The country ranks as top reformer for the third time, writes Samir Radwan* Participants at the World Economic Forum regional meeting in Sharm El-Sheikh in May 2006 were greeted along the road from the airport to the hotels with the slogan "Egypt open for business". This was a reflection of the new spirit brought about by the reforms that began in 2004. Nevertheless, Egypt's ranking according to the World Bank/International Finance Corporation (IFC) report Doing Business back then stood at 165 out of 175 countries. Since then, efforts were accelerated to change the situation, and to prove that Egypt really is a hospitable destination for business both domestic and foreign. The result has been a continuous improvement in Egypt's position, culminating in 114th in 2008, according to the most recent Doing Business Report 2009, issued 9 September 2008. What brought this impressive progress about? In the words of Doing Business 2009, Egypt has been doing very well, particularly in enhancing the ease of doing business. It figures among the top 10 global reformers, and ranks as the top regional reformer. For the third time running, Egypt has maintained its position as a top reformer paralleled only by Colombia. Egypt has continuously improved its position as it has moved from the 165th position in 2006, to 126th in 2007, and 114th in 2008. Figure no. 1 highlights Egypt's performance. The Egyptian economy was the subject of praise in other reports too. According to the UNCTAD World Investment Report 2008, Egypt ranked as top in Africa, and second in the MENA region after Saudi Arabia in attracting foreign direct investments (FDIs). These testimonials have contributed to Egypt being the first country in the region to be accepted in the OECD Investment Committee last year. Several rating institutions have recorded the resilience of the Egyptian economy particularly in the face of the latest inflationary upsurge. Standards and Poors, for instance, has maintained its rating for investment in Egypt at BB+ (top of the second-highest rank), and confirmed the likely stability of this rating in the foreseeable future. However, it emphasised that a major challenge for Egypt is how to deal with galloping inflation. It is this latest wave of inflation, as seen in figure no.2, that intensified the debate concerning the impact of reform in Egypt. There is no doubt that during the last four years economic recovery has been in full swing. After all the economy has been growing at 7.2 per cent and this rate continued this year despite the challenges resulting from imported inflation. The Egyptian economy has been growing at 1.8 percentage points for each percentage point of growth in global GDP. Domestic investment has been growing at 40 per cent and FDIs have increased from $400 million in 2001-02 to $11.1 billion in 2007, and are likely to reach more than $13 billion (or nine per cent of GDP) this year. The balance of payments is showing a surplus, and the international reserves have reached more than $34 billion (which covers more than nine months of imports). Meanwhile, the Egyptian pound has been holding its ground vis-à-vis other currencies. So if performance has been so healthy, what is the debate all about? There is no doubt that the management of transition has its formidable challenges. For one, there is the persistent budget deficit, which stands at some seven per cent of GDP. The government had plans to reduce this deficit by one per cent every year, but these plans were frustrated by the need to increase salaries by 30 per cent to cope with rising food prices. Another challenge is the difficulty for the fruits of growth to trickle down to the broad base of the population. The people's perception is that the economic growth is impressive, but that they do not feel it in their pockets. This is a problem of long-term growth management. The experience of post-World War II and that of the Asian economies shows that job creation is the best mechanism to ease the trickle-down process. This is the immediate challenge to policy- makers and the private sector alike: to create productive jobs with good income. Meanwhile one challenge which is very pressing indeed relates to the impact of the sudden shock of inflation of the last few months. After a period when Egypt was able to bring inflation under control, there were increases due to the Avian Flu and the liberalisation of prices. The effect of these has faded as compared to the impact of "inflation", which refers to the unprecedented increase in the price of imported foods to a net deficit country like Egypt. As the figure below shows, the general inflation rate increased by 25.6 per cent in August 2008, and that of food registered a rise of 35.5 per cent. This is likely to erode into the income of the 20 per cent of Egypt's poor and threaten the other 20 per cent who are near poor to come closer to the poverty line. Looking to the future, reform in Egypt has created a solid base that enables the economy to deal with structural challenges as well as those imported from abroad. Confidence in the economy has earned Egypt the title of top reformer by international acclaim. What is required is for us to match this confidence and attack the problems that are holding the country back from moving from a lower- middle-income rank into a higher-middle- income rank. If I am to bet on one national objective to bring this transformation about, it is investing in improved skilled work force with all that it takes, including reforming the educational system and the training system. Egypt's most important asset is its people, and history teaches us that having faith in that is the key to progress. * The writer is a board member and advisor to the General Authority for Investment and Free
