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Al-Ahram Weekly 21 - 28 January 1999 Issue No. 413 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 21 - 28 January 1999 Issue No. 413
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Focus Economy Opinion Culture Features Living Travel Sports People Time Out Chronicles Cartoons Letters Weighing our own anchor
By Mustafa Kamel El-Sayed
A major development in Egypt in 1998 was something which, in the end, did not take place, although it was widely forecast to happen by the end of the year. The Egyptian banking industry is currently dominated by four state-owned commercial banks, which together control no less than 80 per cent of all commercial bank deposits in the country. It was rumoured that one of the four banks would be privatised before the end of the year.However, the year has ended and there is still no sign whatsoever that such a move might take place in the near future. Instead, bankers, economists and senior government officials spent most of 1998 debating the pros and cons of the privatisation of state-owned commercial banks. The debate was a heated one, involving both pragmatic and ideological arguments. Support and opposition cut across all sectoral divisions, with bankers, government officials and academics finding themselves on both sides on this issue.
Why did this debate emerge now? It would appear that, as part of Egypt's agreement with the IMF, 1998 had been set as the date for extending the privatisation programme to include the financial sector.
Those favouring the privatisation of banks offered many arguments in support of their position. On the one hand, such a move would have a positive effect on investors' confidence in the commitment of the Egyptian government to a policy described as one of "economic reform". The process of privatisation of state-owned enterprises was proceeding quite slowly in all fields in 1998, and the Egyptian stock exchange was for many months locked into a trend of falling prices.
Privatising the banks -- or at least one major public sector bank -- would demonstrate beyond any doubt that the Egyptian government is keen to pursue the "economic reform" policy. It would also reactivate the stock exchange and take it out of the recessionary cycle it was trapped in throughout the past year. Foreign investors would be tempted to come back to the Egyptian financial markets.
Another argument in favour of bank privatisation is the urgent need to modernise the public sector banks. There would seem to be no prospect for improving the efficiency of these banks so long as they remain public property. For this reason, supporters of bank privatisation have been opposed to privatising the banks through the public sale of part of their equity through the stock exchange. Instead, they would prefer that one major anchor investor, possibly a major foreign bank, take over an Egyptian bank, overhaul its operational structure, downsize its workforce and introduce new techniques of management. None of these benefits could be realised if the old management were to continue in place, as it would if part of the bank's assets were simply put on sale through the stock exchange.
Some of the advocates of privatisation are in fact ultra-liberals. They believe, not only that the state should abstain from any involvement in commercial banks, but that it should also privatise the central bank. They pointed out -- multiplying mistakes on every side -- that both the Federal Reserve Bank of the US and Deutsche Bank of Germany are "private" banks. They added that the rich experience of Banque Misr, founded by a group of private investors led by Talaat Harb, demonstrates how a private bank could boost development in the country in all sectors. Banque Misr is celebrated even today not only for the role it played in creating new industries in the 1920s and '30s, but also for the support it lent the country's nascent film industry and national theatre.
These are persuasive points. However, by the end of the year, it could be seen that the opponents of bank privatisation had the more compelling arguments. They referred to the case of East and Southeast Asia, where the state-owned banks were instrumental in supporting economic expansion in the 1960s and '70s. The privatisation of commercial banks in South Korea, for example, was attempted only after the country's economy had taken off. Nobody could reasonably claim that the Egyptian economy has yet entered the "post take-off" phase, or that indeed is anywhere near doing so.
Moreover, the recent economic troubles of these countries, though due to a multitude of factors, have been partly caused by the state's laxity in monitoring the activities of private banks.
Indeed, the closure of a large number of private banks and financial institutions is a major element of the recently-adopted economic reform programmes of both Indonesia and Thailand, where it is seen as a move towards taking them out of recession.
Opponents of bank privatisation, however, do not merely draw lessons from the recent troubles of the "Asian Tigers", or of the newly-industrialised countries of Latin America, or even of the Russian Federation. They also refer to the Egyptian experience of private banking, cited so glowingly by its supporters. Banque Misr itself faced a major liquidity crisis just prior to the Second World War, which it was only able to weather thanks to government support.
Moreover, they point out that banks, along with insurance companies, constitute the commanding heights of the economy. Keeping them under state control during the early phases of development would ensure that their vast resources are used to the benefit of the national economy, rather than to support a few gigantic private economic agglomerates.
President Hosni Mubarak has complained of the narrowness of the social base of the private sector in Egypt, which is dominated by a handful of private entrepreneurs. It is true that the success of these fortunate few relies heavily on loans from the public sector banks. However, as things stand at present, it would be possible for the state to direct these banks to assist more with the expansion of small and medium-sized enterprises. It might be more difficult to guide them along this path if they were to pass wholly into private sector ownership.
As for the claim that lack of efficiency is inevitable in public sector banks, it has been pointed out that privatisation is not the only way of dealing with this. Bank employees could be sent for training abroad, and foreign technical experts could be invited to discuss reform of the country's banks with their counterparts in Egypt.
Moreover, the success of Egyptian public banks in attracting the savings of Egyptian expatriate workers should not be ignored, nor should we overlook the tremendous modernisation effort being carried out by some of these banks, particularly the two big ones.
Finally, the opponents of bank privatisation have also invoked political arguments -- most powerfully, in expressing their concern at what might happen were Egypt to lose national control over the commanding heights of the economy. While not denying that globalisation in the banking industry could bring some benefits, they also point to the grave risk involved were the Egyptian economy to be dominated by transnational financial institutions.
The cases of both Malaysia and Mexico demonstrate the shaky foundations on which the globalised financial sector often rests in the countries of the South. The moment foreign investment and pension funds, or other international investors, deem it beneficial to abandon their local assets in one country in search of bigger gains in other markets, the country in question soon finds it has been left alone to deal with the disastrous consequences of capital flight en masse .
Although both supporters of bank privatisation and opponents alike are to be found within governmental circles, it was the arguments of the opponents of bank privatisation which, at the end of 1998, seemed to carry the day within the highest echelons of the government. This cautious approach, together with the abandonment of the proposal to sell one public sector bank to a major anchor, suggests that the public banks of Egypt may not after all be privatised this year, or even the next.
The writer is a professor of political science at Cairo University, and head of its Centre for the Study of Developing Countries.
