Egypt’s Economic Reforms: Achievements and Challenges Mustapha K. Nabli The World Bank Presentation for Cairo Investment Forum 9-10 December 2006

Recent Performance: Strong Investment and Growth Revival Higher growth rate: from 3% p.a. in to around 7% now Surge in foreign private capital flows both portfolio and FDI (almost 6% of GDP in ) Domestic investment has shown signs of dynamism Higher exports: rise by 37% in FY , which shows enhanced competitiveness Some indications that this is having an impact on employment, including a reduction in unemployment (Ragui study)

There is no doubt that the external environment has contributed to these results The most important impact stems form the recent expansion especially in the GCC in relation to the regional oil boom: a number of links are producing a positive impact on the Egyptian economy ---these effects are significant but much weaker than in previous booms Higher remittances: 14% of GDP in 1979, 3% today Significant increase in tourism activity Foreign investment flows: FDI 7% of GDP in 1979, 4% in 2005 Official aid: 19% of GDP in 1975, 2% today Indirectly: encouraging reforms

But reforms must have contributed significantly On macro-economic management : – exchange rate correction eliminated parallel market Cumulative 26% trade-weighted nominal depreciation in , much of it concentrated in Significant structural reforms –The tax rates and administration reforms –Tariff reduction and customs reform (inspections, clearance processes, faster processing using IT) –Business environment reforms: registration and licensing and establishment of a one-stop-shop, –Financial sector reforms –Privatization of SOEs, including in the banking sector; infrastructure concessions

Evidence of this impact from Investment Climate Assessments by the World Bank Investment climate surveys have shown a significant improvement in perceptions in 2006 compared to 2004 in a number of areas where these perceptions were highly negative and considered as major impediments to investment: (same 738 firms surveyed in 2004 and 2006) Enormous improvement on perceptions on tax rates and tax administration Significant improvements on perceptions about: –customs administration and trade regulations –Business licensing and regulation permits –Legal resolution of disputes –Access to finance and to land

Sustaining and reinforcing growth requires a virtuous cycle which leads to Higher rates of private investment –Domestic as well as foreign: the overall private investment to GDP ratio remains relatively low in Egypt productivity increases –Vibrant firms that innovate & respond quickly and flexibly to changing markets –The investment climate surveys shows little improvement in the productivity of firms over the last few years

Which requires deepening the reform program A number of areas are shown by the Investment Climate Surveys to require more attention to a number of areas on which the government is working already: Improving access to finance and the effectiveness of the financial sector to intermediate resources, especially to SMEs and services firms Reducing barriers to entry, enhancing competition reducing regulatory uncertainty especially for services firms Dealing with informal practices of competition Developing workforce quality skills Combating corruption Ensuring that the benefits of the reforms benefit the smaller firms as much as the larger ones

… and requires also enhancing its credibility -- Making sure that the direction and momentum of reforms are well understood and are maintained –Making sure that announced policies are implemented and no reversals take place –Making sure the benefits of growth are broadly shared: creating jobs, reducing poverty, more generally spreading benefits to the large population –Ensuring that these benefits from the reforms are known by the public Then the virtuous circle of better policies—better results— better expectations---better policies and so on continues to be operating for the benefit of the Egyptian people.