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Egypt: Questions concerning economic management

Ziad Bahaa-Eldin , Thursday 26 Nov 2015
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Views: 3573

As 2015 comes to a close, the Egyptian economy is going through a tough time—a stark change from the optimism that peaked in March with the Sharm al-Sheikh economic conference. Official figures indicate that growth this year is slowing to close to 4 %, Egypt’s credit rating has dropped, domestic debt is nearly 90% of GDP while foreign debt rose from $43 to $46 billion this year alone, and cash reserves have dwindled to $16.8 billion.

Most important, the public continues to suffer from the triple whammy of rising prices, scarce jobs, and deteriorating public services.

Some of this is linked to factors beyond our control, like the floods in Alexandria and Beheira, the Russian jet crash, waning Gulf support, and the slowdown in global trade. But a bigger part is due to erratic state programs and policies and the absence of a clear economic vision, problems manifested in four primary contradictions.

The first is in investment. While the state has declared its determination to increase local and foreign private investment in order to boost growth, investor confidence has fallen over the past few months because of the Government's attachment to the flawed new investment law, the exponential increase in public debt, disruption in the currency market, increased government red tape, and the arbitrary harassment of businessmen, some of whom have had cases pending for years with neither conviction nor acquittal.

These combined factors have made both foreign and local investors more cautious and circumspect.

Secondly, on one hand the state has declared its continued support for popular demands for social justice and has taken some steps to back this up. It has streamlined the bread distribution system, implemented the Karama and Takaful cash transfer programs as well as a social housing project, and recently offered some foodstuffs at set prices.

But on the other hand, it lowered the income tax rate from 30 to 22.5 percent, raised the price of electricity and public transportation, and increased fees for government transactions.

More significantly, it has made no tangible progress in encouraging small and medium enterprises or reducing unemployment. Furthermore, it has allocated only 0.1 percent—just one-thousandth—of the state budget, LE820 million, to the development of informal areas while it moves ahead to build a new capital city.

Thirdly, in terms of fiscal and monetary policies, it’s not clear whether Egypt is pursuing austerity or stimulus as a policy.

One wing of the state seeks to reduce the deficit to 9% of GDP, increase tax revenue by 32% on last year, enforce a new civil service law to limit the growth in government wages, introduce a VAT, and raise interest rates. All of these are austerity policies.

But another wing of the same state is aiming for a growth rate of 5% or more by increasing public spending and implementing megaprojects whose cost and sources of funding remain unknown.

The fourth and final contradiction concerns the role of the state in the economy.

The growth projections used by the Finance Ministry and Ministry of Planning assume that the private sector is the engine of development, the source of growth, investment, employment, and export. But the state’s actual behavior belies this. It is actively intervening in the economy, implementing projects, setting prices, reclaiming land, distributing goods, and selecting investment fields.

If these actions were part of an overall socialist orientation, it would be understandable. Instead, the state is intervening in all aspects of the economy, increasing its control and domination, without a clear social component geared to the interests of poor and low-income citizens.

We face plenty of external problems and pressures, but contradictory economic policies do not help address them. They only exacerbate them and make it seem as if Egypt has three economic governments instead of one.

So what can be done?

In just a few weeks, parliament will convene, the new Central Bank governor will take over, and a new government will be formed.

The state should take this opportunity to reassess its economic path, consult with social and political actors, and make use of unexploited expertise, so that with the new year it can unveil a clearly delineated, consistent economic program that reflects specific social choices.

Sticking with the current ambiguity and contradiction in managing the economy is no longer viable.

The writer holds a PhD in financial law from the London School of Economics. He is former deputy prime minister, former chairman of the Egyptian Financial Supervisory Authority and former chairman of the General Authority for Investment.

This article was published in Arabic in El-Shorouq newspaper on Tuesday, 24 November.

 

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ayman
29-11-2015 09:37am
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Flawed
I think the major problem is the govt's view, a hangover from Mubarak's system, that mega-projects alone or mostly alone could lead the economy. This economic model is flawed. First, it does not allow SMEs to flourish due to the lack of attention and funding from the government (education, training, development). Second, it usually leads to social injustice due to biased laws in favor of the businessmen to lure them into investing in these large projects. How about diverting a few of these billions to help small investors (40-100 thousand L.E) to build a small business. Help is in the form of providing micro loans, training centers to teach how to manage a small profitable farm land, fish farm, hand woven carpets, pottery etc. and help in marketing e.g providing show rooms inside and outside the country and contracting with an international marketing firm to market the products. We should look to countries such as Korea, Japan and Malaysia to learn how they helped SMEs.
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Abd`Elazez hashem
27-11-2015 09:18pm
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The long awaited solutions
dr.ziad is a respectful economic expert,and his article is an excellent description of the current state of our economy ,so i am waiting his next article, to provide us and determine the urgent or short term and the long term practical solutions to rescue our economy in the few coming years with the new parliament and government.
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Al
28-11-2015 03:24pm
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New international government
No incompetent Egyptian Government would be able to solve these problems. Egypt need an International panel of economic experts who are not corrupt, clueless, or under the control of the Army Banana Republic!
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Sam Enslow
27-11-2015 09:08am
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Coordination
The institutions of the State seem to be at odds with each other. After the crash of the Russian plane, great concern was expressed over the economy in Sharm. There are many foreigners in Shark that have invested in small businesses. They prepared to share the hardship with Egyptians. Some if these firms may employee only one or two Egyptians, but now every job counts. What happens? No new laws have been passed, but someone decided these people, doing what Egypt needs and said it needs, are told to renew their visas, they should leave the country and return. This weakens their ability to ride out the economic storm. The result is more unemployed Egyptians. It should be remembered that in Egypt one pay package may be the only one a family has. Egypt has a habit of expressing a desire for something and then fighting those attempting to provide it. Most countries wanting foreign investors or tourists put on a 'charm offensive' but not Egypt.
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Tut
26-11-2015 05:34pm
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The fifth economic blunder
The article clearly and objectively highlights 4 economic weaknesses this government either caused or failed to resolve: lack of real investment policies, lack of social justice, incoherent fiscal policies of stimulus vs austerity, and finally squashing the private sector. One absent blunder from the mix, is arguably the most dangerous, which is the diversion of all resources and limited funds to the Army; buying and ordering massive amounts of unneeded arms, costing tens of billions of dollars while the country is on the verge of bankruptcy. This 5th policy is more harmful than the other 4 because of its disastrous impact, not only on the economy but also on the political, social, and democratic directions of this country. The Army continues to act as if it’s an autonomous country within the country; completely detaching itself from the economic fate of Egypt. It’s owning massive lands, running economic sectors, and now sucking the limited fiscal resources to buy a massive arsenal.
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Al
28-11-2015 03:35pm
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Not the Army's fault
You keep blaming the army for doing what armies do, buy arms. They are preparing for Armageddon when the economy fully collapse under this incompetent government and real revolution breaks out. The army has to be able to defend its country from the 90 million Egyptians rising up against poverty, dictatorship, and injustice.
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