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Al-Ahram Weekly 8 - 14 April 1999 Issue No. 424 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 8 - 14 April 1999 Issue No. 424
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Focus Profile Features Travel Living Sports People Time Out Chronicles Cartoons Letters 'Prize pupil' still has problems
by Sherine Abdel-RazekMost reports and media surveys of the Egyptian economy share a common feature. They usually start by praising the performance of the economy, yet they all contain a long "BUT" list spelling out the shortcomings. Sentences like 'the Egyptian privatisation programme is faring well but it still has a long way to go' or 'Egypt's appeal as an investment location is increasing, but its legislative framework is still an obstacle', are common conclusions found in most literature dealing with the current economic situation.
A quick look at some recently issued economic assessments can be confusing since most economic indicators, whether macro or micro, are quite good, but there are still severe defects related to the social impact of the government's reform programme in such areas as unemployment and the worsening level of poverty.
In its latest semi-annual report, the USAID project which evaluates the privatisation programme stated that the Egyptian economy, as reflected in its key indicators, continues to benefit from its successful macroeconomics and privatisation programme. The report describes the economy's resistance to major internal and external shocks as impressive. Facing simultaneous shocks from the very sharp drop in petroleum prices, the November 1997 Luxor attack on tourists and the Asian financial crisis, Egyptian decision-makers continue to successfully maintain sound macroeconomic policies. (This semi-annual analysis is carried out by the International Business and Technical Consultants Inc. (IBTCI) under a USAID evaluation services contract.)
In its survey on the Egyptian economy published last month, The Economist described Egypt as "the very model of modern emerging markets, the IMF's prize pupil with its economic indicators as rosy as can be."
Both the IBTCI report and the Economist's survey gave specific figures as evidence of the improvement in the economy. There seems to be clear proof of a stronger economy in such indicators as an annual growth rate in the neighborhood of 5 per cent and an inflation rate of 4.6 per cent. The budget deficit stands at 0.9 per cent of GDP, complying with the European Monetary Union Maastricht criteria of 3 per cent of GDP, and foreign reserves of more than $19 billion covering 14 months' worth of imports. The growing involvement of private sector money in different areas of the economy also was highlighted and praised in the two reports.
Looking at these figures, it seems that Egypt has every right to be proud of its economic performance, but a closer look reveals that the picture is not so rosy. The reform programme has helped to stabilise Egypt's economy, yet it still needs to overcome many obstacles to start growing at higher rates projected by Egyptian experts.
Privatisation is a key aspect of Egypt's reform programme, and this effort still faces many challenges. The IBTCI report noted that while a decree formulated in 1997 requires Egyptian enterprises to adopt international accounting standards, this has not yet been done as almost all enterprises lack the wherewithal to convert their current systems to the international standards. The report said the adoption of international standards is important because it will increase the confidence of domestic and foreign investors in the Egyptian privatisation programme.
The report also shed light on the problem of the failure to report on asset sales since September 1996. This is due to the fact that sale proceeds of affiliated companies' assets are not treated as privatisation proceeds but as one-time revenue entries, giving a loss-making subsidiary the chance to cover its losses and continue operating rather than using these proceeds as resources for further privatisation.
Commenting on the privatisation programme, The Economist pinpointed another kind of problem. It noted that Egypt is running out of easy ways to privatise. The magazine said that the programme is slowing down as it reaches the heavyweight public sector banks and insurance companies, both burdened by dodgy loans and accounting malpractices.
And what about the already privatised companies? The IBTCI report pointed to the fact that 65 per cent of the 34 companies privatised so far through the stock exchange were traded at levels below their initial flotation prices. Furthermore, the appeal of the minority privatised companies (those with a less than 50 per cent stake floated on the stock exchange) as investment opportunities is weakening since the state still has control over their assets and shares. However, the report said that this weak performance was offset by an 11 per cent increase in the market capitalisation which reached LE79 billion in 1998 compared to 71 billion the pervious year. The report attributed this to the significant new offerings by private companies such as Mobil and Orascom.
Turning to the atmosphere in which private sector companies are working, The Economist focused on the difficulties facing smaller private businesses in acquiring needed finance. "Egyptian bankers are reluctant to give loans to small businesses for fear of default. They also demand feasibility studies and business plans that the credit seeker cannot provide. What complicates this problem is that most of small-size businesses do not own their own premises so they can't use them as collateral for getting loans. They are also plagued by problems such as regulatory constraints and overlapping central and local government codes." The Economist said that the entrepreneur who wants to acquire a license to trade has to comply with at least 11 laws.
The magazine also pointed out that the overall government's regulatory and legal systems are still troublesome. Settlements of lawsuits can take up to 10 years or more. It can take 77 bureaucratic procedures in 31 different offices to acquire property. The IBTCI report also pointed to this problem. It said that while major legislation was passed during the first half of 1998 in banking, insurance, shipping and telecommunications, much more is needed to make Egypt more investor friendly. It criticised the delay in the issuance of long awaited laws including the new labour law and regulations governing business contracts, business associations and intellectual property rights.
While the social dimension was absent in the IBTCI report, The Economist survey presented some worrisome figures relating to social conditions. The survey expressed its doubts about the credibility of officially announced poverty figures. It stated that about 23 per cent of Egyptian households are below the poverty line. Moreover, it noted that Egyptians have really suffered from the pain inflicted by lifting food subsidies which, according to The Economist, has led to more than doubling of food prices in two years time.
The Economist also pointed to the fact that foreign investments, either portfolio or direct investments, in Egypt are relatively low with the exception of the growing trend toward build, operate, transfer (BOT) projects which the magazine described as the "flavour of the year".
However, IBTCI said capital inflows increased to $3.09 billion in 1997/98 from $1.23 in 1996/97. This was the result of a six-fold increase in net investments which now stand at $3.3 billion (including FDI,direct investments abroad, net drawings). The balance was the outflow of $248 million in portfolio investments, an expected reaction to the recent Asian financial crisis.
