16 - 22 August 2001
Issue No.547
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Al-Ahram Weekly Online 16 - 22 August 2001 Issue No.547 |
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Informed prudence, calculated risk
Ibrahim Nafie sees signs of fresh thinking on economic policy
In my discussions with experts from the IMF and World Bank in Washington last week, I found both encouragement and some sobering food for thought. The Egyptian economy, particularly those aspects addressed by the economic reform programme put into effect in the early 1990s, they said, is on a solid footing. The budgetary deficit, which stood at 3.5 per cent of GDP for 2000/2001, is still within a safe margin and the annual inflation rate has dropped recently to 2.5 per cent, the lowest rate in decades.
They also said that the economic growth rate, which stands at between 4.5 and five per cent, is reasonable. They added, however, that growth still falls short of the rate necessary to produce a tangible rise in standards of living and to offset unemployment. The growth rate should be in the neighbourhood of seven to 7.5 per cent, and in order to realise that, domestic investment should increase from its current level of about 20 per cent to at least 25 per cent of GDP. Unfortunately, the level of domestic savings stands only at 16 per cent of GDP. How, then, do we make up the nine per cent gap, or, in more concrete terms, how do we come up with an extra LE30 billion for investment?
One way is to curb consumption, although in view of the currently low standards of living, belt- tightening could have recessionary effects. A less drastic way is to work to attract foreign investment, preferably foreign direct investment (FDI), in Egyptian-based enterprises. FDI brings with it multiple advantages, among them the transfer of technology and expertise, streamlined production systems, enhanced competitivity of Egyptian products on foreign markets and, above all, jobs.
In contrast, indirect investment, which focuses on stock and securities markets, is, by definition, prone to huge fluctuations and is therefore risky for emerging economies. While these markets may experience huge influxes of capital, circumstances in the local economy, or regional or international developments, could just as easily precipitate a sudden flight of capital. The Egyptian stock and securities markets began to experience such a haemorrhage of capital in 1997, a trend that only began to reverse itself in 1999/2000 with an influx of $3.5 billion.
Borrowing is a third way to supplement the gap between domestic savings and the desired level of domestic investment. Egypt has very solid historical reasons for its reluctance to fall back into the cycle of spiralling loans. Yet, although the IMF and World Bank officials sympathised with these reasons, they felt that this remedy was a bitter pill Egypt would have to swallow, at least in the short term, in order to raise GDP growth rates and counter unemployment. At the same time, they stressed the need to obtain the most favourable conditions possible and expressed their surprise that Egypt had yet to use the two loans approved by the World Bank's International Finance Corporation. The IFC's terms could not be better: a 10-year grace period, after which repayment takes place over 30 years at 0.75 per cent interest.
Nevertheless, what most concerned these international financial experts was why the Egyptian economy had not yet taken off despite the presence of all the essential ingredients. First, they felt that Egypt's economic decision-makers were overly cautious. Prudence was important, they said, but not when it means missing out on opportunities to implement necessary decisions at the appropriate time. While thorough planning and calculation are vital, there can be no gain without an element of risk, as long as the probabilities suggest that the risk will help stimulate the economy.
A second problem, in their opinion, was that the private sector in Egypt is still prey to the public-sector mentality inherited from the era of centralised planning and protectionist measures. Also, private-sector businessmen, they said, are prone to the short-term "make your money and run" approach to investment, an attitude that is largely responsible for the continued failure of Egyptian products to compete in terms of price and quality on both domestic and foreign markets. The profit and loss mechanism, they stressed, is an important component of the dynamics of market forces. Profitable enterprises are built upon careful planning and are capable of developing in accordance with the demands of the market. Enterprises that fail to meet these criteria will lose and, if the economy is to remain healthy, should be eliminated, much as a healthy body eliminates toxins. It is time, they urged, for the Egyptian private sector to be wrested from the state's embrace so that it can begin to exercise full responsibility in taking the lead the government has given it to spearhead economic growth.
The experts emphasised another very important point, which was the need to give priority to quality over quantity in the development of the Egyptian labour force. The question is not, for example, how many schools the government should open, but what these schools will produce in the end. Will their graduates be equipped with the skills and attitudes they need to become productive members of an increasingly diversified and technologically enhanced labour force? This is the key to stimulating the production of Egyptian goods and services that can compete favourably at home and abroad and, consequently, to reducing our enormous trade deficit.
Even as I was taking part in these discussions in Washington, I took heart from two developments at home. The first was the exemplary courage with which the government admitted that its former currency policy was unrealistic and therefore decided to devalue the Egyptian pound to reflect more accurately the forces of supply and demand and to extend the margin of its fluctuation from one to three per cent. The second was the inauguration of Early Warning System for the Egyptian Financial Sector, a periodical to be produced jointly by the Information Centre of the Ministerial Council and the Economics Department of the Faculty of Economics and Political Science at Cairo University. I found this latter step particularly satisfying, because I have long seen the need for a rational mechanism allowing us to predict economic fluctuations -- one that would engage the efforts of independent economic authorities in Egypt. These two developments are signs that the Egyptian government has adopted a fresh approach to economic policy, one that blends informed prudence with a bolder element of calculated risk-taking.
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