By Niveen Wahish Where does the Egyptian economy stand today in your assessment? Every indicator points to the very robust health of the Egyptian economy. Inflation continues to slow down. Data for the fiscal year 1997/98 show that inflation is around 3.8 per cent, which is a great achievement because the corresponding figure for the previous year was much higher. As for the fiscal situation, the budget deficit remains below one per cent of GDP. We are also talking about an economy with a very solid growth rate of around five per cent. How has Egypt's economy reacted to external and internal shocks over the past year? Despite recent setbacks to the economy in the past year, prospects are once again looking brighter. The tourism situation is improving and there is renewed interest from international investors in various types of securities in Egypt. There is also renewed interest in very large foreign direct investment projects. Although the Egyptian economy is still vulnerable to external shocks of the sort that we have seen over the past six to nine months -- by which I mean the Asia crisis, the impact of the lowering of oil prices and decline of tourism in the wake of the Luxor massacre -- the ability of the economy to withstand these external pressures is much better than it was a few years ago. To what do you attribute this resilience? Much of this resilience has to do with the fact that the external debt and external reserve situation of the country have improved considerably. The burden of servicing the external debt and the composition of the external debt are also very favourable. At the beginning of the nineties, Egypt was paying about 50 cents per dollar of current account receipt in interest and repayments of principal on external debt. Now this ratio is only eight to nine cents per dollar of current account receipt. So the situation is much improved, and this has allowed the economy to absorb these shocks without necessarily suffering very significant adverse effects. What has become clearer in the last six months is that the commitment to reform by the Egyptian authorities and the policies adopted in response to external disruptions have been crucial. They reflect the commitment of the economic team of ministers, under the leadership of the prime minister, to staying on top of the situation. The authorities have kept the macroeconomic situation under tight control and the acceleration of structural reform in a variety of areas has galvanised the confidence of potential investors. As a result, we are witnessing a change in the nature of capital flows into the country, from short-term capital, as was predominantly the case last year, to foreign direct investment of the equity participation type. The change is towards a type of capital geared towards creating jobs, improving productivity, and promoting technology transfer. This is the kind of capital that really fosters growth. It is the ultimate goal of the economic reform programme to encourage this kind of capital investment. Now that there are less than two months to go before the stand-by agreement expires, has Egypt in your view met with the expectations of the IMF and realised the objectives it set in 1996? The process of economic reform is very complex. There are ever-changing conditions that make the process of reform a painful one. One needs to apply a degree of judiciousness when deciding whether something has been implemented or not. One cannot be too rigid. The circumstances of the individual country have to be taken into account. In general, the outcome of the programme has been very positive. Almost all the performance criteria have been met: credit, fiscal, monetary, and external reserves. From the macroeconomic point of view, the progress that has been made is indicated by a continuing disinflationary trend and strength of external indicators despite the shocks. Structurally, the pace and the extent of privatisation have exceeded the targets set by the programme. There has also been a degree of success in reducing the impediments to trade. Which sectors, according to the IMF, have witnessed developments that were beyond its expectations? There has been a remarkable success in implementing measures that are of historical importance for the future of this economy, such as the recent laws for the banking and insurance sector. In the future, these two sectors will be at the forefront of progress in productivity and greater efficiency. One needs to recognise that the government in recent months has gone well beyond what was laid down by the programme by widening the scope of the privatisation programme from non-financial enterprises to include economic authorities, telecommunications, port infrastructure, maritime services and, recently, electricity. This puts Egypt at the cutting edge of experiments in increasing private sector participation in all of these areas. These initiatives will form the basis for very fast growth in the years ahead. What are the sectors that need to be improved or have not been dealt with, in the IMF's assessment? Apart from keeping up the momentum of reform, there are two very broad areas where challenges still lie ahead. First of all, this country requires a serious reorientation of its budgetary expenditures. The ultimate goal of reform is poverty alleviation, increasing the number of employed people and fostering growth. On the expenditure side of the budget, there are enormous pressures to increase spending on health and education. We are very much in favour of an increase in public spending in these areas because we believe that they are the key to contributing to human capital development, and therefore to sustainable medium-term goals. If you want to maintain the fiscal control that has been achieved so far, then this country has to make an effort to widen the tax base. I believe there is a very large potential for increasing fiscal revenues from improved tax administration and from the move to a simple system of indirect taxes with a minimal burden on consumers. With a very simple tax administration and indirect taxation this country could raise much more tax revenues and use these resources for greater expenditure in programmes which are growth-enhancing such as health and primary education. The second area of potential progress is that of economic integration with partner countries through the continued reduction of tariff and non-tariff barriers. In my view, this is a priority for the period ahead since such tariffs are serious impediments to a potential quantum leap in the amount of foreign direct investment in the Egyptian economy.
