International organisations recently gave the economy an approving, yet precautionary, nod. Niveen Wahish leafs through two reports For a couple of years now, the IMF's annual mission preparing for Article IV consultations has been patting the Egyptian government on the back for implementing reform policies that spur growth. This year's mission, which visited this month, reported that "Egypt's economy delivered another impressive performance in 2006/07." Article IV consultations are regularly carried out in member countries of the fund. Each member agrees to regular reviews of economic conditions as a means of independently assessing economic policies. Meanwhile, Capital Intelligence (CI), an international emerging markets credit rating agency headquartered in Limassol, Cyprus, announced that it has raised Egypt's long- and short-term foreign currency ratings by one notch to BBB-/A3. And it affirmed Egypt's local currency ratings of BBB/A3. CI's international credit ratings indicate the general creditworthiness of an entity, and the likelihood that it will meet its financial obligations in a timely manner. BBB indicates acceptable credit characteristics, but some vulnerability to adverse changes in business, economic and financial conditions. A3 indicates a strong capacity for timely repayment that may be affected by unexpected adversities. CI foreign and local currency ratings take into account the economic, financial and country risks that may affect creditworthiness, as well as the likelihood that an entity would receive external support in the event of financial difficulties. CI stated that the upgrade in the foreign currency rating reflects "the substantial improvement in external solvency and liquidity ratios over the past few years, which indicate strong repayment capacity and an increased resilience to external shocks". It added that Egypt's ratings are "supported by the good progress being made on fiscal and structural reforms, which have helped to improve economic and financial fundamentals." According to the IMF report, these improved economic and financial fundamentals have helped the economy reach a growth of 7.1 per cent in 2006/07. That in its turn reduced unemployment from 10.5 per cent to nine per cent, and helped contain demand and inflationary pressures. To sustain the momentum, however, is a challenge. Maintaining the high job-creating growth, the IMF noted, needs investments to rise to around 26 per cent of GDP. "Accordingly, constraints on business development, such as inadequate infrastructure, limited access to bank credit by small and medium enterprises (SMEs), red tape, poor public service delivery, and the lack of skilled labour, need to be tackled by reform." CI saw several additional sources of vulnerability. "The budget deficit is large and the public debt burden, though manageable and declining, is comparatively heavy." The ratio of government debt to GDP declined from 103 per cent in June, 2005 to some 78 per cent in June, 2007. In addition, CI pointed out that per capita income is low while unemployment and poverty are both relatively high. "Economic development is hampered by excessive bureaucracy, inefficient financial intermediation," it added. According to Doha Abdel-Hamid, visiting professor of public policy evaluations at Carleton University, Canada, such reservations indicate that these institutions are sceptical about the pace of reform. CI is explicit about this, saying that it expects "the pace and depth of fiscal consolidation in particular to remain slow", in part because of "understandable social and political considerations". It foresees that public debt ratios will decline modestly over the medium term. The IMF mission stressed that reducing the budget deficit is key to raising national savings, and supporting monetary policy in containing inflation. It is also vital to reducing the high level of net public debt; the government plans to reduce the deficit gradually to three per cent of GDP by 2010/11. In the meantime, it aims to contain the deficit at seven per cent of GDP for the 2007/08 central government budget. Achieving the short- and medium-term fiscal targets, the mission said, will require the implementation of policies such as "continued reduction of expenditure in the wage bill, reform of the sales and property taxes, improvements in the efficiency of cash management and public spending, and further reductions in fuel subsidies." Sustaining reform in the financial sector was another recommendation by the IMF. It encouraged authorities to continue improving bank and non-bank supervision, complete the bank recapitalisation programme, as well as improve banking sector data to enhance monitoring and stress testing of the financial sector. The mission also warned that the tightening global credit markets might worsen the external environment, "such as lower global growth and less easy access to international capital markets." Another dampener maybe "reform fatigue", resulting from the fact that "parts of the public are disappointed with the pace at which reform benefits accrue to all strata of society." In fact, as Abdel-Hamid pointed out, the general public may not understand economic jargon found in reports, but they want jobs, reduced inflation, not having to pay bribes and being treated with dignity at government offices. She asserted this will only be possible if more attention is given to the micro- economic side of reform. Abdel-Hamid suggested comprehensive reform in civil services for citizens to feel the impact of macro-economic reform. "There is a need to improve public service delivery, accountability of civil servants based on performance measurement, setting standard time and cost for quality service delivery," she maintained. "Also, well-trained civil service employees and a decentralised work system." All these, Abdel-Hamid believes, are challenges that the government can handle, and it will have to bear the suffering and criticism it is bound to receive. She said there are conflicting goals that require handling with astutely, such as the need to reduce inflation while increasing growth; reducing the budget deficit while expanding the government employee wage bill, to reduce corruption and increase governance. On another thorny issue, that of the elimination of fuel subsidies as recommended by all international organisation, Abdel-Hamid proposed that solid data and statistics need to be shared with the average citizen. She recommended that the government recruit the help of specialists in the design of communication strategies. The IMF mission said that there is a need to reduce the under-pricing of energy, because "it remains an important distortion that risks attracting investment into sectors where Egypt may not have a long-run comparative advantage." It also "encourages levels of energy consumption that impose high environmental costs, and uses up vast public funds that could be more productively spent, for example, on education or infrastructure." Fuel subsidies recorded in the budget amount to 5-6 per cent of GDP. Abdel-Hamid suggested that the government tabulate these recommendations into specific measures with annual benchmarks, and timelines should be detailed. It also needs to inform the public of its plans, and allow them to monitor and evaluate progress. "Reform will be possible," she said, "after mitigating resistance and addressing the needs of the different interest groups in society."
