Reforms ready economy for real growth

19 April 1996

SOMETHING is stirring in Egypt's economy. After years of slow growth and gradual adjustment to market disciplines, Egypt is poised to enter a more dynamic phase. Both investment and exports are rising fast, and, uniquely, government forecasts of growth rates of 5 per cent and more are seen as realistic rather than absurdly optimistic.

Such an improvement in Egypt's economic performance is long overdue. Since President Mubarak assumed power in 1981, economic growth has struggled to keep pace with population growth - even though the latter has come down to 2 per cent a year from 3 per cent. The government has been involved in a dour struggle with the IMF for most of the Mubarak period, to prevent Egypt sinking under the weight of its foreign debt burden.

Egypt has now done most of what the IMF has asked of it - devalued, deflated and deregulated - and has been given debt relief in return. The IMF is now discussing a new agreement that would trigger the final $4,000 million tranche of the debt relief package.

With its fiscal and monetary house more or less in order, the government can now devote itself wholeheartedly to stimulating growth, and thereby address the daunting problems of poverty, unemployment and inadequate social services that pose serious threats to Egypt's long-term stability.

To achieve these goals, Mubarak appointed a new prime minister in January, in the first substantial cabinet change in almost a decade. The new premier is Kamal el-Ganzouri, a US-educated economist who has, reputedly, undergone a gradual conversion from central planning to free market policies, mirroring Egypt's own progress down this path.

Quick impression

El-Ganzouri is hardly a newcomer - he first joined the cabinet in 1984. But he has quickly impressed the business community with the make-up of his economic team, and with his insistence on a collective cabinet approach to economic policy issues.

The key appointment has been that of Mohieddin el-Gharib as finance minister.He previously served as head of the Investment Authority, and his familiarity with investors' concerns on tax issues has encouraged business people to believe that he will move quickly to deal with their complaints. 'El-Gharib is very progressive,' says National Bank of Egypt chairman Mahmoud Abdel-Aziz. 'Having him as finance minister is like the prosecutor being replaced by a defence lawyer.'

El-Gharib has already made his presence felt. He has announced the waiver of surcharges on tax arrears that are settled by the end of the current fiscal year on 30 June, and has decided to make income from mutual funds tax-exempt. Banks have also been led to understand that he will act quickly to resolve the question of taxes levied on banks' provisions for doubtful debts. Industrialists have been encouraged by hints from El-Gharib that he plans to cut, if not abolish, sales tax on capital goods imports.

El-Ganzouri has made plain his commitment to encouraging investment. On taking office, he lamented that Egypt is getting only about $400 million a year in foreign direct investment, considerably less than other countries in a similar phase of development. On this front, early indications are extremely positive: the Investment Authority has reported a surge of interest in the past few months, with £E 7,800 million in new capital invested in January and February 1996, from local, foreign and Arab sources. This compares with £E 2,850 million in the same period of 1995. Most encouraging, foreign investment during those two months rose to £E 1,300 million from just £E 300 million in January and February 1995.

'The response of foreign investors will be the litmus test for the new financial environment,' says Abdel-Aziz. The Investment Authority figures suggest foreign investors are starting to enter the market more forcefully. What has so far been lacking is any sign of major indirect investment flows into listed Egyptian companies.

Cairo bankers are now increasingly optimistic that things are about to change. Misr International Bank senior general manager Mohamed Ozalp says he was surprised by the level of interest shown in Egypt by US investment houses during a visit to New York by a team from the Egyptian-American Chamber of Commerce. 'Maybe Egypt's time has come,' he says. 'Confidence is higher than I've seen it for a long time, and, in addition to all the new government's promises, the economy is doing well.'

Most bankers agree that the privatisation programme needs to gain fresh momentum before the new investment flows can materialise. Offerings of public sector shares on the stock market virtually dried up in the second half of 1995 and the market has been drifting down ever since.

Says Ahmed Elbardai, president of the Egyptian branch of Citibank: 'The price/earnings ratios of actively traded firms average 9 per cent, and dividends are 10-12 per cent - by any reckoning, this is a fabulous country to be in.'

Small Egyptian investors have tended to be less enthusiastic. They have lost out badly in some privatisation issues, and they have preferred the security of the 10 per cent tax-free returns they get on bank deposits. Elbardai says that Egypt needs to get on the International Finance Corporation (IFC) emerging markets index to attract foreign investors. 'We need to speak the investors language, and above all, we need to sell some solid stakes in privatised firms' he says. 'For once, let's not be so concerned about the right price - the aim should be to jump-start the process, and the issue here is the buyer.'

The advantages of stimulating foreign investor involvement are self-evident for most Egyptian bankers. 'We need major institutional buyers to provide the new technology public sector firms are crying out for, to turn around their management and to stay with the investment for the long term,' says Abdei-Aziz, whose bank is setting up two foreign-dominated privatisation investment funds to achieve this purpose (see page 32).

Another pressing reason to push ahead with privatisation is the need to absorb the excess liquidity in the banking system.This excess is estimated by one banker at about £E l0,000 million, defined as 'funds that banks are not able to lend or place in instruments with maturities of more than three months'


El-Ganzouri's government has indicated it is well aware of these issues and is launching a new phase in the privatisation programme. The groundwork for this is being carefully laid by the cabinet, taking away part of the burden of privatisation from the Public Enterprise Sector Minister Atef Obeid. The next few months should see a steady stream of initial public offerings of privatised stock, and the conclusion of the first few deals involving majority stakes in public sector companies being sold through the stock market.

Also on the agenda is a new unified company law, that will replace the three principal company laws now in use, and provide a new system of investment incentives. The law is also expected to include a key clause on corporate taxation that analysts say will stimulate institutional investment in the stock market. At present, all capital gains that institutions make on share transactions go into general income and are subject to the full 42 per cent rate of corporate tax. The new law is expected to allow institutions to make a separate declaration for capital gains, which are taxed at only 2 per cent. 'This could be a turning point,' says Cairo broker Hamdy Rashad. 'Instead of having only 30 or so institutions investing on the market, we could have 1,000.'

The new investment law will be accompanied by changes to the banking law, to allow foreign banks to own majority stakes in local joint ventures. Banks expected to take advantage of this, and thereby wrest control over management, include Barclays Bank, Societe Generale and Banque Nationale de Paris.

The build-up of investor interest in Egypt and the recent launch of a number of major new industrial projects (see page 41) have come at a propitious time for the government. In November, Cairo hosts the third Middle East economic summit, which will provide an ideal opportunity for the government to advertise Egypt's appeal for investment and new project work. And, as one banker notes, 'The Cairo conference provides a natural deadline for the govemment to make good all the promises it is now making.'

Exchange rate: $1 = £E 3.39

Exports by category, 1994/95

Egypt's exports reached $4,597 million in the fiscal year ending 30 June 1995, a record performance by a considerable margin.

The government is aiming to build on this achievement and push annual exports over $10,000 million by 2000. The key to the increase has been manufactured goods. Clothing and textiles exports almost doubled to $1,077 million in 1994/95, and metallurgical goods exports' rose by a similar margin to $498 million.

Cotton exports recovered to $306 million after a series of dismal years, and are expected to increase further, thanks to liberalisation measures (see page 35).

Source. Central Bank of Egypt

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