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Al-Ahram Weekly 15 - 21 April 1999 Issue No. 425 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 15 - 21 April 1999 Issue No. 425
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Profile Features Travel Living Sports People Time Out Chronicles Cartoons Letters Private sector grows small
by Shaimaa LabibA report issued recently by the Egyptian Centre for Economic Studies (ECES) entitled "The Business Environment in Egypt" traces the private sector's development during the years from 1992 to 1997, a period analogous to the economic reform programme initiated by the government in 1991. The study concludes that while the private sector's presence in the economy has expanded, constraints still hinder its effective participation in the country's growth. It said what is needed is a competitive business environment allowing private businesses to realise their potential.
Recent figures indicate that much remains to be done in order to attain the two objectives of establishing the private sector at the forefront of economic growth, while attaining a sustainable annual Gross Domestic Product (GDP) growth rate of 7 to 8 per cent.
The Central Bank of Egypt's (CBE) annual report issued in 1997 shows that although the private sector's contribution to GDP rose from 61 per cent in 1992 to 66.4 per cent in 1997, it still falls far short of the private enterprise contribution to the economy prior to the 1952 Revolution when it constituted 85 per cent of the country's GDP. Egypt's GDP stood at LE2.78 billion in fiscal year 1997/98. And although the private sector's share in total investments between 1992 and 1997 rose from 46.5 per cent to 51.5 per cent, this figure also is low compared to an average of 73.8 per cent in other developing countries such as Brazil, Uruguay or Indonesia. During that same period, the Egyptian economy witnessed an almost 50 per cent decline in Foreign Direct Investment (FDI) flows, the report maintained.
The evolution of the private sector in Egypt shows that it has a dual nature, rather than being homogeneous. Small and medium-sized firms predominate, representing nearly 98 per cent of private economic units. These small enterprises create nearly three-quarters of all private-sector jobs and produce an estimated 80 per cent of the economy's private-sector added-value. Yet, their contribution to economic growth is not on a par with their number. They suffer, more than do the large firms, from institutional constraints. They serve low-income consumers, provide low-quality, low-priced products and use obsolete technologies. The large firms, on the other hand, are relatively well developed, but are too small in number to foster the private sector's growth.
As for the legal status of private firms, in 1992 most private establishments engaged in non-agricultural activities were incorporated either in the form of individual proprietorships (47 per cent of firms) or partnerships (48 per cent of firms), while the rest were private joint-stock firms. Most private firms in Egypt are not traded on the stock market, and although some have been listed recently, their incentive is to obtain tax exemptions rather than enlarge their shareholders' base.
The facts above, the report said, reflect the shallow degree of private sector development.
Investors point accusing fingers at what is termed "the business environment", claiming that it is responsible for the unsatisfactory performance of their companies. They cite the distorted macroeconomic incentive structure which offers meagre investment incentives, and institutional constraints hindering their growth and efficiency, which result in high transaction costs and a lack of competitiveness.
The experiences of countries in East Asia and Latin America, on the other hand, suggest that high degrees of macroeconomic stability, credibility and sustainability are paramount in making a macroeconomic climate conducive to private sector development.
A positive point, however, is that Egypt's structural adjustment has focused on consolidating macroeconomic stabilisation and effecting financial sector reform, privatisation, deregulation and trade liberalisation. Successful financial sector reform has led to greater efficiency in financial inter-mediation. The Egyptian stock market's notable revival is illustrated by both its market capitalisation and trading volume.
Yet despite these achievements, there are still deficiencies: 70 per cent of bank assets are controlled by state-owned banks, and most private banks concentrate on short-term commercial lending, mainly to large and medium-sized private firms. The insurance industry is underdeveloped and highly concentrated, and the stock market does not participate effectively in private sector finance.
Under the ongoing privatisation programme, the government privatised 91 out of 314 companies up to July 1998. Total sales proceeds amounted to LE9.1 billion, which is almost 14 per cent of the total book value of state-owned enterprises (SOEs) estimated at LE63.8 billion. Privatisation has been expanded over the past two years to include joint venture and public banks, as well as state-owned insurance companies. The Egyptian government is promoting Build-Operate-Transfer (BOT) schemes in order to solicit more private investment in infrastructure projects, especially electricity generation, transportation and telecommunications. However, the size of SOEs in Egypt relative to GDP is about 30 per cent, a relatively high figure if compared to the average of 11 per cent in other developing countries.
The Egyptian government has also launched a comprehensive deregulation programme in order to encourage private sector investments. Company registration procedures and customs procedures have been simplified, and laws have been issued facilitating business operations.
Finally, the Egyptian government has taken serious unilateral, regional and multilateral measures to open up its trade system. But although tariffs have shown a downward trend, the present trade-weighted, nominal average tariff of 28 per cent exceeds both the world average of 8.2 per cent and tariffs in other developing countries which average 21.4 per cent. This has resulted in low productivity and threatens efficient resource allocation. Also, administrative and foreign trade practices have not moved in the same direction as tariff reform, leading to a rise in trade-related transaction costs.
Observers of Egypt's economic scene emphasise that unless institutional conditions are amenable to growth, productivity is not likely to increase. Sound institutional policies will promote high market specialisation and competitiveness and reduce uncertainty and transaction costs. These factors are crucial in promoting the private sector's growth and efficiency.
A comparison between the constraints faced by Egyptian entrepreneurs in 1994 and 1998 reveals that some important developments have occurred. Some problems identified as major constraints in the past still hamper the growth of the private sector, while others have been ameliorated. But complicated tax administration, inefficient dispute settlement and unqualified labour still hinder the private sector's performance and development. They are ranked as the most severe constraints to private investment at present. However, the severity of some problems, including costs, access to finance, bureaucratic procedures and uncertainty about some government policies appears to have been reduced since 1994.
