Attempting to reverse the effects of nearly a decade of economic slumber, the government is moving ahead with liberalisation on all fronts, writes Wael Gamal At the inauguration of Tuesday's Euromoney conference, Finance Minister Youssef Boutros Ghali, said, "If you liked the tariff reform, you will love the tax reform." Investment Minister Mahmoud Mohieddin said he had plans to bring in a wide range of Egyptian expertise from international institutions to work alongside the government in the coming period; major changes in investment and insurance leaderships posts were on the way. These comments tend to reflect the ebullience surrounding a recent wave of government attempts to shore up the troubled national economy. Just a few days after radical reductions in custom tariffs took effect, there was a sudden decision to move the price of diesel fuel up by fifty per cent -- the first such price hike in years. The move was seen as an indication that the government is really reconsidering fuel subsidies (which government estimates place at as much as LE30 billion per year). Then the government announced a banking sector restructuring plan, which will pave the way for the impending privatization of one of the major public banks -- a move long called for by international institutions. According to the plan, the weakest six public banks will merge with others to form larger and more competitive entities, and to bypass fears of these smaller banks' inability to control financial and monetary irregularities. The plan also includes setting up an arbitration committee at the Central Bank to tackle the problem of non-performing loans. The policy of selling off stakes in joint-venture banks will also continue with the proceeds being used to restructure the public-sector banks. The package's rationale is that, woven together, these measures will provide the boost needed for faster integration into the world economy. That integration would result in gains that would balance out its potential side effects. The recipe is a loyal application of what are known as "Washington consensus" policies: promoting free trade, financial liberalisation, foreign investment incentives, business deregulation, low taxes, fiscal austerity, privatisation, high real interest rates and flexible labour markets. Although this recipe remains unproven internationally, confidence in the prospects of its successful application here is not confined to the corridors of government; it also provides the common wisdom among the bulk of the business community. The stock exchange reflected obvious enthusiasm. Following the record surge at the end of last week, shares again soared when trading opened this week. The benchmark Hermes index stood at 2.9 per cent, or 58 per cent up from the start of the year. The upward trend was accompanied by a strong -- 50 per cent -- foreign interest in the market. Businessman and Wafd Party MP Mounir Fakhri Abdel-Nour, a newly appointed board member at the Federation of Egyptian Industries, expressed his faith in the formula as a whole, which he said was more than worth the price that some will pay. "It will remove protections from weak and uncompetitive industry sectors, but at the same time boost the competitive ones -- helping the whole industry and economy become healthier," he said. "Of course, the package has social, economic and fiscal costs, but it is in the right direction, and sooner or later, we had to do it. We have commitments to international agreements." The customs part of the package will hit some national industries hard. Ali Tawfiq, who heads an association of automotive component producers, said the new tariff cuts had "irregularities" that would negatively affect his industry. "They didn't reduce the tariffs on industry inputs to the same degree they did on final products, which gives traders not industrialists the upper hand in the market. Some factories have already stopped ordering from us." Tawfiq said the banks were worried, and that "a lot of us will definitely go out of business. To stay alive, we need another step in the same direction. The decisions are political. International agreements are not binding for the car industry until 2017." Economic experts have been pointing to a potential consistency problem in the package. "The decision will encourage consumption, especially with luxury goods," said former economy minister Mustafa El- Said, "which raises the question: is this the best thing to do now, especially considering the main beneficiaries won't be the poor as declared?" The pressure to import, some fear, might also threaten the exchange rate, which has been enjoying relative stability since the beginning of the year. Cairo University economics professor Gouda Abdel-Khalek said, "this set of deflationary measures will not serve to bolster the economy. This kind of package won't lead anywhere." Abdel-Khalek said the new government was trying to solve an impossible equation. "You cannot have a stable exchange rate under flotation, liberalising capital movements and an autonomous monetary policy at the same time. No country has managed that. We have to let go of one of them to move forward. That's the way China and India did it." But will the government package deliver on its promise of being essentially designed to benefit consumers and the poor? While those riding microbuses whose fares suddenly went up by as much as 40 per cent when diesel prices rose last week, might have a gut reaction to that question, other observers would prefer a wait and see approach. Khaled Hamza, head of the General Union of Egyptian Trade Chambers imports department, was optimistic that the customs reductions would generate a fall in prices, the beginnings of a solution to one of the most chronic of post-devaluation problems. "The move will definitely reflect on prices, reducing costs on both locally made and imported commodities. I expect no less than a 10 per cent drop, and a lot more on items with more foreign components." That, however, also depends on whether traders will pass the reductions on to consumers. In the absence of an anti-trust law, and with many sectors controlled by monopolistic elements, there are serious doubts there as well.
