The private sector is crucial for Egypt’s economic growth; fortunately, the government is realizing this with its current direction of inclusive private sector growth.
Speaking at the annual Business Forward event, titled “Egypt Resuming Growth: Opportunities and Barriers”, three prominent economic experts weighed in on how Egypt’s private sector can drive its economic recovery and growth. President of American Chamber of Commerce Tarek Tawfik, Senior Resident Representative of the International Monetary Fund in Egypt Said Bakhache, and Economic Adviser to the Prime Minister Gehan Saleh were on the panel, which was moderated by Dean of the AUC School of Business, Sherif Kamel, providing a platform for an exchange of views on the issue.
Tawfik lauded Egypt’s economic progress, particularly as it has taken far greater strides than many other countries in the direction of economic growth, although he added that there are still some issues. “FDI is not coming into the country, the private sector is shrinking, and the Purchasing Managers Index (PMI) has been below 50 for the last 6-7 years, which is an indicator that we are not growing as fast as we want,” Tawfik explained.
As the economy’s pillars remain relatively volatile, heavily depending on tourism, remittances, Suez Canal revenues, hot money, and the oil and gas sector, making Egypt more vulnerable to the effects of any crisis.
With Egypt’s government spearheading a private sector inclusion program, this is likely to lead to state-owned enterprises gradually exiting the economy, structural reforms, mitigating red tape and furthered public-private dialogue, the president of the American Chamber of Commerce described. He also emphasized the importance of training and boosting the labor force’s capacities.
Tawfik argued that our growth rate recently is mainly triggered by public investment, which is largely generating jobs in sectors with low skills. This has been sustaining growth but if we want to move forward, we have to be changing our trajectory, he commented.
Tawfik recommended that the government should exit from what he referred to as ‘wasted futures’, and should avoid investing in industries that are saturated and where the private sector has the skills and know-how to operate, using the textiles sector as an example. “This is not the role of the government, this is where crowding out happens, and is not a good sign,” Tawfik said. “Governments should be investing in future industries, paving the way for the private sector, and carrying it through, rather than doing the same job the private sector is doing.”
The recent Initial Public Offering (IPO) of the digital payments company E-Finance and potentially six more State-Owned Enterprises (SOEs) in the next few months are promising first signs. As the government adopts more of an exit approach, this is likely to further the appetite of foreign investors. As a transitional year under a post-pandemic reality, 2022 will be a time when the government’s commitment and its longer-term plans regarding SOEs will hopefully unfold with more clarity and transparency.
The IMF has been a key partner to the Egyptian government, particularly with the economic reform program in recent years. In this light, the Senior Resident Representative of the IMF in Egypt Said Bakhache emphasized the importance of reducing the state’s footprint on the economy.
“As I represent the IMF, we have a strong conviction that macro stability is an absolutely necessary condition for encouraging activity in the Egyptian economy. There is a need to reconsider the state’s role in allowing more space for the private sector to freely operate and create goods and services.”
Bakhache noted that the private sector faces ample challenges because of the state’s extensive and restrictive role in the economy. In his view, the private sector needs to be the engine of growth and job creation in Egypt. Additionally, a flourishing private sector requires a stable macro environment and a level playing field to optimize expected return, productivity and job creation potential.
He further emphasized the importance of strengthening the performance and governance of state-owned enterprises, improving accountability and competition practices among all economic actors, particularly by slashing the advantages often unduly granted to state-owned companies. This would allow the entire economic landscape to compete on the same level.
Additionally, Bakhache noted that the Egyptian economy is continually growing, but more can be accomplished by developing private sector incentives. This is crucial since private investments currently contribute incredibly little to economic growth.
One aspect he flagged of prime importance is how the size of Egypt’s working age population will massively increase by 2050, raising the need for high-quality, sustainable jobs to leverage the Egyptian economy’s potential. The state has wide-ranging presence in numerous sectors, through over 20 public sector companies, military owned enterprises and joint ventures across oil and gas, tobacco, construction, banking, hotels, railways, and even baby formula, among other sectors.
“[In other countries] it’s not unusual to see the state involved in banking or public utilities. But it is really unusual for the state to be involved in the production of food, appliances, and textiles. The main issue is that these are not subject to the same disciplining factors that regulate [private] companies,” he said.
Bakhache also explained how evidence shows that SOEs underperform compared to comparator private sector companies as well as SOEs in other countries, which has a real cost. “It’s important for the government to identify the sectors in which their involvement is needed for strategic reasons or market failures. In sectors where this is not the case, it is important for the state to gradually withdraw, and encourage private sector investment there.”
Gehan Saleh, economic advisor to the Prime Minister of the Government of Egypt echoed the points made by the other speakers, saying that “the enhancement of the private sector is not a luxury, it is crucial.” Saleh explained that with the high political instability during the years following the 2011 uprising, the government could not wait for private sector investment in key sectors like infrastructure and electricity. Following the economic reform program of 2016-2019, the government’s vision is to start another phase of structural reforms, in which private sector enhancement is a core objective, prioritizing three sectors: ICT, Industry and Agriculture.
A major goal for the government is to see investments contributing to 25 percent of GDP growth, up from the current 15 percent, and to achieve that investments needs to come more from the private sector and from Foreign Direct Investment (FDI), Saleh stated.
“We will soon announce the sectors that the government will entirely step out of in the short, medium and long term…The corona pandemic delayed the IPO of public companies; [yet] I am confident that we are on the right track,” Saleh stated, mentioning how this government strategy was formulated based on diagnostic studies and engagement with the private sector and international organizations.
Saleh also highlighted the dire need to fix the local ecosystem in order to position Egypt on the global value chain, and improve the competitiveness of Egyptian goods to boost exports, rather than focus on reducing imports, which is not the pressing issue in our case.
Saleh finally mentioned that ‘Hayah Karima’ the mega national poverty-alleviation initiative is a good example of the government crowding in private investments in infrastructure, rather than crowding out.
“The perspectives of the private sector, international institutions and the government are all aligned, it’s now about moving into real action on the ground,” said Sherif Kamel, and added as he concluded the session, “For the economy to reach its true potential– based on the contributions of the panelists- it’s a matrix that includes an environment that is government-enabled, private sector-led, innovation-driven and youth-empowered and future-oriented.”
The rich discussions of the session indicated that reform and progress is not a mere three- or four-year timeline. The complexities of economic growth in a country that showed promise in the face of the past decade’s trials and tribulations are clear, yet the growth story Egypt has recently witnessed is clearly only the beginning of this new chapter.