Egypt: New PM boosts reform hopes

President Mubarak has appointed Ahmed Nazif, the former Communications Minister and a foreign educated computer specialist, as the new Prime Minister. A reshuffle had been expected for some time. The previous Prime Minister, Atef Obeid, and his cabinet had become identified with the economy's recent slowdown, policy inertia and last year's 25% devaluation in the value of the pound against the US dollar. Nazif's appointment has been welcomed by the local press and markets, and has rekindled local optimism that further economic reform may take place. Thanks to a supportive global backdrop, the new PM will inherit a gradually improving economy and stable currency. Longer term economic prospects, however, depend on some difficult decisions and although the new government may be better qualified to tackle them, it is not clear whether they will be able to do so in practice.

Ahmed Nazif is not well known. A business orientated technocrat, with a doctorate in computers from Canada's McGill University, he was first appointed to the cabinet in 1999 to head the then newly formed Communications Ministry. His reputation is based on the success he had in broadening mobile phone and internet usage among Egyptians, by opening the sectors to private sector competition and lowering costs. Much of the optimism surrounding Nazif's appointment is based on the hope that he will bring the same liberalising zeal to the wider economy.. The new PM has appointed a cabinet with a similar pro business outlook, with 14 of the 27 existing ministers being replaced. The semi official al-Ahram said that the new government would pump "youthful and fresh blood" into the administration. An early test case could be the much discussed, and much delayed, partial privatisation of Egypt Telecom

In his first press conference, the new Prime Minister said that his priorities would be education, health, and job creation. Fortunately for him, he will inherit an economy on the turn. The stock market tells is own story, up 29% year to date in dollar terms. Thanks to the external side of the economy, growth this year will surprise on the upside. Egypt's two largest hard currency earners - Suez canal dues and tourism - are on track for strong years. Last year's record USD 2.6bn of Suez receipts looks repeatable and annualised Q1 numbers suggest that visitor arrivals could rise by 15% in 2004. The foreign currency inflows have helped stabilise the Egyptian pound, with the black market now equal to the official rate of 6.2 USD/EGP. The domestic economy, however, remains subdued and public confidence depressed. But with tourism, the largest private sector employer, picking up and a expansionary government budget there should be some trickle down to the wider economy in the second half of the year.

Despite the recent improvement in growth prospects, Egypt's economy continues to grow below potential and remains vulnerable. World Bank estimates suggest that the economy needs to grow at 6% per annum to absorb new labour market entrants and maintain unemployment at its current high levels. The Central Bank puts this at 11%. The recent exponential growth in the public deficit is also an area of increasing concern. The deficit has risen from 3% in 1998 fiscal year to over 7.5% in 2003. Spending has been rising twice as fast revenues. This restricts the government's possible policy choices. Given the reluctance to cut spending or raise taxes significantly, reinvigorating the government's privatisation programme is the only credible policy path. But it also has political costs, as privatisation is likely to lead to public sector job losses. Whether the new government will have more appetite, and political authority from the President, than its predecessor to take such decisions will be key to it making a difference.