Egypt: A long to-do list

March 12, 2015



Egypt’s economy is recovering but more must be done to guarantee inclusive growth, Sri Mulyani Indrawati, managing director and chief operating officer of the World Bank, tells Sherine Abdel-Razek, Al-Ahram Weekly newspaper.

  • Egypt will present itself to the international business community as an attractive investment destination at the EEDC. How do you see the current state of the economy?

Egypt’s economy is showing signs of recovery after four years of subdued growth. However, the government is facing the dual challenge of having to nurture an economic recovery while addressing long standing structural issues. These include high unemployment rates, especially among the youth and women, excessive government borrowing needs and unsustainable debt ratios, acute energy needs, and a deteriorated infrastructure base.

Youth unemployment is in particular a key challenge for economic stability and inclusion, as 70 per cent of the current 3.7 million unemployed are between the age of 15 and 29.

We welcome the fiscal consolidation measures adopted in July 2014. More recently, the Central Bank of Egypt signalled more flexibility in managing the exchange rate. If this reform path and pace are maintained, fiscal sustainability can be realised and the economy can stay on a higher growth path. Recent improvements in economic activity reflect a gradual improvement in confidence, higher investment spending and favourable base effects.

It is also good to see that the government wants to step up social spending, but it also needs to make sure that these efforts are better targetted to help and protect the poor while maintaining a low inflation rate.

Egypt’s main priority now is to promote private sector-led growth that creates a large, diverse and productive set of jobs for the growing labour force, and bring down unemployment. The country needs to make labour-intensive sectors more attractive and tackle costly fuel subsidies. This would free up resources for the government to enhance social spending to support the poor.

  • What kinds of reforms are still needed?

Egypt’s reform to-do list is long. First, it will be important to restore the confidence of people in Egypt and the economic players. This requires a clear economic vision that makes the Egyptian economy more attractive and competitive while building strong and sound institutions.

Reforms that would support greater private investment include maintaining a stable and transparent tax regime, simplifying business regulations and securing adequate energy supplies with a focus on increasing the share of renewables. Also, an ambitious private sector-led training programme would help address an acute skills gap.

Second, both the Egyptian people and the private sector want a climate that is open and encourages competition and levels the playing field. For this to happen, the country will need to foster good governance and strengthen its checks and balances.
This means that transparent and accountable public institutions and the rule of law are critical for promoting shared prosperity and reducing poverty. Egypt has some way to go. It is important not to shy away from tough issues, like addressing corruption or lowering barriers for competitors.

Third, on the social front, the country has clearly realised that economic growth has to be inclusive and reach all segments of the population. The World Bank is providing technical and financial support to the government’s social reform plan that focuses on redirecting resources and enhancing social services provided to the poor; and building a solid social safety net.

  • Do you expect the conference to succeed in attracting the targeted $15 billion to $20 billion in investments?

This is an important event, and the objective is ambitious. It shows that Egypt is open for business. It gives the world the opportunity to learn more about the country’s vision. For the World Bank Group it is part of our ongoing dialogue with our Egyptian counterparts.
Egypt should build on the recent improvement in markets and investor sentiments following the adoption of structural reforms in July 2014. Investors are now looking to Egypt to continue on this path. The best way to do that is to signal that there is political will to install a credible medium-term reform programme that improves investors’ confidence and the competitiveness of the Egyptian economy.

There are certainly opportunities. For example, the agricultural sector has been attracting significant interest as Egypt has demonstrated the ability to develop a highly profitable horticulture sector, which has gained access to demanding markets in Europe and the Middle East. Basic infrastructure needs for supply chain logistics can be developed through public-private partnerships.

Another emerging opportunity for investors in Egypt is water supply and sanitation, with new desalination and water and wastewater treatment infrastructure. This is a good time for investors to develop knowledge of the sector in anticipation of future deals.

  • Do you think the developments in Libya and the expected involvement in military action in Yemen will undermine the appeal of Egypt as an investment destination?

You cannot choose your neighbours, but to avoid spillovers it is critical for a country to grow its economy and strengthen its social fabric. Egypt should be a source of stability in a difficult neighbourhood to attract investors. This is why it is important for it to stay on course with its reform agenda and build on recent signs of recovery, improvements in its economic fundamentals and greater investment spending.

  • From 1999 to 2010 you helped engineer Indonesia’s reform programme, putting the country on the path to economic recovery. What are the similarities between Egypt now and your country in the late nineties?

Every country is different. Egypt is dealing with a vast gap between high expectations and the reality of limited budgets and even capabilities. This is a test in itself. And we dealt with similar issues in Indonesia.

There is a lot of volatility, uncertainty and the danger of political opportunism. In this mix it is important to do the right reforms but also to reform in the right way. People need to benefit, they need to feel that their hardship is recognised. And no stone should be left unturned to find resources and improve inclusion.

In Indonesia our reforms started with an emphasis on the rule of law. We covered everything from media freedom and social inclusion, to elections, corruption, decentralisation and anti-trust rules. We ratified new public-finance legislation and were open about our budget process. It was critical to be transparent and accountable.

We used independent external audits to avoid conflict of interests and to ensure the integrity and credibility of our public finance management. The independence of the central bank was key in signalling that our macroeconomic management was credible and trustworthy. These reforms were important in our particular context.

Each country has to define its own list, but the basic areas of reforms have to focus on the rule of law, good governance, including checks and balances, and a functioning economy.

Egypt is tackling some of the issues already. It will be critical to not stop half-way.

  • What are the main tips you give to a country in political and economic transition?

Political and economic transitions, and even crises, allow countries to build better and stronger foundations, provided that they do not allow the opportunity to go to waste. If a country wants more than to survive a transition, in fact, if a country wants to come out better than before, it cannot afford to rest on its successes.

As I mentioned earlier, the key areas to focus on are the rule of law, good governance, a functioning economy and social inclusion. But economic success without accountability and social inclusion is difficult to sustain. It is therefore critical to ensure that the people feel part of the transition and part of the success.

  • The prescribed panaceas by international donors for Egypt’s economic woes includes the slashing of subsidies and increasing taxes. What kind of social policies should Egypt undertake to cushion the effect of these changes and make the targeted economic growth inclusive?

The problem with untargeted subsidies is that they benefit the rich more than the poor because the rich use more of the resources. Subsidies also encourage unnecessary consumption and are a very heavy financial burden. When your resources are limited you need to spend them efficiently and effectively. Untargeted subsidies are neither.

Tax increases also need to be targeted in a transparent and effective way to support private sector growth and an inclusive growth. Social policies should make sure that resources reach the poor and vulnerable and ensure that they get good services, for example for health and education.

Many countries achieve successful economic reforms by increasing revenues and redesigning spending to find ways to protect the poor and most vulnerable in a sustainable manner. The World Bank is providing Egypt with financial and technical support to enable them to expand access to cash transfers to the poorest members of society. Enhancing the employability of young people and women is another important intervention.

  • Do you think the conditional cash transfers schemes is applicable in Egypt in light of the low level of needed data and high level of corruption? What needs to be done?

Targeted and efficient cash transfer programmes have produced impressive results in fighting poverty in countries like Brazil and Mexico. They have also been successful in reducing poverty, malnutrition and increasing school enrollment in poor areas. Egypt’s “takaful and karama” programme, which is focused on the poorest districts in Egypt, has the potential of being the backbone of the social safety net system.

Of course, you need to combat corruption. To have a targeted social programme and be able to monitor and evaluate the impact, data is key. We have been supporting this process for the last four years and are ready to provide any further support to ensure the system is in place and working.

  • The country has witnessed many turning points since January 2011. How was this reflected in both the value and the nature of the projects you financed in different sectors during this period?

The bank’s work focuses on the poor. But most of the heavy lifting in fighting poverty and encouraging growth will need to come from the Egyptian leadership. However, we can share lessons from other countries and support the ambitious reform agenda. And we can use our regional footprint to see what more the World Bank can do to promote stability and inclusive growth beyond borders.

The World Bank has also continued investing in energy, even during the most volatile times, as we believe it is crucial for the private sector to play an active role in creating jobs in Egypt. We have also worked closely with the government on supporting social programmes.

  • What are the main new programmes the bank is currently working on with the Egyptian government?

The World Bank is committed to helping the people of Egypt to fight poverty and promote shared prosperity. We are fully engaged in implementation of projects worth $5.5 billion in various sectors, including energy, transport, job creation, water and sanitation, health and education.

We are currently preparing projects on strengthening social protection, increasing affordable housing and enhancing access to improved sanitation and sewage services. The World Bank is also promoting programmes to improve the regulatory environment for the private sector to create jobs and service delivery by public sector entities.

  • Observers are concerned about the increased role of the military in the Egyptian economy, to the extent that it is crowding out the private sector in certain activities, especially those funded by Gulf aid. How does the World Bank see this?

A thriving and dynamic private sector is the key to job creation and economic development in Egypt. As mentioned earlier, encouraging an open economy, competition and a level playing field is critical to attract investors. I know from experience that it may not be easy to do that, but we are working with the government to provide an environment in which the private sector can thrive to create the jobs Egyptians need to build better lives for themselves.

  • There are reservations about Egypt’s human rights record, especially after July 2013. To what extent does this affect your decision to disburse aid to any country?

The well-being of people is critical to our mission and our goals of ending poverty and promoting shared prosperity. Transparency, freedom of information and the rule of law are preconditions for sustainable development. These are principles that we stress again and again in all our engagements. We condemn any departure from these principles.