Delivering on promises

Sherine Abdel-Razek and Niveen Wahish , Tuesday 3 Jan 2023

The government is responding to the demands of market players, write Sherine Abdel-Razek and Niveen Wahish



With the advent of the new year, the government came through on measures intended to reactivate the economy. It finalised the State Ownership Policy Document, setting out its plans to allow greater private sector participation in the economy.

“The government intends to fully exit 62 sectors, maintain or phase out its involvement in 56, and maintain or step up its role in 76 others,” Prime Minister Mustafa Madbouli said.

The document aims to boost private sector participation in the national economy from 30 per cent to 65 per cent in three years. It comes as part of a package of structural reforms to encourage investment and is a component of Egypt’s 46-month arrangement with the International Monetary Fund (IMF) under the Extended Fund Facility (EFF).

The economic programme supported by the EFF encompasses a comprehensive policy package that includes “wide-ranging structural reforms to reduce the state footprint, level the playing field across all economic agents, facilitate private-sector-led growth, and strengthen governance and transparency in the public sector”, according to the IMF website.

“The State Ownership Policy — with the primary objective of establishing a clear framework that regulates the relationship between the state and the private sector across various economic activities — is a critical first step down this reform path.”

Khaled Al-Sayed, managing director of the Synerjies Centre for International and Strategic Studies, says the ownership document is a good initiative but further clarity on the modes and timeline of implementation is needed.

On Monday, the Central Bank of Egypt (CBE) said that letters of credit (L/Cs) were no longer required of importers. L/Cs, in place since February 2022, had choked the economy by causing a backlog of imports of finished goods and much needed production inputs. The CBE had imposed L/Cs to control imports and limit demand for hard currency which has come under strain since the breakout of the war in Ukraine.

The Russia-Ukraine conflict triggered abrupt and large-scale portfolio investment outflows and underscored the pre-existing challenges facing Egypt’s external balances, noted the World Bank’s December Egypt Economic Monitor. While the oil trade balance turned into a net surplus and non-oil exports accelerated, the trade deficit continued to widen during fiscal year 2021-22, the report said. Moreover, foreign direct investments (FDIs) remain below potential despite a rebound.

The scarcity of foreign currency, inflated import bill and the interest rate hiking trend followed by central banks worldwide are all weighing down on the pound, leading it to lose ground against the dollar. It has lost more than 50 per cent of its value since the beginning of 2022, reaching LE24.7 per dollar on the official market and more than LE30 on the thriving black market.

Allen Sandeep, head of research at Al-Naeem Holdings, does not expect the lifting of the L/Cs requirement to affect the value of the pound negatively. The sharp depreciation of the pound, he said, will dampen demand on imports this year. Once the import backlog, estimated at between $7-9 billion, is cleared at ports, he expects banks (through the interbank market) to determine the exchange rate on a fairer/more balanced footing.

Most of the backlog should be cleared within two months and there are already indications that the foreign exchange liquidity situation is improving. The parallel market rate is now just 15 per cent shy of the official rate, versus 30-40 per cent a few weeks back. The exchange rate should eventually unify at around LE27-29 per US dollar, according to Al-Naeem’s brokerage estimates.

A flexible exchange rate regime is one of the requirements of the agreement with the IMF.

“The objective of policies under the fund-supported programme is… for the value of the Egyptian pound to be determined freely against other currencies… which would avoid the build-up of a chronic imbalance in the demand for and supply of foreign currency in Egypt and preserve the FX reserves of the central bank,” said the IMF website.

The only sustainable solution for solving the fiscal and monetary challenges facing foreign currency in Egypt is by the country to become an export-oriented economy, says Al-Sayed.

This can be achieved in the short term by realising Egypt’s export potential either in sectors in which it has a unique selling point or those for which there is increased global demand. The three sectors Al-Sayed identifies in the short-term are chemicals and fertilisers, rubber and polymers, and textiles and apparel.

He says the $100 billion export target remains out of reach given current policies.

“To boost exports, we need to address the issues manufacturers are facing in these sectors to facilitate their export cycle,” he said. According to International Trade Centre data, Egypt is capitalising on just 40 per cent of its trade potential in chemicals and fertilisers, 45 per cent of its potential in polymers and rubber, and 37 per cent of trade potential in T-shirts.

“We could easily see an increase of up to 20 per cent of trade volume in these sectors if we improve our export targeting,” he said.

In the meantime, the government needs to take concrete steps to reassure investors over policy stability, foreign currency regulations and a simplified tax regime. “We need to bear in mind the increased regional competitiveness of investments directed to countries such as Saudi Arabia, the UAE, Bahrain, and Morocco which are turning into investment magnets,” he warned.

Al-Sayed believes that though the government has ideas on how to attract investment, such as the golden licence, but they are not well communicated.

He also highlights the importance of carefully studying policies that and simulating their impact on the economy before they are introduced.


* A version of this article appears in print in the 5 January, 2023 edition of Al-Ahram Weekly

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