Friday,21 September, 2018
Current issue | Issue 1237, (12 - 18 March 2015 )
Friday,21 September, 2018
Issue 1237, (12 - 18 March 2015 )

Ahram Weekly

Saving Egypt

Former finance minister Ahmed Galal explains the challenges and priorities facing Egypt’s economy to Niveen Wahish

Al-Ahram Weekly

Ahmed Galal, managing director of the Economic Research Forum (ERF), a regional think tank, was Egypt’s finance minister for eight months during the transitional period following the removal of former president Mohamed Morsi.

During his tenure, Galal’s stated goal was to strike a balance between financial discipline, reactivation of the economy and social justice. He shared his knowledge of the Egyptian economy in an interview with the Al-Ahram Weekly.


How do you view the upcoming Egypt Economic Development Conference?

The conference is only one event. Egypt is going to be more or less the same before and after the conference. But, nevertheless, it is an opportunity for the government to showcase where the economy is, what kind of reforms have taken place and what the reform agenda is. And it is an opportunity to interact with potential investors and the donor community.

Thinking that Egypt is going to be different after the conference is not realistic or wise. We should not be counting on the conference as a savior. Nothing can save you other than what you do internally by way of reform.


What are your expectations for the conference in terms of investments?

The conference is not the time when investors will decide that they are going to invest in Egypt. They go there with an open mind and want to hear what is on offer. If they go away with a positive impression about Egypt, they are going to think seriously about investing and then come back to figure out whether the prospects are real or not. No one takes for granted what somebody else has prepared by way of feasibility studies or anything else.

People who invest put their money on the line. They look at the risks, make their own calculations and then decide. So thinking that you are going to go to the conference with a list of projects and you are going to end the conference with agreements on these projects is not realistic.


How will acts of terrorism in Egypt and the region affect investors’ appetites?

All investors worry about political stability, whether in Egypt or in the neighbouring countries. Political instability creates a lack of predictability. It is associated with more risk, and therefore investment returns have to be higher than usual in order to compensate for taking that risk. Within the region, Egypt is a much more attractive place than a lot of other places. We do not have a failing state, as in Iraq, Syria, Yemen and Libya.

We have more opportunities because we do not have a lot of capital, unlike for instance in the Gulf countries. We have a huge market, as well as links with the EU, so we are a reasonably attractive place for investors. It is just that the more unstable we are politically, the higher the returns investors will want.


On a scale from one to 10, where would you place Egypt’s political stability?

It is very difficult to grade political stability because things change quickly. Egypt was very stable for a long period of time, to the point where stability was in fact a negative sign. Now Egypt has moved into a potential political lift-off since January 2011. The country is on the verge of building a more open society, more democratic institutions and a more modern state.

But transitions are difficult everywhere and Egypt is no exception. We have been going through the transition for some time, and it is not over yet. Those who believed it would be over in a few months were naïve. We know that transitions take years. In Eastern Europe the average was about 12 years, for example. We need two or three rounds of parliamentary elections in order to establish strong political institutions.

Given that, you can say that Egypt is moving along a political roadmap that is sensible and consistent. The only thing that is different in the Egyptian case from, say, Eastern Europe after 1989, is that we have the political Islam movements not accepting the changes and dragging the democratisation process down, and in fact giving reasons for not moving as fast as most Egyptians would like towards political openness.


Some would argue that Egypt does not offer a very democratic environment.

What makes countries make progress is whether they have inclusive political institutions or not. Inclusive political institutions mean that you have a good constitution that guarantees certain rights, a balance in the distribution of power between the legislative, judiciary and executive branches, and the media as a fourth power. These are also countries where democracy is practiced properly, and not just in the form of voting.

Reducing the influence of money on elections and giving equal opportunities for all the parties and individuals in the elections is also important. The rules that govern the elections are as important as the voting itself.

If all Egyptians have an equal opportunity to participate as candidates or voters in a context that guarantees that their votes will count, and in a political system that maintains checks and balances, and a constitution that protects the bill of rights, then you have what you would call inclusive political institutions.

In the Egyptian case, we are moving slowly in that direction with lots of hiccups. I think our constitution is very decent. I think the presidential elections were relatively open and fair. The parliamentary elections are going to take place despite all the imperfections, but these are acceptable because of the present state of maturity. Those Egyptians who took to the streets in the uprisings are not going to go back to their homes and forget about them.

If the system does not mature and evolve in the right direction, I think people will be willing to go down into the streets again. The bad news in the transitional process is what is dragging down the achievement of maturity, and it gives an excuse for not making enough progress at a pace that is reasonable.


How do you view the recent depreciation of the pound against the US dollar?

One cannot discuss the exchange rate without discussing what the monetary policy is trying to do in the first place. Right now, it is not clear what the monetary policy target is. If you observe how things move, some people might conclude that the Central Bank is actually targeting the levels of the exchange rate and inflation as a secondary objective, whereas the Central Bank regulations say that the objective of the Bank is inflation. So, if we were to be consistent with the law, we should be targeting inflation and we would be allowing the exchange rate more flexibility anyway.

Nevertheless, hardly any country in the world allows the pure floating of its currency, and there is a level of management of the exchange rate, given the inflation target. You do not want the exchange rate to be too volatile: it is bad for growth, bad for stability and bad for inflation. But more flexibility in the exchange rate is overdue. I have been suggesting since 2011 that we should allow more flexibility in the exchange rate before we run out of reserves.

You do not wait until you run out of reserves and then allow it to move. You could have moved slowly while striking a balance between the level of reserves available and the level of devaluation, and by doing that some of the negative consequences of sudden devaluation could have been avoided. By doing things gradually, you would have avoided the inflationary pressure.

The devaluation of the exchange rate does three things. First, it makes it attractive for Egyptian firms to export, which is good because we have sluggish domestic consumption and therefore need an external market. It also increases the value of imports. For exporters, that is not a problem because the value of the imported inputs is always a fraction of the value of the exports.

Second, it reduces imports, so it reduces pressure on the balance of payments and the need for filling the financing gap. Third, and this is the negative repercussion, it is inflationary. Why? Because imports whether they come in the form of intermediate inputs or in the form of final consumption goods, will cost more and therefore they will increase inflation.

Every policy reform has positive consequences and some negatives. The question is not whether you should scrap it altogether, but whether to implement it to get the benefits and try to deal with the side effects.


Do you believe the government will continue with the economic reforms it started in the summer of 2014?

The answer to this question has nothing to do with economics and everything to do with politics. I do not know which government you are referring to. What we know is that the president is the only one who is elected, and he is going to be around for three more years.

Therefore, the question is: Will the president continue the reforms? If I were to speculate, I would say yes because he took tough decisions on the energy subsidies after his election last summer. So, if one were to make a judgement on the basis of that, one would conclude that yes, more reforms will be forthcoming.


Do you support these reforms?

Egypt needs a reform package that is a lot more serious than the one introduced thus far. The fact that we have had successive interim governments, with none of them having enough time to fully implement a reform agenda, has been part of the growing pains of the transition. For the first time there will be a new government after the parliamentary elections, either the same government or a new government, with a time horizon of around three years. That is long enough for the current or future government, whichever will be in place, to do what needs to be done.

People cannot eat reforms. Reforms are supposed to be translated into higher economic growth, higher employment, a better balance of the budget deficit and the current account deficit, and reducing dependence on external financing. You also need to worry about issues of poverty and social justice.

These are the three areas where the government has to come up with a coherent agenda that deals with all three objectives of reactivating the economy, bringing about macro-balances, and simultaneously worrying about poverty and equity. The future government cannot afford but to do that and convince the public that it is doing so as well.


Egypt has relied heavily on external assistance since the revolution. Is this sustainable?

What will save Egypt is Egypt. The economy cannot be sustained by external support alone. That does not mean that there are not times in the lives of countries when they can use external support with a lot of justification, however. As a result of the political instability after 2011, Egypt lost half its resources, tourists stayed away, foreign direct investments were not coming and exports were not really increasing by much. By and large, the economy was hit by a political shock, not an external shock.

If you work on bringing about political stability — implementing the political road map and bringing about security — that should take Egypt back to where it was before January 2011. Once you make progress on the political front and the economic front, these two tracks should take us at least back to where we were in 2010.

If you want to do better, then you need to carry out reforms. By definition, we were in a downturn and the foreign support was badly needed, but this does not mean that we are addicted to that support. We know that once we are out of the slump we will be in a more decent shape, and in fact will need investment or trade rather than aid.


Can we do without the support in the near future?

There is a financing gap that will continue with us for a while, but we should be increasingly relying on ourselves, and the kind of win-win support that we can get from outside rather than getting handouts.


You do not think we should go to the International Monetary Fund (IMF) for a loan?

Not at all. Why do we need the IMF? My problem with the IMF is that the reform agenda that was discussed with the Egyptian authorities from early 2011 until June 2013 was about a contractionary set of policies. The IMF programme was not, in my view, the right one for the Egyptian economy at the time it was being discussed. The economy was not growing, and the programme would have pushed it down further, not a recipe that was good for the Egyptian economy. I still think that this is the case today.


Some people argue that we need the IMF to give a stamp of confidence.

That is another fallacy. There are two ways of earning a reputation. One is by earning credibility the old-fashioned way, by announcing reforms and sticking to them and implementing them. The other is to go to the IMF, and somebody might then believe them. I prefer the former over the latter any time. It is real credibility as opposed to borrowed credibility.


Do you believe that repaying the accumulated debt will be a burden going forward?

The level of public debt is very high. It is above 90 per cent of GDP. And some studies show that when countries have a debt to GDP ratio above 90 per cent that is really alarming. When I was in government we were very conscious of this and were very mindful of carrying out enough reforms so that the budget deficit would be on a declining trend and the public debt, as a percentage of GDP, would be declining over time. Any responsible government would not want to lose track of this.

Public debt is an accumulation of debt over time, so by changing the parameters so that you are reducing your budget deficit, therefore your borrowing needs, and you are expanding your GDP, this will act to reduce the ratio of public debt to GDP.

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