Why hold the economic conference now?

The conference is intended to come up with a roadmap for the management of the economy and it is good that so many concerned parties are represented — we have the government, business organisations such as the Federation of Egyptian Industries and chambers of commerce, economists and representatives of political parties. But I should note that if we are talking about economic problems, we need to remember that business is not just about businessmen but also about workers. Workers are the most affected by the current circumstances. They should have been represented too.

Where does Egypt’s macroeconomic management stand?

There is a lack of cohesion between investment, economic growth and monetary policies related to the exchange rate and interest rates, and policies on public spending. The disjunctions mean the policies are failing to bring about [the aspired] justice and redistribution of income.

The government is directly responsible for this lack of cohesion, which has also caused problems to the industrial sector. This was very clear last summer when the Central Bank of Egypt abruptly decided to change import procedures by requiring a letter of credit for all imports. There should be a single entity that works on coordinating economic policies among all concerned bodies. This is essential.

Yet despite its economic difficulties, Egypt’s economic conditions are better than those of some developed countries.

Why has Egypt been so economically affected by the Russia-Ukraine war?

Because our economic policies make us vulnerable. We need to change these policies. We need to work more on expanding agricultural and industrial production.

There is an exaggerated focus on the real estate sector. It is a part of the rentier economy that allows for very high profit margins but one that is subject to significant ups and downs and does not make a significant contribution to increasing GDP.

Meanwhile, the government has failed to give due attention to the manufacturing and agricultural sectors. This has contributed to our economic vulnerability.

What of Egypt’s monetary policy?

Our monetary policy has been harmed by an exchange rate system directly linking the pound to the US dollar and the government’s decision to open the door wide to hot money (currency that quickly and regularly moves between financial markets and ensures investors lock in the highest available short-term interest rates). The central bank has always tried to control the price of the pound against the dollar. This policy has to be changed. We need a new monetary policy that is independent of the fluctuations of the current exchange rate system.

We need regulations that control the movement of hot money. We all saw what happened when the US Federal Reserve started to raise the interest rates on the US dollar and hot money exited Egypt.

Clear regulations are needed for the introduction and withdrawal of capital. For example, we could require a minimum six-month timescale for foreign investment, including those in debt instruments. Nor do I think it wise that all foreign capital be invested in debt instruments. Part of this capital should be directed to the stock market.

One thing that needs to be urgently addressed is the exchange rate system. The Egyptian pound should be linked to a basket of currencies which could include the euro, sterling, the yuan and the yen. The choice of currencies should be decided on the basis of supply and demand situation in the global currency market. The advantage of such a system is that it guarantees a range of competitiveness for the economy. It also allows for a safely flexible operation of exports and imports.

What do you think about the Central Bank of Egypt’s monetary policy decisions?

The Central Bank of Egypt is focused on targeting inflation. It has dealt with inflation strictly as a monetary issue, assuming a direct link between liquidity and inflation, assuming that increasing interest rates will lower inflation.

Recently, however, the central bank opted not to increase interest rates. This is not a sign that it has opted for new solutions but is a function of the fact that increasing the interest rate by a mere one per cent would have cost the budget something between LE5 and LE6 billion. It would have also increased domestic debt, which has already reached LE3.8 trillion. Instead, the central bank chose to raise the mandatory reserve ratio to absorb liquidity in the market.

What are the most pressing economic problems in Egypt?

The limited volume of savings — a maximum of 11 per cent of GDP — is a key problem. Although average income in Egypt is higher than in India — according to World Bank figures Egypt’s annual average income for 2021 was $3876 while in India it was $2277 — the average savings rate in India is estimated between 24 and 26 per cent. This is because India’s policies encourage saving. If Egypt adopted policies to encourage saving, our percentage could go up to 20 per cent of GDP. I would have liked to see this issue take a prominent place on the agenda of the Economic Conference.

Egypt also needs to introduce changes to its foreign trade policy in order to benefit from the system of the World Trade Organisation. For example, the General Agreement on Tariffs and Trade (GATT) allows Egypt to put in place regulations on imports in cases of emergencies which is something that we can use to our advantage.

What we need now is a carefully designed policy on imports. I think we need to prioritise importing raw materials rather than final products though we should avoid a blanket ban on final product imports.

Manufacturing policies should focus on those sectors in which we have a competitive edge and that we want to and can expand. Meanwhile, we should create a tax systems that helps these industries. We should also undertake research to help these specific sectors.

My worry is that we became too focused on real estate and construction at the expense of industry and agriculture.

As far as agriculture is concerned, our priority should be to increase strategic crops, on top of which is wheat. After suffering famine in the mid-20th century India succeeded in increasing its harvest of wheat and is now exporting wheat thanks to its vertical expansion policies. India effectively carried out a green revolution by focusing on high-yielding varieties.

Egypt, too, can make a significant increase in its wheat production. At present, each feddan of wheat produces between 16 and 18 ardebs. With a bit of research and development, we can yield 24 ardebs per feddan and raise Egypt’s self-sufficiency in wheat from 50 to 70 per cent.

Farmers should be encouraged to grow wheat. During my mandate as minister [of supply] I made a point of giving farmers a higher price than the international rate to ensure they didn’t hesitate to supply the ministry with wheat.

Concentrating on agricultural research for all strategic crops has become a matter of life or death for Egyptians.

 

*This interview was conducted ahead of the Economic Conference that was held 23-25 October.

**A version of this article appears in print in the 27 October, 2022 edition of Al-Ahram Weekly.