Egypt's first-ever presidential election on September 7 marked a crucial milestone, even though it came as little surprise that the incumbent, Hosni Mubarak, won with, apparently, almost 89% of votes cast – albeit on a turnout of just 23% of the 32 million registered voters.
The fact that a public political contest was held in a highly autocratic Arab state suggests, at the very least, an irresistible impetus for change in a region renowned for its lack of political dynamism. Yet such a makeover – if it ever truly comes – will sweep in on the back of a more profound set of reforms already being thrashed out by Egypt's government, led by the pro-reform cabinet of prime minister Ahmed Nazif, and implemented by, among others, its finance minister, Youssef Boutros-Ghali.
Since Nazif's government took over last July, the most palpable effect has been the sharp change in the direction of Egypt's economic policy. The new cabinet has moved quickly on key trade, foreign exchange and tax policy reforms, encouraged in part by the boom after devaluation of the pound in 2003, a surge in oil revenues, increased tourism and a fair bit of capital repatriation. A year on, the economy is beginning to look up, with GDP growth forecast at around 5% this year, up from 4.1% in 2004.
But the challenge is not hard to overstate. Public debt stands at X; unemployment is rampant (unofficial estimates put it at 20%); and 650,000 often-restless job seekers enter the market every year. Some 42% of the population – the largest in the Arab world – lives on less than $2 a day. Growth needs to stay above 6% to have a meaningful impact.
None of this seems to discourage Boutros-Ghali, a leading economic liberal in former prime minister Atef Ebeid's cabinet and a chief architect of Egypt's macroeconomic policies in the 1990s. He believes that the government's priorities and approach are now consistent. "We needed to have a clear purpose and a clear goal of where we wanted to end up," explains the MIT-educated economist. "But at the same time we needed to make sure we had the means to implement measures that take into account the anomalies and idiosyncracies of the Egyptian economy."
Sixth sense
Boutros-Ghali, who became finance minister in last July's cabinet reshuffle, having previously held the economy and trade portfolios, says Egypt's economic policy-makers have, by now, "developed a sixth sense of where the economy is and where it should be."
Though he came to politics late in his career, Boutros-Ghali hails from a prominent Coptic family that has for almost a century played a key role in shaping Egypt's policies: his grandfather, Boutros Ghali, was a prime minister who was assassinated in 1909; his uncle, Boutros Boutros-Ghali, is a former minister of state for foreign affairs and former UN secretary-general; and his father, Raouf Ghali, is a well-known entrepreneur.
Heir to this legacy, Boutros-Ghali has wasted no time in stamping his authority on the finance ministry. Fiscal reform is, as he puts it, the most "salient" feature of his agenda as minister: he has focused much of his energy over the last year on "long overdue" tariff, income tax and subsidies reforms, while drawing up extensive plans to increase the transparency of subsidies and improve tax administration.
"When we looked at the budget and fiscal sustainability, the chief problems were customs and tariffs," says Boutros-Ghali. "The economy was stagnant – it needed an initial push." Because of reduced tariff income, the state budget will have lost E£3.5 billion in the first 12 months, although Boutros-Ghali expects to "recoup the whole lot" within two years, partly through the boost he expects it to yield.
The new income tax reform act, which came into force in July, sees rates cut by as much as 50%. It also revokes and simplifies exemptions and introduces the concept of personal responsibility, through an audit of only 10% of tax returns. The government followed its own lead in preparing next year's budget, fully disclosing subsidies while sticking to IMF-approved guidelines.
Boutros-Ghali has also set about modernizing Egypt's budget while improving treasury cash management – both of which he says are necessary for an efficient control of government expenditure, and which should improve the measurement of the fiscal balance.
Yet he freely admits these reforms by themselves won't result in lower government spending or borrowing unless they're supported by what the IMF refers to as "concrete expenditure-reducing measures", such as cutting back subsidies and the government wage bill.
Privatization programme
Partly with this in mind, the government has also kick-started its stalled privatization programme, which has so far witnessed a stake sold in Suez Cement, the largest state-owned company in Egypt. Boutros-Ghali remains confident that Bank of Alexandria, the country's fourth largest by assets, will be sold by the end of the year, and reckons shares in oil firms will soon be up for grabs too.
In many ways, says Boutros-Ghali, the liberalization of the economy has been an evolving process. He points out that the blueprints of the current programme were in fact laid out in the late 1980s, although now, after years of political opposition, "economic policies have taken more of a forward seat in the last few years". Analysts cite past policies that prioritized political stability over economic fundamentals – including a determination to prop up the Egyptian pound – as having compounded the country's earlier economic woes. But, says Boutros-Ghali, "it's now not really so much about the primacy of economic policies but about their content."
This time round, Boutros-Ghali credits new-found political will from the highest authority: "This was a conscious decision by the president to usher in a new vision, a new energy – even our prime minister was born in the second half of the twentieth century," he says, referring to the 53-year-old Nazif. "The crucial difference is that we're now addressing the issues transparently and head on."
This is not to suggest it's all been easy sailing, or even that it will remain so. In late July, a series of explosions ripped through the Egyptian tourist resort of Sharm el-Sheikh, on the Red Sea, killing 88 people, mainly Egyptians. Although this isn't the first time it's happened, Boutros-Ghali is quick to downplay the impact of this bombing – blamed on a militant network based among the Bedouin of the Sinai, with possible ties to al-Qaeda – on the economy. He says that just a week after the attacks "over 50%" of holidaymakers were still at the resort. "People are defiant," he says. "They are aware that this [terrorism] is a global phenomenon and is not particular to any one place," he says.
Militants last targeted Egypt's tourist sector, its main foreign-exchange earner, in October 2004, through car bombings which killed 34 people, including many Israelis, at the Sinai resort. Some 62 people, including 58 tourists, were massacred at Luxor in 1997. "It's a sad fact, but this is the new reality," he says.