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Refiguring the economy

Osama Fayez

09 Mar 2016 1:53 pm

 

 

 

Watani interviews Mounir Fakhry Abdel-Nour

 

Mounir Fakhry Abdel-Nour is a renowned Egyptian politician born in 1945 into a prominent Coptic landowner family from Upper Egypt. His father was among the founders of the liberal al-Wafd Party in the 1930s. Educated at a prestigious French school in Cairo, Mounir Abdel-Nour earned a BSc in Political Science from Cairo University and a BA in Economics from the American University in Cairo. He went on to become a successful industrialist, and followed in his father’s footsteps in politics to become MP in Egypt’s 2000 parliament, and later Secretary-General of the Wafd. From 2011 to 2015 he was cabinet minister in several successive cabinets, handling at various times the ministries of tourism, industry, trade, and investment. 

Today, with Egypt’s economy in dire straits owing to years of turmoil in the wake of the 2011 Arab Spring, Watani met Mr Abdel-Nour for a candid talk on the situation.

 

How would you introduce Mounir Fakhry Abdel-Nour?

I am Egyptian to the core. I am passionate about politics, and in love with Egypt. I hope to see Egypt a civic, just, modern State.

 

How would you assess the Egyptian economy during the current phase?

Egyptian economy is going through hard times, particularly owing to a large deficit in State budget highlighted by a balance of trade and balance of payments deficit. This fiscal year is witnessing a financial gap of USD12 billion to USD15 billion, that we can only fill through loans, grants, or foreign investment.

The situation that we are in today is the result of the difficult times Egypt has been going through ever since the January 2011 Arab Spring. This in addition to a collapse in tourism which was, before the Arab Spring, a major foreign currency earner and a main constituent of the GDP. In order to put Egypt back on track, economic decisions should have been bold, fast and firm; the postponement of necessary measures come at a heavy price since the Egyptian community is becoming increasingly unable to withstand tough, painful measures. Yet the longer we put off these decisions the more compound the economic predicament will become and the further any solution will be. I am, however, not pessimistic; Egypt possesses all the characteristics and components needed to see it through this crisis and on to growth.

 

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Do you think the investment climate in Egypt can attract foreign investment?

No it cannot. The recent investment law does not answer our hopes and ambitions; there is still a lack of harmony between different economic policies. The exchange rate policy in Egypt is among the worst impediments to foreign investments. Foreign investors will shy away from investing in Egypt until the Egyptian Pound is evaluated at its real value; the exchange rate set by the Central Bank is unrealistically lower than its actual value. Investors know that the pound is thus bound to lose value, meaning they will inevitably incur losses if they invest in Egypt at the current value of the Egyptian Pound.

Red Tape and the political and security situation in the region also negatively influence the investment climate in general.

 

How do you see the recent decisions of the Central Bank of Egypt (CBE) to restrict the importation of luxury goods and raise custom tariffs over imported goods that have local substitutes?

The recent CBE’s decisions came to counter the scarcity of foreign currency owing to the deficit in the trade balance and the balance of payments. Twice in its modern history Egypt has taken similar measures when faced with the same problems: during the 1980s and late 1990s. At the time the government tried to restrict imports and foreign currency depletion, which was an undeniably sound decision that resulted in the economic growth from 2004 to 2010. We must learn from experience.

However, I believe that now the decision by the Ministry of Trade and Industry to raise customs tariffs is erroneous and will not pay off. This decision will only serve to reroute trade; it did not take into account that 80 per cent of Egyptian trade takes place with countries that have free trade agreements with Egypt. These include the European Community, other European States, Turkey, all Arab States and COMESA States. Hence, if the cost of certain products increases owing to the rise in tariffs, the obvious alternative would be to import products from States exempt from custom duties under free trade agreements, which means that imports would not be reduced; they will only be rerouted.

Again, I believe the answer is to free the exchange rate; if the Egyptian Pound attains its true value against other currencies this will cause a rise in import cost in general, regardless of the products or their origin. This increase in cost, and hence price, will cause a decrease in demand for these imported products.

I think this step is already taking place; importers in general—whether from the public or private sectors—now evaluate their imports according to the real value of the US Dollar against the Egyptian Pound, or even more in anticipation of expected raises in the exchange rate set by the CBE. They expect the Egyptian Pound to further depreciate against the US Dollar, so they take their precautions and set the prices of their imported products based on that.

Applying realistic exchange rate values ensures higher competitiveness for Egyptian goods inside and outside Egypt, be they agricultural, industrial or service products. The exchange rate policy must be exploited to achieve the goals of the economic policy, which are more job opportunities and increasing competitiveness, ensuring thus higher economic growth.

 

What do small and medium enterprises contribute to the Egyptian economy and youth?

There can be no growth without small and medium enterprises. In order to grow, we need to increase productivity. The production of small and medium enterprises should be linked to that of the larger industries; this would ensure the economic feasibility of the smaller enterprises. They could for instance provide primary products or inputs to the larger factories, achieving thus industrial integration. Planning, encouragement, motivation and integration between small, medium and large enterprises are major components for economic growth.

 

What about the private sector?

Hope lies with the private sector. Past empires have fallen because they only relied on the public sector and their economy was based on central planning. Personal motivation is the real dynamo behind the success of any business. The government and the economic policy makers must focus on creating an investment-friendly climate and offer incentives to the private sector through providing the necessary infrastructure. The government should focus on improving education in order to produce a generation capable of managing enterprises, and able to come up with new projects that would serve development. The government should also put emphasis on vocational training to provide a competent labour force familiar with modern technology.

Growth will only happen through the development of small and medium enterprises, and only when we stop relying solely on natural resources and start depending more on knowledge and modern technology instead.

 

There is much talk in the media about thousands of Egyptian factories in trouble, with production halted in many of them. How do you evaluate the situation of Egyptian industry?

The media has terribly exaggerated the size of the problem. Since December 2011 during the early days of Kamal al-Ganzouri’s cabinet, the then Minister of Industry Mahmoud Eissa called upon those factories facing trouble to tell the ministry of their problems or any halt in operation, and the Ministry of Trade would investigate their cases and take the necessary measures to help them out. By December 2013, some 952 factories announced halt of operation. The main reasons were technical and financial, since there was a great need for capital. The Ministry of Industry was able to allocate EGP500 million from the 2013 – 2014 budget to sustain these factories or businesses.

The National Bank of Egypt and Banque Misr, both national State-owned banks, were assigned to study the creditworthiness of the businesses in distress and their ability to pay back their debts. The CBE banned non-State-owned commercial banks from this field since they had not honoured previous loans with the national banks, thus had weak creditworthiness. The Ministry of Industry was only able to help some 100 factories, in cooperation with the Social Fund for Development and the National Investment Bank.

 

Can you update us on the World Bank’s loan to Egypt?

To date the loan has not been granted. We are still awaiting the first instalment of the USD3 billion loan, which will amount to USD1 billion. However, this loan is directly related to application of the VAT tax in Egypt.

 

What is the size of trade exchange between Egypt, Russia and China?

The development of Egypt’s relation with Russia and China has very clear political dimensions. The aim is to reach a balance in relations between the East and the West. President Sisi played an exceptional role in initiating links with Russia and China. I was present during several of these visits and meetings with top officials. Egypt and Russia share well integrated economic relations; Egypt exports large quantities of vegetables and fruit to Russia, and benefits from Russia’s expertise in arms production as well as the iron and steel industry. Egypt should step in and nurture her economic relations with Russia, particularly now that the West has imposed sanctions on Russia.

An industrial zone was allocated within the Suez Canal development project area that is sure to attract foreign investors. Egypt also reached an agreement to establish a free trade zone between Egypt and the Eurasian Economic Union which includes Russia, Armenia, Belarus, and Kazakhstan.

As for cooperation with China, a huge Chinese fibreglass factory has been set up in the new Suez Canal Development Project area. This will boost Egypt’s exports, since Egypt will become the world’s sixth exporter of fibreglass. China is a major investor in Egypt in the fields of energy, communications, petrochemicals and petrol. In spite of its economic crisis, China recently made deposits amounting to EGP1.8 billion with the CBE, the National Bank of Egypt and Banque Misr.

 

What is the size of trade between Egypt and the US? And what is the size of US investments in Egypt?

Until recently the US was Egypt’s largest trade partner at USD8 billiona yearof trade exchange, but the figure has now gone down to USD7 billion. China has outstripped the US in the size of trade exchange with Egypt.

 

Egyptians, particularly the poor, have not yet felt the fruit of the government’s endeavours to achieve economic development. What is your view of this?

This will take time and will necessitate sound, tough economic policies. It will require a prioritisation in the order of projects to be implemented. Projects with swift economic return should be selected, in addition to infrastructure projects, which are greatly needed.

I am not pessimistic and I believe that the Egyptian economy has many elements that will help it pull development through. However prioritisation and scheduling of projects is important.

 

What is the current state of the middle class?

With an inflation rate of 11 per cent, an unemployment rate of 12 per cent and an unfriendly investment climate, the middle class is crushed. The State needs to take swift steps, and these will be tough. Devaluing the Egyptian Pound will further raise inflation, and prices will spiral. In order to reduce the budget deficit, the State should decrease its outlays, no easy task considering the debt service and the augmentation of local debt. The government also needs to revisit its subsidy plan, again a step that will place a burden on Egyptians. Altogether, this forebodes tough times which we must tolerate if we look for a healthy Egyptian economy.

Several moves, however, may cushion the tough times. Egypt is rich in resources waiting to be fully made use of. The Golden Triangle for mining in the Eastern Desert awaits exploitation. The tourism sector needs a boost in order to prove to the world that Egypt is capable of protecting its tourists. In 2010 some 14 million tourists visited Egypt and generated USD12.5 billion. Our aim is for 20 million tourists to visit Egypt every year and for tourism to generate an income of USD20 billion. Investments are being made in the petrochemicals sector and in the car industry sector. In Beni Sweif a USD1 billion Samsung project is underway for a plant to produce telephones, washing machines and refrigerators.

 

What can you tell us about applying the minimum wage level?

It must be applied. But I also stress on respecting the balance between an employee’s rights and duties. The employer should have the tools to reprimand an employee who does not assume his or her responsibilities. A new labour law is being studied and if passed it will ensure this balance; it will preserve the rights of employees and employers.

 

How does the world perceive the Egyptian economy?

The world in its entirety knows what has been taking place in Egypt since the 2011 Arab Spring, and the kind of difficulties that we have been facing. They also know about the painful measures required to achieve economic reform. Yet we have lost our media battle to the West. We have not been able to alter the stance of the western media vis-à-vis the 30 June 2013 Revolution which they still insist was no more than a coup, as well as the issues of public freedoms and human rights, the harsh court rulings and the handling of demonstrators. We cannot refute these claims even though they are frequently reported in an erroneous context, and even though the hazardous security and political situation Egypt faces is there for all to see: the chaos and unrest in Libya from the West, the water crisis and the Renaissance Dam from the South, the unrest and terrorism in Syria and Iraq from the East, and the dark terrorism that threatens Egypt from the inside.

Keeping the balance between preserving security and respecting freedoms is a challenge. The US had to apply the Homeland Security Act which required Americans to forego a lot of freedoms. Following last November’s attacks on France President Hollande made suggestions to the French Parliament that included, among many tough measures, a Constitutional amendment and declaring a state of emergency. Everyone must understand that dire circumstances can call for undesirable measures.

 

Watani International

9 March 2016

 

 

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