The political and economic reforms in Egypt

italiatelegraph

 

 

 

 

Rasha Makki

 

 

Abstract:
The topics covered in the study are about a planned economy, reverse strategy, fiscal and monetary policies, exchange rates and the issue of inflation consumer subsidies; external debt crises; Negotiations between Egypt and international donor institutions for financial support, Privatization. finally, the proportionality between per capita income and the study of the causes of poverty.

This study answers these questions and more: (What are the long-term structural features of the Egyptian economy? What are the factors that facilitated or hindered its performance?)
Some believe that the answer on these two questions is to focus on direct investment in both the private and public sectors, both locally and internationally
However, we will discover this only by studying the most important economic decisions that have affected the Egyptian economy since 1952 and the political factors behind them.
The analysis concludes by examining institutional reforms and development strategies to address the structural problems of the Egyptian economy and lay the foundation for rapid and sustainable development.

Intro:
Egypt, the oldest and most populous country in the Arab world, and one of its most influential in the southern Mediterranean region, is now moving into the global economy. the country has begun the structural reform programs needed to put the country onto an export-growth path the main constraint for this is the need to introduce change at a pace which will not undermine political stability.
What are the long-term structural features of the Egyptian economy?
What are the factors that have facilitated or inhibited its performance?
This study answers these questions and more by examining the most important economic decisions to have impacted the Egyptian economy since 1952 and the political factors behind them.
The political economy of reforms in Egypt lays out the enduring features of the Egyptian economy and its performance since 1952 before presenting an account of policy- making growth and structural change under the country’s successive presidents to the present day.
Purpose of the study:
Topics covered include the move towards Arab socialism and a planned economy; the reversal of strategy and the inflate fiscal, monetary, and exchange-rate policies; consumers subsidies; external debt crises; negotiations between Egypt and international donors and financial institutions; privatization; labor and employment; and poverty and income distribution.
The analysis concludes with examination of institutional reforms and development strategies to tackle the Egyptian economy’s structural problems and lay the foundation for sustained ad rapid growth.

The Background:
The public sector in Egypt is still all-pervading as a result of nationalization and centralized state control introduced between 1952 and 1974. The foundations of liberalization were laid in 1974 with laws to open up the economy to foreign investment and protect investments against nationalization and confiscation. Little was done however to weaken state control over the economy. The industries set up in the 1970s were highly protected, inward-looking and dependent on imported inputs.
By the early 1980s, the Egyptian economy already largely depended on oil export revenues, Suez Canal dues and remittances from Egyptians working abroad to pay for imports of food and capital goods. Substantial investments were meanwhile made in highly capital-intensive industries, which obviously did not ease unemployment. The fall in oil prices in the mid1980s cut oil revenues and remittances and worked its way through the economy.

By 1989-90, the Egyptian economy had reached an untenable situation:
• the current account deficit was $1.3 billion in 1989.
• at the end of 1989, Egypt was among the world’s most heavily-indebted countries. Its foreign debt was $43.7 billion and servicing it cost the equivalent of 22 per cent of Egypt’s exports of goods and services.
• the general government deficit, at the root of foreign indebtedness, stood at 7 per cent of GDP in 1990.
• inflation, measured by the retail price index, averaged 18 per cent a year between 1989 and 1992.
• at the end of 1989, total reserves, apart from gold, stood at $1.5 billion.

The International Monetary Fund (IMF):
In the first half of 1991, Egypt benefited from several international measures:
• the Social Fund for Development was set up with about $600 million committed by the European Union, the United Nations and bilateral donors;
• the IMF agreed to a three-year standby accord for SDR 400 million;
• the World Bank extended a $300 million structural adjustment loan;
• the Paris Club agreed to debt relief covering half of Egypt’s debts.
*Why does Egypt need money from the IMF?
The government has many bills to pay, including the wage bill of the public sector and the subsidy bill. The sources of incoming revenues for the government, on the other hand, are very limited and will not cover the bills. To close this financing gap, the government secured a loan from the IMF.

The turnaround came in 1990-91. Egypt’s participation on the Western side in the Gulf War in 1990-91 led to vast transfers of funds from Western and Arab donors and the promise of debt relief. The latter was conditional on the IMF’s certification that Egypt had sound policies leading towards macroeconomic stabilization. In turn, the IMF required Egypt to adopt a comprehensive economic and structural adjustment program which, irrespective of the government’s enthusiasm, led to economic progress. Meanwhile Egypt’s positive role in the Middle East peace process since 1993 has further encouraged Western governments’ favorable disposition.

Egypt raises policy rate and floats currency:

Egypt’s central bank raised its policy rate and floated its currency on October 27, as it announced a preliminary agreement on another international monetary fund package.
The central bank of Egypt’s monetary policy committee raised the rate by 200 basis points at an unscheduled meeting to 13.25%. the rise – the third this year – brings the total for 2022 to 500bp.
The central bank also said it had adopted a “durably flexible exchange rate regime” for the Egyptian pound.

Restrict imports:
With the increasing financial commitment on the government budget in the form of expenditures in foreign currency (imports and payments of debt and the service of the debt) with limited sources of foreign currency (tourism, Suez Canal and remittances of Egyptians abroad), the pressure is high and Egypt have to prioritize. Import restriction policies have also been followed at different points in time to protect and encourage local industry.

Russia-Ukraine war impact:
The Russia-Ukraine war is having a direct and indirect impact on Egypt. Directly, Egypt is one of the world’s major importers of wheat and the war is affecting the size of wheat production and export. Indirectly, the war is causing a global economic slowdown affecting the global demand on products, leading to a global slowdown, reducing the trade through Suez Canal. Additionally, people are not able to afford holidays outside their countries, reducing tourism revenue, and the economic slowdown is affecting job creation, reducing overall demand on workers, including Egyptian workers and potential workers abroad. This is impacting the main sources of foreign currency to Egypt.
In before statement, the central bank said the conflict had “dire economic ramifications” and consequently led Egypt to experience large capital outflows.
Annual headline inflation accelerated to 15% in September, its highest in almost four years, according to official data. Price rises, which come after years of austerity reforms under a 2016 IMF deal, have hurt many of Egypt’s 104 million population.

Dam of Ethiopia:
One mega project may be Egypt’s biggest economic threat; The grand renaissance dam of Ethiopia is set to slow the flow of water through the Nile as it fills a reservoir larger than the size of greater London posing a risk to Egypt’s water security over the estimated four to seven years it will take to fill.
On the other hand the hydroelectricity generated is aiming to offset chronic power shortages in both Ethiopia and upstream neighbors.

Egypt has experimented with more than its fair share of economic policies shifting from a private to a state-run development model in the 50s and 60s attempts to open its economy were often disjointed resulting in an underwhelming performance a common theme through all of this has been its macroeconomic instability one which revolutions largely failed to address whilst the country’s more recent performance has shown some positive improvement deep structural flaws remain including concerns over its governance and levels of corruption ranking 117th out of 180 countries on of the corruption index a sing of the significant issues the nation needs to address to unlock its true potential.

The Way Forward: Toward Comprehensive Institutional Reform
Egypt has managed to achieve good macroeconomic outcomes— though ones largely generated by favorable external factors—while making very limited progress in facing its socioeconomic challenges and its structural and institutional problems. Egypt needs to develop a productive economy that can sustain a mode of growth less dependent on external factors while creating decent jobs for the unemployed, the under employed, and new entrants into the labor market. This could facilitate addressing regional disparities and finding long-term solutions to major social and economic imbalances. It is obvious that achieving these objectives necessitates being engaged in a comprehensive economic reform effort that allows a wider scope of ownership than the current one and that is better coordinated with social policies pertinent to different economic sectors. Engaging in such an effort requires addressing the key factors that are impeding reform efforts and preventing the mass of the population from receiving the rewards of reform while incurring its costs.
• Developing State Institutions
if Egypt is to meet its current economic challenges and engage in comprehensive reform, special attention should be paid to developing a set of formal and informal institutions that can define the rights and obligations for all actors in the economy and regulate the process of reform.
Three types of state institutions need to be developed: institutions that influence the work of the bureaucracy, institutions that shape politicians’ behavior by punishing or rewarding certain types of behavior—influencing the accountability and transparency of politicians—and institutions that widen political space and participation for Egyptian citizens.

• Rebuilding Private-Sector Institutions
One way in which economic reform can become more responsive to the needs of the SMEs is by introducing private-sector representative organizations where both small and big enterprises interact; because SMEs are more numerous, their bargaining power in shaping economic policy would be strengthened. In addition, the reorganization of business organizations according to the economic sector would help mitigate the side effects of the sectors’ shifting importance in the economy. Indeed, in this regard, the state should focus on targeting the potential drivers of future economic growth by selecting specific high-value-added sectors and rewarding those companies that succeed while withdrawing support from those that do no.

• Advancing Civil Society Institutions
Workers need to be enabled to have a stronger bargaining position vis-à-vis other social partners, who have mainly benefited from reform. Key International labor Organization standards of freedom of association and collective bargaining should be respected
the prohibition of civil society organizations from engaging in political activities should be abolished. Respecting and promoting the role of different civil society organizations, especially those acting as watchdogs, is necessary in this regard.

• political activities
In addition, Egypt needs to widen the space for political activities. This requires two main steps: making sure that the elections are fair and transparent and amending the regulations pertinent to the freedom of assembly and activities of political parties. Within the context of economic reform, expanding political space is important for two main reasons. First, it helps increase participation in the process of reform and it increases Egyptian citizens’ chances to benefit from the upsides of economic reform. Second, it puts pressure on the political parties in Egypt to develop specific economic programs and to formulate agendas to present to the voters, which would allow Egyptian citizens to assume a more proactive role in influencing the nature of economic reform efforts.

Sustainable development in Egypt:
In light of the opportunities currently available in Egypt that were presented in this section of the report, SDGs localization in Egypt requires moving through the following stages:
First: Taking advantage of the planning opportunities available in Egypt: The institutional arrangements for the local development program in Upper Egypt are the true cornerstone for SDGs localization, as they greatly empower the local entities and enhance participation and accountability through various mechanisms. Therefore, Qena and Sohag can be considered as the localization baseline, especially that the Ministry of Planning and Economic Development and the Ministry of Local Development intend to develop the local planning system and provide the necessary financing tools for the local development. However, given the challenges in this regard, development of the local planning system requires a change in the planning laws and regulations, which is currently old and overlapping. It also requires a great deal of work on building institutional and human capacities.

Second: Shifting towards decentralization and enhancing participation, accountability and capacity building: SDGs localization requires a serious effort to gradually shift towards decentralization and implement the related constitutional entitlements. This shift will be achieved only with existence of supporting tools, especially the State’s general planning laws, local administration system, and human and institutional capacities building. Continuous political will comes at the top of the tools supporting the shift towards decentralization to ensure shift safety and effectiveness. Participation and accountability mechanisms should be strengthened within the framework of shift towards decentralization.

Conclusion:
During an interview titled “Egypt’s economic reform program” on channel the banker, Hassan Abdullah chief executive of Arab African international bank said:
“we should increase our focus on direct investment both on the local private sector original and as well as international”
Hassan Abdullah
chief executive of Arab
African international bank
For all Egypt’s economic problems it’s currently planning to building 20 new cities with the aim of housing 30 million people including the new administrative capital intending to house the new parliament and most government agencies its central business district will also be filled with skyscrapers including the tallest building in Africa “Iconic Tower”.

1) Joseph Licari, Economic Reform in Egypt in a Challenge Global Economy, OECD development Centre, working paper No.129, 1997, p13,14
2) Joseph Licari, Economic Reform in Egypt in a Challenge Global Economy, OECD development Centre, working paper No.129, 1997, p14
3) (https://www.aucegypt.edu/news/floating-pound-currency-devaluation-egypt)

4) (https://www.centralbanking.com/central-banks/monetary-policy/monetary-policy-decisions/7953559/egypt-hikes-policy-rate-and-floats-currency)
5) (https://www.reuters.com/business/finance/egypts-central-bank-raises-key-interest-rates-by-200-basis-points-2022-10-27/)
6) (https://www.youtube.com/watch?v=bcizKcboxL4)

7) see, Sufyan Alissa, The Political Economy of Reform in Egypt, (Understanding the Role of Institutions), Carnegie Endowment for international peace, No.5, 2007, p20 to 22

8) Khaled Zakaria, localization of Sustainable Development Goals in Egypt, Planning system I Egypt- current situation and future steps, part 2, the Egyptian center for public opinion research, 2020,p12.
9) (https://www.youtube.com/watch?v=_qJqjsODjb4)

Sources:
1. Joseph Licari, Economic Reform in Egypt in a Challenge Global Economy, OECD development Centre, working paper No.129, 1997.
2. Khaled Zakaria, localization of Sustainable Development Goals in Egypt, Planning system I Egypt- current situation and future steps, part 2, the Egyptian center for public opinion research, 2020.
3. Sufyan Alissa, The Political Economy of Reform in Egypt, (Understanding the Role of Institutions), Carnegie Endowment for international peace, No.5, 2007.
Links:
1. (https://www.aucegypt.edu/news/floating-pound-currency-devaluation-egypt)
2. (https://www.youtube.com/watch?v=bcizKcboxL4)
3. (https://www.youtube.com/watch?v=_qJqjsODjb4)
4. (https://www.centralbanking.com/central-banks/monetary-policy/monetary-policy-decisions/7953559/egypt-hikes-policy-rate-and-floats-currency)
5. (https://www.reuters.com/business/finance/egypts-central-bank-raises-key-interest-rates-by-200-basis-points-2022-10-27/)

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