Can the new cabinet live up to the high expectations the business community has pinned on it, Niveen Wahish reports If it is anything to go by, the positive stock market performance of the past week is widely viewed as a reaction to the cabinet reshuffle reflecting the high expectations the business community has of the new government team under Prime Minister Ahmed Nazif. "Very, very well," is how Hassan Samir, head of trading at Prime Securities, described the stock market reaction to the news. Samir also pointed out that foreign interest increased from less than 10 per cent to 25 per cent of daily transactions. The rally is seen as a signal of general optimism that the new cabinet will launch a new wave of reforms to revive the economy. But Prime Minister Nazif's cabinet faces the Herculean task of boosting investments, exports and foreign exchange revenues, creating jobs, stabilising prices for basic commodities and reforming the financial sector, all while safeguarding the interests of low-income groups. In its first meeting on Monday, the cabinet pledged to start work on these tasks immediately. A report issued by EFG-Hermes, one of Egypt's largest brokerage firms, mirrored the general enthusiasm and expressed confidence in the new economic team. Entitled "Egypt Economics and Strategy -- Government Changes: Entering the Sweet Spot in the Reform Cycle", the report said that the "probability of enacting significant reforms over the coming few years is higher today than at any time since the early 1990s. This high probability of success is the result of a consensus around reform that is itself a direct result of the economic difficulties experienced over the past six years." Moreover, the writers of the report said the fact that the ministers of the economic group are members of the Policies Committee of the National Democratic Party (NDP), where they worked together on reform plans, "bodes well for their ability to implement a coherent reform programme". The majority of the new economic team, composed of the ministers of finance, industry and foreign trade and internal trade and investment, hold a similar liberal market-oriented ideology. However, their ideas do not stand well with Gouda Abdel-Khalek, professor of economics at Cairo University and head of the economic committee of the left wing Tagammu Party. "Egypt is closer than ever before to the ideology of the International Monetary Fund, World Bank, and World Trade Organisation, which is disturbing." He does not think that the recipes of these international financial institutions are in harmony with Egypt's needs. In his opinion, what is needed most are reforms that are of benefit to the majority of the population. "How can we say that reforms implemented so far are successful when the long bread queues continue," he commented. However, statements from the new cabinet seem to support the idea that improving living standards for the population at large is the basis of the reform agenda. Statements like: "Taxes could be cut to increase individual income" and "Job creation is the purpose of reform" have been widely circulated in the past few days. But experts say that these targets can only be achieved by working on a number of levels. According to Sherif Delawar, management professor at the Arab Academy of Administrative Sciences and member of the NDP Policies Committee, the new cabinet "knows the problems they have at hand, have worked out solutions and need to get down to implementation". Delawar explained that proposals on various key issues were made in the Policies Committee. "The cabinet is here to implement what has been well defined during the past two years," he said. Delawar said that developing the administrative structure of the government and trimming bureaucratic red tape are the most pertinent issues the government needs to tackle. Moreover, "the visible and invisible costs of doing business or getting public service are affecting our competitiveness," he said. Improved coordination between organisations and ministries to ensure better decision- making could be achieved through the expansion of information and communication technology throughout the government. Reforming taxes and customs is another government priority. According to the EFG-Hermes report, a 30 to 40 per cent reduction in taxes is expected. Customs procedures are expected to be streamlined with international standards to "minimise the scope for discretionary behaviour by customs officials". Although tax and customs reforms will lead to a decline in short-term revenues, the writers of the report believe that "it will boost revenues in the medium term due to a reduction in the delinquency rate and expansion of the tax base." An important aspect of tax reform, said Delawar, is to change the way taxpayers are treated. He pointed out that a main reason why many businesses prefer to remain part of the informal sector is not because they do not want to pay taxes, but because they do not want to deal with the tax authority. The new cabinet must also tackle the budget deficit and deal with subsidy policies. President Hosni Mubarak instructed the new prime minister to "find non-traditional ways of dealing with traditional problems". The budget deficit is one of the issues where Youssef Boutros Ghali, minister of finance, is expected to be treading murky waters. Whereas in his former post as minister of foreign trade he was a strong advocate of lowering customs barriers and integrating into the global economy, his current post as treasurer will make him hold onto every source of revenue to cover the burgeoning government budget and decrease the budget deficit, which stands at around LE52 billion or nine percent of GDP. A good part of the budget goes towards paying subsidies, around LE12 billion in 2003-2004. The wages of public servants, according to a study by the Economic Research Forum, amounted to around LE22 million in 1999-2000. Attracting investments is another major task for the new Investment Development Ministry. The new ministry has brought together the former Ministry of Public Enterprise Sector, the Investment Authority, the Capital Market Authority, the insurance sector and the mortgage sector. The various tools available through these authorities are expected to help boost local and foreign investment. The EFG-Hermes report predicts the new ministry is "likely to phase out cumbersome business establishment processes", and points out that it could play a role in "bridging future current account deficits brought about by lower tariff barriers by attracting foreign investments". The Ministry of Industry and Foreign Trade, meanwhile, is expected to work on integrating Egypt into the global economy. According to Delawar, "there has to be a strategy to place our industry into the division of labour of the global economy. The idea of manufacturing a product from A to Z is obsolete," he said. "Multinationals will be part of this strategy. Multinationals are currently in Egypt only for its domestic market. That should change." But while the task is daunting, positive results may be felt soon. According to one economist, who preferred to remain anonymous, "the current government may soon cash in on reforms started by its predecessor." She explained that economic cycles normally last five years and had the former government stayed on, things would have begun to turn around by beginning of next year. The EFG-Hermes report presented a similar view and called it the "sweet spot in the reform cycle". With positive signs like Suez Canal revenues reaching $2.6 billion, tourism numbers higher than ever, a stable foreign exchange market and the gap between the official and parallel currency markets at a minimum, it appears the benefits have already started rolling in. Moreover, as the EFG-Hermes report put it, "because the incoming economic team has a blueprint they developed together and is backed by a consensus among key stakeholders in the private sector, we believe that a change in policy and faster execution are highly probable. The results could make themselves felt as early as the second half of 2004 or early 2005." Moreover, according to the anonymous source, "the team understands that they are transitional until next year's election and realise that if they want to stay on they must deliver meaningful and tangible results."
