Since it came to power almost three years ago, Egypt’s reformist cabinet has won the praise of international markets for a series of tough reforms that have – on the face of it – turned around the Arab nation’s fortunes.
Now, with key macroeconomic reforms completed, the market-oriented administration brought together under prime minister Ahmed Nazif faces the more controversial second round reforms that will face opposition from powerful and ordinary Egyptians alike.
Finance minister Youssef Boutros Ghali is well aware of the need to raise the growth rate to pay for tough reforms ahead. He is unambiguous in his pro-market stance: “We want to eliminate the socialist policies of the past, and open up the economy,” he tells Emerging Markets in an interview.
The minister insists that the rising growth rate will in turn help remedy Egypt’s labour woes. His challenge is to cater for a rapidly growing population of some 75 million, of whom 60% are under the age of 25. According to the Central Bank of Egypt (CBE), unemployment averages 10%. Yet growth rates remain healthy: in 2005/06, real GDP rose 6.8%, up from 4.5% in 2004/05. Boutros Ghali points out that this fiscal year, real GDP growth should hit 7%, while inflation will ease. “For the foreseeable future, until 2010, we forecast growth of 7-9%,” he says.
Key to boosting growth is increasing gas exports to meet a large demand/supply gap, and strong non-oil economic growth. Inflation is high, although the finance minister says it is mainly self-inflicted. “A number of elements caused a one-off increase in inflation: avian flu in 2006 had a large impact, since prior to that inflation stood at 3-3.5%. After the flu, with a 40% energy price adjustment in July 2006, inflation rocketed. The inflation rate is now at 12.2-12.4%, and the target is 6-8% for the next 12 months.”
The budget deficit is also looking healthier, with a forecast of 5.6% in 2007/08, down from 9% in 2006/07 – largely due to windfall revenues from privatization.
Privatization yielded E£15 billion ($2.65 billion) in 2005/06, but Boutros Ghali says that in the year ahead proceeds will not be used for revenue. Rather, privatization proceeds will be channelled into financing priority areas: “There will be a focus on sewage and water treatments, since these are key problem areas. We hope to [develop these sectors] in the next 15-20 years, and the privatization proceeds will accelerate the process, especially [tackling the] sewerage problems for the less privileged.”
At the top of his list is financial sector reform, which he links to a wider political overhaul, based on promoting services for consumers, as opposed to what he admits has traditionally been a “predatory” government. Indeed, reforming the banking sector is a key priority as prime minister Ahmed Nazif’s government attempts to keep up with the financial needs of a growing population.
Egypt is also looking to strong support from traditional donors such as the European Union, World Bank and African Development Bank. The EU has lined up $736 million for economic reform, education and health developments – and, more contentiously, improvements in human rights and democracy.
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Critics say that septuagenarian president Hosni Mubarak remains loath to devolve power, crushing liberal critics as well as the Islamist opposition. Boutros Ghali says these com-plaints are over-stated – one of his government’s failings has been to fall short on selling reforms to the public. But Boutros Ghali’s allies in the financial establishment are rallying behind him. CBE deputy governor Tarek Amer points out that in 2003, “a third of banks were insolvent, and the banking sector was very fragmented; monetary policy was not effective, and the central bank’s actions were not reflected in the market.”
Amer tells Emerging Markets that “investment conditions were bad”, but that authorities responded. A new CBE board was appointed to create a genuinely independent central bank and produce price stability. By cleaning up the foreign exchange market, “we eradicated the black market, and we gained a bank flow of $160 billion in 2006, after a successful inter-bank concentration,” Amer says. The Egyptian pound has stabilized. A more confident central bank is building a new headquarters, has recruited younger economists and bankers, and signed working agreements with the International Monetary Fund. A monetary policy committee has been established, which meets every six weeks to discuss targets for inflation.
Privatization has accelerated, most notably with the sale of Bank of Alexandria. According to Amer, “In 20 months, we sold 20 banks. In the past, it would have taken us 10 years to sell one.” And, he adds, “for the first time every bank in Egypt has real capital.”
Amer point out that the CBE wants to attract international banks that can bring competition into the market. International players vying for market share in Cairo include HSBC, Barclays and Credit Agricole.
CBE is in the process of creating an arbitration mechanism, so that any grievances between investors and borrowers are resolved within four months. This is a significant step, since most bankers still complain about the legal framework.
One senior executive at a leading international bank tells Emerging Markets that “one aspect of the market that discourages international bankers from setting up in Egypt is the legal framework, which stands between lenders and borrowers – the favour is with the borrower. For example, if the bank lends the client money for a car or house, and if the client cannot repay the loan, the bank has no rights to repossess its asset.”
Critics say that four months is still too long to wait in such a legal battle. But bankers canvassed by Emerging Markets are confident this will improve in time – provided reformers like Boutros Ghali are allowed to get on with overhauling the economy, in a country whose ageing political elite has been notably reluctant to modernize.