The Oxford Business Group - Countries : Egypt : Weekly Briefing, Volume 68

Egypt, January-4 Volume 68.
21.01.2004

Seven Challenges

Egyptian Prime Minister Atef Ebeid's annual policy speech, usually delivered at the end of December or early January, is usually an occasion for his government to celebrate its achievements. Rarely, his critics say, is it a time to outline any problems the administration might be facing.

This is why it came as a surprise to many that the speech Ebeid delivered for 2004 was both unusually frank and grim, revealing officially for the first time the financial strain put on the state by a depressed world economy, the depreciation of the Egyptian pound and the rising costs of imports.

Ebeid listed seven challenges facing Egypt, proposing solutions to each of them that have already come under fire.

The first challenge Ebeid listed was guaranteeing minimum goods and services for the poor.

"We have a strong and clear-cut commitment to shield the poor from external shocks," he said, adding that President Hosni Mubarak had told him to make this his priority.

Ebeid then added LE1.6bn to the current LE63.8bn (40% of the national budget) dedicated to provide services to the poor. The additional money will be used to finance subsidies on imported basic foodstuffs such as wheat for the government's subsidised bread programme. But he also warned that Egyptians had become complacent about the availability of subsidies, adding that these were becoming increasingly expensive for the government.

"Even worse, the majority strongly believe that they have an established right to services and goods free of charge or at subsidised prices," he said.

Food subsidies - especially on the five-piaster bread loaf, the staple diet of poor Egyptians - are a critical political issue in the country, with the last major civil disturbance the nationwide "bread riots" in 1977 after President Anwar Sadat had doubled the price of bread. Sadat was forced to reverse the decision. Ebeid said that his government was committed to providing subsidised bread and that the public sector would be taking over the distribution of wheat - previously in the hands of private companies - to guard against increasingly frequent shortages.

The second challenge cited by Ebeid was the widening budget deficit and rising public debt. Egypt's public debt currently stands at LE252.2bn, or 60.8% of GDP, while the budget deficit rose sharply compared to the previous year from LE25bn to LE40bn.

However, Ebeid said that in the last 12 months, the country's balance of payments had risen by nearly $1bn, going from a $456.3m deficit to a $546m surplus - figures that have since been contested by analysts. Egypt's foreign debt remained the same over the past year at $28.7bn, Ebeid added, but gave no explanation how the government could raise more income, saying only that the state would need to sell public assets and promote tax revenues.

But analysts and opposition MPs were high critical of one of Ebeid's plans for dealing with public debt, which would involve swapping the debts of certain state bodies for ownership of public sector enterprises. For instance, instead of paying the current 11% interest rates on the bank account in which the national pension fund is kept, the government would swap the debt for equity in state enterprises, in effect replacing the interest payments as the source of the pension fund's income. Quite aside from consisting of what one analyst called "anti-privatisation", the plan raises the question of how famously unprofitable - and unsaleable - public sector companies will be able to generate any income for the fund. The implications for Egypt's stalled privatisation programme and pension system are dire, say critics.

Ebeid also took the opportunity to defend his January 2003 decision to free float the national currency, which caused in effect a 50% devaluation. Many analysts have been critical of the way the float was handled, both because of its timing (just before an expected shock from the Iraq war) and the now widespread perception that despite claims to the contrary the government is still manipulating the currency.

During his speech, though, Ebeid put the blame squarely on exporters and foreign currency speculators for playing with the market - and said he would take steps to address the problem. The prime minister said the government had "encouraged" exporters to deposit three-quarters of their foreign currency holdings with banks to help meet the market's needs and make them "prove they are loyal to the supreme interests of their country".

Even more controversial than this step - which has already been applied to hotels - was his decision to create special public sector bank accounts that would offer interest rates on US dollar accounts between 1 and 1.5% higher than the international norm. The announcement caused consternation among bankers and economists, who said that such accounts would increase the dollar shortage while burdening the state with an increased dollar debt.

Another challenge outlined by the prime minister was unemployment. For years there has been a growing gap between the entrance of new jobseekers in the Egyptian economy - currently about 600,000 per year - and the government's ability to provide jobs - about 150,000 per year. Ebeid repeated his government's adage that providing jobs should not just be considered the government's responsibility, but also the private sector's. But he gave little in terms of concrete steps to curb unemployment, which has been rising over the past three years, or wean public expectation off the Nasser-era social contract that guaranteed a job for every graduate.

A crucial aspect of the government's problem in meeting expectations has been runaway population growth, with the number of Egyptians more than tripling over the past 50 years. Although Egypt already has a wide-ranging population control policy in place and has successfully lowered the growth rate, Ebeid took the opportunity to introduce a new three-year programme to combat under-age marriage in poor districts.

Another issue the country faces is combating construction on Egypt's limited arable land. Ebeid said the government would do more to encourage new housing communities in the desert (beyond the narrow strip of land irrigated by the Nile) and announced that a new law was being drafted to regulate the relationship between tenants and landlords, which should also help increase investment in the housing sector.

Also in need of reinforcement, Ebeid said, was the banking sector. Faced with an unstable currency policy and the lingering problem of non-performing loans and associated corruption scandals, the government has already begun a reform of the public banking sector and has appointed a host of new managers from the private sector. But by and large, loan defaulters - many of whom have escaped the country - have still to pay back what they owe, or reschedule their debt. The prime minister extended a new invitation to loan defaulters to negotiate with the government - a move tried several times before.

However, "This is a final invitation to all loan defaulters interested in finding a solution to their problems," Ebeid said. He has given them a one-month grace period to comply.

The seven points constitute a tough policy agenda, with each area of concern requiring major and serious efforts to crack. Yet talking about such issues frankly has to be a good start to tackling them. Many Egyptians are now waiting to see what happens next.

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