Egypt’s Inaction After Donor Conference Disappoints Financial Community

VOL. XLV

No 12

25 March 2002

EGYPT

Egypt’s Inaction After Donor Conference Disappoints Financial Community

More than a month after Egypt convened a donor conference to mobilize support for its economy, its financial community is complaining that the government has shown little commitment to much-needed economic and financial reform. Egyptian economists say that the aid pledged was short on conditionality – with political factors likely playing a significant role – putting the government under no real pressure and allowing further procrastination. While some longer-term funding was tied to reform, shorter-term emergency aid appeared to carry only suggestions rather than conditions.

Shortly after the conference, aid agency officials indicated that the delivery of aid pledges worth over $10.3bn was dependent on International Monetary Fund (IMF) approval of Egyptian macro-economic proposals (MEES, 11 February). Some had hoped that the IMF would impose tough conditions on Egypt before making any money available. However, its initial $500mn payment is part of the $2.1bn earmarked for quick disbursement and is coming from the IMF Compensatory Finance Facility, which typically carries only limited conditionality. Moreover, following the donor meeting, and in line with standard policy, the IMF made no statement regarding the country’s economic performance and appears unlikely to do so any time soon. According to IMF sources, the fund is currently discussing policy with the Egyptian authorities and will not give any information until after its Article 4 meeting in July at the earliest, and possibly not until its board meeting in October, when, if approved by the Egyptian Government, it will release a Public Information Notice (PIN). Currently Egypt is participating in a financial sector assessment program and a report on this will also be issued to the board in October.

The net effect, suggest local analysts, is that Egypt will continue to stall on the more difficult tasks of financial reform while “window dressing” with reforms and privatizations in easier sectors. While there has been a recent focus on the possibility of privatizing the four state banks (Bank of Alexandria, Banque du Caire, Banque Misr and National Bank of Egypt), experts are quick to dismiss this in light of the authorities’ historical inertia in this respect. And renewed debate on the subject seems to be largely a response to the World Bank’s call after the conference for public sector bank privatization and stronger regulation in the financial sector rather than any real commitment. Moreover, as one local economist warns, even if banking sector reform takes place, the impact will be limited given the current exchange rate mechanism.

Both the local and international financial community have called for Egypt to phase out its rigid official exchange rate and gradually move towards letting the Egyptian pound float freely against other currencies. The government has resisted such calls due to the potential domestic unrest that might ensue, although in defending its peg it has whittled away at its foreign currency reserves, giving it less of a cushion in the future (MEES, 21 January). Just prior to the conference, Egypt’s moves to devalue the pound were failing to keep pace with steeply falling black market rates, and the most recent devaluation, on 14 January, brought the Egyptian pound down by 0.2% and took the official exchange rate to $1=E£4.51, which was higher than the $1=E£5.30-5.40 seen at that time on the black market. While black market rates have now moved to more acceptable levels of $1=E£4.80-5.00, analysts suggest this further reduces the pressure on the government for change.

Although the Egyptian pound has gained some ground against the dollar, Egypt is still suffering from a foreign exchange shortage. Dollars from tourism dried up after the 11 September attacks on the US, compounding the dollar shortfall resulting from reduced oil earnings and Suez Canal receipts. A slight recovery in tourism has recently given a psychological boost to the currency, but few expect this to last. And if interest rates rise globally on the back of economic recovery in the US and Europe, the troubled Egyptian pound could come under renewed downward pressure. “I would have thought that the best time for structural reforms is while the financial assistance from donors is coming in – now we have these resources, but the government doesn’t appear prepared to make the sacrifices,” said one analyst, adding that “it will only do something when its back is against the wall.”

One recent government move that has been welcomed is Minister of Foreign Trade Yusuf Butrus Ghali’s draft of a new capital markets law to regulate securitization and information disclosure. “Egypt had a shortage of information in this area. We need something to regulate transparency and insider trading,” said one analyst. Some observers suggest the law could help encourage foreign investment, but others believe that unless the government addresses the exchange rate such reform is unlikely to have much impact. There are also suggestions that Egypt should reduce its interest rates from the current 13-14% in a bid to promote corporate spending. “This goes back to the currency problem,” the same source said. “The government keeps the interest rates high so that people opt to keep their savings in Egyptian pounds.”