A Revamp of Economic Policy

The market awaits the implementation of some very bold government promises.

This week Prime Minister Mustafa Madbouli told a press conference that the government was seeking to re-engage the private sector in the economy, targeting an increase in its share to 65 per cent, up from 30 per cent in fiscal year 2020-21.

The cabinet is also hoping to attract $10 billion in new investments over each of the next four years by offering stakes in state-owned assets in everything from renewable energy projects to real estate in new cities, desalination, and telecommunications projects and projects in the education sector. Madbouli revealed that assets worth $9 billion had already been identified, and projects worth a further $15 billion are being evaluated.

The drive to attract private sector participation aims to spur growth, create jobs, and boost competitiveness, and is needed, says the government, to offset the impact of the war in Ukraine on the Egyptian economy.

Madbouli estimated that the crisis has already cost Egypt LE130 billion in direct losses on the back of higher commodity prices and higher interest rates, and LE335 billion in indirect losses because of additional spending on items such as wages and pensions, social safety nets, and tax breaks.

He also revealed that a paper will be issued by the end of this month detailing the sectors from which the state plans to exit, and those in which it will continue to be a major player.

Head of the Egyptian Federation of Investors Associations Muharram Hilal said that there was plenty of room for the private sector to increase investment and contribute to the growth of the economy, though he understood why the state’s share of the economy had grown in recent years.

According to Madbouli, government intervention in the economy in the years immediately prior to 2014 was necessary because unemployment had hit 13.2 per cent, GDP growth was trailing at 2.2 per cent, the budget deficit stood at 13 per cent, and net international reserves had sunk to $13.6 billion.

Hani Berzi, head of the Export Council for Food Industries, believes the state should steer clear of sectors in which private companies had a track record of success, and that the state’s entry into activities such as cement, steel, and construction had compromised the private sector’s ability to contribute to economic growth.

He also thinks the state should exit loss-making sectors such as aviation and railways, arguing that state involvement results in an unjustifiable drain on the public purse coupled with bad service.

Banking expert Amr Bahaa agrees. For the private sector to play an active role in the economy again, he says the government will have to unpick the policies that pushed it away in the first place and re-establish a level playing field for investors. It will also need to overhaul judicial procedures and simplify the tax system.

The tax rate does not matter, he argues, as long as the rules are clear.

Alexandria University professor of economics Mohamed Abed warns that the government must carefully consider the assets of which it disposes lest it sell off the birthright of future generations.

He also thinks the Egyptian Wealth Fund should be given a greater role in managing and investing public owned assets transparently.

What is important, he says, is for the government to exercise its regulatory functions without favouring anyone.

Incentives announced by Madbouli to encourage the private sector include a simplified process of land allocation for industrial purposes under which land is granted on usufruct terms and priced on the basis of the cost of infrastructure. Investors will also see a reduction in licensing red tape, and additional incentives for green projects, projects in the health sector, and investments in new cities will be offered.

Madbouli’s announcements coincided with a visit by a US delegation of green technology companies organised by the American Chamber of Commerce in Cairo.

During his meeting with the delegation, the prime minister underscored Egypt’s interest in attracting investments in the growing green energy sector.

Such projects, according to the government’s new plans, would be granted what was termed a “golden licence” which would circumvent cumbersome bureaucratic procedures.

In its bid to boost employment opportunities and economic growth, the government also plans to establish 300 factories in cooperation with the private sector, creating 700,000 new jobs.

According to a cabinet statement, Madbouli told the US delegation that GDP growth is expected to come in at 4.5 per cent, a one point drop in the figure given in the 2022-23 draft budget presented to parliament last week.

Abed cautions that the full impact of the Ukraine crisis has yet to make itself felt. According to Madbouli, the Ukraine crisis could cost the global economy $12.5 trillion by 2024, wiping out many of the gains made in the last 15 years, and global debt is at a 50-year high and inflation has reached unprecedented levels.

To help the Egyptian economy overcome the adverse conditions Madbouli said the government will offer support to exporting industries to increase overseas sales by $100 billion within five years, and encourage $20 billion worth of imported inputs substitution.

Egypt’s total imports were around $75 billion in 2020.

Berzi supports specific incentives for exporting industries rather than tax breaks for the entire industrial sector, pointing out that “we tried tax breaks before and they did not work.”

Banking expert Bahaa, however, wants to see support for all industries that depend on local components, including spinning, weaving and textiles, and fertilisers, and argues that small and medium-sized enterprises need to be developed as feeder industries for larger manufacturers.

He would also like to see manufacturers set up projects in different parts of the country rather than everything being centred on Cairo.

Madbouli also said Egypt expects to conclude a loan agreement with the International Monetary Fund within months, without specifying the amount, and that the government is targeting a 6.2 per cent budget deficit in the current fiscal year.

According to the prime minister, the bulk of Egypt’s debt — 91.2 per cent — is medium to long maturity, and only 8.8 per cent is short-term debt. Egypt’s external debt had reached $145 billion by the end of 2021, and the government is targeting a reduction in total public debt to 75 per cent of GDP from the current 85.8 per cent by 2026.