The Egyptian economy is in a slowdown, not a crisis. In fact, Minister of Foreign Trade tells Niveen Wahish, the economy is behaving quite predictably Click to view caption has been involved in the management of Egypt's economic reform programme since its inception in 1991. When the government last year shifted the emphasis of its attention to improving the trade balance, a new Ministry of Foreign Trade was created, with Boutros-Ghali at its helm. Over the past 11 years, he has held various posts, including minister of economy, minister of state for economic affairs, as well as minister of state for international cooperation. He spoke to Al-Ahram Weekly on his ministry's pet project -- the new exports promotion law presented to parliament last month -- and on how Egypt's foreign trade status has a large bearing on the country's economic performance As parliament discusses the new law designed to promote exports, how would you assess the government's efforts in this domain during the past decade? Over the past 40 years, the guiding principle for macroeconomic policy was import substitution. That is a policy that has proven its failure all over the world. In the late 1980s, we, too, realised that import substitution is not the solution to Egypt's problems. We moved towards liberalising trade in the early 1990s and proceeded to establish a stable macro-environment in which we could promote any policy, especially export policies. In the mid-1990s, the time came to put exports forward. But this cannot be done overnight. You create the environment conducive to export promotion; you create a culture of export promotion and a system of incentives. And like any other activity here in Egypt, you eliminate bureaucratic impediments. When I took over, I tried to look at other countries' experiences. We are not here to reinvent the wheel. Many countries have promoted exports before us and have done so very successfully. The ingredients for promoting exports are well known. We just need to adopt policies that are known to be effective in the Egyptian environment. This is what we proceeded to do. First, we established a strategy for export promotion. We produced volume one of the strategy a year ago. Volume two will tell what we have done, what we have not done, what we intend to do about it and what we plan to do in the second year. How would the new law contribute to these efforts? After a while, there comes a point where existing legislation becomes a hindrance and you have to change laws, regulations, intervention policies and the path the exporter has to take from his factory to the exit point so that he can export efficiently. This is what the export law tries to do. Many people have said that we have gone through numerous drafts of the law; that the final version is not the one they saw. We produced a draft and circulated it among businessmen and they said this is exactly what they wanted. Then the draft that came out of the economic committee of parliament was not the same draft. Everything needs compromise. I would have loved to push the first draft, but for the sake of saving 70 per cent of the law, I had to compromise on 30 per cent. I would have loved to pass the law as it was drafted the first time. It dealt with the problems of exporters, things we live through, know and hear of. But nothing happens overnight. Reforms do not happen overnight. You start with one step that will bring forward another. The law introduces substantial improvements, at least on paper. Whether we will be able to implement this in reality is another story. It is just one battle in a very long war. We have won this battle, even though many think that the law does not represent what they want. But, I live exporters' problems every day, and I see it as a great step forward. I think that the results we got from exports and exporters to date in response to our policies suggest that, as I anticipated, the Egyptian economy is very resilient. And if you implement proper economic policies, it responds in proper economic ways. Many people pretend that the Egyptian economy behaves differently than most economies do. That is not true. Our economy behaves exactly the way other economies do. And if we implement the policies that have proven successful elsewhere, they will prove successful in Egypt. Are we following the model of one country in particular or a combination? I follow the model of a combination of countries -- models that were implemented in Korea, Malaysia, Thailand, Argentina and Brazil. I have had first-hand knowledge of these economies and I know what they have done and how successful it was. We have picked the policies that are most suited to Egypt and, to a large extent, we have constructed some that are particular to Egypt and the Egyptian environment. We have implemented some innovative policies that can be found nowhere else. Was it not possible to solve exporters' problems by amending existing laws rather than devising a new law? That is what the law does. It amends existing legislation across the board. We have 23 items of legislation that deal with exporters and exports. We could change the relevant articles in each law separately. But if change is made to one article of the law, it triggers change in a handful of other articles in legislation that is not under our purview. This law brings all stipulations that cover exports in any other legislation under its authority. So, the law does not add, but amends a whole array of legislation. How will the Export Promotion and Development Fund to be established by the law carry out its aims? Will it subsidise exports? No, the fund is not meant to subsidise exports in any way. That is inconsistent with our commitments to the World Trade Organisation (WTO). Despite having been re-included in Annex 7 of the subsidy agreement, which formally allows us to subsidise our products outright, we follow our commitments to the WTO religiously. The fund is meant to promote exports and the exportable sector in a way that would have happened anyway had we been promoting industrialisation. But we will concentrate on those sectors that have the biggest export potential. We will not be subsidising the export act itself, but will concentrate on trade and administrative reforms and developing marketing capabilities in the sectors with the most export potential. The fund is currently in operation under a different name -- the Fund for Price Stabilisation for Exports and Imports. It was established in 1971 and I think it has had a very noticeable impact on a number of exportable commodities. The law dissolves that fund and transfers its assets and liabilities to the new one. Do you expect the export law to be approved in the current parliamentary session? Yes, I hope so very dearly. It will be the speediest law to pass through.. No. It is only made up of six articles and has been under discussion since January. It does not come as a surprise. Which sectors do you think could potentially be the engines of growth in exports? Today, we can export 400 products, ranging from electronics, steel and machinery to textiles, garments and agro-products. We cannot develop all 400 simultaneously. We neither have the manpower, nor the money; so we have to concentrate. We have focussed on four sectors. First, textiles, which includes spinning, weaving, garments and home textiles. Second, the agricultural sector -- agro-industries, horticultural products, cut flowers, medicinal herbs, fruits, vegetables, jams and biscuits. We have a massive comparative advantage in these sectors. Then we have the construction industries, comprising ceramics, granite, marble, tiles, cement, iron rebars and steel. Finally, chemicals and pharmaceutical industries -- a sector where we are making massive progress. These are the first priority sectors in the first phase of export promotion. The phase after that will include other sectors that everybody knows we have an advantage in, but, because of lack of manpower, I have to postpone. The first four account for about 80 per cent of our present exports. Once the law is in effect, what will the targeted growth rate for exports be? Any country that has an active export promotion programme should be able to achieve an average annual growth rate of above 25 per cent. In the last five years, we achieved an average annual growth rate for non- oil exports of about 12 per cent. It will not happen overnight. Don't expect exports to boom the minute the law is out. Achieving the targeted growth rate depends on how fast our economy responds, how effective our policies are and how credible people think we are. We may have policies to support exports, but people do not think they will last. People do not want to build economic decisions on policies that lack credibility. Right now the policies we have implemented are perceived as being very credible, but they have to be reinforced. We need to have trustworthy policies that will induce producers to shift from the local market, which is a relatively easy market, to the foreign market, which is a more lucrative market, but also a much more difficult one. They have quality requirements, management requirements, delivery requirements, packaging requirements, and all the rest. In the local market, we are a Third World country. We would buy commodities at standards that are not as exacting as those of Europe and the US. How have Egyptian exports been affected by the events of 11 September and what are your projections for the current fiscal year? Egyptian exports were affected substantially by the 11 September events, but not for a long period of time. For example, our average exports to the US prior to the events were in the order of $65 million per month. That figure dropped to $40 million after the events. This year, it started to pick up again. And now, we're almost back at where we were in 2001. But keep in mind, 2001 was a slow year in and of itself, irrespective of 11 September. There was a world economic slowdown and global trade decreased by close to eight per cent. Our exports were affected and tourism was affected, but now we're coming out of it and we're beginning to recover, so is the world economy. Non-oil exports are predicted to grow this fiscal year, ending in June, to close at an average growth rate of about 12 per cent. It grew by 10 per cent in the first half (July-December). I suspect it will grow by a higher percentage in the second half and the average for the year will stand at around 12 per cent. How has the devaluation of the Egyptian pound improved the competitiveness of Egyptian exports? Any devaluation improves the competitiveness of the exportable sector. And it has had a very good impact. A lot of sectors that were struggling suddenly managed to break even. Part of the recovery in exports is due to the devaluation. But also, devaluation has been partly responsible for the recovery in domestic industry. Devaluation has made imports more expensive and has shifted demand away from imports towards domestic industry. There are a lot of sectors that are benefiting from a shift in demand from importables to domestically produced goods. Therefore, it has created the beginnings of a recovery in the Egyptian economy both on account of people moving away from imports to the domestic equivalent, and on account of exports being able to penetrate a lot more markets than they used to under the old exchange rate. All of this takes time. People expect an immediate reaction to the devaluation. That is not possible. In most economies, a reaction happens after around nine to 12 months. In Egypt, because our economy tends to be less flexible, it takes from 12 to 18 months. But the reaction is there and it will happen. In general, how do you evaluate the effects of devaluation on the economy as a whole? Fix the exchange rate and demand shifts to domestic products in seconds. It has a positive impact on domestic production because it transfers demand away from imports. Imports have declined from around $17 to $15 billion. That's a massive drop. Our economy pretends to be dependent on imports, but it is not. We can reduce imports even more than now, provided we do so using market tools rather than administrative intervention. Market tools include the exchange rate, tariff rates, domestic marketing techniques and the promotion of quality in the domestic economy. What are your views on the idea of rationing imports to improve the trade balance? How much of Egypt's imports can actually be cut? Reduction of imports is a dynamic process. We don't reduce imports by not importing, but by producing the equivalent locally. Most of our imports can be replaced by another set of imports that cater to a different set of industries and a different set of production processes. The question is not one of reducing imports, but rather of increasing your capacity to sustain the import process. This capacity can be boosted by increasing your exports, diversifying your economy and increasing your sources of foreign exchange -- not necessarily from exports, but rather from an increase in your foreign direct investments. Improving your borrowing capacity, your ability to service debt and your growth rate in GDP will also indirectly affect your capacity to service imports. The issue of imports and exports does not come in a vacuum. It is part of an entire macro process that is dependent on the exchange rate, the interest rate, prices, the way you are managing your investment programme, FDIs -- the entire spectrum of macro-economic policies. You cannot just isolate them. Why do you think Egypt still faces an economic crisis today when it has, to a large extent, followed the directives of the International Monetary Fund and the World Bank in carrying out its economic reform programme? We did not follow the directives of the IMF and WB. We negotiated a programme with them that we drafted, many of whose elements they did not agree upon. We managed to convince them that our measures were going to be more useful than those they were proposing, which we deemed inappropriate and would have a negative impact on the Egyptian economy. We do not have a crisis. We have a slowdown that is significant, but look at our external position, the balance of payments today has a small deficit. The current account has a small deficit. We have no foreign debt to speak of. The servicing of the foreign debt is more or less insignificant. Inflation is 2.7, which is decent. The budget deficit is under control. When expenditures rise more than the receipts, the budget deficit widens and the economy slows down. But it is widening under control. There are no problems with it. We have a slowdown, but nothing that other countries have not experienced or that we cannot handle or that is not part and parcel of the daily life of any country. This is part of managing the economy. Sometimes it's a little tougher than at other times. We're working on it. But these inflation figures have always been challenged. The figures have always been challenged because they have a constant error factor. But we are interested in the movement relative to itself, not in the absolute figure. It's that same figure that we have been following since the early 1990s, when it was 29 per cent. Today it is 2.7 per cent, so there is massive improvement. There has been a rise in the inflation rate compared to six months ago when it was 2.2 per cent. What are your comments on Standard and Poor's recent downgrading of Egypt's credit rating. Does this call for a new reform package? No. Rating agencies tend to be cautious. They have already had their fingers burnt in the South East Asian crisis. The guys who went down the drain were all AAA rated or close. They've become cautious. When they see an economy slowing down, when they see some of the policies -- due to the slowdown -- being also slowed down, they tend to get anxiety attacks. The S&P report says that all of the proper policies are in place, but they need to be accelerated. Most of the basic macro indicators are good, but the economy needs to be pushed forward. They talk about one or two variables here and there, but essentially, their main complaint is that a number of policies have slowed down. And in an economy that is slowing down, that is understandable. I expect that once our economy begins picking up speed, and there are indications that it has begun that process, they will change the rating. Are investors' decisions not affected by these credit ratings? Sovereign rating agencies are not the only factor that affects the perception of the investor. In fact, after 1997, they have become one of the minor factors. Look at the pricing of Egyptian bonds in international markets; it was not affected by the rating at all. The market has a different perception than these rating agencies. Investors may or may not believe it. In Egypt's case, they did not believe it to a significant extent. It's nice to have a good rating from a rating agency, but it is not the end of the world if you don't. We are in an environment where Japan has been downgraded. Speaking of Egypt's sovereign bonds, how do you assess the criticisms that Egypt is paying too much interest on those, especially at a time when worldwide interest rates are falling? We caught the bond at the lowest rate possible. These are US treasury rates that people pay to the US government, not to the Egyptian government. There is a premium and whereas the US treasury rates have come down, the premium for developing or emerging market economies has gone up. I believe that we have established a spectacular first issue for a country that has never gone to the commercial market. And we have achieved a spectacular after-market performance. It's very easy to say: "Had we done it today", but who knew what was going to happen today. We have succeeded in establishing an Egyptian benchmark in international capital markets that has served us very well. The money is in the Central Bank of Egypt and its Egyptian counterpart funds are being used to replace a debt that we used to service at 12 per cent with one that we pay six per cent on. What trade issues between Egypt and the US were highlighted during your meeting with the US trade representative? We're trying to deepen trade relations between the two countries and push for the start of free trade negotiations between the US and Egypt. This takes time and takes measures, and we hope to come closer to announce the start of negotiations between the two countries . Last November, the Ministry of Economy was turned into the Ministry of Foreign Trade. How do you think this change will impact the economy? It has a positive impact on the economy for two reasons. For one, it is the culmination of reform that we initiated in 1990, which was based on the premise that monetary policy has to be separate from fiscal policy. Fiscal policy is managed by the government, the Ministry of Finance, essentially, but also by other involved ministries. Monetary policy should be the purview of the CBE exclusively. Dismantling the Ministry of Economy eliminated the last channel through which the government could influence monetary policy, which, in a sense, enshrines the 1990 reforms institutionally. That's good, because it will maintain financial as well as monetary discipline. The second advantage is that it has concentrated the powers of an entire Ministry on Foreign Trade. And, in a country that promotes liberalisation and integration into the global economy and into the world system, having a ministry exclusively in charge of foreign trade is a major step forward. How has it reflected on the performance of the Central Bank of Egypt (CBE)? Ask the CBE. Agricultural exports to the EU have been a success, yet brown rot has always been a problem facing potato exporters. How have you attempted to overcome that problem? We are in constant contact with the EU on the issue of sanitary and phyto-sanitary problems. The EU has barriers to trade in the field of agricultural products that take several forms. We make sure that we are in constant contact so that these barriers do not represent a major obstacle to our exports to Europe. I call Pascal Lamy, the EU trade commissioner, frequently, to discuss the progress of trade between the two sides and make sure things are under control. We also consult with each other before taking any steps against one another. How can the process of implementing an FTA with the EU be speeded up? I will submit the agreement to parliament in its next session. When will the ban on garments imports be lifted? There is no ban on garments imports. There is a re-drafting of tariffs and it will be adjusted some time soon. The ban on garment imports was lifted in January. Will the tariffs imposed last January continue to be applied? They will be amended because some of our trading partners have expressed reservations regarding these tariffs. We're looking into them, and if they happen to contradict with our WTO commitments, we will adjust them in accordance with these commitments.
