29 Nov. - 5 Dec. 2001
Issue No.562
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Al-Ahram Weekly Online 29 Nov. - 5 Dec. 2001 Issue No.562 |
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The search for added value
Ibrahim Nafie reviews the implications of the reshuffle of economic portfolios
Cabinet reshuffles focusing on ministries related to the economy aim above all to enhance our performance in meeting a number of economic challenges. These range from increasing job opportunities and raising the standards of living to contending with the global recession precipitated by the events of 11 September.
The reshuffle entails a considerable element of administrative restructuring, so as to eliminate overlaps in ministerial responsibilities, thereby establishing clear lines of accountability and enhancing inter-ministerial coordination. Perhaps the most important steps in this regard were to strengthen the autonomy of the Central Bank in formulating currency policy and to found an independent Ministry of Trade, changes that seek to remedy the enormous Egyptian trade deficit by stimulating exports. As President Mubarak put it: "Exports are a question of life and death."
The current global recession compels us more than ever to make new and courageous decisions to eliminate past flaws in our economic policy and render it more effective in stimulating economic growth. Although there are many areas that need creative input, I will focus here on two: Egypt's balance of payments and Egypt's tourism industry.
Although the value of the Egyptian pound has declined sharply over the past three years it was only recently that the government began to recognise the need to devalue. Until this point the government had argued that the plummeting values of Asian currencies against the dollar and, hence, against the Egyptian pound, had encouraged a dramatic rise in imports, adding to already high levels of luxury imports. It also attributed the problem to speculation undertaken by currency exchange companies at the time.
It further argued that Egypt's four major sources of hard currency (tourism, the Suez Canal, oil exports and remittances from abroad) were inherently fluctuating in nature. Yet, whether they fluctuate upwards or not, these sources alone are insufficient to place our balance of payments in the black. Egypt's visible trade deficit climbed from $7.3 billion in 1993-94 to $12.6 billion in 1998-99, and although it has been reduced to $9.3 billion last year, the deficit is still far too great to be offset by our four major invisible sources of hard currency income.
Although the government has taken certain measures to control imports they have continued to skyrocket, reaching approximately $17 billion in 1997-98 and 1998-99. This is an alarmingly high figure, and it represents a major dilemma. Almost a half of these imports are intermediate and capital goods that are necessary for increasing production geared toward export. If we are to reach our target of a seven per cent annual growth rate we must increase export production, which in turn means that we must increase imports of those goods needed for this purpose. Simultaneously, although devaluation may enhance the competitivity of Egyptian exports, the consequent increase in the cost of imports restricts the overall value of this measure.
Most economic experts support the recent currency policy that allows the Egyptian pound to float within a three per cent band of the set rate. However, while they praise the new flexibility they also believe that we should follow this measure with a more comprehensive currency policy that will stimulate investment and end the crisis of liquidity and stagnation that has plagued the economy for the past three years.
Still, the focus on fiscal and currency policy alone will not remedy the trade deficit. Attention must also be given to the closer integration of industrial and trade policies with currency and fiscal policies. I have long held that the policy of import substitution adopted by the government and public sector in the sixties was counterproductive. Curiously, we have almost come full circle, though under the banner of the private sector. It is sufficient here to point to the many assembly industries, in which the import component, and the added value, are relatively high.
To simply set some abstract goal of increasing export trade is not realistic; nor will it effect much change in our current export structure. Perhaps what is needed is a concerted drive to push industry towards production geared towards export from the outset, through credit, tax and customs incentives, possibly scaled in ratio to the added value that accrues with the enterprise. Whatever solutions are adopted, the crux of the problem is not whether to fix or float the pound, but rather how to contend with the factors that effect the pound.
It is little wonder, therefore, that most experts argue for a fundamental change in the very basis of our currency exchange system. By linking the pound to the dollar we run the risk that the pound increases in value against all other major currencies, which indeed occurred for three years running, leading to a decline in the competitivity of Egyptian exports in international markets. For this reason, some have proposed introducing a system whereby the value of the pound would be linked to a basket of currencies, in which the Euro -- the currency of Egypt's foremost trade partner -- would carry significant weight. The suggestion merits a thorough cost-benefit analysis, and should it prove advantageous the government and Central Bank must take the necessary actions to put it into effect as quickly as possible.
Whatever measures are adopted, ultimately the issue is the need to remedy the core problems underlying the trade deficit. To simply revalue the Egyptian pound on occasion is not sufficient. We must address the fundamental structure of industry and exports if we are to make any significant and lasting dent in the deficit.
In this regard. the tourist industry demands closer inspection. Last year, income from this sector exceeded $4.3 billion, making it our number one foreign currency earner. Egypt's total non-petroleum exports last year stood at over $4 billion, petroleum exports were $2.2 billion, remittances from abroad fell short of $4 billion and income from the Suez Canal was less than $1.8 billion.
In addition, the tourist industry has important economic spin-offs. While the direct income from this sector accounted for five per cent of GDP, economists estimate that if we take into account tourist-related industries that figure rises to 10 per cent of the GDP. In addition, experts say that every additional $100 million spent by tourists creates 33,000 jobs. A similar rate of growth in the food production and clothing industries -- the two other most labour intensive industries -- would generate 29,000 and 19,000 jobs respectively. It goes with out saying that such job-generating industries should be prioristised in formulating policy.
Although tourism in Egypt, as everywhere else in the world, is suffering the repercussions of the events of last September, we must take all possible measures to realise the sustained growth of this sector. Egypt's tourist potential is far from fully exploited and offers the prospect of attracting far greater numbers of tourists than in the past.
The tourist industry is the only industry in which one might say that exporters and importers meet face to face at the moment of production and consumption. It is thus vital that we offer a service as attractively presented and packaged as possible so as to enhance Egypt's chances of attracting greater numbers of tourists. In this regard, I would like to draw attention to several issues that should merit our immediate concern. Above all, as Mubarak has stressed on many occasions, the burden of remedying our current problems is one that must be shared by all Egyptians. Tourism entails, first and foremost, a conducive climate, which, in turn, implies that promoting tourism is a national cause that should involve every Egyptian, not solely those directly involved in the tourist industry.
Secondly, certain entrepreneurial practices in the field of tourism have not been consistent with the need for long range investment in this sector. The business of building up a solid and steadily growing tourist industry is one that requires sustained and honest effort, particularly given that this is a sector that is highly vulnerable to the slightest international and domestic developments. While it is important to support those working in this sector during the current crisis, it is simultaneously necessary to stress that this should not serve as a pretext for reverting to certain harmful practices, such as over-charging once tourism picks up again. The effects of such policies are already apparent. At a time when we are attempting to attract more Arab tourists, we find that many have turned to Lebanon in order to spend their holidays or celebrate marriages because of the exorbitant prices hotels and reception facilities in Egypt are charging them compared to those in Beirut.
Thirdly, while I fully accord with President Mubarak's exhortation to Egyptians to refrain from spending their holidays abroad due to the pressure this creates on our foreign currency reserves, more efforts should be devoted to making tourism at home more attractive. Domestic tourism should not be viewed as a temporary stopgap, but rather a vital branch of the industry. Egyptian tourists should be made to feel as welcome and as well catered to in our tourist resorts as foreigners, all the time, not only in times of crisis. This entails instilling a new attitude in the tourist industry as a whole, one founded upon a professionalism that respects the concerns of the client, regardless of nationality, and that packages and markets the product for all seasons, not just to meet temporary exigencies.
Finally, we should be more self-critical with regard to our national media, especially towards the sensationalism in certain newspapers that has driven tourists, especially Arab tourists, away from Egypt. A warm and welcoming climate is the best advertisement we can make for Egypt. The slurs and exaggerations regarding the spending and holiday habits of foreign and Arab tourists, as though they have suddenly landed on another planet, make the worst propaganda possible for Egypt, even though I am certain that this is the last thing the writers want.
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