Economic reform, NDP style
Mahmoud Mohieddin speaks to Niveen Wahish about the challenges facing the NDP's policy recommendations
Mahmoud Mohieddin, chairman of the National Democratic Party's economic committee and a member of the general secretariat, was at the core of the NDP's preparations for its first annual conference held last month, during which a comprehensive set of economic policy papers were presented.
According to Mohieddin, combating poverty and unemployment, as well as improving incomes through a higher growth rate are clear goals of the National Democratic Party. The NDP is also calling for comprehensive reform that not only touches monetary policy, the taxation system and the public debt, but also targets the social insurance system, industrial policies and examines how to promote small and medium enterprises.
However, Mohieddin said, events of the past year have hindered the achievement of these goals. Foremost among these obstacles are higher prices and lost confidence in the economy which resulted from the decision to float the Egyptian pound last January.
One of the most important policy papers presented by the NDP is one on monetary policy. The paper, according to Mohieddin, stresses the need for an inflation-targeting regime, a policy that the Central Bank of Egypt (CBE) has announced it will adopt.
But Mohieddin warned that there are many prerequisites and preconditions for an inflation- targeting policy. To begin with, he said, the CBE has to enjoy operational independence -- which is provided for in new banking laws, but awaits implementation. "Operational independence means the CBE has to have total freedom to use whatever tools it deems necessary to achieve a given target. There should not be any government interference in the tools used by the CBE, such as interest rate, reserves or open market operations," he said.
There also has to be coordination between monetary and fiscal policy, Mohieddin noted. Activating the coordinating council between the government and the CBE is central to achieving this. "We also need to activate the board of directors of the CBE," Mohieddin added. "All these prerequisites are provided for in the law, but await the issuance of its executive charter."
Another important factor for CBE's operational independence is the need for qualified personnel. "We don't have the luxury to take any chances," he said. Additionally, conviction and risk-taking must become the new norm. "Transparency, disclosure and the direction of monetary policy should be known. We shouldn't be too fanatic about numbers, but once we decide on a figure, we should stick to it. Activating an inflation-targeting regime is not something that can happen overnight. Brazil took 11-13 months to install the inflation targeting regime. Other countries took longer."
The monetary policy's new direction has only been possible due to the floatation of the pound earlier this year, Mohieddin explained. And despite the fact that the pound has depreciated by over 35 per cent since then, he still believes it was the correct decision. With a fixed peg, the CBE could not utilise monetary policy. However, he noted that the infrastructure for the floatation's success, such as a dollar inter-bank market, is not yet in place.
"I believe that the rate of the pound in both the official and black markets is undervalued. There is a huge risk or uncertainty premium that is eroding the value of the pound. The mess in the management is responsible for what's happening," he said.
Nevertheless, Mohieddin said, there has been a positive outcome to the depreciation of the pound. There were real value increases ranging between 15- 25 per cent in many exports, such as agriculture, food products and ready-made garments during the period January-August 2003. The stock exchange has also seen increases in transactions, particularly by foreigners, due to the currency devaluation. However, these benefits have not been felt throughout the economy because the contribution of both exports and the stock exchange to the GDP is minimal.
According to Mohieddin, other sectors also stand to benefit from the devaluation. "If the industrial sector is responsive, it will be possible to substitute locally made products for imports. We have seen this happen with many of the inputs required by local industry which are now becoming too expensive to import," Mohieddin said.
Mohieddin concedes that the most important ramification of the devaluation has been price increase of both imported and local commodities. "We are particularly concerned about the effects this has had on imported essential food items," Mohieddin said. "But we are happy that the government has intervened by controlling prices and increasing supply."
Mohieddin does not believe that increasing subsidies for basic food items will worsen the budget deficit. He said that the government can always maintain its target budget deficit by reallocation of items and improving the quality of spending. Moreover, these increases in spending may be accompanied by an increase in revenues, possibly through taxes. The net effect of these subsidies may not be as drastic as if they were taken as an absolute figure. The deficit reached 6.3 per cent of GDP in fiscal year 2002/2003 (July-June) and is expected to increase to 7.3 per cent in 2003/2004.
Mohieddin believes that, despite everything, Egypt's economy remains healthy.
"Although the budget deficit is high, it is not a crisis situation," he said. "Inflation is high, but we don't have hyper-inflation. On the other hand Egypt's external position is looking good with a current surplus of over $500 million, external debt has not increased and foreign reserves are in good shape."
However, Mohieddin said that the reforms planned by the government could be assisted by calculated borrowing, without complicating the external debt position. He does not believe that Egypt needs International Monetary Fund financial assistance at this stage.
"What we can do is borrow long-term, with maturities of up to 15-17 years. This is available through the World Bank (WB), the African Development Bank (ADB) and regional funds. There is currently $1 billion in the pipeline, negotiated with the ADB and WB. There is also a supplemental assistance of $300 million from the US and $2 billion in loan guarantees. These funds are needed to support many of the measures that we are undertaking."
However, he said that any conditions which may be attached to the WB loan or the supplemental assistance "would not be any tougher than the reforms targeted by the government and the NDP. The measures outlined in our policy documents are agreed upon with the government. They are not recommendations or a wish list."
The NDP and the government hope to get these reforms under way in one or two years, and to further strengthen these reforms through legislation.
Mohieddin is aware that many of the measures outlined will be difficult to implement, but "we cannot postpone these measures, and many of the problems that we are facing today are because we postponed many measures in the past."
According to Mohieddin, the NDP's programme faces three major challenges. "We are doing this while expectations of the people are beyond the capacity of the government to deliver in the short term. Globalisation will not leave us alone. And we don't have the luxury of adequate institutions that would help us in getting things right."