Egypt: The proof of the pudding is in the eating

President Hosni Mubarak won the country's first presidential election, garnering 88.6% of the vote. The local media has focused on what it perceives to be the imperfections of the whole election process. However, over the long run, the more important issue is whether the government produces results. Some countries have very weak or non-existent oppositions and still produce spectacular economic performances. Therefore, the key is how will the President work with the government to deal with the challenges facing the country.

Previous Egyptian governments have had limited success. However, there are reasons to be more optimistic than in the past. There has been an increasing realisation in recent times, as the standard of living has been eroded, of the need for economic reform. The cabinet appointed in mid-2004 has pushed ahead with such reforms aimed at accelerating growth, via greater private sector involvement, and creating jobs - the key challenge for a country where an estimated 45% of the population are under the age of 20. Official estimates of unemployment are already 10%, although most believe this understates the extent of the problem with underemployment also an issue.

For his part, the President has indicated further economic reform is required in order to transform the private sector from a 'weak junior partner that needs support and guidance, into a full partner in mobilising the investments needed to operate and generate income'. He has set targets for growth of 6% (versus a CAGR of 3.2% from 2000-2004) and annual job creation of 700,000 - the government estimates 5.5% growth is required to absorb the new entrants to the labour market. This has resulted in new reform vigour.

Areas of success under the new cabinet include an overhaul of customs tariffs in terms of both cutting tariffs and reducing the system's complexity. The government has also pushed through with sharp reductions in income taxes. The pace of reform has been surprising and with these measures requiring the President's sign-off, it does suggest that Mubarak appreciates the need for greater liberalisation and is willing to walk the talk.

Meanwhile, a forthcoming World Bank report, Doing Business in 2006: Creating Jobs, will highlight Egypt as one of the few countries in the Middle East/North Asia region that is not falling further behind in terms of the business climate being provided. Indeed, it puts Egypt as one of the top 12 reformers globally. According to a news release, the report will note reforms in company, credit and property registration as well as in the customs office as having boosted the country's overall investment climate.

While the above measures should be applauded, the tax cuts will likely have a short-term negative impact on the fiscal accounts, despite official projections that tax revenues will increase. Public finances were already in dire straits with the 'augmented' budget deficit (ie. debt increasing deficit) at 6.5-8.0% of GDP in recent times. Of course, the government could be right that lower tax rates will reduce tax evasion and increase taxable economic activity in the medium-term, but it clearly needs to find alternative revenue sources, while exercising greater controls on public spending than has been seen of late.

Progress has already been made with the government having raised over EGP 3.3bn in recent months, with more planned in the coming months. However, the determination of the politicians to push ahead with dramatic privatisation will be made evident by progress on two planned asset sales.

First, is a stake sale in Telecom Egypt. Second, and most crucially, the sale of Bank of Alexandria, slated for the end of the year, will be crucial as it will test the government's ability to balance the issue of job security for bank employees against the need to get a good price. It is also important, as the high level of banking sector non-performing loans (currently running at around 25% of total loans) is a potential liability for the government in the years ahead. The appointment of an adviser on the sale of both assets is clearly a positive step, which indicates the commitment to push ahead.

The government realises that a failure to push ahead with either asset sale would damage confidence in its willingness to take the short-term pain in order for the economy to reap the longer-term benefits. In theory, the lack of a strong opposition should make such decisions easier. Soon we will know just how serious the administration is about reform.