Report addresses economic and political reform
CAIRO: Once again, the Economic Intelligence Unit has come out with its annual country report on Egypt, and this year the country has gotten mixed reviews.
According to the 2007 country report, the Egyptian government seems to have backtracked on its promise to deliver political reform following recent violent crackdowns on public protests. The Economist Intelligence Unit believes that the tightening of political control is partly motivated by the strong performance of the banned Muslim Brotherhood in the parliamentary election in late 2005. On the other hand, economic growth picked up in fiscal year 2004-05 and is forecast to accelerate in 2005-06 and 2006-07 to 5.7 percent and 5.9 percent respectively.
On the political front, the report states that the political liberalization that the president claimed would be in place during the multi-candidate presidential elections seem to have come to a standstill and, in fact, the elections were never truly democratic. In addition, the U.S. Congress cut aid to Egypt by 10 percent in early May.
The success of the Muslim Brotherhood in the 2005 parliamentary election sparked worry within the National Democratic Party. However, some younger, more dynamic figures within the ruling establishment argue that an effective way to counter the Islamists would be to accelerate the program of economic reform embarked on by Prime Minister Ahmed Nazif’s cabinet, stated the report. This, they contend, would achieve more rapid, sustainable economic growth, which would raise living standards and, over the longer term, blunt the appeal of the Islamists.
While there is a real risk that the increase in support for the Brotherhood could constrain the process of reform, this scenario is unlikely to come to fruition because it would socially dislocate the president, whose caution is well established, according to the report. Even so, the government is likely to go ahead with its planned reforms, with the aim of raising the rate of economic growth and strengthening the capacity of the private sector to decrease unemployment and consequently reduce pressure on the public finances.
Reform measures that have been introduced include sharp cuts in income tax rates and customs duties. The cabinet has also bolstered privatization, consolidated a troubled banking sector, began to overhaul commercial legislation and tackle deeply rooted bureaucratic constraints. However, this approach carries risks, states the report. If commitment to reform weakens, economic activity might not strengthen sufficiently and privatization might not accelerate enough (even when taking into account the widening of the tax base), thus leaving public finances in a shaky state.
On a more positive note, government revenue is projected to reach LE 162 billion, up from LE 130 billion in 2005-06. Real GDP growth reached 6.1 percent year on year in the second quarter of 2005-06, up from 5.7 percent the previous quarter.
General government expenditure is also projected to rise by 15.4 percent to LE 217 billion. Finance Minister Youssef Boutros-Ghali announced that a major goal in this year’s budget was to contain the fiscal deficit, although it is projected to diminish only slightly to LE 58 billion.
Government officials have emphasized their intention to reduce the deficit in the coming years, aiming for a deficit of three percent of GDP (currently it is 9.2 percent of GDP), but this will depend upon the government finding a solution to the problem of domestic subsidies, which, at LE 58 billion in 2006-07, are budgeted to account for 27 percent of total current (operational) expenditure, according to the report.
Figures from the finance ministry show that the proceeds from privatization reached LE 13.3 billion in the first seven months of the current fiscal year, more than double the LE 5.6 billion for the whole of 2004-05, and 10 times greater than in 2003-04. Further privatization initiatives have been announced in recent months, as well as plans to promote public-private partnerships in sectors such as infrastructure, power, communications, health, education, housing and transport. Twenty percent of EgyptAir is to be privatized in an initial public offering in 2007, according to the report.
Prime Minister Nazif was quoted in March as saying that Egypt is seeking to attract $20 billion in foreign investment into the country’s oil and gas sectors over the next five years, including funding for 20 new petrochemical plants, states the report. According to official sources, the oil sector already accounts for 80 percent of total foreign direct and indirect investment in Egypt.
