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Egypt Moves to Recapture Its Recent Economic Growth
March 10, 2010
Wall Street Journal
Egyptian officials have laid out an ambitious set of economic targets for the Arab world's most populous country, hoping to recapture the fast growth of the middle of the last decade and to lift living standards.
Egyptian officials are promising 5% gross domestic product growth this year and 6% in 2011, eventually matching the growth of 7% and higher that Egypt enjoyed for three years before the global economic crisis hit in late 2008.
If Cairo is even moderately successful, it could bode well for other countries in the region. Egypt's slower economic overhauls may emerge as a sustainable model for countries in the Middle East, such as Jordan and Syria, that have big populations but little of the region's oil wealth. Dubai and other Arab states of the Persian Gulf, for years the engine for rapid growth and investment in the Mideast, now suffer weakened banks, defaults and falling property markets brought by over-reliance on global credit.
To reach its goals, the Egyptian government plans to actively seek more foreign direct investment by emphasizing the country's comparative resiliency during the economic crisis, to push tax reform by streamlining the complicated income-tax and property-tax codes, and to curb widespread nonpayment of taxes with stricter enforcement. They also aim to reduce the drag created by Egypt's socialist-era subsidy programs.
A new set of property-tax laws just took effect, preceded by months of public-service announcements on radio and television to explain the changes.
A sustained expansion is needed to help put an end to Egypt's persistent economic ills. The inflation rate has slowed only slightly from a peak of 13.3% in November. The budget deficit, weighed down by high food and fuel subsidies, consumes about 8% of gross domestic product. Unemployment stands at an official 8%, but many economists say the figure is much higher and doesn't reflect rampant underemployment.
Ragui Assaad, an Egyptian-born economics professor at the University of Minnesota, estimates that only one in four new university graduates will find substantial jobs.
"Unemployment doesn't measure intermittent work, low productivity work or below-subsistence-level incomes," he says.
Few observers expect an easy path to growth. A recent report by the government's General Authority of Investment describes major structural obstacles to having economic policies benefit the majority of the population. It says that much of the foreign direct investment coming into the country targets the petroleum and financial sectors, which don't create large numbers of jobs. It also highlights policies such as fuel subsidies, which help big businesses keep costs low in factories and help trim car owners' household budgets, but don't help most people.
Economists inside and outside the country have criticized Egypt's education system for failing to provide job skills for a fast-growing youth population.
The government's past successes, however, offer reason for hope.
For several years, a small cadre of economic reformers, working under President Hosni Mubarak and his son, Gamal, pushed to liberalize Egypt's creaking, state-dominated economy. Overhauls focused on reducing bureaucratic red tape for business owners and foreign investors, as well as on privatizing or selling several state-owned banks and industrial companies. The process had its critics, but succeeded in pushing Egypt to growth peaks.
Things came unhinged in 2008, however, as the expansion stoked inflation and triggered unrest in some places, including the so-called bread riots in Cairo and in several rural cities in the Nile Delta.
Foreign direct investment fell to about $8.1 billion in the fiscal year ended June 2009 from a peak of $13.2 billion the previous year, according to the central bank. Suez Canal receipts fell to $4.74 billion for the year from a record high of $5.1 billion, says Suez Canal Authority Chairman Ahmed Ali Fadel. Tourism and remittances from workers overseas also slumped. Critics also complained that too much economic power was concentrated in the hands of an oligarchy with deep ties to the Mubarak family. The following global economic downturn further worsened the economy.
But last month, Minister of Investment Mahmoud Mohieldin said Egypt is optimistic again, setting a $10 billion target for FDI this year. Suez receipts rose 6.6% to nearly $390 million in December from the previous month, government data show.
Economists had expected remittances to plunge as Egyptian expats, especially in places like Dubai, lost jobs. But many brought savings home to Egypt, boosting the local economy.
High growth "will put Egypt back on foreign investors' maps," Egyptian Trade Minister Rachid Mohamed Rachid was quoted saying in Davos.
Egypt was protected somewhat from outside shock by a largely isolated economy, especially when it comes to the country's conservative banking industry. But modest reforms also played a role. Prof. Assaad applauds the previous privatization efforts and the new campaign to boost tax income and rein in spending, particularly subsidies. Still, he says, "The underlying structural problems in the Egyptian economy remain. The big problem has always been the growth trickling down."