Economy of Egypt

Business representatives described the size and terms of the loan – $3 billion at a 1.5% interest rate – in favourable terms, arguing that it would have represented an important vote of confidence in Egypt as a destination for foreign investment. It was suggested that this would have made Egyptian treasury bills more attractive. Conversely, the manner in which the loan issue has been handled – with an announcement of a loan agreement quickly being reversed for reasons that were not made transparent – was said to have affected perceptions of foreign investors as they survey Egypt's business climate. Although few investors are pulling out, very little new investment is coming in to the country, owing to uncertainty and a lack of confidence. The rebuilding of this confidence is vital to Egypt's economic future.

The impact of other foreign capital in Egypt

Egypt is at a critical stage of its post-revolutionary evolution, when it is important that debate continues on a range of issues of concern to a variety of Egyptian constituencies. A series of workshops convened by the MENA programme in Cairo will address elections, moving from military to civilian rule, political alliances, UK and Western policy, the economy and the role of the media. A core aim of this project is to increase political inclusion: to draw previously peripheral or suppressed voices into national and international policy dialogues.

It was said that Egypt rejected the IMF's loan on political, rather than economic, grounds. The about-face in government attitudes towards the loan raised questions for many about who was really driving economic policy, the transitional government or the Supreme Council of the Armed Forces (SCAF).

Participants also noted that the EU had linked some of its own grants to the IMF agreement and it was now unclear how they would proceed. However, it was stated that that the European Commission continues to support Egypt through its 'SPRING Programme' (Support to Partnership, Reform and Inclusive Growth).

During 2011/12, €350 million is expected to be channelled through a cooperation budget. In addition, the EU already provides Egypt with €150 million per year, disbursed as grants for different projects.

Alternative sources of funding

The government's alternative strategy has been to fund the deficit through borrowing from domestic banks. This is feasible, as liquidity is not a problem, but remains a more costly option as interest rates are higher. However, a number of participants were concerned by this. It was noted that the fiscal deficit has widened substantially this year, partly because of increased spending on salaries, although the government reduced its planned spending for 2011-12 after deciding not to take up the IMF's loan.

Egypt has also been offered large sums of financial support from the Gulf countries, particularly Qatar and Saudi Arabia. To date, pledges of support amount to $10 billion (although only $500 million of this had been provided at the time of the workshop and there was some scepticism about how much would materialise). Participants questioned whether these loans also have unwritten conditions attached. For instance, it was suggested that the Gulf states that had been closely allied with former president Hosni Mubarak might seek to influence the outcome of his trial. Another participant argued that Gulf pressure may have played a role in the removal of the former post-Mubarak foreign minister, Nabil Al-Araby, who was moved to the Arab League.

Some participants perceived a crucial conflict of interests between the Arab countries that are embarking on democratic transitions and the Gulf monarchies. One described the emergence of a 'two-speed Arab world' in the wake of this year's uprisings. Discussion focused on whether it was advisable to reject the IMF and World Bank in favour of Gulf funding; each source is seen to have links to a specific set of political considerations with implications for Egypt's transition.

Monitoring how funds are used

Instead of focusing on where the money was coming from, it was suggested that questions should instead be asked about how it would be spent. Participants agreed that it was important for Egyptians to be able to assess the extent to which spending was improving education and health, and reducing poverty. At present, there is a need for greater freedom of information. It is extremely difficult to verify reported improvements or to guarantee how effectively new revenues would be spent. In addition, there has been little progress in conflict of interest legislation. Few participants believed that the government publishes enough information on spending or social development indicators. In addition, several argued that Egypt's public sector financial management systems need to be reformed.

The practice of providing economic assistance to non-democratic governments, both before and after the revolution, was criticised, leading questions to be raised about the accountability of the SCAF. One participant said that the EU and international institutions had turned a blind eye to human rights abuses for thirty years and were now lending to a regime that was carrying out military trials and conducting 'virginity tests' on female protestors. Another argued that the world had to deal with the Egyptian government in order to deal with Egypt.

THE BROADER INVOLVEMENT OF INTERNATIONAL LENDERS AND DONORS IN EGYPT

As became apparent in the first session, perceptions of international lenders and donors in Egypt are mixed. Discussions in the second session focused on perceptions of Western and Gulf funding, and debated how best it could be directed.

Non-governmental organisations

The issue of international funding for non-governmental organizations (NGOs) in Egypt was discussed in detail. Some participants were sceptical about the role that foreign funding might play in an NGO; it was argued that accepting money from external sources makes an organization appear unable to secure funding from closer to home, laying it open to charges of foreign interference. However, respondents questioned the alternative to foreign funding, arguing that it is also problematic for NGOs to seek funding from the private sector. In addition, the Ministry of International Co-operation's new restrictions on foreign funding were also criticised for being an obstacle to the success of NGO activity.

Concerns were also raised about the potential for aid to 'corrupt' civil society. One participant argued that external sources of funding had created an 'upper' and 'lower' civil society. The former is western-funded with little connection to the Egyptian people, whilst the latter is domestically-funded with a greater connection to people on the ground. Describing conversations with strikers at the Mahalla textiles factory, the participant highlighted the difficulties facing female activists seeking the sort of legal or financial support that Western donations so regularly fund.

The state vs the private sector

The second session also focused on the question of who will facilitate development: the state or the private sector. Under the previous government, the private sector had sole responsibility for development. Several participants argued that this should not have been its role. Given its associations with the corruption and crony capitalism of the former regime, the private sector would need to boost its credibility and accountability if it is to play any role in development.

One speaker outlined three priorities facing the economy as a whole: infrastructure building, job creation, and poverty alleviation. In order to tackle these, another participant emphasised the need to achieve a greater degree of accountability in both sectors. In addition, they argued that a balance needs to be struck between the notions of independence and choice exercised in public sector institutions: although popular opinion must be taken into account, it was argued that economic needs and political accountability should also remain important considerations.

A range of opinions were voiced on both the suitability and the capacity of the public sector to address the priorities outlined above. One participant emphasized a 'romanticized' perception that many Egyptians have of the public sector, rendering it seemingly untouchable. This was said to be damaging as it prolonged the longevity of institutions that are inefficient, badly managed and hugely over-staffed.

It is clear that the private sector also has a number of challenges to overcome before it can play a more dynamic role in Egypt's economic development. There was consensus among participants that there had been a good deal of corruption in both the public and the private sector under the previous regime. However, opinions differed on the extent to which this problem could be overcome in the coming months and years.

It is clear that the experience of the past few decades has led many sections of society to perceive the private sector in a negative light. However, representatives from the business community raised concerns about the unfair demonization of their industries. One argued that anyone who had been a businessman in the past decade is now regarded as a profiteer without a social conscience. This perception ignores the social role played by businesses, it was argued, as they have hired, trained and developed their staff. In addition, it was argued that Egypt in fact has a history of successful private enterprise, with Egypt Air and Bank Misr cited as examples. Business representatives believe it is unreasonable to argue that private sector corruption in under previous regimes has now permanently discredited the value of a better regulated private sector in the future.

Although most participants saw reform of the public and private sectors as an important step, not everyone agreed that it should be a priority. One speaker argued instead for a greater focus on transitional economic policies and that reform of the public sector should be left to an elected parliament.

CONCLUSIONS AND RECOMMENDATIONS

There remains considerable scepticism about the role of international assistance, especially when it is channelled through institutions such as the IMF or World Bank. However, the day's discussion suggested that there is some scope for such institutions to regain a degree of trust through greater transparency and accountability. Historical mistrust of international financial institutions partly reflects their legacies of dealing with unelected governments whose economic policies were praised internationally but perceived more negatively by the public at home. These institutions may now need to communicate better with the Egyptian public, but may also need to pay more heed to popular concerns.

Egypt needs to implement a national economic development plan in order to prioritize spending, and decide the best way to meet its job creation and social justice needs.4 These were all key demands of the country's January 25 revolution. However, it is not easy for a transitional government to make such decisions since it will not be in office long enough to implement them.

Participants suggested that economic decision-makers needed to find ways to restore investor confidence to the Egyptian market. IMF lending might help in that regard. There should also be a focus on turning Egypt's competitive advantages to good use, including its strategic location, human resources and expertise in manufacturing. Some participants called for a new national study of economic strengths and weaknesses in different regions. The development of Sinai is also considered an important national and strategic project.

Developing a manufacturing industry produces low-margin, labour-intensive goods, such as buttons, nails and laptop components, is seen as a way forward to help meet the country's job creation and growth needs. Lifting the financial burden off small and medium enterprises (SMEs) by giving them tax breaks or loan exemptions could also be beneficial.

Finally, there was some debate regarding what agricultural policies to pursue and which crops it would be best to focus on (wheat and corn or fruit and vegetables, for example). One participant argued strawberries would be more profitable to produce than wheat, but another argued wheat was more important to reduce reliance on foreign imports. This discussion was underpinned by varying degrees of nationalist sentiment; some participants favoured co-operative farming, of which there is a long history in Egypt. Again, as in other areas, better data and research into what is economically most viable for Egypt's agricultural industry would help move this debate along and inform policy.

An overriding theme of the discussion was the need for greater transparency, better data and a stronger evidence base for policy, in virtually every area of the economy. This may be an area where international expertise can be helpful. For their part, international financial institutions and governments allied to Egypt need to be aware of the centrality of corruption as a factor that undermined the popular legitimacy of the previous regime. This has damaged public confidence in

business, and remains a key grievance among Egyptians today.

ABOUT THE EGYPT DIALOGUE PROJECT

Egypt is at a critical stage of its post-revolutionary evolution, when it is important that debate continues on a range of issues of concern to a variety of Egyptian constituencies. A series of workshops convened by the MENA programme in Cairo will address elections, moving from military to civilian rule, political alliances, UK and Western policy, the economy and the role of the media. A core aim of this project is to increase political inclusion: to draw previously peripheral or suppressed voices into national and international policy dialogues.

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