A better half
The economy was stagnant during the first-half of 2003, but the second half of the year promises improved performance, according to a recent barometer of corporate activity. Mona El-Fiqi reviews the report
Business Barometer, a report issued biannually by the Egyptian Centre for Economic Studies (ECES), recently assessed economic poor economic activity for the first half of 2003 while anticipating the second half of the year optimistically. These assessments are based on firms in the manufacturing, construction, and tourism sectors reports' on the first six months of 2003.
The unfavourable assessment of the first half was based primarily on rising prices and wages; declining domestic sales and employment; and stagnant investment, accompanied by only modest increases in production and export levels.
The increase of exports and prices, according to the report, is primarily the result of the move to a flexible exchange rate regime in January 2003 which led to a devaluation of the Egyptian pound by 31 per cent. The modest rise in production reflects increased export demand and rapid recovery in the tourism sector following the war in Iraq. Meanwhile, declines in domestic sales and employment, as well as stagnant investment, are due to many factors, the report explained, such as "difficulties in the corporate and banking sectors", weak interest rate transmission mechanisms and a low level of corporate confidence.
However, with respect to the second half of 2003, most of surveyed firms are optimistic. Primarily, this optimism is due to the fact that the war in Iraq was shorter than expected, which may lead to the full recovery of tourism and workers' remittances. The second is that the gap between the official and parallel exchange rate is narrowing gradually, which will give exporters added incentives to take advantage of external markets. Moreover, firms are upbeat about the government's plan to inject additional capital into the economy through external borrowing, possibly including a combined loan of $1 billion from the World Bank and the African Development Bank.
The outlook for the near future is, however, somewhat mixed. On one hand there has been a rise in exports (by a monthly average of 36 per cent in pounds) and a decline in imports (by a monthly average of 18 per cent in pounds), leading to a current account surplus, and mainly due to the pound's devaluation and weak local demand. On the other hand, there are signs that the economy remains sluggish. Most notably, industrial utilisation of electricity and cement consumption either declined or increased modestly in the past six months compared to the second half of 2002. The number of new enterprises also declined vis-à-vis that same period.
Ultimately the report searches out an answer to a pressing question: What can be done to activate the economy and restore confidence in the short run?
With no clear answer, the report revealed different viewpoints. Some argue that higher government expenditures and lower interest rates could do the trick; others suggest that fiscal deficit is already high (about seven per cent of GDP) and low interest rates could increase the pressure on the pound without stimulating investment. According to the ECES report, a desirable option would be to focus on boosting exports and attracting foreign direct investments by adopting such measures as allowing the pound to move more freely, reducing trade protection and concluding a sizable privatisation deal.
Looking beyond the short term, the report said that there is no substitute for reforming the financial sector, market institutions and the education system to put the economy on the path of sustainable growth.
