A lack of integration and reform

At a regional conference, it was clear that Egypt's 15-year old economic reform programme has left a lot to be desired, reports Pierre Loza

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Although the Economic Reform and Structural Adjustment Programme (ERSAP) launched in March 1990 has certainly had some positive impact on Egypt's overall economic performance, at the same time it has been far from a cure-all. "Some of the improvements initiated by ERSAP, such as reducing inflation and curbing the fiscal deficit, are now showing signs of reversal," said economics professor Gouda Abdel-Khaleq, the head of the Tagammu Party's Economic Committee, last week.

At a Centre for European Studies workshop that brought together academics from Egypt and around the region to highlight different experiences with regards to reform programmes, Abdel-Khaleq analysed Egypt's.

Because of ERSAP, Abdel-Khaleq said, the value of foreign debt dwindled while domestic debt significantly increased . "If you add external debt to domestic debt right now, excluding private debt, the ratio would be in the neighbourhood of 120 per cent of GDP." This contributed to an overall deficit that jumped from $20.7 billion between 2000/01 to $30.2 billion for 2002/03, he said.

Abdel-Khaleq also spoke out against what he called the "unholy trinity -- [which means] you cannot have a fixed exchange rate, open capital market transactions, and aspire for an independent monetary policy" all at the same time, he said. "Something has to go wrong." By defending the Egyptian pound-US dollar peg, and offering higher interest rates on domestic currency, the door ended up opening wide for interest rate fluctuations and an increased dollarisation rate. Although the higher interest rate attracted massive capital inflows, the rigid peg did not allow the pound to appreciate, especially after a sequence of devaluations.

An interest rate that is above the regional average, he said, makes prospects of integration tough to imagine, at least in the foreseeable future.

Abdel-Khaleq said the government has rushed into liberalising financial policies, leaving behind what he called "the real side of the economy." To counter this destablising factor, he suggested following China and India's examples by placing stronger restriction on capital account transactions. He also advised pegging the pound to a basket of currencies, where the euro would play a more dominant role. He also criticised the government for cutting its investments by 50 per cent, in a flawed attempt to make the private sector the primary anchor for investment.

On the political front, Abdel-Khaleq voiced the pressing need for legislative empowerment. "It doesn't make any sense to talk about economic reform, when the legislature can never vote to change the budget proposal put forth by the government," he said.

Naglaa El-Ehwany, the director of the Centre for European Studies, added pointed criticism of the government to Abdel- Khaleq's analysis. She said that besides the fiscal deficit and domestic debt, government expenditure should not be overlooked. The government's persistence on patronage mechanisms and subsidisation, she said, do not correlate with its agenda of promoting a free market economy. "If we say we can not reduce the size of the government from six million employees, then we should not be talking about market forces. Why should petroleum products be subsidised? If you have a car, you should pay for its gas."

El-Ehwany said these government employees should be provided with other opportunities that will have to go beyond decreeing laws that are rarely implemented correctly. Like many developing economies, it is the methodology of implementation that has proven most problematic. "If what we mean by market forces is that everyone does whatever they want, including the government, that is not market economics," she said.