 On the brink of a big boom
With an official population estimate of 65 million and a moderate government, the Arab Republic of Egypt , or Misr, has long been the Middle East’s biggest market and America’s best friend in the Arab region. Set back by 30 years of socialism, or
"nationalization", Egypt has unfortunately not progressed economically as much as some of its neighbors. Now after eight years of economic reforms that began in 1991 under the leadership of President Hosni Mubarak, it is earning a new reputation as a model emerging market. Relatively unaffected by the Asian contagion, and with low inflation, a growing stock market and rapidly developing private industry, the country’s ministers say that Egypt is now on the brink of a big boom. They say that by the year 2000 Egypt should achieve a 7 % growth rate – the kind of economic growth that would begin to rival the Asian economies of the past three decades and one that would provide a better standard of living for all Egyptians. "If you compare the numbers of 1991, all the macroeconomic variables and macroeconomic profile of the country have improved tremendously", notes Mohamed Taymour , Chairman of merchant bank EFG-Hermes.
Egypt has been a republic since the overthrow of the monarch King Farouk in 1952. It has had only three rulers since then : Nasser, Sadat and Sadat’s vice president and designated successor, Hosni Mubarak. President Mubarak is currently serving his third six-year term after he was reelected in 1993 with around 95% of the vote cast. As with each of the elections since he became leader, he was unopposed. Hosni Mubarak has been called the most democratic leader Egypt has ever had, but critics point out that he holds all the power in his hands. He is the sole one who can appoint the government and its cabinet ministers. During Mubarak’s term Egypt has been in peace with its neighbors thanks to the negotiated peace with Israel signed by Sadat in 1979, following the Camp David Treaties. The peace, while ultimately costing Sadat his life to an assassin’s bullet, brought an end to years of uneasy relations and war. In the devastating Six Day war in 1967 Israel attacked Egypt and destroyed Egypt’s air force, captured Sinai, and closed the Suez canal. In the early years of Sadat’s term, on October 6th 1973, Egypt launched a surprise attack across the Suez Canal as well as on the occupied Sinai. In the peace treaties that followed, Israel agreed to pull back from Sinai, thus reopening the pristine desert peninsula bordered on the North by the Mediterranean sea and on the south by the Red Sea. Economically speaking, Egypt has been slowing dismantling the nationalization policies installed by Colonel Abdul Gamel Nasser ever since he died in 1970 and was replaced by Anwar Sadat. Sadat’s open door policies created wealth, but only for a minority inflation subsidies. When food subsidies were lifted in 1977 riots erupted until they were reinstalled. Macro economic progress only began in 1991, after President Mubarak agreed to a structural economic reform program with the World Bank and the International Monetary Fund. The first phase of reforms tightened the government’s budget, inserted monetary controls, liberalized the exchange rate policy and began deregulating prices. Its second phase saw further price deregulation and the beginning of privatization of public sector companies.
The eight year reform program with the IMF officially ended in October 1998 with an impressive record of success. Ibrahim Fawzy , president of the General Authority for Investment & Free Zones asserts that the success of the economic reforms simply "speak for themselves." Egypt achieved a steady economic growth of about 5 % for the past two years, inflation has been brought down from 25 % in the 1980s to less than 4 %, and the exchange rate of the Egyptian pound has been stable for the last eight years, fixed at a rate of 3.41 pounds per dollar.
"When we started there was this very hectic system for the Egyptian pound versus the U.S. dollar with several rates, black markets, white markets etc," recalls Ibrahim Fawzy.
During the 1990s, the careful spending and monetary policies enabled Egypt to amass an enviable level of $20 billion worth of foreign reserves. Although a recurring shortage of foreign exchange in the past year has required the Central Bank to begin spending a bit of its reserves, the level is still high enough to cover 16 months of imports. Egypt’s leaders are fond of pointing out that Egypt is one of the world’s few emerging markets that managed to escape the financial crisis that began in Asia. Economy Minister Youssef Boutros Ghali says that this combination of stable macro economic indicators combined, ironically, with Egypt’s lack of integration with the world economy kept Egypt from getting entangled in the rest of the world’s problem.
Egypt is determined to push its growth rate higher and to continue with economic reforms at its own pace –even if that pace is slower than some might like. Finance Minister Mohieldin El Ghareeb stresses that Egypt needs a "sense of gradualism in reforming." The Ministry of Finance is working gradually to reform the income tax structure and to lower its very high tariffs that make imported products expensive in Cairo and ultimately impede trade. Ghareeb says investors have to understand that many Egyptian businesses are not used to international competition. "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," he says. During the last three years Egyptian industry has begun to start looking at quality of production with an eye on international markets.
"It took a lot of effort. But now I think that a lot of companies have started to export," says Ghareeb. "Exports of manufactured products are now increasing. We do it gradually and this is very important because modernization usually takes time and transfer of technology takes time."
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Economy Minister Youssef Boutros Ghali says an expansion of investment flows from the United States to Egypt will push Egypt towards growth. He reasons that, "In Egypt, I have access to a very large market. I should have access to a very large pool of investors. If I manage to attract both of them here, it should have a very substantial effect on the Egyptian economy. The opportunities for development and investment in Egypt are immense, not only because the local market is very large but also because the export potential of Egypt is huge." The United States is Egypt’s second largest trading partner, after Europe. When Vice President Al Gore and Egypt President Hosni Mubarak met in early 1998, they established the Al Gore-Mubarak partnership for economic growth and development , with the aim of boosting trade in tandem with the planned reduction of U.S. aid to Egypt by about 5 % per year beginning in 1999. "Our objective is to make sure that the government has the necessary climate to attract foreign companies to help us export to the outside world" says Gamal Mubarak , investment banker in Cairo and Chairman of the Egyptian Presidents’ Council, the partnership’s advisory board consisting of 15 businessmen in Egypt and the USA respectively. As part of the effort, the U.S. Trade and Development Agency, held a 3 day investment conference in Egypt in fall 1998 at which 50 small to medium size Egypt companies were given an opportunity to pitch their companies to a room of potential U.S. investors. According to the U.S. Embassy in Cairo, about 230 U.S. companies are now investing in Egypt.
In 1996, Egypt began in earnest a program of privatizing
314 government run companies that ranged from banking to fertilizer to movie theaters. About one third of the companies have now been privatized to some degree. Atef Ebeid , minister of public enterprise sector, points out that Egypt’s privatization program was ranked by the IMF among the four top achievers in privatization in 1997, measured in terms of proceeds to the government as a percentage of GDP. That year Egypt collected 9.6 billion Egyptian pounds from its privatization program. In 1998 the program stalled, with only a handful of companies going private. Officials blame the slowdown on the stock market, which was in a tailspin, making it an unattractive environment for selling shares in the state companies. Investors complained about a lack of transparency in the government’s valuation of the state companies. They shunned a couple of big offerings and the government was forced to pull back and rethink the way it was privatizing. The government has since announced it will use underwriting firms to handle future sales and instead of putting companies on the stock market in 1998, it has been seeking strategic investors to purchase all majority shares of the companies. Ebeid wants to see all of the state companies privatized in the next two years. But there are obstacles. Many of the companies are bloated with staff and debt. The government has to create early retirement programs for employees, restructure the debts, and then find buyers.
While many countries undergoing privatization start with the utilities, Egypt started from the opposite direction. "We took the hard way," says Ebeid.
"We started with the economic enterprises that are competitive and competing in the market, not with the monopolies." For example, one of the early successes of the privatization was the sale of the government ‘s monopoly beer company to Al Ahram Beverages Co. Backed by an investor group. ABC bought the company that makes Egypt’s flagship Stella beer 1996. It is one of the best performers on the Egyptian Stock Market and is one of Egyptian five companies whose Global Depository Receipts trade on the London Stock Exchange. Having privatized some of its most attractive competitive companies, Ebeid’s ministry is now turning to the utilities, banks, insurance companies and other infrastructure companies. A utility and one of Egypt’s four big state run banks as well as an insurance company are all scheduled for privatization in 1999.
But although Egypt has plenty of good news to trumpet for potential foreign investors, the picture is not all rosy. Tourism - a year after the unfortunate terrorist attack killed 58 European tourists at the Temple of Hatchesup in Luxor -- is coming back faster than expected, but oil revenues have been in free fall since the start of 1998. The decline in tourism and oil revenues combined with a decline in revenues from the Suez Canal in the wake of the Asian crisis have caused some havoc with Egypt’s availability of foreign exchange with which to do business with in Egypt. The Central Bank has been adjusting its intervention to make more dollars available to the economy when needed, but in early 1999 the exchange rate of the pound to the dollar began rising on the black market. The country’s leaders hope that by the end of 1999, tourism revenues will be back on track, oil prices may be heading back up, and the pressure will be off the exchange rate. The lack of dollars has to some extent hampered trade, and although the Ministry of Trade and Supply is intent on increasing exports by 10
% across the board per year, analysts say it’s unlikely that goal can be met. With imports growing at a rate of 12 %, and exports growing at 8 %, the trade deficit has been widening.
Egypt’s President Mubarak and Egypt’s top ministers are also taking pains to combat fears about possible terrorism in Egypt. Although the Islamic fundamentalist movement is growing in Egypt, with an improving economy and a disposition favoring the status quo, an uprising of the sort that has spread through other Arab countries is not likely to occur in Egypt. The leaders stress that Egypt is at peace with its neighbors. Moreover since 1973 Egypt has maintained a peaceful relationship with Israel. Both countries continue to receive about $2 billion per year in assistance from the United States. Egypt is working on free trade agreements with most of its Arab neighbors as well as with the Euro-Mediterranean trade block.
"If you compare Egypt with a neighboring country, whether Mediterranean, Islamic, Arab, African or Middle Eastern, you will find that Egypt has a remarkable position," says Taher Al Sherif , secretary general of the Egyptian Businessmen’s Association. "First the country is politically stable and everyone is content with the political system. The social standards are, on average, satisfactory," he says, noting that any kind of social upheaval of the type that have occurred in many Middle Eastern countries, is highly unlikely.
Business interests say the government is intent on doing what it takes to increase investment, if investors will just take a look and not lump Egypt into the pot with troubled emerging markets. Within the scope of the 1997 Investment Law No. 8 Egypt offers foreign investors two ways of investing with incentives -- free zones and inland investments. Since a major priority of the government is to support export oriented industries in order to increase Egypt’s export revenues, the development of free zones – territories within the national boundaries but considered outside customs boundaries – have become increasingly popular among investors, as evidenced by the increase in free zone investment which reached $1.6 billion in 1997, up from $700 million in 1993. Incentives include unlimited tax exemption on profits, free duties on all kinds of imports and 1 % annual duty on the value of traded items. Inland investment incentives include 5 year exemption from taxes on profits and a 10 year exemption from taxes to investments established in industrial areas. The government offers a 20 year exemption from taxes on profits to investments established outside the "Old Valley", i.e. the Delta. Imports of machinery and equipment are duty free except for a flat rate of 5 %. Foreign expatriates are permitted to repatriate 100 % of their net profits and foreign investors are permitted to own land. Ibrahim Fawzy also wants to make it clear that foreigners can establish companies without a local partner and they have the right to employ expatriate staff. As a conclusion his message to investors is this: "An investor who is not taking a serious look at Egypt will be missing too much." |
EGYPT
