State seeks to turn the corner




By Mark Huband in Cairo

Financial Times, 10 May 2000

Juggling the need for accelerated economic reform while maintaining social stability, is the perennial challenge facing the Egyptian government.

But far from assuring stability by accelerating reform and raising living standards, the government last year lost much credibility by allowing itself to be sidetracked.

Hesitant decision-making and a lack of vision meant that only in the past month has the government taken decisive action to address these problems by committing itself to repay an accumulated private sector arrears Pounds E25bn over the next 10 months.

The appointment of Atef Obeid as prime minister last October was heralded as the start of a more co-operative process of decision-making within the cabinet. Equally, Mr Obeid sought to give greater power to ministers to formulate and implement policies. While his intention may have been good – and came as a relief to ministers exasperated by obsessive control exercised by Kamal el-Ganzouri, the previous prime minister – it was not the most appropriate strategy for the pressing problems then faced by the economy, the main one being the private sector debt which increased the number of bankruptcies by 50 per cent last year.

Chief among Mr el-Ganzouri’s mistakes, which Mr Obeid has inherited, was the failure to address a crisis in foreign exchange liquidity, which escalated in late-1998 and throughout 1999.

Poor decision-making processes led to a failure to intervene quickly and decisively to prevent the last year’s liquidity shortage from becoming a crisis. This has subsequently tilted the economy into recession. However, the need to act quickly was only recognised six months after the new, more collegiate government took over last October, when pressure from banks and private sector companies had risen to fever pitch.

At the heart of the crisis lay a commitment to retaining a currency peg to the US dollar that is widely considered to have led to the Egyptian pound becoming overvalued by 10 to 15 per cent. To bolster the exchange rate, intervention led to official reserves falling from $20bn to $15bn.

The resulting squeeze on foreign exchange led to the imposition of damaging regulations to limit imports, which had soared to create a $12bn trade deficit as importers roamed the crisis-hit markets of East Asia in search of bargains. Draconian restrictions on importers and the squeeze on liquidity in turn crippled importers, depleted government revenues and led to the build-up of arrears.

Government officials, who are now seeking to allow the currency to move more freely within a range of 2 to 3 per cent, expect the economy to take a year to recover from the mess left behind by the Ganzouri administration.

But it has taken until the past month for Mr Obeid to present a wide-ranging policy review intended to show that the government is now addressing the problems it has inherited.

“There is a new policy. It’s just not apparent,” says Youssef Boutros-Ghali, minister of economy and foreign trade. “The easing of pressure on the exchange market is a policy. And we know what caused the problems of liquidity.. There’s a problem of addressing the question of arrears in a way that is structurally sound. We could have just printed money. But we haven’t. So, there is a policy.”

Mr Boutros Ghali stresses that policy shifts are subtle. “You need to get the system going. You need to get people used to change. Reform is consistent, and has happened without major upheavals. We don’t need to give strong signals any more. We have been slated as an economy that is moving. The forces for reform are now much better entrenched than they have been since 1986,” he says.

Doubts about the government’s apparent inability to take tough and immediate action have, however, been mitigated by the general assessment that the macroeconomic picture remains positive and capable of withstanding the current knocks. The current account deficit, which had soared to $379m in mid-1999, had fallen to $110m by December, equivalent to 1.7 per cent of GDP on an annual basis.

Despite sluggish privatisation generally, the sale of state holdings in cement companies generated almost Dollars 1bn over the past year, while foreign direct investment in 1999 was about Dollars 1.5bn. Up to 20 per cent of Egypt Telecom is also expected to be sold this year. Meanwhile, tourism revenues rose by 43 per cent on the previous year and growth in the oil and construction sectors accounted for much of the 5 per cent GDP growth recorded in 1999.

Despite the shambles over the liquidity crisis, specific aspects of monetary policy have also been pursued with increasing adeptness. The government is now committed to issuing treasury bills in line with maturation, which has pushed up T-Bill rates.

However, positive macro-economic signs, as well as attempts to improve monetary management, have yet to restore confidence in the short term.

“With the pound being high, the export sector is crumbling,” says a leading investment banker. “The picture isn’t good any way you look at it, and the only way out is massive, aggressive privatisation, irrespective of the immediate cost of privatisation assets, irrespective of the immediate value. It’s better to throw people out on the streets to find jobs, than to pay them to do nothing.”

No one within the government is prepared to voice such views, either publicly or privately. Meanwhile, the failure to act quickly to address the threat of bankruptcy faced by many large companies because of accumulated arrears has undermined the credibility of the government.

In addition, the implications of poor monetary policy have further delayed steps towards fuller use of the 65m people who make up the domestic market, as a source of growth. The credit squeeze hampered the growth and diversification of the fledgling retail banking sector, and did not bode well for the successful application of a new mortgage law, expected to be passed this year.

“But the biggest challenge is the employment challenge,” says Heba Handoussa, managing director of the Cairo-based Economic Research Forum. The government calculates that only 5m people in the country have significant purchasing power, and so has sought to increase export-led growth as a means of creating jobs.

“Population growth is coming down, to 2 per cent, but the labour force is growing by 3 per cent,” says Ms Handoussa. “There is a serious mismatch between the needs of the labour market and the quality of training. The budget needs to be reallocated. You have got work on programmes for the youth which will create jobs for the youth.”

Essential to creating these jobs is the repositioning of Egypt an export-driven economy. Since the appointment of the new government, the streamlining of export procedures has accelerated, while longer term improvements to transport and bureaucratic infrastructure are starting to bear fruit. However, Egypt still only exports 20 per cent of its manufactured goods, a low figure for such a large country.

The challenge, then, remains to convince foreign investors that Egypt is the platform for the region they have been seeking. For now, the government is faced with a steady but not dramatic growth in the domestic market, which has yet to attract FDI on a large scale.

But Egypt is dragging its feet over the signing of a free trade partnership with the European Union. Meanwhile, other regional trade blocs have yet to offer adequate incentives to foreign direct investors – incentives that are essential to the creation of new jobs. Much work therefore still needs to be done before the hope of export-generated growth becomes a reality.

© Financial Times