Ebeid's balance sheet

Prime Minister Atef Ebeid has laid before parliament his government's plans for getting out of recession and achieving higher growth rates. Gamal Essam El-Din reports
"I have nothing to say about the government's policy statement. I simply recommend that, when the government next comes to parliament, it is armed with a balance sheet of actual achievements," Zakaria Azmi, ruling party MP and President Hosni Mubarak's chief of staff, said on 13 March.
The prime minister took Azmi at his word. Almost a month later, on 10 April, the prime minister came to the house armed not only with a balance sheet of actual achievements, but also with a full agenda for economic action during the coming period. As a result, Ebeid's statement won the renewed confidence of the majority of the ruling National Democratic Party (NDP). Things went less smoothly, however, with 36 opposition deputies and independents. This number, compared to previous years, is the largest ever to reject a government policy statement.
In concluding remarks to his statement on 10 April, Ebeid said that since his government came to office in October 2000, its efforts have been largely devoted to dealing with seven economic challenges. These challenges, Ebeid revealed, will continue to be the government's top priorities in the coming period.
Topping the government's list of challenges is the foreign exchange crisis. "Until the end of June 1997, Egypt achieved a surplus in its balance of payments. It topped $2.1 billion in 1993/1994, but dropped to $754 million in 1994/1995 and to $571 million in 1995/1996. In 1996/1997, it climbed again to $1.9 billion," Ebeid said. The prime minister attributed the foreign exchange surplus in the three years 1995, 1996 and 1997 to two factors: the high-interest rate on Egyptian pound banking deposits (20 per cent higher than the interest rate on dollar deposits) and high customs duties on foreign imports. "This largely discouraged citizens and market dealers from hoarding dollars and created a big surplus," Ebeid said.
Ebeid estimated that in 1997 Egypt began to suffer the first tremors of the now four-year-old foreign exchange crisis. These were "the terrorist attack on tourists at Luxor in November 1997 and the financial meltdown of Southeast Asia in the same period. This also coincided with initial moves to phase out customs duties on imports to bring us into line with international trade liberalisation trends," Ebeid said. As a result, he recalled, the balance of payments suffered its first deficit of $135 million in 1997/1998. This figure climbed to $2.1 billion in 1998/1999, $3 billion in 1999/2000, and $853 million in 2000/2001.
To address the foreign exchange problem, Ebeid said, the government has two options: to rely on its foreign exchange reserves to cover the dollar gap, or introduce a more flexible foreign exchange regime. "The former government opted for the first, but we have chosen the second option," Ebeid explained. "This is coupled with a policy aimed at contracting demand and boosting supply. On the demand side, the government has moved to save on $1.5 billion-worth a year of overseas purchases. On the supply side, the government has turned to the oil sector to generate greater foreign exchange revenues," Ebeid said. These measures, he added, have met great success. "In the fiscal years 1997/1998, 1998/1999 and 1999/2000, we suffered deficits in the current account balance of $2.4 billion, $1.7 billion and $1.3 billion respectively. These turned to a surplus of $33 million in the first quarter of 2001 (July-September)," Ebeid said. "But just as we were moving on the right track, the 11 September attacks shattered our hopes for stabilising the foreign exchange market in the longer term."
Even worse for the national economy, Ebeid said, was that the negative impact of 11 September attack saw some speculators trying to manipulate the foreign exchange market in their favour. "We responded with an iron fist. At the same time, we turned to foreign donors and to the oil sector to boost our dollar revenues," he commented. The foreign investments directed to the oil and natural gas sectors, Ebeid said, are expected to reach $10 billion in the next three years. "At the end of this period, Egypt will reap the plentiful harvest of these investments in the form of an annual revenue of $9 billion in oil and natural gas sales," he said. Ebeid also asserted that tourism is starting to bounce back to pre-11 September levels. "This will help stabilise the foreign exchange market, though it will remain highly dependent on political stability in the region," he noted.
Economic pundits in the People's Assembly, however, agree that Ebeid's measures for dealing with the dollar crisis are still far from sufficient. Abdallah Tayel, chairman of parliament's economic committee, told Al-Ahram Weekly that Ebeid mentioned nothing about the deficit in the trade balance. "This deficit is the main reason for the deficit in the balance of payments and for Egypt's foreign currency shortage," Tayel said. In 2000/2001, he continued, the deficit in trade balance reached $9.3 billion. "Things remained bad in the second half of 2001 as the deficit hit $4.3 billion. This escalating deficit will shatter any hopes for stabilising the dollar market if foreign exchange revenues from tourism and the Suez Canal are not enough to cover it," Tayel said. Statistics from the Central Bank of Egypt (CBE) show that foreign exchange revenues from tourism and the Suez Canal stood at $2.6 billion in the second half of 2001. This is low in light of the fact that the two sources generated $6.1 billion in 2000/ 2001. Tayel suggested that tourism businesses deliver their foreign exchange revenues to banks in full. "This is necessary because a large part of these revenues do not find their way to banks," Tayel said.
Closely related to the foreign currency problem is a second challenge; namely cleaning up the banking sector. "I know that a lot of MPs have tabled several interpellations (questions that must be answered) about the banking sector and defaulting businessmen," Ebeid said. He said that the CBE was entrusted by the government with running an overview of the situation. "It discovered that banks gave huge credit facilities to the private and public sectors in the years 1997, 1998 and 1999. Bank credit facilities increased on average from 15 per cent to 22 per cent per year. In total, banks gave LE186 billion in credit facilities in those years," he recalled. Ebeid said that "a very small number of indebted businessmen received huge credit facilities without having the experience necessary to use them profitably. The CBE is currently investigating each case individually. Banks will do their best to help businessmen service their debts in a convenient way, though not to the extent that banks will give up on any of these loans," he continued. Ebeid also stated that a government five- article bill will be submitted to parliament, aiming to arm banks with greater guarantees for recovering their credit in a safer and less costly way.
Parliament answered Ebeid's policy statement with a report urging the prime minister to move more seriously in the direction of bank consolidation. "Consolidation is necessary in the banking sector to create new banking entities better able to compete in the liberalising world of international financial services," the report said.
Ebeid said reforming the banks is vital for abolishing the long-standing economic recession and liquidity crisis. This is the government's third challenge. To face it, the government will concentrate on boosting demand and public spending. "That is why the new budget for the fiscal year 2002/2003 will be the biggest in Egypt's history in terms of expenditure. Expenditure is estimated at LE141.6 billion, an 11.6 per cent increase over last year's spending (estimated at LE126.9 billion)," Ebeid said. The prime minister also indicated that national wages and salaries will account for 22 per cent of total budgetary expenditure, or LE34.8 billion. Moreover, he added that, in under a year, the government, through the National Investment Bank, has paid LE20.4 billion-worth of public sector arrears to local contractors and suppliers. This greater public spending will be used "as the major tool for recycling money in the market and fighting recession," Ebeid said. He hopes the new budget will raise the growth rate to five per cent, from the present 3.5 per cent.
Various economic experts in parliament, however, cautioned that greater expenditure, without corresponding revenues, could finally result in a huge budget deficit. Finance Minister Medhat Hassanein estimated that the deficit in the new budget will stand at LE17.2 billion, or 4.2 per cent of GDP. Fayeqa El-Rifaie, deputy chair of parliament's budget committee, argues that Hassanein's estimate is too optimistic. "Budgets usually start with modest deficits but [the economy] end [s] up with staggering ones. In the former budget (2000/2001), for example, the initial deficit estimate was around LE11 billion. But in the first quarter of 2000/2001, the deficit is [already] estimated at LE7.2 billion. If this is the total for just one quarter, what will it be at the end of four quarters?" El- Rifaie asked. Tayel suggested that the government should reduce banks' reserve requirement to 10 per cent, from 14 per cent, of their total deposits. "This measure alone will allow banks to pump at least LE8.9 billion in the market," Tayel said.
Ebeid said his government's fourth challenge will be to shrink domestic debt to the minimum possible. This debt, Ebeid stated, now stands at LE203 billion, or more than 60 per cent of GDP. Ebeid said his strategy in reducing this debt largely depends on reforming what are called "economic authorities": the authorities that run certain public sector services. "In the new budget, the 62 authorities will receive LE3 billion in financial help. The Egyptian National Railway Authority (ENRA) will receive LE1.7 billion. We know that these amounts are a big drain on the treasury but we can't refrain from offering them [help] especially as the latter provide essential services to limited-income citizens," Ebeid said. He disclosed that the economic authorities will be affiliated to the National Investment Bank (NIB). "This will be the first step towards putting them on the right track in terms of rectifying their financial structures and raising their revenues," he said. This move was supported by El-Rifaie who commented that the subsidised services provided by these authorities should be gradually phased so they can bail themselves out of their chronic cycles of economic woe. Leftist MPs, however, warned that privatising economic authorities in a haphazard way could cause dramatic social upheavals.
The fifth challenge on Ebeid's agenda is "deepening industrialisation." "This will be achieved by boosting the government's demand for and purchase of local products. The government's annual purchases are estimated at LE25 billion," Ebeid said. Other measures, he added, were "to raise the competitive edge of local Egyptian industry in foreign markets. We have managed to phase out hurdles facing Egyptian products in at least 15 foreign markets." Besides, Ebeid added, the government will stick to providing huge incentives for new industrial communities. "This policy has led to the setting up of 83 industrial communities, including 25,262 factories. Of this number, 2,263 were set up in the last three years, or 754 per year, or over two a day," he remarked. Chiming with the prime minister's statement was the release this week of an 80- page report by parliament's industrial committee entitled "modernising Egyptian industry." The report said that industry accounted for 20.1 per cent of GDP in 2000/2001, climbing from 16.5 per cent in 1991. The value of industrial production reached LE168 billion in 2001. "This value should be upgraded to at least 50 per cent of GDP if Egypt is to match the cut-throat competition in foreign markets and close its trade balance gap," the report said.
The sixth challenge on Ebeid's agenda was to boost privatisation and attract greater foreign investment. "The Egyptian privatisation programme is one of the most successful and transparent in the world. It is being implemented in a way that gives corrupt people no chance to profiteer," Ebeid said. He revealed that accumulated government capital in public sector companies is estimated at LE6.5 billion. "The privatisation programme has enabled the finance ministry to recover the value of this invested capital. However, public sector companies currently slated for privatisation are still burdened with LE27 billion in debts to banks," Ebeid said. Parliament's report warned that the privatisation of some public industries has led to the proliferation of private monopolies in the strategic areas of steel, cement, beer and fertilisers. "The government had better hurry an anti-trust law through parliament. This is necessary to ensure that public monopolies will not turn out to be private monopolies at the expense of free competition and the interests of ordinary consumers," the report said. The report also rebuked the government for its failure to attract greater foreign investment. "In 2000/2001, foreign direct investment (FDI) in Egypt amounted to a mere $502 million. In the second half of 2001, the value of FDI reached $334 million," the report said. It blamed the repercussions of the 11 September attacks, the American war in Afghanistan and the Middle East turmoil for the steady decline in FDI flows into Egypt.
The seventh challenge on Ebeid's agenda is battling unemployment. Ebeid unveiled that an "Unemployment Fund" is being established: the first of its kind in Egypt. "This Fund will be devoted to providing monthly financial assistance to laid-off workers. The money from this fund, initially estimated at LE750 million, will come from government and private sector contributions. Half a per cent of each worker's salary will also be deducted to contribute to this fund," the prime minister said.
Ebeid also noted that the number of government workers now stands at seven million: five million in government offices and public sector companies and two million in the economic and service sectors. "The government is committed not to increase this number. New appointments, estimated annually at 170,000, will only replace retired employees," he said. Ebeid has taken harsh criticism in the past for his employment policies. El-Badri Farghali, a leftist MP, said Ebeid's lavish promises for fighting unemployment were all easier said than fulfilled. "Over three years into his term in office, Ebeid promised to create 2.257 million job opportunities. This was far from reality and will never be realised," said Farghali.
Recommend this page
© Copyright Al-Ahram Weekly. All rights reserved
Send a letter to the Editor