By Moin A. Siddiqi.

Egypt has enjoyed a decade of political and economic stability and its vibrant economy is beginning the new century on a much sounder footing. The country is seen as a role model for the International Monetary Fund (IMF) in the Middle East and North African (MENA) region, a view underpinned by the successful pursuit of a macro-economic stabilisation programme throughout the 1990s.

The IMF in late 1998 said: "Egypt's achievement over the past seven years has few parallels." The government now maintains an informal arrangement with the IMF. The Fund provides technical assistance and general advice on complex areas such as improving banking and capital market supervision and utility privatisation. However, the IMF's seal of approval is important for Egypt's continued good credit rating in the international financial community

The World Bank has reclassified Egypt as a middle-income developing country with per capita income of $1,500.

The nations macro-economic record over 1995-l999 is healthy. Real GDP growth has averaged almost five per cent a year with the annual inflation rate declining to six per cent and a modest fiscal deficit of just one per cent of GDP. The domestic debt of Egyptian pound (EŁ)136 billion remains high but is on a downward trend. The Ministry of the Economy projects 6.7 per cent growth in 1999-2000, though the IMF forecasts a slight slowdown to 5.4 per cent. The government is committed to fiscal discipline with the 1999-2000 budget deficit targeted at one per cent of GDP

Factors underpinning a buoyant economy since the mid-1990s are revival in private consumption and business spending as well as ongoing public-private investments in large-scale infrastructural projects. The process of liberalisation has increased scope for private sector growth. The goal is to increase the latter's share of GDP to 80 per cent over the next two years through opening of state monopolies to private competition. As a sign of confidence, exchange controls have been abolished.

HSBC investment bank presented a bullish country assessment. It said: "Egypt is the market that stands out for us. The combination of a changing external position, strong domestic growth, and a defensive and exceptionally cheap market, will prove to be a winning combination that will ensure outperformance relative to other emerging markets."

Having achieved macro-economic stability, Egypt should move rapidly towards the second stage of micro-reforms. The new government, headed by Prime Minister Atef Obeid, is perceived as more reform-oriented. Gradualism had, in fact, characterised the overall pace of economic reforms, especially in areas of deregulation and privatisation, under the former prime minister, El Ganzouri. The previous administration was criticised for poor management of the exchange rate policy and a marked slowdown in privatisation. Of the 314 state owned enterprises (SOEs) originally selected for privatisation in 1994, 127 had been sold-off as of mid-1999, with receipts totalling EŁ10.7 billion ($315 billion).

The new administration has a challenging agenda, including accelerating structural reforms, underpinning robust medium-to-long-term growth, kick-starting the privatisation process, attracting foreign direct investment (FDI), and tackling a large perennial trade deficit, as well as reforming a rigid exchange rate regime. Capital inflows depend mainly on the pace of privatisation and further deregulation of key sectors, such as utilities.

A major privatisation in the first half of 2000 will be a much-anticipated flotation (10 to 20 per cent) of Telecom Egypt, advised by ABN Amro, KPMG and Commercial Investment Bank. It is valued at between $550 to $1,100 million, making the sale the largest offer so far. The government is also committed to privatising the power sector. Greater Cairo Electricity Company, Canal Zone Electricity and Middle Egypt Electricity are expected to be sold off later this year. But most SOEs are heavily indebted and over-staffed, requiring more restructuring. The seven main power generation and distribution companies owe the state about EŁ4.9billion. There is however, no concrete official policy so far concerning the denationalisation of the four major state banks - National Bank of Egypt, Bank of Alexandria, Banque Misr and Banque du Caire - which together control 60 per cent of the retail market, nor for the privatisation of insurance companies, or partial privatisation of prime assets like Egypt Air and Egyptian General Petroleum Company. In the next two years, utility and more cement sectors sell-offs, as well as the flotation of the government's stakes in several banks, insurance companies and department stores could triple the Egypt stock Exchange (ESE) market capitalisation and greatly boost foreign portfolio investment. A much faster pace of privatisation should increase economic efficiency and reduce domestic debt. But much work is required for completing industrial sector privatisation by the year 2001.

There are continued pressures from the non-oil industry for a system of flexible exchange rates, The EŁ has been pegged to the US dollar at a rate of $l:EŁ3.4 since 1994. But in real effective terms, ie, inflation differentials between the US and Egypt, the EŁ has appreciated steeply by 50 per cent since 1990, thus undermining the competitiveness of non-oil exports. The new government may relax the Central Bank's policy of rigidly defending $US-EŁ peg. Already there was a slight depreciation to EŁ3.44 by the end of 1999, compared to EŁ3.38 a year ago. A further modest depreciation is likely this year, with the pound falling to EŁ3.5 to EŁ3.7:$1 in the second half. A controlled depreciation will boost non-oil exports, increase demand for domestic manufactured goods and help bring down interest rates, underpinning growth.

A report by HSBC research warns: "There appears to be a stark choice for the Egyptian authorities: either accept the pound is overvalued and devalue or float while reserves remain enough to manage the level of devaluation or maintain the peg and hope that the external position turns around before the reserves fall to insufficient levels."

Egypt possesses diversified sources of forex earnings, which comprise workers' remittances, Suez Canal revenues, tourism and oil and refined products, The prospects for the balance of payments have improved, thanks to recoveries in tourism, Suez Canal dues - underpinned by an upturn in international trade - and firmer oil prices. Also, higher economic growth in the Gulf Co-operation Council (GCC) countries in 2000-01 will have positive effects on workers' remittances and official bilateral aid.

However, since the 1998 deficit on the current account has grown to a level equivalent to 2.6 per cent of GDP. The shortfall has been financed by drawing on foreign assets of nationalised banks. The IMF projects deficits over the next three years. Despite this, the overall external account should be manageable, as long as net capital inflows are sufficient. In more recent years, a strong growth in private consumption and domestic investment have fuelled a boom in imports, but are not matched by a corresponding increase in exports, resulting in a trade imbalance. The authorities are trying to reduce a chronic deficit by administrative controls. From last year, importers of luxury and non-capital and intermediate goods must provide 100 per cent cash cover, before opening letters of credit.

The government needs to promote non-oil exports, like textiles, carpets, chemical products, pharmaceuticals, cotton, and engineering products. The IMF forecasts a significant increase in exports between 1999-2000 and 2002-03, assuming however, the continued expansion in non-traditional exports.

Although official external reserves have fallen from a high of almost $21 billion in March 1998, forex reserves of over $16 billion as of August 1999 still provided a comfortable import-coverage of over one year. Egypt is also a net creditor to the international banking system, with net deposits of $13,229 million in the OECD-based banks in June 1999.

The country's external debt of $30 billion and debt service ratio of only nine per cent in 1999 are manageable. Its debt as a per cent of GDP has declined from 84 per cent in 1990 to 33 per cent last year, which is well below the average for developing countries (146 per cent). The structure of debt is also favourable, with a long repayment period (20 to 30 years), at concessional terms. Private external bank claims last June were $7 billion. Thus Egypt should not experience an external financing gap over the medium term, because of its strategic importance in the Middle East. Last year, bilateral donors, mainly the US and Saudi Arabia, pledged $2.5 billion in aid.

Egypt is America's second-largest aid recipient after Israel. Sustained currency stability is contingent on higher capital inflows, generated mainly from invisible (services) exports, especially tourism, and future privatisation receipts. The investment-grade credit rating assigned to Cairo by both Standard & Poor's (US) and Fitch IBCA (Europe) is evidence of international confidence in Egypt's long-term prospects.

The momentum of until now successful economic reforms should not stagnate. The government should vigorously pursue a well-defined programme that can transform Egypt into a dynamic expanding economy, on a par with the newly industrialised countries (NICs) of East Asia.

The long-term challenges are fostering a business climate conducive to sustaining a robust eight to nine per cent annual GDP growth. This is imperative for absorbing the 500,000 young people entering the labour markets annually over the next 10 to 15 years, and substantially raising real per capita income.

Sustained political and social stability, the prerequisite for a healthy economy, is largely dependent on much improved living standards, a social safety net for vulnerable groups and lower unemployment.

However, present levels of savings and investment can sustain a long-term average growth of five to six per cent. This in turn, leads to GDP per capita growth of three to four per cent.

In essence, the key to unleashing Egypt's potential lies in completing the second stage of remaining micro reforms, mainly in the areas of privatisation, much faster deregulation, trade liberalisation, improving the quality of public services, upgrading basic infrastructure, and modernising the financial sector, on a par with South Africa,

A robust self-sustainable growth requires substantial increase in both domestic savings and fixed investment rates to 25 per cent and 28 per cent of GDP respectively, supported by improved productivity and enhanced quality of investment. Egypt also needs to reduce its reliance on crude oil by expanding non-tradional exports and to develop its natural gas reserves (assessed at 37 trillion cubic feet). More importantly, it must attract far more foreign direct investment (FDI), which totalled $6,396 million between 1990-1998 according to the IMF. The economy needs annual FDI inflows of $4 billion, and this in turn will inject managerial expertise and advanced technology in manufacturing industries, thus making Egypt more competitive in global markets. The Egyptian market is of strategic importance to multinational corporations selling in the MENA region.

President Hosni Mubarak, now in his fourth six-year term, has presided over a remarkable transition during the 1990s.The president is keen to increase Egypt's integration into the global economy and encourage sustainable private investment and export-led growth, thus providing more job opportunities and improved living standards. Mubarak sees an open and buoyant economy, with increasing foreign investment and funding for major infrastructure projects, as his legacies.

In essence, Egypt has the capacity in terms of both natural and human resources, to join the ranks of newly industria1ised economies within 10 years, providing infrastructural reforms aimed at increasing investment and savings are properly completed.