Egypt's Political Leadership - Nazif's Govt. & Socio-Economic Reforms.

A World Bank report in September 2007 said the climate for doing business in Egypt in 2006 had improved more than in any other country. The report

revealed a wave of company-oriented reforms across the Middle East. In the World Bank's rankings, which looked at business regulations, Egypt in 2006 was the top mover - rising to 126th from 165th - in a list which showed the pace of business reforms in Eastern Europe overtaking East Asia.

One of the underlying drivers of reform in the region is the swelling ranks of unemployed youth, seen as a source of unrest by many governments. Even oil-rich GCC states such as Saudi Arabia, which in 2006 jumped into the top 25 ranking of places to do business, from 38th, were keen to create more employment by stimulating labour-intensive industries. Increased trade and a desire to legalise and tax the informal sectors of the economy in 2006 were also big drivers of business-friendly regulations in many emerging markets.

The World Bank said rapid reforms made by Egypt were broad and brought immediate results. A World Bank official on Sept. 26, 2007, was quoted as saying: "Egypt's reforms went deep. They made starting a business easier, slashing the minimum capital requirement from E[pounds sterling]50,000 ($8,900) to E[pounds sterling]1,000 and halving start-up time and cost. With more properties registered and less evasion, revenue from title registrations jumped by 39% in the six months after the reform".

The key was aggressive implementation of ambitious economic reforms launched by Nazif's government. Since Nazif was made PM in 2004 and by mid-2007, the state had sold more than 79 firms in privatisations in which, unusually, domestic and foreign investors had been allowed to take part. Tax reforms by Finance Minister Youssef Boutros Ghali had seen income tax cut from a top rate of 42% to a flat rate of 20%. Cairo had also privatised some large state-run enterprises, including Bank of Alexandria.

The General Authority for Investment and Free Zones (GAFI), which acts as a one-stop shop for international investors, in mid-2007 said the state had earned [pounds sterling]E5,100m ($2,653m) from privatisations in fiscal 2005-06. It had earned a further [pounds sterling]E12,450m ($2,188mi) in the first half of 2006-07 as the programme accelerated. Privatisations had encouraged FDI, which had set records over each of the previous three years. FDI had climbed from $1,300m in 2004-05 to $4,300m in 2005-06, according to the Central Bank of Egypt. In the first three quarters of 2006-07 alone, FDI totalled $9,200 and was forecast to hit $10,000m by the end of fiscal 2006-07 to last June 30. In a research note issued earlier in 2007, the IMF said: "FDI flows have exceeded expectations. Underpinning these developments is the continued confidence in the depth and breadth of the structural reforms under way in Egypt".

Nasser Sa'idi, chief economist of Dubai International Financial Centre and author of the MasterCard report, in mid-2007 said: "The resource inflow into Egypt is focusing more on remittances and FDI, which means it is the private sector that is leading the turnaround. Job creation is mainly happening through ventures and industries that are being created". Newly privatised firms should also create jobs in the long term as they expand after restructuring.

Goldman Sachs then said average GDP was to reach $1,820 in 2007-08. But Egyptians are still poor compared with their GCC neighbours, though they are a lot less poor than they used to be. GDP per head was $1,672 in 2006-07 and just $1,417 in 2005-06. The country had enjoyed real GDP growth of 6.8% and 6.5% in the previous fiscal years, respectively, and Goldman Sachs forecast further real growth of 5% in 2007-08. The bank's New Markets Analyst report said: "Egypt will continue to benefit from strong global growth and high energy prices. Strong FDI and portfolio inflows should support Egypt's balance of payments position".

Egyptians were exporting more goods than ever before, and were setting records for imports too. Exports had reached $41,600m in 2006-07, up from $35,900m in 2005-06. Goldman Sachs forecast $46,100m in 2007-08.

The Trade and Industry Ministry, under Rashid Muhammad Rashid who is a rising star among Nazif's ministers, has set up tax-exempt qualifying industrial zones to attract foreign businesses. GAFI, under Rashid's ministry, has succeeded in attracting to Egypt foreign giants such as the UK's Vodafone and the UAE's Etisalat. Both telecoms firms hold mobile phone licences in Egypt and have gained from the Egyptian consumer's increased ability to spend. By mid-2007, Etisalat had signed up 1m customers since it began operations in Egypt on April 30.

Problems: By mid-2007, it was reported that unsustainable inflation, monolithic state-run industries and outdated working practices had characterised Egypt's economy in recent years. In contrast, the construction boom in the GCC area, the development of a seemingly endless list of mega-projects, and the spread of shopping malls across the Arab Gulf region were the conspicuous symbols of its growing economic power. Yet in a survey of consumers in Egypt, Kuwait, Lebanon, Saudi Arabia and the UAE at the end of June, Egyptians expressed the greatest confidence in their economy. Egypt's score in the MasterCard Worldwide consumer confidence index was 94.3 out of 100, compared with Saudi Arabia's score of 92 and the UAE's 88.8. This was all the more surprising because two years earlier Egyptians were second only to the Lebanese in expressing pessimism about their economy.

Rachid Muhammad Rachid, the trade and industry minister, is key among Egypt's decision makers. His biggest challenges are to attract enough FDI into industrial zones to create as many jobs as he can, and fast, and to cut energy subsidies. The FT on Sept. 27, 2007, quoted Rashid as saying previously economic reform had been seen as the "output"; and now it had to be viewed as part of the "input" of an overall reform process. He added: "We were not seeing that in the beginning clearly...because we were coming from the background that Egypt's problem was more on the economic side (see down4EgyptWhoJan23-06).

For a small minority of Egyptians, life has improved, with increased wealth and more options available to spend it. But for the overwhelming majority, life's daily grind continues with few signs of progress amid concerns the disparity between the rich and the poor is growing. Narrowing the gulf seems to be the new theme of a government which has spent four years trumpeting the reforms but is realising they alone will not solve Egypt's myriad problems.

Rashid said: "It means we have to really start looking much more seriously and much deeper into economic reform as an input into the social development equation". Rachid, a possible future PM, estimated that perhaps 75% of the population was not yet enjoying the gains of reform and was instead "feeling the pain of it". He said: "I spent a lot of time in the last two or three months looking at this issue and I met a lot of people and they said it clearly. The statement they say is that: 'We are the poor who are financing the economic reform to make the rich people richer'".

Rashid is a businessman turned politician. The successes were easily supported by numbers which Rachid rattled off with ease - economic growth at 7%; industrial growth at 7.5% and export growth at 35%; all above targets. However, the FT said, "the challenge was to translate the statistics into higher incomes, more jobs, lower inflation and improved services in a country where many have no assets, unemployment is high, skills are low and institutions inefficient". Rachid said he believed the government was on track but acknowledged there were serious issues which needed to be tackled, adding that the administration under-estimated the impact of inflation.

Inflation had peaked at 12.8% in March 2007 before dropping back to 8%. But the FT on Sept. 27 said: "poor families who rely on a basket of basic goods whose prices have risen significantly, such as cooking oil and dairy products, complain that inflation has been as high as 50-60%". Rashid said hearing such complaints were "eye openers for us because it's not enough to look at the statistics". Similar issues face governments throughout the region as populations display rising disillusionment with politicians.

There are many factors contributing to the bleak mood on the street, including years of ineffective government; the dire state of services, and repeated failures to deliver on promises of prosperity. And in Egypt the problems are as acute as anywhere with a population of over 78m and growing fast, packed into just 6% of the country's land. The inequality and disillusionment were critical factors behind the dramatic gains of the Muslim Brotherhood in the 2005 elections (see the background in gmt4EgyptWhoJan23-06).

In 2007 Egypt had an unusual number of protests by striking workers and villagers upset by water shortages, as well as rising food prices - 27,000 textile workers in September staged a strike. The most recent bid to revitalise the economy can be traced back to 2004 when PM Nazif began bringing members of the private sector into the government for the first time. After initial reservations, Rachid, a former board member of Unilever, was among the first to answer the call. Yet he was aware that the government had to grapple with hugely sensitive issues such as subsidies which are a massive burden on the treasury and unpopular privatisations if the process is to move forward.

The FT quoted Rashid as saying: "The commitment is there, the challenge is that we have different ways of how we see us implementing this reform". But the FT added: "even as progress is made on the economic front, critics accuse the government of regressing on political reform. Rachid was adamant that one could not have one without the other, saying: 'I don't believe anybody in the decision-making apparatus in Egypt has any doubt that you have to move on both sides. What you have seen in the last two or three years of course is the speed and the sequencing of both. I see the implementation going through the same style of what we have seen in the economic implementation in the 1990s. Two steps forward, one step back, one step on the side. You are still trying to find, you know, the ground under your feet in terms of the political reform".