Wednesday,19 September, 2018
Current issue | Issue 1298, (2 - 8 June 2016)
Wednesday,19 September, 2018
Issue 1298, (2 - 8 June 2016)

Ahram Weekly

No place for placebos

While prospects for the economy may be improving, there is still some way to go before the country returns to pre-2011 Revolution growth rates, reports Niveen Wahish

Al-Ahram Weekly

Government officials say that they are now more optimistic about growth prospects for the economy, with 4.4 per cent GDP growth expected for the current fiscal year compared to 4.2 per cent growth last year — double the average for the three years that followed the 25 January Revolution.

This is a huge achievement since some sectors, including the processing industry, saw negative growth in the first half of the year, according to Minister of Planning Ashraf Al-Arabi. It means that the economy is diversifying in such a way that even if one sector fails others are able to keep it going, Al-Arabi said. He was speaking to participants at the Investment Regulations Forum, organised by NGage Consulting, in Cairo.

The government is expecting a growth rate of 5.2 per cent for the 2016-2017 fiscal year.

Although the current growth is an improvement, it is below the seven per cent achieved in 2006-2007. A higher growth rate is needed to support population growth of 2.05 per cent, with the country’s population now closing in on 91 million.

Egypt’s rate of population growth is eight times that of South Korea and five times that of China, Major General Abu Bakr Al-Guindi, head of the Central Agency for Public Mobilisation and Statistics, said at a seminar organised recently by the Egyptian Centre for Economic Studies (ECES) and the Press Syndicate’s Economic Division. For the country to have the resources needed to capitalise on its human resources, the economic growth rate needs to be three times the population growth rate, he said.

To achieve seven per cent growth, 25 per cent of GDP should be invested, said Omar Mohanna, chair of both the ECES and the Suez Cement Group. But the country only has a five per cent savings rate, so the economy needs the remaining 20 per cent in the form of foreign direct investment (FDI).

But this has not been forthcoming. FDI reached around $6.5 billion in 2014-2015, just half the record level of around $13 billion it saw in 2006-2007. It was hoped that a change in the investment law ahead of the Egypt Economic Development Conference held last year in Sharm El-Sheikh would help boost investment, but this has not been the case.

Though there are some good things about the law, it has so far failed to resolve longstanding investor complaints about land allocation for projects and the country’s bureaucracy. “It might have been better to have let the old law stand rather than raise expectations and then end up with a distorted law,” Mohanna told participants at the ECES seminar.

But the shortcomings in the law are on their way to being resolved, Ahmed Farouk, economic advisor to the minister of investment, told the NGage seminar. “The ministry is in the process of issuing a modified version of the law,” he said, adding that it will be discussed with the business community and other stakeholders.

He added, however, that attracting investment is not solely about the law. In 2008, Egypt had a low ranking in the World Bank’s “Doing Business Report”, he said, but the bank had identified it as a fast-reforming country. Further reform is what is needed to regain investor confidence, he said.

Farouk said it is also important to resolve conflicts between government authorities over land. “These represent 60 per cent of the problems facing certain projects,” he said. To reach the level of FDI achieved in 2006-2007, the government must target certain projects and resolve the land issues related to them, he added.

One project that the government has placed much hope in is the Suez Canal Special Economic Zone. Plans are underway to transform the area into a logistics and industrial hub over a 15-year period. The zone’s board of directors has been given independent authority to handle investment in the zone, a move aimed at bypassing the bureaucracy that has brought many projects to a halt in the rest of the country.

“There are great expectations for this zone, but such projects take years,” board member Ahmed Fikry Abdel-Wahab told the ECES seminar participants. One issue that has dampened expectations has been subjecting investors to a 22.5 per cent tax, just like in the rest of the country. Previously projects in special economic zones faced only a 10 per cent tax. There has been pressure to decrease the tax again, given that Egypt’s competitors, including Morocco, offer generous tax incentives.

But while supporting the idea for the tax cut, Abdel-Wahab is worried about the impression the fluctuation in tax policies could leave on investors.

The economy is facing multiple problems and has not stabilised since the 2011 Revolution, Abla Abdel-Latif, executive director of the ECES, told seminar participants. There are problems with infrastructure, the administrative apparatus is huge, and there is a jungle of intertwining legislation. Added to this is the recession in the global economy and the spiralling population increase.

It is impossible to tackle all these problems at once, she said, meaning that the government has opted to choose drivers of change such as mega-projects. But despite the huge investments in infrastructure projects, housing and the New Suez Canal, the performance of the economy remains weak.

There are core problems that if resolved would make a difference to the management of the economy and affect growth positively, Abdel-Latif said. These include the lack of proper data, resulting in the fact that decisions are not based on accurate information, economic policies are contradictory, there is no crisis management, and there is a heavy and inefficient bureaucracy. This has resulted in misguided government spending and a lack of accurate planning, she said.

Egypt’s budget deficit is expected to reach 11.5 per cent of GDP in the current fiscal year, and it is aiming for an 8.9 per cent deficit for the next fiscal year. But Mohsen Adel, deputy head of the EG-Finance Association, doubts that that this will be achievable. “If we manage to maintain 11.5 per cent, that would be good enough,” he said, pointing out that the budget was based on oil at $40 a barrel, but that it has now reached $50.

“The budget deficit must be brought down, otherwise it will grow out of control,” he said.

Al-Arabi, however, assured the NGage seminar participants that the targeted figures are achievable through measures that the government is planning, such as the introduction of a value-added tax (VAT) and rationalising subsidies. The government expects the VAT to bring in some LE30 billion, but it has not disclosed how it will rationalise subsidies.

Another area where Abdel-Latif wants to see improvements is social justice. Social justice needs to be about empowerment through improved educational opportunities and health care, she said. It should involve geographical justice and it should look more at the role of women.

Without serious reforms funds such as the $3 billion in budget support expected from the World Bank will only temporarily alleviate pressure on the budget deficit and the shortage of hard currency, and will not boost growth, Abdel-Latif told the ECES seminar.

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