Egypt may have succeeded in dodging the negative effects of 11 September, but its economy is not yet out of danger. World Bank Director in Cairo Mahmoud Ayub talked to Niveen Wahish Click to view caption Historically, the World Bank (WB) has conjured up negative feelings among many in developing countries. In Egypt, this is especially true. In the 1950s, it was singled out in a song by Abdel- Halim Hafez as the bank which refused to fund the construction of the High Dam. More recently, however, it has become associated with the economic and social development of Egypt. Director for the WB's Egypt, Yemen and Djibouti country department Mahmoud Ayub, has 26 years of experience in the WB behind him. Although he has only been in Egypt for two years, they have been some of the most testing times for the Egyptian economy. He spoke to Al-Ahram Weekly of his assessment of Egypt's economic situation amid regional tension and a global slowdown. How would you assess the Egyptian economy's current situation? The current world economic situation is definitely not helping Egypt. Growth in the world economy last year was less than 1 per cent. Realistically it will be no more than 1.5 per cent this year, with a slowdown in the major economies of North America, Europe and Japan. This obviously has implications for the Egyptian economy, especially tourism. In terms of capital flows to emerging economies, the latest data show a clear shift toward countries with investment grade credit ratings. Egypt's downgrade earlier this year does not help. And then, of course, there is the sword of Damocles hanging in the form of possible military action in Iraq, which can really affect the tourism sector in Egypt, which has just started to recover from the shock of 11 September, 2001. The growth rate of the Egyptian economy (about 2 per cent last fiscal year) was definitely not enough to absorb the 600,000 new entrants into the labour market each year, let alone to make a dent into the present unemployed pool. For that, the country will need a growth rate closer to 6-7 per cent annually. On the other hand, Egypt possesses many advantages that allow it to achieve a higher growth rate. It has a large domestic market of almost 70 million people. It has a relatively cheap labour force, which can readily be trained. The country has incomparable cultural and tourist attractions. It has proven natural gas reserves of close to 45 trillion cubic feet. Compare this with its current annual consumption of only 5 per cent of those reserves. It possesses social stability with enviably crime-free cities, an increasingly rare commodity in the world. For Egypt to exploit these comparative advantages and tackle the unemployment problem, the challenge will be to more aggressively address its unfinished agenda of structural reforms. Experience indicates that there are as many dangers involved in excessive caution as in excessive haste. What are some of the issues on what you call the unfinished agenda of structural reform? There are several elements of which the government is aware and is working on. First, there is the need to improve the business environment, which is generally considered to be an important barrier to increasing the level of private sector activity. This includes time-consuming administrative procedures when establishing a company, lengthy customs procedures and slow clearance rates for commercial courts. Second, the relatively weak export performance of Egypt reflects the country's anti-export bias. Trade tariff rates are relatively high and distortionary, there are non-tariff barriers and relatively complex customs and certification procedures. Third, despite many improvements in the financial sector in terms of regulation and legal and technical infrastructure, there is need for further strengthening and modernisation of the financial system. And fourth, there is need to establish a unified and more market-based exchange rate that ensures that legitimate currency demands continue to be met. It is rumoured that the Egyptian government informed WB president, James Wolfensohn, while he was in Cairo last month, that it was freezing the privatisation programme. Is this true? This is only a rumour. The government never said anything of the sort. It is an openly known fact that the process of privatisation has slowed down compared to the mid-90s. But there are good reasons for the slowdown. The easiest companies to sell were sold at the time, when the world market was in a much better shape. Now we are entering the difficult part of privatisation: How to sell companies for which there is not much demand from private investors? The slowdown is also, to a large extent, determined by the world situation. Privatising one of the banks is not privatisation for the sake of privatisation, but to give a clear signal to world markets that Egypt is still serious about privatisation. This will give a much needed boost to the local stock market. And this will also have implications for the sovereign rating that Egypt receives. The concern of the rating agencies has been that there was not enough happening on the structural measures, including privatisation. Wouldn't the restructuring of management be enough to revamp the banking sector? Despite the fact that a lot of good work is going on to revamp management within at least some of the banks, at the end of the day, ownership does become an issue when we have four of the largest commercial banks all publicly owned. Sooner or later, competition and efficiency issues become critical. What could be the likely impact on the Egyptian economy of possible military action in Iraq? It would be foolhardy to predict. There are too many unknown factors. What will be the type of a military operation? How long will it last? How much opposition will be encountered? And so on. There is absolutely no way to know about these imponderables before hand. What one can say is this: Tourism in Egypt and in the region will once again be negatively affected and this time before it has fully recovered to pre-11 September levels. It will also affect Egypt's merchandise exports, especially those to Iraq. It will probably affect worker's remittances and transfers. It may result in higher insurance premiums applicable to Egypt. And of course, all these will have a negative multiplier effect through the economy in terms of lower growth, lower investment and lower fiscal revenues. What is the World Bank's development strategy and programme for Egypt? The World Bank Group has an active development assistance programme with Egypt for the period 2002-2004, which was agreed to with the Egyptian government last year, and approved by our board of directors. The over-arching objective of the country assistance strategy for Egypt is to reduce poverty and unemployment, through the development of human resources, education, health and a social safety net, through focus on cross- sectoral issues such as gender and water resource management, and through improvements in public sector management and private sector development. The main instruments to implement this strategy are lending and knowledge management services. Over time, we expect our non-lending activities to become more and more important. On the lending side, we have a base lending level of $450-500 million planned over the next three years. We have 18 operations, one of the largest of our portfolios in the Middle East region. But the strategy also foresees an additional $1 billion in quick-disbursing support in case the Egyptian economy is hit by unforeseen events, as happened in September 2001. In case of such exogenous shocks, the World Bank will be pleased to financially support the government in implementing its reform policies. Increasingly, also, the government of Egypt and the World Bank are developing a strategic relationship on non-lending activities, related to knowledge management and sharing the experience of other countries with the authorities. The World Bank is fully supporting the government of Egypt in developing a poverty reduction strategy, in assessing the need for reform of the financial sector, in developing mortgage markets, in providing guidance on performance-based budgeting, in improving public sector management and on mainstreaming gender issues. The World Bank Group's private sector subsidiary, the International Finance Corporation (IFC), has a very active and diversified portfolio in Egypt, managed through its regional office in Cairo. In fact, the IFC has its largest portfolio of all MENA region countries in Egypt, the 12th largest world-wide. During the recent visit of President James Wolfensohn to Egypt, he and Prime Minister Atef Ebeid also signed a Memorandum of Understanding (MoU) establishing the North Africa Enterprise Development Facility. This is a World Bank Group office that will concentrate on the development of critically important small and medium enterprises. We are also planning to decentralise some of our activities from Washington to Cairo, using our office as a hub for work in the region on procurement, financial management and disbursement related activities. How would you assess the result of President Wolfensohn's visit to Egypt? By all accounts it was a very successful visit. The meetings with President Mubarak, the prime minister and the cabinet were opportunities to discuss openly the key development challenges of Egypt and the region. It was also an opportunity to reaffirm our very good relationship and to make it clear that the bank stands ready to help, as and when needed. His main message was that the government understands fully what needs to be done, that we have no difference on policies. It is a question of implementing these policies. Mrs Wolfensohn, an educational specialist, discussed with Mrs Suzanne Mubarak and the ministers of education and higher education, the importance of early childhood development as the base for all future education. there was also a very useful discussion of issues of quality, access and retention in education. The World Bank and its sister organisation, the IMF, have been facing anti-globalisation protests during the past few years. During the recent visit of President James Wolfensohn to Egypt, there was a meeting of Egypt's anti- globalisation group to protest his visit. What do you think of this movement? Globalisation may have a thousand defects, but it is here. We cannot ignore it. And we most certainly cannot wish it away. The challenge for us individually and as a community of nations is how best to harness its positive aspects and how best to minimise its costs. There is no point in burying one's head in the sand. The anti-globalisation group in Egypt expressed their views in a civilised and educated manner during President Wolfensohn's address in Cairo. I fully respect their views and how they expressed them, even though I may not completely agree with them. How can Egypt achieve the targeted 6 per cent growth rate needed to create more jobs? A higher growth rate of 6-7 per cent will require a higher level of investment, on the order of 4-5 per cent of GDP or more. Some of this investment can be financed by increased domestic savings, through revenue and expenditure measures. However, realistically most of it will need to come from external sources. An increased level of foreign direct investment (FDI) can be one such source. Howver, FDI is notoriously susceptible to the business and regional political environment. Over the last three years, FDI in Egypt has declined from $1.5 billion to $0.5 billion. This leaves us with external borrowing. Egypt has always maintained a very cautious external borrowing strategy, which is generally very laudable. However, when there is need for greater investment to address the unemployment problem, and when the global interest rates are at record low levels, the country can afford to borrow more aggressively from abroad for well-appraised projects. But there are those who argue against borrowing from the IMF/WB? Fortunately for Egypt, the debt burden is very low, at 30 per cent of GDP. Most of this debt is on soft terms, very little on commercial terms, maybe 5 per cent. That's one point. Second it is much better to borrow and use the money in financing good projects, rather than not borrow and keep economic activity unnecessarily low. You cannot really address your unemployment and growth problems if you have a low level of investment. And for investment you need domestic resources as well as foreign resources. There is plenty of room for borrowing. What is the outlook for the Egyptian economy? The outlook will very much depend on what happens in the Middle East. Egypt is affected by what happens in the region. In the absence of any major shock, the economy will start improving gradually over the next two years. We are projecting growth rate for this coming year to be around 3.5 per cent, compared to 2 per cent last year. If the government takes the needed actions, it could slowly bounce back to 5.5 per cent in subsequent years. That "if" is based on action being taken to encourage the private sector and adopting a more market-based exchange rate system. What are some basic lessons you have learnt while serving with the World Bank? From my experience in economic and social development, there are two basic things that I concluded. First, the world can never be a safe and prosperous place if we continue to have major income disparities between rich and poor countries, and within countries. We simply cannot afford to view as normal a situation where 20 per cent of the world's population -- the developed countries -- accounts for 80 per cent of the world's income. Sustained peace without social justice is impossible. This is not a question of benevolence or charity. It is a question of self-interest. In the words of Woodrow Wilson, "unless justice be done to others, it will not be done to us". Second, while development assistance to countries is important, its effectiveness in increasing economic growth and reducing poverty depends critically on the commitment of the recipient country. Research at the WB and elsewhere indicates that governments which are seriously committed to reform, and do not see reform as an imposition from outside, have a much better record of using development assistance effectively. Development aid is most effective in countries with a comprehensive home-grown reform agenda that focuses on education and health programmes to build human capacity, transparent and clean governments, effective legal and judicial systems, a well-organised and supervised financial system and a macroeconomic framework free of gross distortions. And in the more colourful words of the famous departed Reggae singer, Bob Marley, "a hungry man is an angry man." In what way can developed countries help more effectively in reducing the gap between rich and poor nations? Developed countries must take action to cut agricultural subsidies, subsidies that rob poor countries of markets for their products. These subsidies are in many cases made to large corporations. And they amount to a staggering $350 billion a year, nearly seven times what the developed countries provide in foreign aid to developing countries. On the aid itself, there is a strong case to be made for increasing it. World Bank estimates indicate that it will take an additional $50 billion a year to reach the Millennium Development Goals. This means roughly doubling the current aid flows. But even this larger figure would still only amount to 0.5 per cent of GDP of developed countries, which is below the 0.7 per cent of GDP target agreed by global leaders years ago. Have you noticed any bias or discrimination after 11 September on account of your name or nationality? There are cases where one feels discrimination real or perceived. On one of my trips to the US, the immigration officer welcomed me with a big smile, but the smile soon faded when he saw my Pakistani passport. But let us not exaggerate this bias against Muslims and Arabs. Our communities are playing an active, important and constructive role as citizens of the foreign countries in which they live. Let me also add that it is a good time for us to self reflect. There is no time for escapism. We need to practise what we preach when, rightly, calling Islam the religion of compassion, peace, social justice and tolerance. Are we going to be a society of knowledge seekers and open minds that made the Arab and Muslim world the envy of other cultures for many centuries, or are we going to blame the rest of the world for our plight and shutter down the windows of our minds?
