Back to the future for Egypt with more state control?

Is Egypt moving to open up its economy or is it headed back towards the old days of more state control? It’s hard to be completely sure. Government policy is seldom clear.

The last big round of liberalisation started in 2004, when the government of the prime minister Ahmed Nazif came into office with a bang. It slashed import tariffs, removed walls of protection around industry and reinvigorated free trade agreements with Europe, the US, the Arab world and Africa. It cut income taxes for both corporations and individuals.

It also sold off government stakes in private banks and partially or fully privatised a string of companies, including the country’s fourth largest state bank, the Bank of Alexandria.

At about the same time, the central bank allowed the Egyptian pound to fall in value against the US dollar, eventually letting it respond to supply and demand in a managed float.

This paved the way for a huge expansion of Egypt’s private sector, which was allowed into sectors previously dominated by the state. The result was annual GDP growth of about 7 per cent, a rate that was only slowed by the 2008 global economic crisis.

Over the past few years, however, state control seems to have come back into fashion.

The government has embarked on a series of state-driven megaprojects, including the expansion of the Suez Canal, the reclamation of 1.5 million feddans, a giant new capital city east of Cairo, a project to build a million low-income houses and a vast upgrade of power plants. It has been pumping new funds into old state-owned companies.

The government has also introduced a stream of rules designed to help it avoid devaluing the Egyptian pound, which the central bank has pegged far above its market value against the dollar. Among these is a decree that the trade and industry ministry issued last week. This will require that overseas suppliers register with the Egyptian government export and import control organisation and that they allow Egyptian technical teams to inspect any imported products.

The deputy central bank governor Gamal Negm said Egypt was importing too many non-essential products that could be made locally. His reserved special ire for the US$3.2 billion in cars with an engine capacity of 1,500cc to 1,600cc that Egypt imported in 2014-15 as well as $272 million in ready-made children’s clothes, $159m in sweaters and shirts, $103m in women’s suits and $194m in women’s sleepwear.

Apart from probably being at odds with World Trade Organization rules that Egypt signed up to, the new decree means more government interference in business and yet another layer of bureaucracy. It also means less choice and almost certainly higher prices for consumers.

Meantime the central bank has been adding ever more cumbersome measures to plug loopholes as businessmen devise new ways to get around currency controls. Under a previous central bank rule designed to limit imports, businesses have only been allowed to deposit foreign currency worth $50,000 a month into their bank accounts.

Media reports on Tuesday suggested that importers had been bypassing this by using Western Union and that the government had now reduced the daily limit for money sent to China to $3,000 a day from the previous $7,000.

Another measure of the government’s increasing economic role is bank lending.

Credit to the private sector as a percentage of GDP has been falling for well over a decade. It is now equivalent to only about 26 per cent of GDP, according to calculations based on central bank figures. Credit to the public sector, on the other hand, has soared, with most of the increase occurring since the 2011 protests It now is equivalent to about 61 per cent of GDP.

The government likewise seems once again to be stuffing its state-owned companies with new employees, according to anecdotal evidence, a practice it had largely stopped in the 1990s.

For example, the state textiles holding company had gradually been reducing the number of employees in its companies through attrition as employees retired, according to one businessman. Total staff had fallen to 50,000, from 68,000 in the early 1990s. But starting in the second half of 2014 it once again began hiring, and since then the number of employees is now back up to 60,000.

Despite the move towards more state control, it is extremely unlikely that Egypt will return to the days of the 1980s and early ‘90s, when the antiquated government banks that controlled the market recorded their transactions by hand in enormous ledger books, or when grocery shops had few imports on their shelves. It is more likely a case of two steps forward, one step back.

Patrick Werr has worked as a financial writer in Egypt for 25 years.

Follow The National’s Business section on Twitter

Share This Post