 Cementing Economic Growth |
According to the Ministry of Finance (link to VIP), the Egyptian economy grew by an impressive 6 percent last year, with an historically low inflation rate of around 3 percent, down from 7.3 percent in 1996. External debt stands at $28.8 million, representing 31.5 percent of a GDP of $90 billion, down from 46.8 percent in 1996. With GDP per capita up to $1,320, unemployment in the country is on the way down, dipping under 7 percent for the first time in decades.
As a recipe for this growth, the government is reinforcing its commitment to the private sector as the engine of Egypt's economic development, now and in the future. "We have suggested a number of programs to create jobs, in addition to helping the private sector create jobs by removing all obstacles," says Egypt's Minister of Finance Medhat Hassanein .
Key to this effort are government plans to spur exports. The Ministry of Economy and Foreign Trade is promoting a new institutional infrastructure that will promote an export-oriented economy. The first part includes intensifying preferential and free-trade agreements with the European Union and the United States, as well as bolstering regional trade through the Arab world and Africa. Second, the Egyptian government is getting into the PR business, hiring marketing firms to promote major export earners like textiles, garments, leather goods, chemical products and agro-industrial products, as well as agricultural goods.
While government efforts help, exporters say that the bottom line lies in the competitiveness of Egyptian goods. "When you are exporting, quality is priority, then comes cost and market share," says Mohamed Sadek Ragab , chairman and managing director of Eastern Company S.A.E. , Egypt's largest tobacco exporter. "We are trying to know the needs of our product suppliers and establish a win-win situation."
Ragab sees programs like COMESA as necessary to boost regional trade and economic growth: "If COMESA countries become more involved in the purchasing of Egyptian products, this will enable us to increase our profit margin and improve the trade balance."
While the effects of the export measures remain to be seen, the growing trade deficit continues to hinder the economy, which has worsened the balance-of-payments situation. After two years of downplaying the country's longstanding liquidity crisis, the Egyptian government has stepped forward with a bold, multibillion-dollar stimulus package.
In April 2000, President Mubarak ordered the injection of $7.5 billion into the economy, through repayment of some of the state's domestic debt, which stands at $40 billion. The source of this repayment, the president pledged, would be "real and genuine reserves."
"I will never allow the printing of excess banknotes, as that would harm the economy and present us with an inflation problem," Mubarak added.
Most important, the move signals a governmental willingness to address the internal and external doubts that have sprung up over the past year regarding Egypt's economic reform campaign. For months local investors have been asking for a speed-up in privatization and a break in the liquidity deadlock. Now, finally, government officials are willing to use words like "crisis" and "recession," while assuring investors that the state is on top of the situation. A week after Mubarak's announcement, Finance Minister Medhat Hassanein commented that the government "is aware of the importance of getting out of the recession crisis."
Egyptian president Hosni Mubarak meets with US president Bill Clinton in the Oval Office at the White House 28 March, 2000 in Washington DC - AFP Photo Tim Sloan
The state has set an ambitious timetable for its plans. Hassanein announced intentions to rectify much of the problem before the end of the year. The announcements set off a flurry of speculation. Where would the government find the money, and how long would it last? Most analysts predicted that when times were tight, Egypt would fall back on familiar financial pillars: borrowing through foreign soft loans; increased oil production; speedier privatization; and the collection of back taxes and customs duties.
For now, Prime Minister Atef Ebeid 's government has chosen the latter three options, foregoing foreign borrowing. While the government has announced general plans for issuing a Eurobond, it has decided to keep the monetary arrow in its quiver, lest the stimulus plan should fall short.
Although Egypt's external debt stands at $28.2 billion, limited foreign borrowing is not out of the question, and might help the private sector in acquiring capital. "We need it to establish a foreign benchmark, which will allow the private sector to borrow in the capital markets and ensure proper pricing," says Economy Minister Youssef Boutros Ghali. "If there is an Egyptian benchmark, it will save the private sector from 75 to 100 basis points."
The government has focused instead on spurring the privatization of state assets. Plans include a 20 percent offering of Egypt Telecom, and steps have been taken towards reorganizing and evaluating the electricity authority, state banks and insurance companies for divestiture. | After telecom, next on the block will be the insurance sector. Two groups of investment banks have started work on evaluating the assets of state-owned insurance companies. Morgan Stanley Dean Witter and HC Securities and Investments are focusing on Al-Chark Insurance, while Flemming-CIIC is evaluating Misr Insurance and Egypt Reinsurance.
Recent privatization deals have included the sale of Assiut Cement and Amereyah Cement by the government's Metallurgical Industries Co. Amereyah was recently purchased by Cimpor, the Portuguese cement giant. "Cimpor bought 92 percent of Amereyah shares, paying about LE91 per share," explains El-Mikati, chairman and executive manager of Amereyah Cement. Amereyah has traditionally been the one of the most efficient Egyptian cement companies. Thanks to privatization and planned restructuring changes, El-Mikati is optimistic, projecting that "this year net profits will reach LE150 million."
Adel El-Danaf , chairman of Metallurgical Industries and also of the Arab Iron & Stell Union, plans to continue the intense privatization process of its companies. "The Egyptian Aluminum Company is now at the top of the list for privatization," he says. "Several international aluminum companies have shown a lot of interest in this privatization, and there are extensive negotiations under way at the moment. We must first finish with our ongoing concerns and privatize our affiliated companies Egyptian Iron & Steel Company, Egyptian Ferro Alloys Company and the Egyptian Company for Railway Wagon & Coaches (SEMAF)."
The Egyptian Ministry of Public Enterprise has drawn up a new and ambitious list of 92 public-sector companies in which it will divest this year, towards the overall goal of privatizing 314 public-sector enterprises. Included in this list is the government's Omar Effendi department store chain, the Sednaoui, Pension and Hannaux Salon Vert clothing stores, several hotels, textile companies and an 11-percent stake in tobacco producer Eastern Company. The following year, the government promises to divest in another 95 companies, completing the Ministry's privatization plan.
"I hope that within two to three years, all public companies will have improved considerably, particularly those in the textile and metallurgical sectors. I want to see the country evolving towards a free-market economy," says the Minister of Public Business Sector, Mokhtar Khattab .
Money for the liquidity bailout will also come partially from stepped-up government efforts to collect nearly $5 billion of unpaid taxes and customs duties, a task that Hassanein has pledged to carry out in an "unoppressive" manner. The government has also cited high real estate prices as another drain on liquidity, and Egypt's depressed housing market is expected to directly benefit from the bailout. Real estate agents, however, say that the market's slump is due to anticipation of the new mortgage law--currently making its way through the approval process--more than to the liquidity shortage.
Analysts privately remain skeptical about the plan, as the extent of reforms has yet to be seen and the government's ability to inject new money into the economy remains unclear.
Central to this diagnosis are questions about the role of megaprojects in creating the liquidity shortage. Several--including Toshka, the project to create a "parallel Nile Valley" in the Western Desert--are believed to have run over budget. Both Hassanein and Boutros-Ghali have stated that work will go on, albeit with reduced funding for the time being.
The government had, until recently, been spending $3.7 billion a year on projects in the South Valley (Toshka and East Oweinat), East Port Said and Ain Sukhna, with $120 billion more pledged over the next 20 years.
However, the megaprojects' presence has probably been felt most in Egypt's growing $17 billion import bill. According to some estimates, up to 60 percent of the country's imports consist of capital goods to help build the projects. Sensitive about criticisms from foreign and local analysts over the megaprojects' drain on liquidity, the cabinet points to $3 billion in Asian imports that came in the wake of the currency meltdown of 1997, as well as a decline in tourism the same year.
Those days, the government says, are over. While Egypt is still in the red, the current account deficit for the second quarter of fiscal 1999/2000 was almost $111 million, the lowest since the first quarter of 1997/98. These better numbers were built on a sharp spike in tourist arrivals late in the first half of 1999/2000--fueling expectations that tourism would be a solid engine for future growth. Income levels for the first half of 1999/2000 are 43 percent higher than for the same period last year and are predicted to reach a record $4.5 billion for the year.
Egypt's capital account is also improving. Net portfolio investment increased by $352 million in the second quarter of fiscal year 1999/2000. Direct foreign investment has reached a record $639 million, following the recent privatization of the Tora Portland and Ameryah cement companies.
The bad news remains Egypt's foreign exchange reserves, which fell by $1.4 billion between July 1998 and December 1999, to $15.6 billion, as the government struggled to maintain the exchange rate at LE3.42 to the U.S. dollar. Meanwhile, the deficit increased by a little over $4.5 billion, which directly corresponds with the decline in foreign exchange reserves over the same period.
So far, the government remains adamant that a devaluation is out of the question. "We are confident that as the market evolves and grows with increasing speed, the exchange rate will set itself," says Boutros Ghali. "We do not intend to interfere, and I believe that it is presently at the right level." |
