and tax administration, then issues related to the investment authority, then problems with land, property rights, and registration, then problems associated with the labour market, as well as problems concerning exit rules. That's why tariff reform came first. Now we are tackling tax administration and tax rate problems. Significant cuts in tax rates are being introduced, and we are [also] trying to improve the administration by simplifying the rules. Even if you are not a tax code specialist, you will be able to comprehend your main rights and obligations as a taxpayer. We have also simplified procedures for the submission of the tax report, ending with the payment. There is also a reliable and dependable dispute resolution mechanism. The whole thing, with either tax or customs reform, is a signal that the government is responding to market needs. We complemented that with changes in other areas. We started significant measures to reduce the fees related to obtaining land for industrial purposes by 40 per cent, granting governorates in Upper Egypt the right to provide land for free. We have also introduced measures to different aspects of the asset-selling process. That is why we are seeing significant private sector interest in the market at present. Are you satisfied with investor response to these changes? What we have done so far is basically the first reform step, just the start, and the response so far has been mildly positive. I cannot say that I am completely satisfied with the response, unless you consider that the stock exchange indicators, for instance, have increased significantly. The CASE 30 [an index of the 30 most active companies] increased by almost 60 per cent from 15 July to 27 December 2004. Since the start of 2004, Egypt has been one of the markets that have witnessed a significant increase of its indices -- approximately 93 per cent in dollar terms. All of that gives off signals of trust and confidence. Have you seen an increase in the actual number of investors? In terms of new investments and participation in the stock exchange (although that is an indirect form of investment), there has been a significant increase. In terms of the number of registered companies under laws 8 and 159, there has also been a significant increase compared to the same period (July-September) last year. How do you evaluate the economy's performance as a whole this year, and how are growth rates going to develop next year? From a macro-economic outlook, 2001-2004 was not necessarily a bright period in terms of performance; there were higher inflation rates, higher unemployment rates, and lower economic growth rates (an average of 4.1 per cent for 2003/2004). Meanwhile, this is an economy that has to grow by a minimum of 5.5-six per cent. Unemployment is officially around 10 per cent or more. The inflation rate, according to the Consumer Price Index (CPI), is in the double digits. Thus, there is nothing really to celebrate about this period. At the same time, our external position has been faring well, in terms of the reduction in the trade deficit, the surplus in current accounts, and the comfortable position of international reserves. One can now basically capitalise on the external achievements because these are going to give us room to do the necessary reforms. Life would be much more complicated for the economic policy-making process if we were facing serious external imbalances. If we were not in a comfortable position, we would not really go for the tax and tariff reforms, or the major decisions being undertaken now by the trade minister regarding the liberalisation of trade and the accession of final products, in garments for instance, to the market. These things are happening not just because of courageous government measures, but also as a result of the comfortable external position. What is your vision for 2005, and when will we reach the 5.5 per cent growth rate? We are setting targets that we can achieve without miraculous intervention. So when we say five per cent growth rate -- that is an attainable target by the end of 2005. But this is not going to be enough. When we say that we are going to double the size of foreign direct investments, that is not very difficult, because it is already very low. What we are trying to do is target more than one year. The measures we are taking, and even more so with the institutional set up, with the kind of irreversible action track that we are adopting now, [makes clear] that we are pursuing the liberalisation of the economy without allowing for any kind of U-turn. We are seeking out the private sector's involvement without allowing any double-checking of this kind of approach. We cannot say, today, that we believe in the private sector, and then, tomorrow, pursue an interventionist measure that would give the government an advantage. You often talk about benchmarking your actions -- how do you plan to do that? There are many advantages of benchmarks. One of them is basically avoiding the feeling of being satisfied with yourself. This may not mean much because you are a part of a world that is very dynamic, agile and competitive, and if you are not making sure that you are occupying your position in a formidable way, it will be taken from you. The benchmark also gives you a good target for the future, and tells you something as well about what has been undertaken by others in different sectors and different markets. It also gives you some sort of understanding of the kind of achievement you have reached. The problem with economic measures is that the impact comes later. It is very useful to tie yourself to some specific measure, and to feel that these measures, in some circumstances, have resulted in positive outcomes elsewhere. That way, in a good environment, you would be sure that you are eventually going to achieve the same results. Who are we being benchmarked against? We have a peer group, countries with similar circumstances, and similar or higher per capita income, although we may have other potentials or advantages. We compare ourselves with countries in Eastern Europe, with South Africa, and with some countries in Latin America. This is in the short and mid-term. We are normally placed with these groups when ranked by international institutions and rating agencies. Still, there is nothing to prevent comparing the economy with the big players, with members of the Organisation for Economic Cooperation and Development (OECD). Will we soon be one of them? I am not proposing that at all, but I am encouraging my peers to see Egypt as a member of the OECD club within 15 years, if not less. By that, we are taking the battle seriously, not just because we like to sit at the same table with the big players, but because they have gotten where they are by following international standards and internationally accepted measures of running the economy and related sectors. They achieved the things that are becoming very familiar here. This is a ministry that speaks very frequently about information disclosure, corporate governance, standards and benchmarks, rating agencies, and outlooks. We are not just cornering ourselves into some narrow domestic issues, but minding the details and understanding that this economy [can only] grow from within its capacity and via its people. We are not at all ignoring that we are part of this world. And we would like to be on the investment and trade maps, and part of a major players' club like the OECD. Can you provide us with your take on the Investment Climate Assessment (ICA) report currently being prepared in cooperation with the World Bank ? Soon after taking office, I decided that I needed a good assessment of the business environment, based on international experience and standards, the outcome of which could be used to internalise measures and problems, and their solutions, in our policy-making process. We will do that frequently. We reached a preliminary assessment that was finalised in the shortest ever period in the history of the World Bank. The beauty of these assessments is that in many cases they confirm what you already know. So I was not surprised to discover that there are still problems with the tax and customs departments. There are problems with the accession to land markets. And this was the main problem for industrial and agricultural purposes. You cannot invest without land. Fortunately, the prime minister is heading a committee dealing with issues like accession to land, property rights, and ownership rights. He also delegated the registration issue to Administrative Development Minister Ahmed Darwish, who is leading different authorities towards a solution to this historical problem. Another problem is related to the private sector's access to credit, which was not a surprise. You did not need the World Bank to tell you that; all you had to do was check the private sector's credit growth over the past two years, and you would see that it was almost in negative terms. I requested that their presentation emphasise the negative aspects, because we are aware of the country's positives. We do not need people to come and tell us the advantage of the location, trainable workforce, the diversity of the economy, and the recent stability in the forex markets. We need to emphasise the negative things, and at the same time we need them to give us some suggestions based on international experience. What are some of these suggestions? You need to wait until the end of January for that. But before then, we will be making some investment policy guidance available. I need two meetings with the investment authority's board of trustees, in order to finalise Egypt's investment policy -- its main objectives and the main sectors. We are going to internalise some of the ICA results in the policy. What kind of progress has been made on the asset management programme? What companies are lined up for sale, and in what sectors? From July 2004 until the beginning of December, we managed to sell 11 companies and assets; some of what we sold was basically machinery or parts of companies -- the total value of all that was LE170 million. Are there any companies that are considered taboo and not to be sold? There are no taboos. As long as we have a good buyer, and we manage to protect the interest of the workers, and get a good return on value, then we offer the companies without any kind of restrictions. Some companies -- like those involved in pharmaceuticals or mills -- were previously labelled strategic... Are they still seen as such? We abolished the use of the term strategic. Strategic is something that has to do with national security, but from an economic perspective, everything has conditions. In terms of the value of the sale to the country, the interests of workers, and ensuring better management, [the important thing is that] these conditions are being satisfied. Which companies are attracting more interest? We are seeing good reactions to companies involved in food production like BiscoMisr. We are seeing interest in cement companies. There are some proposals for the mills, and the same for steel. We have also managed to sell two textiles companies. What about big companies like Al-Mehalla textiles? These companies need special treatment. We have a programme with the Trade and Industry Ministry and the Social Fund for Development, to benefit from 80 million euros in EU support in this particular sector. So you will first work on restructuring these companies before you sell them? Yes, unless I have a buyer. It is not a question of insisting on selling. We are not making a decision to sell based on theory or ideology, but on market conditions. What if a company is making a profit? Why not keep it as a source of revenue? To make more profits for the company itself. There is a difference between profits from an accounting perspective and an economic perspective. If you are not getting the most economic profit, and you cannot increase that profit via better management, with the same circumstances, then this is a good deal. If you are not 100 per cent sure that this kind of profit is sustainable, because you have some doubts about management and its capacity to handle shocks or different circumstances, it is better to sell it. At the end of the day, all of the companies that I have are for sale. This is my mandate. Now that the general assemblies of the various holding companies have met, how do you evaluate these companies and their affiliates' performance? The performance was significantly positive, even for the loss- making companies, which made fewer losses than last year. This is all attributed to the holding companies' good work and the management of the former public enterprise sector minister. Now, however, we are at a different stage, with different challenges. We are not taking what happened into account, but what should happen in the future, and that's why I am having another series of general assemblies for all these companies starting January. What about the joint venture companies? Do you plan to get them all off your hands in 2005? No. There are 695 companies. It is not a question of how many, but rather significant cases that would restart the process. Which sectors are you talking about? Cement, banking, tourism. What about the mortgage system? Why have only a handful of loans been given? You cannot re-activate the market with laws or executive regulations alone; that is just the start. There have been some amendments to the executive charter to simplify the procedures and encourage companies to provide loans, including issues related to income verification. The second modification is related to the evaluation of the property itself, and this is going to make the lives of mortgage finance companies easier. At the same time, many companies are about to be established; more importantly, because it is a bank-based market, many of the banks are considering mortgage finance. I am having a meeting with the Central Bank of Egypt (CBE) governor to activate this. 2005 will be the start, just the start, of mortgage finance in this country. The market can only be revived if we manage to have better conditions for lending or providing finance. The realisation that you can obtain your property via instalments over 20 years is going to cause major changes in spending behaviour, savings behaviour, and obtaining property in this country. The Economist Intelligence Unit (EIU) has said that Egypt's main challenge is "bringing greater coherence and transparency to monetary policy and the management of the exchange rate, tackling rapidly rising inflation, and raising extremely low business confidence". How will those things be dealt with? There is no doubt today that the government and the CBE have managed to create a better foreign exchange market. With monetary policy, meanwhile, we admit that we still need many things. We need to have obvious targets, like an inflation- targeting framework. The CBE and the Finance Ministry are working towards containing all the problems of coordination between fiscal and monetary policy, getting the budget deficit under control, controlling the growth of money supply, and sending the right signals as far as monetary policy is concerned. The EIU has also forecast a depreciation of the pound... I will not comment on that. There have been forecasts that Egypt's growth will come externally, not domestically? This is a fair judgement. By opening up the economy, and the links between growth and trade liberalisation, we are expecting that a great portion of our growth is going to be through our trade-related sectors, sectors that are associated and exposed to the rest of the world. This is what we are seeing today. Sectors like petrochemicals and food are growing because of their links with outside markets. The agreement creating Qualified Industrial Zones (QIZ) has been promoted as an attraction for investment. Have you received any requests to set up in these zones? We received signals and letters of interest, as well as people investigating and exploring opportunities, from various parts of the world, including India, Turkey, and some Asian countries, all wanting to invest in order to benefit from the advantages of these zones. Why haven't prices dropped despite the reduction in customs? What we said is that these changes are going to reduce inflation, which may affect the prices of certain commodities and products, but not necessarily reduce the price level. These measures will have a positive impact on the standard of living, which is a combination of incomes and prices. This is going to happen in the short to mid-term, not immediately. What are your plans for the insurance sector? We are developing it via new management for the public sector companies, and by involving the private sector and foreign companies in more aspects of the market. We are involving them via the privatisation of insurance companies before the end of 2005. We are improving it via the introduction of new instruments and policies, and via the finance minister's support. We are also going to reduce the stamp duty, which is one of the killer impediments for some aspects of the insurance sector. Will any of the public banks be privatised in 2005? The prime minister has announced that, before the end of 2005, the Bank of Alexandria is going to go. Plus, all the public shares in joint venture banks are being offered now.
