2 - 8 August 2001
Issue No.545
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Al-Ahram Weekly Online 2 - 8 August 2001 Issue No.545 |
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Tight-rope acrobatics
Prime Minister Atef Ebeid's recent statements to the weekly magazine Al-Musawwar beg the question whether "fatigue" has overcome government thinking on how to engineer the ever more elusive, and ever more necessary, economic growth. Ebeid said that given the failure of locally generated investment to cover the costs of creating jobs -- assessed, in the production sector, at anything between LE80,000 and LE100,000 per job -- strategy would be redirected towards strengthening the service sector. And though he stressed that the main sources of hard currency will continue to be oil, the Suez Canal, expatriate remittances and tourism, he was less specific on what mechanisms will create 950,000 employment opportunities annually in the service industries.
As for the $1.5 billion raised by the government's recent Eurobond issue, it will -- for now -- go towards bolstering the hard currency holdings of the Central Bank, currently estimated at $14.2 billion, rather than being directed towards investment projects that might generate hard currency, as was originally intended.
Another second objective of the Eurobond issue, Ebeid said, was to "test Egypt's creditworthiness in world markets, and pave the way for the private sector to cover their funding needs through international borrowing," which seems, at best, a peculiar rationale for an international bond issue.
On the downward pressures on the Egyptian pound against the dollar, Ebeid insisted that the CBE will not be releasing more dollars onto the market until its reserves supersede current levels. He argues that the market "will stabilise" as remittances come in from the four traditional sources of hard currency, and attributed the current shortage of dollars to "the tendency by individuals to horde."
While conceding that tying the Egyptian pound to a basket of currencies merits detailed study, Ebeid said that the exchange rate issue "is not the most important factor determining investment overall. It may be decisive for exporters and a market in recession, but political and security stability are the more important elements" in determining investment decisions.
The prime minister brushed off any suggestion that local currency savings be bolstered by an increase in interest base rates to counter dollarisation, insisting that the banking sector remained "capable of offsetting any tendency in this direction."
Nor is the tax burden likely to be reduced any time in the near future. The sales tax, Ebeid said, will be one of the government's major planks in meeting the LE180 billion current account shortfall. However, the government will submit a "new tax law" in the upcoming parliamentary session, reducing the current 60 per cent levied on companies' net profits to the 30 per cent stipulated by the new zones law.
None of the prime minister's statements shed light on what the government is thinking concerning monetary policy beyond the short term, except, perhaps, for a brief reference to increasing capitalisation within the banking sector so as to ease credit facilities by means of reducing by a margin the reserve ratios required by the CBE for these banks.
Strategies for improving chronically poor productivity were not addressed. Fiscal incentives for export were not given prominence, and once more it is to the Suez Canal, expatriate remittances, oil and tourism that the government is looking to finance growth.
But the fact is that continuing to treat the exchange rate as a sacred cow by artificially bolstering the pound in a situation where the supply of dollars is precarious fails to take into account the impacts of any long term scarcity of hard currency, and has contributed towards a three-tiered exchange market involving the banks, exchange rate bureaus and a revivified black market. Tight rope walking policies will not do. Unless a gradualist approach is adopted on these matters sudden devaluation, with its accompanying inflationary pressures may well become the one option left.
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