The plaudits have been rolling in for Egypt's economic performance in the past few months, and, more to the point, the dollars from foreign investors have too. Bankers estimate that $200 million has been invested in Egyptian securities since mid-summer, and the year-end total is likely to be about $500 million. Now that vehicles are in place to channel these investments international funds targeted on Egypt and reliable custodial services much larger sums are expected next year and thereafter.

The interest in Egypt on the part of international and domestic investors alike has been stimulated by the impressive economic data, the injection of pace and purpose into the government's reform efforts and the availability of cheaply priced stocks.

The government has succeeded in reducing inflation to around 7-8 per cent from more than 20 per cent through tight fiscal policies, it has built up foreign exchange reserves of about $18,500 million and kept the current account in balance. Privatisation has also moved ahead in leaps and bounds this year. thanks to a much more co-ordinated approach by Prime Minister Kamal el-Ganzouri. Awareness of the potential of Egypt has been boosted further by the international flotation of two tranches of privatisecl stock, in Commercial International Bank (Egypt) and Suez Cement Company.

However, Cairo business people and economists emphasise that, for Egypt to derive the full benefits of its present favourable status, the momentum of reform must be maintained and investment in securities must be supplemented by direct investment in new projects and radical improvements in general living standards.

'If the pace of reforms is sustained, we envisage a higher trajectory of growth, from 4-5 per cent now to perhaps 6-7 per cent in two or three years,' says one World Bank official. The bank and the IMF are now encouraging the government to press ahead with sweeping reforms of the tax system, to continue the privatisation programme and liberalise the trade system.

The IMF board is due to approve a new two-year standby credit facility on 11 October. This will have two basic functions:

it will immediately trigger the release of the $3,900 million final tranche of a debt relief package agreed with Paris Club creditors in 1991; and it will establish the framework for the next stage of reforms.

Privatisation and tapping private funds for new infrastructure projects are integral elements of the new programme (see page 8; pp 15-18). But equally important are the changes envisaged in the whole way the Egyptian government operates. The key issues are:

Taxation The government is putting the finishing touches to a new investment and company law that will change the system of tax exemptions for projects. The law will replace current investment law 230, passed in 1989, and the main private company law 159, of 1981.

The government has tried to model the law on systems used in other successful developing countries, in particular in southeast Asia and Latin America. Cairo sources say one of the changes will be to replace standard tax holidays for new projects and expansions with discretionary tax benefits.

targeting incentives on certain types of project in certain locations, and setting limits on the extent of tax forgiveness.

The law is aimed at simplifying investment procedures, but the government is also keen to ensure that it is not unnecessarily deprived of corporate tax revenues. 'As things stand, it is very simple to exploit loopholes in the law to extend tax exemptions,' says one Cairo businessman.

If the government succeeds in recapturing this corporate tax base, it should provide the leeway for the liberal-minded finance minister, Mohieddine el-Gharib, to cut personal income tax. He has said he aims to cut the top rate to 30 per cent from 50 per cent, and the bottom rate to 10 per cent from 20 per cent.

Another important area for tax reform is in the banking sector. 'I can confidently say that no bank in Egypt has up-to-date tax accounts,' says one Cairo banker. 'It is impossible to do so unless you pay everything the authorities ask for without question.'

A major bone of contention is the tax deductibility of provisions. Bankers say things would work much better if a formula was set for the appropriate level of provisions for banks. Any disputes would be adjudicated by an independent committee.

'The key element in this whole debate is that once a judgement is reached in the courts on ambiguous questions, the precedent should be set and respected,' says a banker. 'What happens now is that you can win a judgement, but you still have to go through the whole process again the next year.'

IMF officials say reforms to the tax and judicial systems will be central elements in the new programme. The government's willingness to address problems in these areas has been welcomed by business people.

However, they accept that certain more obscure obstacles to investment such as the insidious influence of the military establishment will not disappear merely by virtue of more user-friendly legislation.

Trade liberalisation The government will enact a further cut in its tariff rates as part of the IMP deal, taking the top rate down to 50 per cent. But Cairo economists say this is a side-issue compared with the negotiations under way with the EU about a partnership agreement. This will entail agreeing a precise programme of tariff reductions, eventually leading to the elimination of all tariffs on trade with the EU.

The difficulties for Egyptian firms adapting to the resultant competition with EU companies will be compensated by substantial financial and technical support from the Europeans. The EU partnership would also act as a stimulus for Egypt to lower its tariffs with the rest of the world, economists say.

'They could be importing goods from European firms that are more expensive than those they could find in Asia, for example,' says a World Bank official. 'If they cut tariffs across the board, they would not have to face this problem.'

The trade question worries some Egyptian businessmen intensely, however. They judge that Egypt is not equipped to take on the industrialised world on equal terms. 'If the price of getting the last bit of debt relief is selling another 20 public sector companies, so be it,' says one leading company director. 'But if it is higher, exposing us to the full blast of international competition, I am afraid it will be a catastrophe.'

The answer, in the view of those business people who remain sceptical of the allembracing benefits of global free trade, is for the Egyptian government to revert to the tried and tested stratagem of prevarication.

This would entail going through the motions of liberalising trade, introducing some halfmeasures and finally wearing down the international negotiators Egypt is dealing with. In the case of the EU discussions, this appears to be happening already, as the two sides remain far apart on crucial questions, notably opening up European markets to Egyptian agricultural products.

Social policy The recent advances made by the Egyptian economy have been strictly relative. Most Egyptians live in grinding poverty. Unemployment is running at about 15 per cent, city dwellers live packed into poorly built houses, and are offered barely adequate education and health services.

Cairo has been dubbed the third-noisiest city in the world, and it is demonstrably one of the most heavily polluted. Utilities are in better shape, mainly because of the huge aid-financed investments in infrastructure over the past 20 years.

El-Ganzouri has shown he means to tackle these problems head on. He has pushed through a new housing law, aimed at stimulating the rental sector, and he has abolished inheritance tax on property. He has also set in motion a scheme to encourage the rental of apartments built in the new industrial cities. Most of the housing in these cities has been designated for sale, and as such has been out of the reach of workers.

El-Ganzouri has also taken a potentially crucial step towards dealing with the appalling misuse of resources in education, by allowing the creation of private universities. Economists say the Nasserist policy of providing free university education to all has had the effect of diverting resources away from primary and secondary education. The cost per student in university is as much as 40 times that for a schoolchild. The failure of the Egyptian education system is starkly apparent in the level of illiteracy, which has remained stuck at 50 per cent for the past 20 years. El-Ganzouri has taken a close interest in education, insisting for example that schools should have play areas most don't.

The benefits from dealing with these longneglected issues will take some time to come through. However, economists say the government at last has the opportunity to increase spending in social sectors, now that its revenue base is stronger, and the private sector is starting to take some of the responsibility for infrastructure finance.