Reuters
CAIRO: The pace of Egypt s economic reform has slowed down as the government faces tough political choices on cutting spending and finds it harder to sell state-owned firms on a depressed stock market.
Reiterating the slogan Egypt is open for business, ministers have pledged to continue reforms praised by institutions including the IMF. But making changes is harder than when they started two years ago, economists say. Reforms so far have included cuts in income tax and import tariff levels and streamlining the banking sector. The government at first also managed to breathe life into a dormant privatization program. A lot of the reforms were sitting there waiting to happen; they just needed a decision, says Reham El Desoki, senior economist at EFG-Hermes in Cairo. Now they need more time to do their homework before they can announce changes. The main challenge the government faces is trimming its spending to cut debt levels, economists say. The budget deficit stands at about 9.3 percent of gross domestic product (GDP) for the current fiscal year ending this month, broadly unchanged from the previous year. The government agreed with the IMF on the goal to cut spending when a team from the Fund visited the country in April. The budget deficit and public debt in Egypt, while still manageable, are relatively high and cannot be sustained at current levels without compromising Egypt s economic potential, the IMF said. Trimming subsidy spending, especially on energy, is crucial to curbing the budget deficit. Nearly a fifth of government spending in 2006/07 has been set aside for energy subsidies. The government promises it will trim fuel subsidies, but is cautious about the public reaction and silent on timing. We will try and streamline it, target it better, Finance Minister Youssef Boutros-Ghali told Reuters in May. We are working on it. People don t realize how difficult this is. People are not used to having higher prices. Last time energy prices were changed was in 93, he said. Subsidy cuts are a sensitive subject in Egypt, where people rioted in 1977 when the government tried to raise bread prices. The poor would not feel a petrol price rise as much as the better off, but the government is still cautious. Most of the middle class see this (subsidy cuts) as detrimental to its interests. What you have now is a bad social contract; You don t change our basic interests and we will not struggle for democracy , says political analyst Mohammed El-Sayed Said. The government has experimented by raising some fuel prices. They did a litmus test with the increase in the price of diesel in 2004. There were no riots and in terms of effects on inflation, it wasn t catastrophic, El Desoki said. They have been preparing the public, she said. The privatization program has been knocked by the slump in the stock market, which has fallen more than 35 percent from record highs in February, making it harder for the government to sell shares through initial public offerings (IPOs). That has made the government look at other ways to sell firms. There is a trend towards principal investors and funds and financial institutions at the expense of looking to stock exchanges, until they recover their health, Investment Minister Mahmoud Mohieddin said in May. An example of this approach was the April announcement by Alexandria Mineral Oils Company that public sector shareholders planned to sell shares worth half AMOC s capital. Mohieddin has announced the indefinite postponement of the privatization of Egypt Aluminum. Part of the firm was offered in an IPO in February but there was not enough appetite to cover the shares offered. The government was also put on the back foot by an outcry from opposition parties over its plans to sell state-owned department store Omar Effendi at a price criticized as too low. People found it an opportunity to attack the minister of investment, saying he wants to sell Egypt, says Samir Radwan, economist at the Economic Research Forum think-tank. It has made them more cautious. They have looked into how to make the process very transparent and prepare public opinion for privatization in a much better way, Radwan says. But economists expect the government to push ahead with reform, even if at a slower pace, as the only way to push growth toward the levels needed to employ the hundreds of thousands who each year enter the job market. The government says the unemployment rate is 9.5 percent but independent economists say that is a significant understatement.
