Cairo needs to find economic balance

17 October 2008
The economic liberals who run Egypt’s government have decided that state intervention is the best way to mitigate the slowdown.

An economic slowdown in Egypt is inevitable. The country’s economy, which grew at more than 7 per cent in 2007, will slow down this year and next as its main export markets, the EU and the US, fall into recession.

The latest International Monetary Fund forecast puts Egypt’s growth at 6 per cent in 2009, but others expect it to be closer to 5 per cent.

The economic liberals who run Egypt’s government have decided that state intervention, rather than laissez-faire economics, is the best way to mitigate the slowdown.

The Trade & Industry Ministry is talking to the country’s banks to ensure that exporters continue to have ready access to credit.

Just in case it dries up, the ministry has increased the Export Credit Guarantee Company’s capital by £E300m ($54m).

Other proposed measures may be less effective - a fund to protect exporters against fluc-tuations in the value of the Egyptian pound is of no use at a time when the currency is depreciating against the dollar and treading water against the euro.

Another proposal to remove export tariffs on cement and steel, and revoke an export ban on rice, will do much more to help companies struggling in the current climate.

The second part of Cairo’s strategy is to freeze energy prices for companies. The government wants to remove all energy subsidies for companies by 2017.

By deciding against making subsidy cuts in 2009, the government is delaying the day when companies can no longer rely on artificially cheap energy.

A possible third element - reducing interest rates - is potentially the most tricky. The base rate of 11.5 per cent is far below inflation, which is at 21.5 per cent, and any cut could mean prices rise even faster.

There is a fine balance to be struck between stimulating the economy and fighting inflation.

News page 9

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