H.E DR. MOHIE EL-DIN AL GHAREEB,
MINISTER OF FINANCE
SUNDAY 8 NOVEMBER 1998
1/ Q. Since the government started its reform program, Egypt has already achieved major goals. Fiscal deficit fell to 0.8% last year, inflation rate went down to 4% last May How would you evaluate the current economic situation in Egypt?
First of all we are enjoying stability. Inflation is under control. There is proper supervision of the Central Bank over the credit situation in the country, all over the bank system. The fiscal deficit is under control again. It is 0.8%, it could be 0.9% and maximum 1%. It could reach 1% but not more. We are doing our best that it should not exceed 1% of the GDP. We are rationing our expenditure, continuously reviewing priorities of spending and giving utmost attention to lower and medium income groups. We are trying to provide better health and education services to those groups, especially in remote areas, i.e. in rural areas, to ensure social safety and justice. It is an important background for enhancing economic growth because we provide a lot of incentives to investors and we do follow this in a gradual sense in our economic reform. We are trying to alleviate the burden over those lower income groups. It is only then that they will accept that the country can provide really incentives to investors and to the business community. Then they will really feel that whatever is being done to encourage investment through incentives and that at the end it will help to provide employment opportunities to their sons and brothers and so forth. It proved to be quite important that being transparent in our policy helps in achieving our goals. These communities should know what kind of measures should be taken in the future especially in the areas of taxes, customs and so on. Because of that, the policy of the Ministry of Finance, in the tax reforms and the customs reform, has been really transparent. Consequently our policy for the last three years has been the gradual reduction of custom duties ; tariffs have been reduced three or four times during the last three years and the maximum tariffs and duties now is standard 4%. We are gradually reducing protection to the local industry in order to push it further to be ready for competition whether on the local or international market. During the last three years I must say that this kind of transparency helped domestic industry in Egypt to modernize, to take care of improved quality of production and to try to promote Egyptian products on the international market. It is not easy. It took a lot of efforts. But now I think that a lot of our companies have started to export. Exports of manufactured products that are locally produced is now increasing. Its weight in our exports now has really increased. We do it gradually and this is very important because modernization usually takes time and transfer of technology also takes times. So, gradual reduction of tariffs has been one of the policies that has been accepted by the IMF. This actually is one of the items in the program for economic reform of the IMF. In the area of tax reforms, we reduced the income tax. The maximum now is 40% instead of 48% and that helped again to alleviate the tax burden on the different income groups because we are also taking care of the poor, i.e. the low income groups, similar to the higher income groups. We also alleviated the burden of taxation on lower income groups and at the same time we reduced the top tax limits. So, whatever are the gains from economic development and economic growth under the economic reform program, it has been general because the poor and rich have both gained benefits from this reform and this kind of balance is very important for social stability. I think the IMF was a very honest adviser and I would really say that their experience with Egypt was a possibly unique experience because they came to understand the sense of gradualism in reforming. They usually recommend some kind of strong measures that can easily create instability. We were lucky to manage to convince them that gradualism, which is President Mubaraks policy, enables us to reduce the burden of economic reform on the lower and medium income groups.
2/ Q. In June 1991 the Government signed the Economic reform & Structural Adjustment Program. The Privatization Reform started around 1994. What is the policy of your Ministry in order to ensure long term stability from now on?
We will be following the same policy as in the last three years. I am for further liberalization of the Egyptian economy and more integration with the world economy. We signed the GATT agreement and we are members of the WTO and we stick literally to what we have already signed before, which means full liberalization of trade. This has already been accomplished except for one product which is the ready made garments. This is the only commodity which is, up till now, banned from importation until the end of 2001. In the beginning of 2002, importation will be authorized. We are doing so because our ready-made garments industry is still trying to establish itself and competition from the Far East is frightful. We are now trying to modernize this industry so that by the end of
2001 we will be able to compete internationally. Of course, we do export ready-made garments but there are some cheap products which come from the Far East and their quality is not up to the Egyptian standards, especially the cotton products, that we try to keep the local market protected from this kind of cheap quality products. Even for that product we are trying to speed up liberalizing importation on that . We hope to liberalize it even before this date which we agreed upon with the WTO.
3/ Q: Do you have a special program for financial isolation and liquidation of loosing state owned enterprises?
I do support the acceleration of privatization for many reasons. I am sure that Dr. Ebeid must have mentioned that the privatized or the re-privatized companies are now much better off than before when they were in the public sector. They produce better and with better quality. The product mix is now wider. They are now more efficient and labor productivity is higher. They are making more profits. I always support those who make good money because those are the ones that can expand and those are the good examples for others who come to invest in Egypt. The more you have winning companies, the more you will able to attract foreign direct investment. The real challenge to Egypt now is how to attract more foreign direct investment. The more we succeed to attract, not only the multinationals but also the medium and small-size businesses, the more we would manage to have Egypt on the long-term growth path. We are in the second phase of the privatization program and our plan is that in 3 years we would have privatized all companies but I do support the acceleration of that program as much as we can. Of course, in the end everything depends on the state of the capital market and on the availability of investments coming from abroad to the capital market. But the reason why we support that is not only because it is the base for the private sector to increase proper competition in the market and to strengthen the weight of the private sector in the policy making of the economy, but also because two-thirds of the privatization proceeds come from the Ministry of Finance. I utilize those proceeds to reduce the domestic debt. Two-thirds of the proceeds of privatization are utilized to reduce some of the domestic debt on the treasury to banks and to the private sector because at the present about 20% of government expenditure goes to serve the domestic debt. So, the more we succeed to reduce domestic debt, the less will be the spending on the service of domestic debt in the budget. And this would mean that we will be able to devote and to allocate more funds to improve the health service as well as education.
4/ Q. Concerning privatization of the largest state owned banks, the Big 4, could you tell us more about the situation of those big 4 banks today?
About 60% of the banking activity in Egypt is done through those 4 banks which means that when one of those banks will be privatize before the end of 1999, about 15% of our bank activity will shift to the private sector directly and then the majority of the bank activity will be in the hands of the private sector. I am sure that you must have been told that Parliament has permitted non-Egyptians holding of banks to exceed 15%. By law you can have a bank that is 100% owned by non-Egyptians. The foreign branches in Egypt are doing very good business. They do operate by the local and foreign currencies. And their business is now flourishing and they are now increasing their weight. Actually those 4 banks used to acquire 70% three years ago and now it is 60%. In the future after being privatized it would be about 40-45%. Again the business of foreign branches in Egypt and joint venture banks is now expanding.
Q: Which one of the 4 banks that will be privatized?
We do not know exactly yet but I have to tell you that we have already evaluated those 4 banks but mostly it will be either the Alexandria Bank or Banque de Caire. Mostly it will be one of those banks. I do not think that we will go for the National Bank of Egypt or Bank Misr. I can not tell you exactly about the insurance sector because they are evaluating it at the moment.
5/ Q: Within this economic reform what will the status of the Central Bank of Egypt be?
The Central bank of Egypt, by law, is functioning like any other modern Central Bank. It is supervising the bank system whether it is publicly owned or privately owned. The Central Bank is supervising the bank system, irrespective of bank ownership.
6/ Q: Today, what are the sectors of the economy that really need foreign direct investment?
Well, we do welcome foreign investments in all areas including the BOT projects. The investment law more or less qualifies all activities to foreign investors, whether in industry, agriculture, tourism, hotels and so on. All kinds of areas are now open to foreign investors. In addition to that we have the BOT projects - the new power generation projects are open to international companies. The first two projects are done by foreign investors. From now on no more power generation projects will be public at all. It will be through BOT projects. Same again with new airports in tourist areas. Three have already been allocated to private investors; one in Marsa Alam on the Red Sea, the second is in Alamain in the North Coast and the third is in Ras Sedr which is south of Sinai, and there will be two more. Also, we have new industry zones. Some of the new major ports, like the one in east Port Said, are under construction and developed by international companies. The oil sector is also part of the international economy. All the major international oil companies are operating in Egypt and they have their own special law to cover this kind of activity. The oil and gas exploration in Egypt is all carried out by foreign companies. We have no restriction at all on foreign investment in Egypt.
7/ Q: When talking about the global economy, how would you evaluate the impact of the Asian, Russian, and now the Brazilian crisis on the Egyptian economy?
We do not have this kind of direct link in financial flows with those markets. That is to say that the capital exchange in Egypt is affected but to a very minor extent by what happened in South East Asia because the size of the foreign investment in the Egyptian stock market is still small so when the Asian crisis happened, the sale of securities held by foreign investors in the Egyptian market was very small simply because they had not really invested a lot of money in the stock exchange in Egypt. Most of the foreign investments in Egypt is direct investment in industry, tourism, hotels and so on. But in the stock exchange, we have few foreign investment in securities and circulation to make capital gains. That is why there was a minor impact of that crisis on the Egyptian economy. I will say that the problem which is now Russia is not affecting Egypt directly but it has an impact at the moment on the prices of raw materials. The prices of sugar did fall sharply during the last couple of months because the Russians cut their imports of sugar sharply. Prices did fall in one day which is quite a lot. Egypt is one of the major importers of sugar in the international market. So we did import sugar at a very reduced price so we did really make money in importing sugar due to mainly the Russian problem. So, what is taking place in Russia and Brazil is supposed to be bad for the whole international economy but sometimes you might be able to make a short term gain in areas where you import from those countries. But in the end we are also bound to face some kind of small losses to the extent that we do export to Russia and Brazil. Actually, our exports to Russia are very small. With the former Soviet Union it used to be one of the major markets to Egyptian markets but now it has become a very small market to Egyptian exports. So what is happening in Russia is not affecting our exports.
We are not bound to face any problems in this area but the opposite is that we can make a lot of gains if we can have peace in the Middle East. We can export a lot of our oil and gas. We can easily extend our pipelines to neighboring countries. We can easily export it to Israel and Palestine. Also we can export electricity to the whole area. We are part of some kind of regional network in the Middle East.
8/Q: Americans have good relations with Egypt. What would you like to tell them to attract them even more?
We have a partnership agreement with the United States. We have the Council of Businessmen for science. We will be having a joint meeting in early December. We managed to attract a number of big American companies in many activities whether in engineering or pharmaceutical as well as other areas. But we have not been able to succeed in attracting the medium and small size businesses from the United States. The problem is promotion and available information. We would like these companies to investigate possibilities of investment in Egypt. The international reports about Egypt are available. The IMF reports are available. The reports from the international press are also available. I will also say that Egypt enjoys economic and social stability. As for terrorism, Egypt is really more safe than other countries and people here are very hospitable to the guests from the rest of the world. I would say that whether you come here as a tourist or a businessman, you should really obtain more information about experience from other businesses here in Egypt. The U.S. can ask for the experience of other American companies in Egypt : their growth history and performance during the last
10 years, the return on capital, the incentives that they have enjoyed, the way we are solving problems, etc. I think that they will find that the experience here is very encouraging for international businessmen to come and seek information on how to do business in Egypt. I think that they will find it quite promising.