EGYPT The new Caironomics

Ahmed Nazif's new government promised much when coming to power two years ago. It certainly needed to. Unemployment was pushing 12 per cent, consumer price inflation had topped 20 per cent and domestic growth was stagnant. The economy needed a fillip and Prime Minister Nazif's liberalising administration tried to provide one. So far, it has succeeded. Egypt is enjoying its best period of growth for two decades. But more than 70 million Egyptians still need their economy to keep growing, and fast.

All the main macroeconomic indicators since July 2004 have shown positive improvement. Oil exports are expected to top $30,000 million this year, compared with $18,000 million three years ago, with non-oil exports growing at a similar rate. A reinforced monetary framework has brought the exchange rate under control, after the Egyptian pound lost about 50 per cent of its value when unpegged from the dollar in 2003. It is once again steadily appreciating in value, although the growth in real export demand remains positive at 2 per cent a year. Most importantly, 'economic growth has broken the magic figure of 6 per cent necessary to absorb new labour market entrants,' says Samir Radwan, managing director of Cairo's Economic Research Forum. 'In fact, this year [2006/07] the figure is predicted to reach 6.9 per cent.'

A policy of liberalisation has led the growth, with the fiscal reforms of Finance Minister Youssef Boutros Ghali at the forefront. Income tax has been slashed from 42 per cent to a new flat rate of 20 per cent, boosting private consumption and domestic demand, and procedural reforms for income tax declarations and collection have also been designed to reduce corruption and encourage workers back into the formal sector. Further reforms are on the way. Planned pension reforms, introducing a pay-as-you-earn system, are expected to yield savings to the government of around 1.5 per cent of gross domestic product (GDP) a year.

Cairo's privatisation programme, accelerated and expanded under Nazif and Boutros Ghali, has also been a major driver of growth. The government has made £E 15,500 million this year alone. And Reham el-Desoki, senior economist at EFG-Hermes, says that although it might have peaked in terms of big asset sell-offs, there is little sign of a significant slow-down. 'There are still many deals to come, including two international telecommunications gateways, the sale of Bank of Alexandria and Eastern Tobacco,' she says. 'The government realised it had a lot of assets to sell and they discovered there is a lot of foreign interest in buying them.'

This escalation of privatisation - notably, this year, the sale of the third mobile telecoms licence to Emirates Telecommunications Corporation (Etislalat) and the tourism development investments of Emaar - has contributed to the dramatic growth of foreign direct investment (FDI) into Egypt. Four years ago, FDI amounted to little more than $400 million. By 2005/06, it has reached $5,966 million. Just as impressive, says Radwan, is that 'for the first time there has been a shift away from the usual petroleum investments and towards the non-hydrocarbons sector'. Non-petroleum investments were worth more than $3,000 million of total FDI in 2005/06, doubling those for hydrocarbons, hinting at a greater dynamism and growing economic diversity. Radwan is glad to see such an improvement and not merely for the sums of money flowing in. 'FDI is valuable in itself, but it is also a catalyst that brings contingent benefits,' he explains. 'Foreign firms bring new and better management techniques as well as technological innovation, which will pass into the domestic market.'

However, certain factors are still holding the economy back. Although the investment environment is improving, bureaucratic inefficiency remains the biggest concern for investors. Egypt's imports bill has ballooned too and now tops $35,000 millio