Taking stock

Whether Ebeid stays on as prime minister remains to be seen, but his cabinet's days are numbered. In two separate articles below, Gamal Essam El-Din and Sherine Abdel-Razek examine the record of the four-and-half year old cabinet

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When it took over in October 1999, Prime Minister Atef Ebeid's government inherited a heavy burden -- a crunch in local liquidity caused by the previous government's increased spending on so-called "mega projects". The local economy was also suffering from the aftermath of the Southeast Asian financial crisis, mirrored in a huge trade balance deficit of $11.5 billion, with imports -- mainly from the hard-hit Asian tigers -- mounting to $17.9 billion in fiscal year 1999/2000.

A few months later, the scarcity of the dollar pushed the government to address the impotent exchange rate policy. Testing the waters, cautious monetary measures that helped inject more liquidity in the market were introduced, along with a managed peg exchange rate via which the pound was allowed to float against the dollar in early 2001.

That slow road to recovery was harshly tested by the aftermath of the 11 September attacks. Then, just as the damage on the local economy was being assessed, the government found itself simultaneously having to deal with a spate of high-profile bad loans, with scores of big businessmen fleeing the country after failing to meet their financial obligations.

As public discontent -- amongst everyone from economists to local businessmen to the average worker -- increased, the government chose to blame much of the problem on an estimated LE50 billion worth of bad loans. The worst, however, was yet to come. By the end of 2002, with the resurgence of a parallel black market where the dollar was being traded at a rate much higher than the official LE4.5 peg, the exchange rate system had proven to be an utter failure. Local businesses were nearly paralysed by the scarcity of dollars.

Suddenly, on 28 January 2003, Ebeid surprised the market with the floatation of the pound.

In purely economic terms, the much-maligned decision actually resulted in a shift in the government's luck. Although the government later attempted to intervene with policies to protect the local currency from its resulting free fall against the dollar, the floatation, in the long run, proved to be the panacea for much of the economy's woes.

"The decision was backed by clear logic, coming as it did three months before the strike on Iraq, a war that was expected to deprive the economy of much-needed hard currency revenues from tourism and foreign investments," said Khaled El-Mahdy, head of research at HSBC Egypt. "It cleared the uncertainty surrounding the economy since mid 2001, and made the prices of local shares very attractive -- as proven by the subsequent and ongoing revival in the capital market's performance since the floatation took place."

Market capitalisation, in fact, increased to LE171 billion, or 42 per cent of GDP, by the end of 2003, compared to 34.3 per cent at the end of 1999, and a 30 per cent low in 2001. The balance of payments, moreover, posted a surplus in 2002/03 for the first time since the 1996/97 fiscal year.

According to US investment giant Merril Lynch, Egypt's current account, composed of commodities and services purchases, has also experienced a significant turnaround in the past few years. Its current account surplus totalled about $2.2 billion in the first half of 2003/04, with the possibility that the surplus for the entire year could rise to $4.2 billion, or 5.6 per cent of GDP. In the late 1990s, Egypt had large current-account deficits, totalling 1.9 per cent in 1998/99, and 1.2 per cent in 1999/00.

This dramatic turnaround depended on a number of factors, including the narrowing trade gap, a floatation-driven decline in imports, and a revival of tourism revenues.

El-Mahdy and most other economists and businessmen blamed the government, however, for not taking the tough floatation decision earlier, and thus forcing the economy into a nearly two year slow down. Ebeid's economic team, including the central bank governor, also pursued extremely conservative monetary policies until late 2001, refusing to use international currency reserves to inject liquidity in the market -- afraid a sharp change in pound value would push commodity prices up, thus stirring local discontent.

Which, as we all know, happened anyway. After the floatation, prices, on the rise since the 2001 semi-float, skyrocketed to unprecedented levels. A 53-year-old accountant at a state-owned industrial company, who moonlights as a taxi driver to cover his family's needs, said he had "never seen days like this before, when my salary evaporates in the first days of each month. What used to cost LE100 a year ago now costs me LE150--175."

The negative social impact of the price increases is not reflected in the government's figures. On the contrary, the government boasts that inflation is under control, using the Consumer Price Index (CPI) as proof. Despite the pound's nearly 80 per cent depreciation against the dollar over the past few years, the CPI only went up from 3 to 5.5 per cent from early 2000 to late 2003.

But the index is "misleading", said ruling National Democratic Party economic committee head Mahmoud Mohieddin, "because it is calculated on a basic set of commodities that are mainly subsidised by the government, and thus it does not reflect the real increase in prices".

Businessman and Wafdist MP Mounir Fakhry Abdel- Nour said whatever promises the government had made about the floatation having a positive "trickle-down effect" had not been met. "People on the street don't feel it; actually, they are suffering from even more unemployment and poverty." Abdel-Nour said the blame rested on the low level of investments, whether public or private. "We failed to attract more money due to the discouraging investment environment, in addition to lack of coordination between monetary and fiscal policies." The liberation of the forex system should have been followed by a decrease in interest rates to encourage investing, Abdel-Nour said.

Credit limitations in the wake of the bad loans scandal made matters worse. Mohieddin underlined this point with figures reflecting the lack of growth in the credit extended to the private sector. "It was 25 per cent in 1998/1999, 7.4 per cent two years later, and 3.6 per cent in 2003-2004."

The privatisation process, meanwhile, has been at a seeming standstill. Although a total of 78 companies have been privatised under Ebeid's government, only seven of those were sold in 2002, and only two last year. Over 800 companies are still slated for privatisation; to entice buyers, many require restructuring. In February, the government announced plans to sell off 34 public-sector companies, but nothing has yet emerged. A recent USAID study evaluated the budgetary cost of not accelerating the privatisation process at LE100 billion over the next five years.

All of this comes at a time when the budget is in dire need of more sources of revenue. The budget deficit continues to expand, rising from 6 per cent of GDP in 1999-2000 to 8.3 per cent in 2002/03.

Finance Minister Medhat Hassanein laid the blame on an increase in social spending. The government has increased subsidies for basic imported food commodities to cushion the rise in prices of mostly imported food staples.

Ebeid's government tends to cover its rising expenditures with expanded borrowing. As this has been mainly from the internal market, public domestic debt has reached unprecedented levels. According to a Shura Council report, Egypt's domestic debt, including what the government owes to the Social Pensions Authority, totalled LE440.7 billion, or 108.3 per cent of 2003-2004 GDP. The internationally accepted level is just 60 per cent of GDP.