On the bright side

OVER the two-day eighth Euromoney Arab Financial Forum, Egypt's economic status was the topic of lengthy discussions, both during official sessions and chats by the water cooler. The exchange rate was often the focus of those discussions, with many judging the pound to currently be undervalued. Agreeing with these assessment, Minister of Foreign Trade Youssef Boutros-Ghali is optimistic that the real value of the pound will eventually be determined by "economic fundamentals".

Undervalued or not, there has been a bright side to the depreciation of the pound. As Boutros-Ghali said, it has become relatively more profitable to export than to produce for the domestic market alone. This in turn will lead to a massive shift by factories to restructure themselves for exporting. According to Boutros-Ghali, figures show that the volume of exports has grown considerably since the floatation of the pound.

He admitted that the process will take time and will continue to create a burden which the government should shoulder to protect the economically most vulnerable Egyptians.

Ahmed Galal, executive director of the Egyptian Centre for Economic Studies (ECES), touted the benefits of the pound's depreciation in promoting an export sector.

"The most important variable in determining profitability of producing for the local market versus the outside market is the exchange rate," he told a group of journalists. He also pointed out that the depreciation of the pound has also made it more expensive for Egyptians to import, thus allowing some of the import-substituting industries room to operate. Imports contracted by about 20 per cent in 2002 compared to 2000.

"But that by itself is not enough," argues Galal, explaining that an economic transformation will not be complete without accompanying reforms such as trade liberalisation, financial sector reform, educational reform, institutional reform, taxation and fiscal policy reform. "We need a package that combines all these elements such that we make sure that the structural adjustment process is taking place more seriously rather than on the margin as is the case now," he said.

He questions how exports can boom when protection for the local industry remains high. Tariff rates average 20 per cent in Egypt, compared to 10 per cent in Chile and seven per cent in Korea, the two models often cited by proponents of export-led growth.

Galal stressed that the Egyptian economy is in a much better position that it used to be, "but we are not where we should be". He said that despite the reforms undergone in the 1990s, the modernisation of Egypt's laws and the signing of free trade agreements, "the reform process is not over yet."

"Until 1998 we had an anchor for reform," he said, referring to the agreement with the International Monetary Fund. Although during the past two years reform has not stopped, he said, it has been haphazard and unfocussed. He called for a new wave of reform, similar to that of the 1990s.