Friday, September 11, 2009

Egypt in safe hands ?

Published: August 18, 2009

The Egyptian minister of finance’s background serving in the IMF and various roles in the country’s government put him in a good position to navigate the global economic slowdown and continue with his financial reforms. Tom Blass reports.

Since at least the rule of the Ptolemies, Egypt has always played a role in the course of world events, and the legacy of two millennia of cosmopolitanism is all too evident in the corridors of Egyptian power. Minister of finance Youssef Boutros-Ghali exemplifies the country’s international outlook.

Mr Boutros-Ghali forged his career at the International Monetary Fund (IMF) in the early 1980s having obtained a PhD in economics from the Massachusetts Institute of Technology, and rose to the rank of senior economist at the IMF, specialising in the economics of the developing world. He was appointed as an economics adviser to the Egyptian prime minister in 1986 (the beginning of the country’s economic reform) and played a prominent role in negotiating stand-by arrangements with the IMF in 1987 and 1991, and in debt rescheduling agreements.

Ministerial posts soon followed – first minister of state for the council of ministers, then minister for international co-operation, minister of economy, minister of economic trade and, in 2004, minister of finance.

As passionate an advocate of trade liberalisation as he is of financial reform on home turf, Mr Boutros-Ghali has been active in World Trade Organization meetings in Seattle, Doha and Cancun, and, as chairman of the US-Egypt Trade and Investment Framework Agreement, is negotiating a free-trade agreement between Egypt and the US.

Mr Boutros-Ghali has suggested that at the heart of Egypt’s recent and forward successes is a fundamentally changed relationship between the state and both businesses and individuals.

He says the massive reform in the way customs and income tax are imposed has made a huge difference. “Before reform, the [income tax] system was predatory, obscure and extremely complex. Now we’ve eliminated all tax exemptions, credits, etc... and this streamlining has created a huge shift in confidence.”

Spend versus save

In the three years to 2008, economic growth had averaged about 7% a year. But in the wake of the financial crisis, his ministry must navigate difficult waters. One of his ambitions is to reduce the budget deficit, and to manage a contraction in revenues without increasing spending (for example, clamping down on most subsidies and protections against food price rises). But he insists that a $13bn stimulus package is justified and necessary, and cannot be sacrificed in order to reduce the budget deficit.

The drive for reform and general improvement of governance is evident elsewhere.

One area of the economy which the government hopes will take off is the financial services industry. The new Financial Services Authority Act creates a single over-arching regulator for the non-banking financial services industry, including insurance, capital markets, mortgages and leasing.

The resulting Egyptian Financial Services Authority (EFSA) was finalised just as many financial services authorities around the world received a slating for their inability to prevent banks going into freefall. But while the Egyptian ministry of investment did look at other models, it did not follow the template of any single one.

It in effect merged three entities: the three bodies which previously regulated mortgage lending, the insurance industry and capital markets. All other non-banking financial services also fall within its remit while the banking sector falls under the authority of the independent central bank.

“The EFSA was conceived well before the financial crisis,” says EFSA director Ziad Bahaa El-Din. “As elsewhere, its purpose will be to close regulatory gaps when supervising multifunctional institutions.”

Critics of the EFSA are unsure about its ability to police the sector, especially against market manipulation and insider trading, and argue that existing regulations would suffice if only they were enforced. However, the new authority will be able to suspend licences of regulated businesses and impose fines in some cases. It will also have the power to initiate criminal prosecutions.

Meanwhile at the Egyptian stock exchange, vice-chairman Mohammed Omran says he and his colleagues are doing what they can to ensure the market is transparent, efficient and well run. One of its greatest challenges will be to remove from the exchange the many companies which, though listed, do not trade. Mr Omran is also keen to see the exchange trading new products, including, by 2011, derivatives.

Steps are being made in this direction – and Mr Omran appears committed to shaking things up. He points out that three departments within the exchange deal with market manipulation – those dealing with surveillance, disclosure and market transparency. Regulation obliges board members, the chief executive and chair of companies to disclose their own trades at the end of each week, for example, and companies are banned from trading up to 15 days before any significant corporate event, and three days afterwards.

Its political continuity under the helm of president Hosni Mubarak is not uncontroversial: it held multi-candidate presidential elections for the first time in 2005 but critics claim that they were managed in such a way that the outcome would be assured. Nonetheless, the US for one regarded the elections as a historic departure and as having “enriched [the country’s] political dialogue”. And certainly, the international community appears to have a confidence in the Egyptian administration, which in turn affords it a mandate to continue a reformist agenda which the government believes is bearing fruit, crisis or no crisis.

Political weight

The 2004 election of Ahmed Nazif as the country's prime minister also marks a significant and positive change in economic reform. Mr Nazif has overseen many of the changes which increasingly make the country an interesting investment destination.

Commentators have pointed out that, since the election, GDP growth has remained continuously high (although it came to an abrupt halt in the second half of 2008). Egypt attracted FDI into a diverse portfolio of industries (including food processing, logistics, white goods, textiles and the automotive assembly) – eschewing the dangerous reliance on the oil sector maintained by other, similarly endowed countries.

The figures bear this out. FDI as a percentage of GDP has steadily risen since 2003 from 0.5% to 8.1% for 2007/08. In 2003, 80% of FDI was accounted for by inflows into the petroleum sector, and only 20% by investments into greenfield projects and expansions. By 2007/08, the petroleum sector only accounted for 31.3% of FDI and greenfield investments and expansions had increased to more than 50%.

Figures for 2008/09 have dropped dramatically – but these, the government points out, are out of its control. It is, however, taking steps to ensure that when the world economy begin to recover, it is well placed to catch the breeze. Egypt plays a strategic role in the Middle East, Mediterranean region and north Africa. The government insists that the sails are all set – and have been for some time.


2004 - Government of Egypt - Minister of finance
1993 - Government of Egypt - Various roles, including minister of state for economic affairs and minister of foreign trade
1986 - Central Bank of Egypt - Governor. During this time Mr Boutros-Ghali worked as an economic adviser to Egypt’s prime minister
1981 - IMF - Various roles rising to senior economist