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Egypt is making renewed efforts to reform its economy: The Economist

Privatisation has a bad reputation in the country but the government is giving it another go, according to an article by The Economist, appeared in the Middle East and Africa section of the print edition under the headline “Changing track”

The train north from Cairo winds through the lush fields and meandering canals of the Nile Delta, before chugging into Alexandria. The scenery is pleasant on a 180km journey that can drag on for more than four hours. It is slow enough that EgyptAir offers flights on the same route.

Egypt’s state-owned, 6,700km rail network, the oldest in Africa, has seen better days. Stations are dingy; trains are dangerous and often delayed. In August 41 people were killed in one collision. It was the deadliest crash since 2012, but smaller ones are common, with over 1,200 last year alone. (Britain’s rail network, with three times as many passengers, saw about 750.)

Days after the accident the transport minister said that he would bring in the private sector to improve quality and safety. His ministry is drafting a law to allow private firms to run trains and stations. If it passes, it would be the clearest sign yet that Egypt is serious about reforming its top-heavy economy.

The state has played an outsized role in business since the coup in 1952 that created the modern republic. It ran factories, banks, utilities and even newspaper publishing houses. At one point more than half of Egypt’s industrial production and 90% of its banking revenue came from the public sector. This socialised economy helped create an urban middle class. But by the 1970s it had become bloated and inefficient. Anwar Sadat, then president, had limited success encouraging private investment with his infitah (“openness”) policy.

His successor, Hosni Mubarak, oversaw a real shift. In 1991 his government picked 314 public companies to privatise. They employed 1m people and generated more than 60bn Egyptian pounds (then $21.4bn) in annual revenue, about 15% of GDP. Within ten years the state had sold more than half, including soft-drink bottlers to Coca-Cola and Pepsi, and a cement factory to Lafarge, a French industrial giant. A study in 2002 for the American government found that these early sales increased productivity at little cost to employment.

By the time Egyptians overthrew Mr Mubarak in 2011, though, privatisation had become synonymous with corruption and job losses. Most notorious was Ahmed Ezz, who bought a public steel company and soon cornered the market. Then he became an influential MP. Critics accused Mr Ezz of using his position to protect a near-monopoly, though the government dismissed two cases against him. In 2006 Mr Mubarak sold a chain of department stores called Omar Effendi. The shops were crumbling but sat on valuable real estate. The investment ministry valued the chain at 1.1bn pounds (then $210m). The Saudi buyer paid half that price, and promptly pushed thousands of employees into early retirement. An Egyptian court later overturned the sale, one of several re-nationalisations that followed the revolution of 2011. The privatisation scheme was halted.

Despite forecast GDP growth of 3.5% in 2017, the government badly needs cash. The budget deficit was 10.9% of GDP for the year ending in June, most of which went on paying interest on government debt. So the sale of state assets is set to resume. The government has hired three banks, both local and foreign, to sell part of its stake in ENPPI, an oil company. That could bring in up to $150m. It also wants to offload shares in Banque du Caire, the third-largest state-owned bank. It hopes to raise about $10bn from such sales over the next three years.

Last year Egypt allowed its currency to float in order to obtain a $12bn loan from the IMF. The exchange rate plummeted from around nine to the dollar to nearly 18. Foreign remittances, a big source of hard currency, are up sharply in the local currency. The tourism industry, which once employed more than one in ten Egyptians, is slowly reviving as foreigners snap up cheap hotel bargains. Visitor numbers rose by 54% in the first seven months of 2017, compared with the same period last year, and tourism revenues jumped by 170% (both still far below their 2010 peaks).

No room for complacency

That said, economists reckon much of the recent growth is thanks to loose fiscal and monetary policy. Government debt has risen to 130% of GDP. The central bank is printing money at an alarming clip to fund the deficit. The broad measure of money supply grew by 39% over the past year, which drove galloping inflation. The official rate is 33%, which probably understates reality, and food prices are rising even faster.

Salaries and pensions have not kept pace. Even the middle classes are struggling. Any attempt to privatise public services would be controversial. The railways raised fares in 2015; Egyptians fear private operators would hike them further.

The companies marked for sale, therefore, are mostly in the banking and energy sectors, which have little direct impact on most Egyptians. The government is offering only minority stakes, limiting buyers’ ability to carry out restructuring. It will sell only about a quarter of ENPPI, which is healthy and well-managed, with 19% growth in profits, reaching $64m last year.

Such sales may help the state’s balance-sheet. But they will not fix dismal public infrastructure and hospitals. In June a wealthy animal-lover offered the government 10m pounds to rent Giza’s grim zoo, where dead animals have been left to rot in cages, promising major investments. It declined, worried that he might raise the five-pound entry fee.

Source: The Economist

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