17 - 23 January 2002
Issue No.569
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Al-Ahram Weekly Online 17 - 23 January 2002 Issue No.569 |
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A few taboos
The economy is officially in trouble, but not all hope is lost. Ahmed El-Naggar* believes that, with a little fine-tuning, we can get back on track
The Egyptian economy is in a fix. Even before 11 September, the economy had slowed down to near recession in some sectors, chief among them real estate. The banking system was shaken by defaults on loans extended without sufficient collateral to well-connected individuals. Unemployment soared; when the government, in an attempt to alleviate the crisis, announced a limited number of job vacancies a few months ago, 4.5 million people applied. The exchange rate and the foreign currency market have gone through turbulent times, not only because of the persistent deficit in the balance of payments, but also because of smuggling. Illegal imports and the flight of capital earned through corruption and black-market speculation have doubled the pressure on the pound.
The US crisis brought things to a head. Worst hit were tourism and air travel, as well as a host of small tourism-related service industries. Falling oil prices, also connected to the US crisis, led to a drop in the value of our exports. The Gulf economies suffered too, jeopardising the livelihood of many Egyptians who work there. As a result, the pound fell to 4.62 to the dollar, at the official rate, and lower than that on the newly revived black market.
Can Egypt do anything to address the crisis and prevent the economy from going into freefall? Yes. A number of measures could revive the economy and avert a full-fledged collapse of the type seen recently in Argentina and, a few years back, in southeast Asia.
First, the structure of public spending in Egypt must undergo a profound change. We should reduce our spending on infrastructure and focus instead on creating industrial projects, promote new high-tech industries, and modernise our agricultural industries. We have to create new industries, even if we plan to sell them to the private sector at a later stage. Second, we need to sponsor small industries by creating incubators that help plan, coordinate and finance small and micro-enterprises. For example, the government and a number of NGOs can cooperate in creating an institution whose main task would be to prepare feasibility studies for small projects in industry, agriculture, and services, and which would coordinate among prospective small investors to ensure that they can link up with bigger projects that require their products and services.
Every cluster of small ventures should be affiliated to a larger industry that it provides with components or services. The incubators should always be on the lookout for domestic and foreign marketing outlets for the goods small projects produce. This is necessary to sustain these projects and the jobs they create. Until now, our private sector has been unable to create sufficient job opportunities to absorb the country's labour force. The cost of creating new jobs in the private sector is too high: according to the data provided by the General Investment Authority, it costs LE231,000 to create one new private-sector job.
The Egyptian economy's ability to grow and generate new jobs depends on sound fiscal and monetary policies. The interest rate must be lowered in keeping with rates on major currencies. The argument that higher interest rates keep the pound attractive as a medium of savings is weak, for instability undermines the pound's value and credibility. By relaxing fiscal policy, i.e., lowering interest rates, the economy will have a better chance of regaining its health.
As for the balance of trade deficit, the government, the chambers of commerce, and major importers need to reach a consensus on halting imports of non-essential goods. Our economy should not be burdened by the affluent classes' desire to consume luxury imports during a downturn. Exports have to be stimulated through fiscal and monetary measures, but this effort can only bear fruit in the medium and long terms.
We also need to fight smuggling. In 2000, this smuggling totalled $4,091 million: the difference between Egypt's official import figures and the corresponding numbers provided by Egypt's trade partners. Aside from the obvious damage to state revenue, smuggling undermines the efforts of legal importers and wreaks havoc on local industrial competitors. Furthermore, the practice falsifies the trade deficit, since official data are clearly lower than the actual deficit. Smuggling also puts added pressure on the pound by encouraging black-market operations.
Capital flight is another serious problem, at least for the exchange rate. Money smuggled abroad was usually obtained through illegal means. Bogus investors who owe money to local banks, corrupt individuals who made their money through bribes, drug traffickers, black market racketeers: these are the people who want to cover their tracks.
As for pegging the Egyptian pound to the dollar, it has only exacerbated the problem by subjecting the pound to the dollar's mood swings, which usually have nothing to do with our economy. Instead, the pound could be pegged to a basket of major currencies led by those of Egypt's main trading partners: the dollar, the euro, and the yen.
Now is a good time to encourage tourism from Arab countries, through preferential pricing and active marketing. This is the best way to offset the downturn in American and European tourism. Arab tourists who used to prefer Europe and the United States are now likely to be looking for alternatives, considering the mood of discrimination and racial hatred that has swept the West since 11 September.
By the same token, Arab investors are likely to be exploring alternatives outside the West. We should encourage them to invest here. But first, we must improve economic transparency, clamp down on graft, and stop discriminating among investors according to their political connections.
An Arab economic summit is another timely idea. The Arabs need to coordinate their reaction to the post-11 September global economic situation. Such a summit could examine ways of boosting Arab economic cooperation. More specifically, it should envisage a timetable for freeing the movement of merchandise, capital and labour across the Arab world, a matter as essential for the revival of Arab economies as it is for their international standing.
* The writer is an expert at the Al-Ahram Centre for Political and Strategic Studies.
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