Oxford Business Group (OBG) is a global publishing, research, and consultancy firm, which publishes economic intelligence on the markets of the Middle East, Africa, Asia, and Latin America.
To learn more about OBG’s views of Egypt’s economy, and the recently adopted economic reform programme, Daily News Egypt interviewed Robert Tashima, OBG’s Africa’s managing editor, who reviewed the economic performance of Egypt during the last period and the impact of economic reforms on the life of the average Egyptian.
How do you view Egypt’s economic reform programme?
I mean, first off, I think one thing I should make clear from the beginning is that a lot of my perspectives are going to be from OBG’s vantage point. We’ve been present in Egypt for about 14 years now, speaking with private sector stakeholders, government officials, and civil society to get a sense of what’s going on in the country, where the opportunities and what the challenges are. We communicate that to foreign investors, and we come to these sorts of issues with a very particular external view points. What we seek to do is not just to take a look at the Egyptian market in isolation, but also to take a look at how Egypt performs relative to other markets in the Middle East and North Africa, because generally, our subscribers are members of the foreign investment community whether companies or sovereign governments. These look for a place to invest their money, but they study a number of economies to seek the best return for their investment.
In terms of Egypt’s economic reforms, I would say no they’re not sufficient, but I think that every economy has room for improvement, but I think it has been noticeable over the past couple of years that the Egyptian government has made concerted efforts to listen to the needs of the private sector and make an aggressive push to the overall attractiveness of the economy.
However, by taking a look at Egypt from a different perspective, it’s very clear that the reforms and the changes have not been perfect, but I think there is a high degree of political will in terms of improving Egypt’s attractiveness to both local and foreign investors, such as the new tax exemption, and fiscal incentives, proposed over the past couple of years. You’ve also got this unified customs tax for equipment importation, and you have a new corporate tax and a value added tax.
These efforts go a long way, and, again, even if they did not achieve the intended results, I think that for the government to actually conduct them goes a long way in terms of improving investor confidence. One thing that has been really impressive from our perspective was the effort taken by the government to address the very difficult and tricky issue of subsides, which date back to the bread riots of the 1970s.The government has managed to reduce the subsidy bill, and the government has been trying to reduce this burden on the state, which can have a number of knock-on effects when you’re paying more in current expenditures for things like subsidies that reduce the amount that the government can spend on things like road maintenance or schools for example.
Consequently, I think the reforms that have been carried out over the past couple of years—whether fiscal incentives, tax regime changes, subsidy cuts, or even currency flotation—have gone a long way in terms of strengthening the attractiveness of the Egyptian economy, at least in the short term, and as we go through these programmes, they will hopefully meet the target and the long-term outlook for Egypt’s attractiveness will continue to improve. I mean, there hasn’t been any major change yet in business confidence or investor confidence surveys. The PMI for March was actually slightly down what it was in February or January, so obviously we’re not seeing that kind of turnaround, but I think it will take time.
But, you know, we in OBG just recently completed our first ever business barometer, which is a survey given to Egyptian CEOs, where we talk to top executives in the country to get a sense of what they are thinking about the economic outlook and the reforms being carried out. And we found that 80% of the top executives in the country are either positive or very positive about local business conditions, which was surprising.
In your point of view, what are the amendments and modifications that can be applied to the reform programme to increase its efficiency?
Given that Egypt is currently ranked the 122nd rank in terms of the World Bank’s “doing business ranking” report, which that shows that there is a lot of room for improvement in terms of business environment, especially in terms of dispute settlements and arbitration.
One of the things that we often hear when we’re doing our research in Egypt from the private sector is the challenges related to land transactions: how burdensome they are, how slow they are, how expensive they can be. I think that, currently, the time it takes to register property in Egypt is roughly twice that of the regional average. For example, if you’re a developer looking to build a mixed-use use project or if you’re an industrial company or a factory, the fact that you have to wait for 50 to 60 days to just register the property.
This is a huge disadvantage in terms of efficiency of your investment, so that’s certainly a challenge, and there is obviously plenty of room to address those issues. We’ve seen improvements in construction permits and investor protection. But the land act is certainly one area where there’s room for improvement, as well as the challenges faced with the new lottery system, and the revenue sharing model. There is growing concern whether those are viable options.
Moreover, I believe that another area where there’s certainly room for improvement is where you’ve seen the Central Bank of Egypt (CBE) and the government take a lot of efforts to improve the access to finance. There has been a lot of talk about boosting not just small and medium enterprises (SMEs), but also the private sector credit. I think that this is particularly challenging for Egypt’s banking system.
Doing that is not a question of whether or not Egypt’s banks have the capacity to lend or whether they have healthy balance sheets. Egyptian banks’ non-performing loan ratio is declining, and they have a loan to deposit ratio between 40-42%, which is one of the lowest in the region.
This means that there’s a lot of capital and a lot of liquidity for banks to lend. However, I think the pressure is coming from the rapid growth of locally held government debt in the banking system. You’ve got a lot of government bonds that banks currently hold, and it has grown by 300% since 2010. As a result, the banks’ incentive and ability to lend to the private sector is reduced.
How do you view the soaring inflation rates, and how it can be controlled?
I think that a 32% inflation rate is one of the highest in a decade. This is obviously exacerbated by the currency flotation and the reliance on imported products and equipment, which means that households and smaller businesses in Egypt are very vulnerable to price increases.
The subsidy cuts also made it worse. Natural gas prices rose by around 100-150%, which was really just a crazy amount for your taxi driver or your average household to suddenly have to start dealing with. I think the inflation peak has passed and that things are beginning to stabilize, but certainly it is a big concern for the large proportion of households.
There have been proposals from the International Monetary Fund (IMF) to potentially look at tightening monetary policy, by pushing up interest rates to help address that. The government is really trying to reduce unemployment and boost export revenues in order to ensure that the economy is growing in a sustainable fashion. This is also besides the fact that they are attempting to improve the level of inclusiveness and achieve a higher growth rate than they currently have, which means they need to continue to push for recovery, and tightening the monetary policy won’t help that in any way, as it will just delay the prospects for recovery.
The government is attempting to maintain a very tricky balance, where they are trying to control things like subsidies and improve the broader stability of the macro economy by floating the pound and reducing the pressure on foreign reserves, all while trying to reach higher growth rates and minimise the pain on lower-income households. In my opinion, figuring out how to balance that is really going to be the single most difficult task for the government in the next twelve months.
Can we achieve the government’s target of 7% growth rate, and what is the sufficient GDP growth rate to achieve the aspirations of the Egyptian people?
It is very clear that the current growth rate in Egypt is not close to the target. We are expecting that, by the end of this fiscal year (FY), there will be a growth of around 4%. The aim was to have it 2-3 percentage points higher. But I believe there are things that can be done to support improvement in terms of household income, employment, and, more importantly, providing a more inclusive basis for growth. One of those is education, not only by improving matriculation rates, but also ensuring that what people are being taught will improve their employability.
This can be achieved by not only improving enrolment in universities, but also by boosting technical and vocational training and providing internships and apprenticeships for people who might want to work in high-end manufacturing facilities, such as automotive plants or telecoms and IT activities.
Every year, 700,000-800,000 people enter the workforce in Egypt, so providing them with jobs is really crucial. However, it is not only a supply issue; it’s not just about creating jobs that provide employment, but also about ensuring that people who graduate from universities or high schools have the skills necessary to find quality employment—and if they didn’t find quality employment, they should have the ability to start their own business.
Consequently, even if GDP growth doesn’t reach the target, there are various ways to improve the life of the average Egyptian, one of which is to improve access to affordable housing. There’s a huge housing deficit in the country and particularly in Cairo and Alexandria. The price of formal housing is out of the average citizen’s capability. It is estimated that there are between 15 to 20 million people in Egypt that live in informal houses.
In regards to creating job opportunities, I think that SMEs can play an integral role. You’ve got a segment of the economy or a collection of businesses that could employ something like 70% of the total workforce.
Even if the GDP didn’t reach that magical 7% number over the next year or two, I think that certainly at the moment it looks like it will take longer than the next year to hit that rate, but there are, nonetheless, a number of ways to improve people’s living condition.
What is your evaluation of the Egyptian-American relationship, in the wake of the recent visit?
We can say that the US-Egyptian relations are being reset. US officials said they want to renew their relation with Egypt, but I think the discussions that they had in Washington DC focused on the joint cooperation between them in the fields of security and countering terrorism. The big question mark here is really more about the US strategy. It is very difficult to discern what the US attitude is towards Egypt, and the Middle East more broadly. It looks like the US is pulling back from foreign engagement. The White House has forecasted a 30% cut in spending on diplomacy, and this is going to be translated into a decreased level of aid. However, the uncertain or unclear foreign policy of Trump’s administration makes it very difficult to measure exactly how it’s going to play out in a concrete way.