People went to the far east to import many of those essential consumer products, cars, earth moving equipment, production lines, grains, food items, building materials and making use of this chance to import as many as possible at very low prices. We have stored all those products in the free zone areas in Alexandria, Port Said and Suez. That is why our balance of trade has suffered a lot, but I am sure that it is a temporary stage. Still, over the last two decades we suffer from a deficit on the balance of trade. But, it did not affect the balance of payments. The balance of payments was affected by the Luxor attack from which we are recovering. The second cause was the drop in the oil prices. The third cause was the decrease in the Suez Canal revenues, which depended on ships coming from all parts of the world especially Asia and therefore the financial crisis negatively affected the traffic in the canal that dropped from $2 billion to $1 billion. On the other hand, Egypt was fortunate and conservative in the sense that we did not suffer from the international financial crisis that the world has, and still, suffered from. There is a direct threat from Latin America. Egypt has not been affected by this crisis because we are not fully integrated into the global economy. The second reason is that we have a very conservative banking system. The Central Bank of Egypt controls the banking system in Egypt. We have a very tough banking law and foreign exchange law. Thirdly, our capital market is still quite young. It is controlled by the government and the authorities. The fourth reason is that most of the financial systems in Latin America and East Asia are backed by corruptive regimes, in Malaysia, Indonesia, Japan and Brazil. The corruption level is not as bad as such countries. In fact, it is marginal and no place in the world is free from corruption.
2/Q: According to you, in which sectors do you foresee a boom?
There are three major sectors, the commodity sector, services sector and social services sector. The commodity sector comprises the industry, agriculture and so on. Within the industry, you will find that most of the industrial sector in Egypt is moving upwards with about 10-12% growth rate. This includes textiles, building materials, food industry, chemical industries, which are the major booming industries at present. But, in some sectors, including the ones previously mentioned, competition is very tough and there is the so called "monkey investment", which refers to multiplying of large investments in which investors imitate large investors and produce commodities similar to their products. This chain of repetition without new ideas and creativity takes place without careful studies and projection. It merely takes place because the first investment was successful. A lot of building materials projects have taken place in that fashion. The market is now full of such investments in the food industry, chemicals, building materials and textiles. That is now we are suffering from a recession. The manpower and per capita income can not cope with the rate of development in many areas. For example, there are 17 major projects in the ceramics industry but demand is far below production. That is why every one of those 17 projects is giving discounts on their products to the level of production costs, just to be able to sell. They are losing money. The market is full of many varieties but there is no demand. The entire distribution chain suffers as well. Assume that a company has two production lines of one type of ceramic and it gives the distributor and retails its production. They store the product in their warehouses. If the product is not sold at the end of the day, the retailer or the wholesaler returns the product to the manufacturer who puts it as unsold inventory. What the manufacturer will do is have squeeze the capacity by having only one production line and closing down the second line. The manufacturer will also lay off labor. This is simply the recession. We are suffering from factitious rate of growth. A lot of real estate projects are being built in Cairo, Alexandria, the North Coast, the Red Sea coast, but there are no buyers. It used to be a sellers market decades ago, now it is a buyers market. The real estate sector grew by over 22% last year through bank loans and idle investment. On the other hand, the reform program is almost finished. The challenge now is how to maintain the results of the reform program without any setbacks. That is not our program, but rather it is the government’s problem. The government has to keep the momentum, keep changing the legislature that governs the economy by developing and upgrading them to cope with what is happening in the world because we are not isolated from the world’s economy. We are the largest Middle East country; with a population of 65 million people. We have a very remarkable political and security rule and we can not disengage politics from the economy.
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3/Q: Would you say that you are confident in the mid-term?
Yes. I am very confident and I believe that we are on the right track. The issue, however, is not whether you are on the right track or not, but how fast you are moving on that track. But, we are getting much faster than before. The government is giving incentives to the private sectors. Some economic problems arise mainly because of the balance of trade deficit. There is also the problem of unemployment and training. These are the three main problems in the reform program. I would say that we achieved more
60% of the targets and goals of the program, which are tremendous. Financial and monetary reforms have been easily implemented, without any side effects. The restructuring consists of two major parts: privatization and trade liberalization. Trade liberalization has been smooth but still the government has too many laws as far as foreign trade is concerned. They do not want to ban products but every now and then they issue decrees that impede foreign trade in one way or the other. Instead of dealing directly with the deficit by increasing exports, the government resorts to the easier solution by reduce imports by making them difficult to import. They should have removed impediments from exporting like give incentives or eliminating taxes on exports. These are problems that remain unsolved but if you refer to the monetary and financial reforms you would see that Egypt is one of the few countries in the world that implemented those reforms that easily without side effects. Privatization started very slowly in 1992 then the pace increased in 1996 and now we have privatized 100 public enterprises out of 315 companies, which is not enough. That number should be 150 or 200 companies. But, because of the recession and practices on the government’s side, the sale has not been easy for the buyer; valuations have been overestimated, they put conditions that people are not ready for. Compare the buying process of an existing public enterprise with external debt, bad management, obsolete equipment with a project in a new area, with modern technologies and new production lines, new management and without any debt. What makes the public enterprise attractive is that it already has a market for its products, a market share, a monopoly, expertise and a brand name and so on. That is why I would buy it. I would get new management and new equipment. But, I should buy a company that has a market for its products. The government thinks that investors are queuing to buy such companies when they really are not. That is why the speed of privatization is slow. The financial and monetary reforms should reflect on the ordinary citizen.
4/: What further measures should be done by the government to improve the privatization program?
The seller, i.e. the government, should ease the process of privatization and not put up all those unacceptable conditions. 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 for several reasons. First, the country is politically stable and everyone is content with the political system. The social standards are, on average, satisfactory where the people are content with their conditions. Egypt has an attractive economic environment. When the EBA started, the private sector share in GDP was below 15% in very limited areas like agriculture and the informal sector. In 1987 the share went up to 27%. In 92/93 it increased to 60% and then to 80% in the current year. This gives you a picture of how sharp the curve of the private sector participation in the development process is.
5/Q: Keeping in mind that Forbes magazine reaches more than 4 million readers, what will your final message to them be?
There are two ways of investment, direct and indirect investments. In direct investment they have to look for a good partner. Then they should move to the remote areas where the government is offering incentives like 20 years tax holiday. If the location is closer to the valley the tax exemption period is 10 years and 5 years in traditional areas. In the free zone areas the tax exemption is for life. Deciding which sector to invest in is quite difficult. But, all sectors are open to investment not like
20 years ago when the government limited the sectors available for private sector investment. This is no longer the case. The issue will be the investors’ capabilities and plans for the future as well as their local partners. The investor has to come and find out for himself. The EBA has 450 members whose companies’ contribution to GDP is
12% and over 6% of exports. They employ more than 1 million people and import about 60% of our imports. We have a continuos dialogue with the government. The government is very responsive to the private sector. They are also cooperating with the private sector. The government also seeks the help of the private sector is in formulation of rules and regulations. |
EGYPT
