Egypt edging near recession

Emerging Egypt: The remnants of a privatisation era during the 1990s and early 2000s, a Hosni Mubarak legacy, where many state-run firms were sold off have left many ordinary Egyptians jaded.

The Egyptian economy, reeling from a big budget deficit in tandem with falling GDP and the government's decision to brush off privatisation, has been the subject of criticism. Khaled Desouki / AFP

CAIRO // Egypt's economy is struggling to overcome a tussle among private companies hoping to take advantage of the fall of big business and to overcome the interim government's resistance to any move towards privatisation as reminiscent of the Hosni Mubarak era.

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Experts representing the country's private sector have criticised the government's decision to brush off privatisation as a means of supporting the economy.

Six months on from when Mr Mubarak stepped down from the presidency, Egypt is still reeling from a big budget deficit and falling GDP.

Some in the industry say the interim government is attempting to appease the public by refusing to go down the privatisation route, because many people associate that policy with crony capitalism.

"It has become a very populist government and that is reflected in many decisions, [where officials] shy away from issues that should be debated," said Magda Kandil, the executive director at the Egyptian Center for Economic Studies, a non-profit, private-sector research institute. "There was a deliberate attempt to appease people," said Ms Kandil, who is also a senior economist at the IMF.

Last month, Hezam Al Beblawy, the finance minister and deputy prime minister, who replaced Samir Radwan, said the government had no plans to sell any more state firms but neither did the state have any intention of nationalising companies.

As Egypt's economy heads for recession, Egyptians fear that the government could turn to sell-offs of national companies, a bitter reminder of a swathe of privatisations during the 1990s that helped the country to avoid bankruptcy but created the cronyism that ultimately contributed to the revolution.

Ordinary Egyptians accuse the government of selling assets cheaply to cronies, with the fruits of growth not distributed equally and rarely trickling down to the poor.

That is contrary to basic economic ideology of privatisation as a way to improve operating efficiency, bolster corporate governance and wipe out corruption.

The Egyptian government responded to a dramatic fall in growth and macroeconomic imbalances in the early 1990s by privatising some of the country's biggest companies, which now include the Bank of Alexandria and the telecommunications operator Mobinil. At the time, the country had a budget deficit that was 17 per cent of GDP and an inflation rate of about 15 per cent.

Although the programme lifted the fiscal burden and opened up the country's capital market, Egypt remains haunted by the corruption that underpinned many of those so-called "sweetheart" deals.

And officials and businessmen with links to Mr Mubarak's regime are still being investigated for allegedly amassing of huge fortunes.

But for those in the private sector, that does not mean an end to privatisation.

The textile industry, where an increasing number of employees have been striking for higher wages, has pushed the government to increase subsidies for the sector, cutting into the country's budget, says Ms Kandil.

"There's no question that the privatisation programme [of the 1990s] failed to produce the fruit of growth for many, but some industries are operating under losses under the public umbrella, and could be privatised," she said. "We are overspending when we should be rationing."

Others agree that private investment in Egypt, whether from international, regional or local investors, is a requisite for reviving the economy. But it will probably take time. "It's a fluid situation in Egypt, but if you want to talk investments, you're talking in the medium to long-term. But there is a huge potential for investment if the government is corruption-free," said Karim Shafei,the managing director of Al Ismaelia, a property investment company in Cairo.

"That has been the biggest impediment we faced in the last 10, 20 years," said Mr Shafei. Despite the lack of agreement between private-sector companies and the government, there are signs that Egypt's top entrepreneurs are vying for the empty spaces that are being left behind by failing big private companies with associations to the former regime

Ahmed El Bardai, the former chairman of Banque du Caire, the country's third-largest bank, has been promoting his microfinance company, Reefy, which he launched in 2007 partially with the help of the telecoms billionaire Naguib Sawiris. His company provides loans to small and medium-sized businesses in the private sector, and considering that small and medium-sized enterprises account for 80 per cent of the country's employment, it is not surprising he expects this to become a fruitful business.

There are about 500 microfinance lenders now in Egypt that lend to small business entrepreneurs such as shop owners, bakeries and local insurance companies, and many believe that these will only increase in number as Egyptians attempt to revive their livelihood after Mr Mubarak.

Mr El Bardai said he had "no doubt that greater emphasis" would be on micro and small business, in contrast to a government that saw growth only through big business.