Al-Ahram Weekly   Al-Ahram Weekly
1 - 7 June 2000
Issue No. 484
Published in Cairo by AL-AHRAM established in 1875 Issues navigation Current Issue Previous Issue Back Issues

Front Page

Non-growing pains

By Ibrahim Nafie

Ibrahim Nafie Since problems with liquidity hit the headlines, endless articles have been published suggesting various ways of alleviating the problem while simultaneously enhancing economic growth -- the holy grail of fiscal policy. That discussion of appropriate economic strategies should have been so wide-ranging is a heartening sign, reflecting a high level of participation in public affairs. I am thus encouraged to contribute further suggestions for consideration.

The government should attempt to "Egyptianise" its own major purchases, exercising a form of positive discrimination in favour of locally produced goods. There is a problem of definition in implementing such a policy. To consider a product Egyptian two thirds of its total value must accrue to Egypt -- and measures should be taken to ensure there is no exaggeration of the value of local components. To implement such a policy, too, a strategy must be formulated capable of turning an attractive slogan into a practical reality.

One mechanism is that the government invite tenders from the private and public sectors, as well as small enterprises, having published its requirements in detail and, most importantly, well in advance. Tenders should be submitted at least six months before the implementation of the specific projects they are intended to facilitate, regardless of whether it is the public, private or small enterprise sector that is bidding.

This process must, for the sake of confidence, attain the utmost transparency for no suspicion of corruption must be allowed to taint procedures for government purchases.

The advantages of Egyptianising government purchases is that it effectively channels demand to motivate real economic growth through optimising the utilisation of the nation's labour force and productive base while simultaneously bolstering the position of local public and private companies. By ensuring that large capital purchases are restricted to local companies -- whether owned entirely by Egyptians, joint-ventures, or wholly foreign owned companies located in Egypt and employing Egyptian nationals -- would make the Egyptian market more attractive to foreign investors in a way that favours direct investments promoting technology transfer.

Egyptianising government purchases also means that public expenditure will be recycled to enhance liquidity and reduce imports, which in turn will improve the trade balance, support the pound and preserve currency reserves.

The state, too, needs to maintain a strong role, necessary to ensure economic, political and social growth and stability. We must not succumb to blackmail from any state or international institution. Egypt, as a developing country, needs to enhance the government's economic role because, essentially, it is the government that guarantees economic, social and political stability. In 1997, current account and development spending, as a percentage of GNP, reached 47.9, 46.6, 44.3, 41.7, and 41.5 in Italy, France, Sweden, Britain and Finland respectively. Yet according to the World Bank the figure in Egypt stood at only 34.3 per cent.

The state, too, must work towards effectively stimulating the economy through incomes policy, which implies a redistributive approach to GNP in favour of middle and lower income groups. These groups currently spend almost all their income on securing basic needs. President Mubarak's insistence on the social dimension of development, and for improving income distribution, recognises the importance of allowing these groups to become more active consumers.

As regards the privatisation programme, some 27 companies have been slated for sale before 31 December, 2000. Given the strain on liquidity at the moment, it may well be wise to reconsider this ambitious programme since such a massive round of privatisation can only exacerbate the liquidity problem. Such postponement does not represent a retreat from the important process of continued privatisation, but a recognition that in the current circumstances the economy can ill-afford a further drain on available money supply.

Now, perhaps, is the time to evaluate the impacts of the privatisation programme so far. The revenues generated by the sale of public sector companies to date have been fairly severely dissipated. Only 41.3 per cent of proceeds have, in effect, been transferred to the Finance Ministry, the remainder being absorbed by necessary restructuring, including the writing off of existing debt and the implementation of early retirement schemes for workers.

Red tape, too, needs to be eliminated, while the tax-system needs to be overhauled in such a way as to ensure that the burden falls fairly, and that tax receipts are collected efficiently.

Government strategy must, in short, concentrate on encouraging growth by stimulating demand, with financial incentives being provided for production based on Egyptian components, particularly in the field of advanced technology, and for products with strong export potential.

Tax exemptions and the provision of foreign currency to fund imports, for example, should be allocated on the basis of the importance of the finished product to the national economy, or else because the product makes a significant contribution to Egypt's export trade. To make effective allocations in this regard, companies' performance must be reviewed annually.

It is dangerous to underestimate the importance of following such a course. The arbitrary granting of incentives can only weaken the national economy by undermining the motive to produce goods essential to the local market, or for export. And let us not forget -- exports have become a matter of life or death. Initial data from the Central Bank indicates that Egypt's exports for 1998-99 did not exceed $4.5 billion. Stimulating exports, and correcting the trade imbalance, is a matter of the gravest urgency, for Egypt's economic future depends on developing its ability to compete in international markets.

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