The country's economic status: recent reforms begin to pay off

Silver linings

In less than a month, three reports paint a positive picture of the Egyptian economy. Gamal Essam El-Din reports

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On 5 June, 1967, Egypt faced a military setback that left a very deep negative impact on its economy and physical infrastructure. Forty years later, however, the Egyptian economy is healthy. On 5 June, 2007, the US, a country which Egypt squarely blamed for the military defeat of 1967, painted a very positive picture of the Egyptian economy. In its annual report entitled Economic Trends Report -- Egypt -- May 2007, the US Embassy said Egypt realised its best real GDP growth rate in 40 years -- 6.8 per cent for the fiscal year (FY) ending June 2006, even higher than the strong growth the previous year.

The report highly praised the government of Prime Minister Ahmed Nazif, declaring that its three-year reform programme has led to progress in reforming financial and non-financial services, taxes and public expenditure management. In the report's words, the reform efforts of the Nazif Cabinet prompted one international ratings institution -- Standard and Poor's (S&P) -- to upgrade its outlook for Egypt from negative to stable.

The positive picture of the Egyptian economy under the Nazif government was painted not only by the US Embassy report, but also by others issued last week. The first, published by the Egyptian Businessmen's Association (EBA), also praised the 6.8 per cent real GDP growth rate, attributing this to the growing and robust role of the private sector in the Egyptian economy. The EBA report said that the Egyptian private sector contributed around 70 per cent to the unprecedented 6.8 GDP growth rate. The US Embassy and EBA reports both agree that the key, and greatest, growth is secured by the private sector in natural gas production, which grew by 75 per cent in FY 2005- 06, compared to 20.6 per cent in FY 2004-05. Next came the construction sector, which grew 18.2 per cent in FY 2005-06 compared to 8.7 per cent in FY 2004-05.

The EBA report emphasises the growth in Egypt's exports in FY 2006- 07. According to the report, Egyptian exports climbed to $10.4 billion, registering an increase of $4.6 billion in one year. The report, however, lamented that 90 per cent of this increase was due to a growth in oil exports. The US Embassy report agrees, noting that Egypt's leading export in FY 2005-06 is crude oil and petroleum products, which spiked from $5.5 billion in FY 2004-05 to $10.4 billion in FY 2005- 06, as a result of revenues generated by liquefied natural gas (LNG) exports.

The US Embassy report says the US is Egypt's largest single-country trading partner, accounting for approximately 18.8 per cent of its imports and 30.6 per cent of Egypt's exports in FY 2005-06. A third report about the Egyptian economy, carried out by the American Chamber of Commerce, also notes that the conclusion of the QIZ (Qualified Industrial Zones) agreement between Egypt, the US and Israel in December 2004, has led to a dramatic growth in Egyptian exports to the US.

The three reports agree that the Nazif government achieved great progress in the areas of foreign investments, privatisation and boosting the share of services in Egypt's GDP. The US Embassy report puts special emphasis on the government's reforms in the banking sector. It underscores that, "the competitiveness of and competition among banking units have increased, in part due to the increased presence of foreign banks in the market and the consolidation and cutting of the total number of commercial and investment banks to 36 by the end of 2006 from 45 at the end of 2005.

The three reports register a number of weaknesses about the Egyptian economy. In a press conference held in the US Embassy on 6 June, a senior US economic official emphasised that, "unemployment remains a challenge, requiring breakthrough mechanisms for job creation levels exceeding the growth rate of the labour force, about 600,000-700,000 new workers annually." "Official unemployment numbers show a slight increase from 10.5 per cent in FY 2004-05 to 10.9 per cent in FY 2005-06, though independent estimates place it at about double that," the report said.

The US Embassy and EBA reports also direct frank criticism at the government's strategy on subsidies. The US Embassy's senior official was critical of subsidies, especially those directed to energy and petroleum products, for market distortions. "This kind of subsidy goes to the exclusive benefit of wealthy people rather than to the limited income classes," said the US Embassy senior economic official. "We think," he added, "that the strategy of subsidies should be adjusted to go to the benefit of those who deserve them, namely the poor and limited-income classes."

Agreeing with the US Embassy, the EBA report harshly criticised the government's subsidies. "Subsidies account for 26 per cent of the budget's expenditure, followed by wages and salaries [22.5 per cent], and debt interest [17 per cent]," said EBA's report.

The US report believes that more subsidies mean more spending, thus leading to a rise in the level of inflation. "Inflation has risen steadily since March 2006, when the Consumer Price Index (CPI) was 3.7 per cent," the US report said, adding that, "by October 2006, inflation reached double digits at 11.8 per cent and most recently hit 12.4 in January 2007." Minister of Finance Youssef Boutros Ghali, recently addressing the People's Assembly on the new 2007-08 budget, agreed that subsidies and the annual bonus offered to state and government employees have a big role in raising inflation rates. "The government wants to raise the salaries of government employees but this rise should come from real sources or we could face a big wave of inflation," said Ghali.

The three reports criticise the high fiscal budget deficit -- eight per cent of GDP -- and the rise in public debt. According to the US Embassy report, by June 2006, external debt was $29.6 billion, up from $28.9 billion the previous year. The main factor contributing to this increase, said the report, was foreign purchases of domestic bonds and bills, which grew from $613.6 million to $1.86 billion between June 2005 and June 2006.

Comparing the situation to June 1967, the US Embassy report emphasised that the overall security atmosphere for US and foreign companies operating in Egypt remains excellent. Unlike 1976, the report said, "the government in 2006 reiterated its interest in foreign investment and its opposition to any boycott of US products, and major threats to foreign investment and entities have not materialised."