FES

Egypt
/ Michael Field. - [Electronic ed.]. - Bonn, 2000. - 25 S. = 71 Kb, Text
. - (FES-Analyse)

Electronic ed.: Bonn : FES Library, 2001

© Friedrich-Ebert-Stiftung

A Decade of Economic Growth

Business Successes

Privatisation

Stock Market

The "Real Economy" and Standards of Living

New Economic Difficulties

Lack of Commitment to Reform

Political Parties and Elections

Emerging Civil Society

Declining Islamist Influence

Cultural Islamism

Muslim/Christian Tensions

Conclusion - the Need for Political Change

The mid-1990s idea that Egypt was emerging as an economic "Tiger on the Nile" has gone out of fashion. Yet there was real economic change in the decade. The government successfully implemented an IMF reform package and the country’s growth since has run at around 5 per cent.

Successful private businesses have developed in food products, electrical goods, contracting, building materials, vehicle assembly, telecommunications and tourism. Foreign investment - outside oil and power generation - has been on a more modest scale.

Since 1993 the government has sold controlling interests in 114 state companies, but the privatisation process is now slowing. The more attractive businesses have been sold, and government officials find it difficult to accept that most of the state companies that remain are of little value.

The standard of living of poor Egyptians is slowly improving. There has been some fall in unemployment. It is the old middle class - people working in the public sector - who are being squeezed.

In the last two years the economy has slowed. Government borrowing has increased and interest rates have risen. Bankers suggest the Egyptian pound should be devalued. For the longer term growth will be held back by the lack of real commitment to free markets among the Egyptian political classes - and by the many vested interests in the system.

Egyptian politics has been static since the early 1990s. President Mubarak does not believe reform is necessary. Opposition parties are allowed, but their activities are restricted and they have little credibility with the public. The Emergency Law passed after the assassination of President Sadat in 1981 is still in force.

Islamist violence has been brought under control since 1997, mainly by heavy handed security methods. Popular support for the militants has waned, partly thanks to TV soap operas that show them in a hostile light. The moderate Islamists of the Muslim Brotherhood have been weakened by internal divisions. Socially the influence of Islamic ideas may still be increasing.

In some of the villages of Upper Egypt relations between Coptic Christians and Muslims remain tense. The government has no policy for dealing with the violence, apart from tough policing.

The Egyptian intelligentsia worries that the lack of political mobility may breed frustration and further violence in society. At the least, the fear is that it will slow the development of Egypt socially and economically.

A Decade of Economic Growth

There was a period in 1996 and 1997 when the young brokers who move the global investment markets started to refer to Egypt as the "Tiger on the Nile". The Egyptian government loved the idea. The core of its economic strategy is to promote its country as an attractive place for foreign investors. It generally represents it as having a more vigorous economy and a much stronger commitment to reform than is really the case. Helped by state inspired publicity and the enthusiasm of the young bankers, investment flowed into Egypt, though the sums were not huge by international standards and much of the money was Egyptian capital that had been held abroad rather than investment by foreign companies. Some small fortunes were made on the stock exchange.

The tiger image did not last long. It went out of fashion quite suddenly when the real tigers of Asia crashed and Egypt ran into difficulties of its own. Nowadays in Cairo nobody mentions the word without a wry smile.

Yet there was a real change in Egypt in the 1990s. At the beginning of the decade the country had serious problems. Its economy was state controlled and immobile. Although since the years of President Sadat (1970-81) the private sector had been allowed to play a role in trade and real estate development, most of the economy remained socialist - in structure, bureaucratic procedure and mentality. The state had foreign debts of some $50 billion, more than 100 per cent of gross domestic product, and a huge budget deficit.

Then in 1990 the government had a stroke of luck. Saddam Hussein invaded Kuwait and Egypt promptly joined the allied coalition. It was forgiven $7bn of military debt owed to the United States and $6bn of debt owed to Saudi Arabia and the Gulf countries. In May 1991, three months after the liberation of Kuwait, Egypt reached a deal with the International Monetary Fund (IMF) under which its government creditors agreed to write off half the $20bn still owed to them, in three tranches, if Egypt undertook a prescribed programme of economic reform.

The government duly abolished multiple exchange rates, which had the desirable effect of putting all the subsidies it paid its people - a major cause of its problems - into the budget, where their true size became visible. The budget deficit was then reduced, partly by a gradual rise in the prices of electricity and gasoline and the elimination of subsidies paid on all but three food items - sugar, edible oil and bread. Later even subsidies on these products were cut. Today there are minor price controls on sugar and oil, but the only subsidy paid by the government applies to low quality flour for cheap bread. This measure, which helps the poorest in society, is not a great burden on the government and it does not worry the IMF. In the last five years the budget deficit has been around 1 per cent of GDP.

The Egyptian pound was floated, albeit in a controlled way. Interest rates were decontrolled and the government issued tax free treasury bills. Money from expatriate Egyptians poured into the country, the pound became quite buoyant and the government’s reserves gradually rose to $20bn. They were stable around this level in 1997 and 1998.

The government’s borrowing was kept under tight - almost obsessively tight - control. The external official debt in April 2000 was $29bn. Most of this was at well below market rates, which gave it a discounted value of $19bn. At face value the debt was equivalent to 31 per cent of GDP.

The most important consequence of the reforms has been a reasonably strong rate of GDP growth - stimulated above all by the decontrol of interest rates. During the 1990s GDP growth ran between 4 and 6 per cent, which was enough to give a gradual rise in real incomes of 2 or 3 per cent a year. Egypt’s 65 million people now have a GDP per capita of about $1,300.

Business Successes

It has been mainly Egyptian businesses that have driven the country’s growth. Many of the companies that are successful now began importing or manufacturing simple products in the Sadat period, developed slowly in the 1980s and have blossomed in the last decade. Food products have been a big area of expansion. There are many businesses producing such items as potato chips, frozen chicken legs, ice cream and other dairy products, chocolate and traditional Egyptian confectionery, pasta, and food ingredients such as acetic acid. Generally the new food industries are rated as good quality and are highly profitable. A new brewery has been established, making a beer named Sakkara, which has taken the top of the market from the long established and recently privatised Stella brand.

Some companies have gone into simple industrial goods and building materials, such as pipes, or domestic electrical appliances. The electrical goods brand name Mustapha Ali has become well known.

On a more sophisticated level several of the car importers in the last five years have gone into assembly, in some cases with foreign partners. Egypt now assembles Mercedes cars and busses, GM cars and small trucks, Mitsubishi and Ford pick-ups, and Renault, Peugeot, BMW, Daewoo and KIA cars. The Egyptian content of the vehicles is around 40 or 50 per cent: the tyres, glass, interior fittings, batteries, lights, bumpers and paint are mostly locally produced. There is some question as to whether vehicle assembly is an appropriate industry for Egypt. The plants benefit from a high level of tariff protection and although the government is trying to delay removal of these tariffs for as long as possible, the WTO will eventually insist they go. It could be argued that the capital that has gone into the plants would have been of greater benefit to the economy in the long term if it had been invested in other areas.

The most visible area of growth has been tourism, in Cairo and the Nile valley, on the Mediterranean coast, and, above all, on the Red Sea coast. Some of this development, including several of the big Cairo hotels, has been undertaken by investors from the Gulf states and Saudi Arabia. Tourism has stimulated the construction, building materials and food industries. It is now encouraging developments in aviation. In the last year or so 28 companies have been given licences by the Civil Aviation Authority to develop businesses including charter flights, air taxi services and hot air ballooning. In several cases tourist companies are developing airports and/or air services linked to the resorts they are building.

All this activity has led to the emergence of some big entrepreneurial names - something unheard of in Egypt since President Gamal Abdel-Nasser nationalised most of the private sector in the early 1960s. Much the best known new name is that of Sawiris, a family of Copts (Egyptian Christians) from Assiut in Upper Egypt, which owns the Orascom Group. The founder, Onsi Sawiris, began as a contractor in the 1950s, went abroad when his company was nationalised in the 1960s, and returned in the 1980s with various foreign dealerships. As the government opened more sectors to private investors - allowing them into businesses where they would compete with the state - he and his sons went into tourism, hotels, construction, building materials including cement, port management and most recently mobile telephones. The group has a big holding in MobiNil, one of Egypt’s two fast growing mobile operators. The Sawiris are known as well educated, decent businessmen, professional and, in the commercial sense of the word, aggressive.

Other prominent new names include: the Swedi Group, in electric cables, building materials and real estate; the Ezz family, in steel and ceramic tiles; the Baghat family in consumer durables, assembly, real estate, hospital development and the internet; and Mohammad Farid Khamis, who owns a carpet company , Oriental Weavers, which is the country’s biggest private sector exporter.

Foreign investors have been most important and visible in the oil and gas sector, where BP Amoco is the leading producer. They are also involved in build-operate-transfer power projects, where, EdF of France and Intergen of the US have stakes. Four companies - Lafarge, Blue Circle, Cemex and Cimpor - have recently bought much of the cement industry. Vehicle producers have invested in assembly plants, and two companies, one of them Vodafone, have gone into mobile telephones. Most other foreign investment is in pharmaceuticals, food and household consumer goods. The main investors here are Glaxo Welcome, Unilever, Proctor and Gamble, Cadburys - which aims to use its Egyptian plant to export to the rest of the Middle East, Heinz, Nestlé - which has had to recapitalise its operation, and Pepsi- and Coca-Cola. If one excludes the oil and power sectors, the scale of foreign investment has not been very great. The total for all sectors since 1994 has been not much more than $6bn.

An investor whose experience provides an interesting indication of the way the Egyptian economy is evolving is the British food supermarket group, Sainsburys. The company is in an 80/20 partnership with an Egyptian business, runs 100 stores - most of them rather small - and has so far invested around $160m. It is planning to put the same sum again into the country in the next two years. In one of the two areas in which foreign investors often encounter difficulties - quality of labour - it has had a typically mixed experience. It has found that its older middle managers - many of them in 51 stores it runs under licence from the government - have the management style of the old economic régime. They are bureaucratic, inflexible, dislike innovation and regard the system as more important than the customer. But younger graduates, newly out of university, the company finds quite different. They have some grasp of English, which they are keen to improve, they are computer trained and they want to work for a professional organisation which will turn them into modern managers. The company prefers to develop these people - it has extensive training schemes - rather than try to alter the ways of the older generation.

In the other difficult area - improving the quality of local suppliers - Sainsburys has caused some controversy. In its stores it sells mainly locally produced goods under the suppliers’ own labels, but it has some of its own label lines, both imported and locally produced. For obvious reasons - cost, avoidance of tariffs and convenience - it wants to increase the local supply of its own label products. It also hopes to expand purchases from Egypt for its outlets in Britain. Generally it has found that potential suppliers cannot produce to its standards, but a small number are excellent and there are several more which it can help in raising standards. Given that Sainsburys is a major potential customer, these producers have been only too anxious to be helped to improve their output. The contracts they have signed with the company have been valuable, and they have had their eye on being able to raise their standards to a level where they will be able to export on their own.

The poorer quality producers - some of them owned by quite influential, long established businessmen - have felt themselves under pressure. For the first time they have been asked to produce what the retailer and customer want, whereas since Nasser’s time the normal practice has been for the retailer to be supplied with whatever is produced. They can see that it is quite likely that in future, as other stores start to compete with Sainsburys (which is the only foreign retail group in Egypt at present), they will be asked again to change their products and cut their prices. They have not been at all pleased to see part of their business with 100 supermarkets disappear as Sainsburys has awarded its own label contracts. They have complained to influential friends at the top of government, though they do not seem to have been given a very sympathetic hearing. In early 2000 they tried another approach when they joined with some discontented retailers and persuaded an obliging Islamic judge to issue a fatwa (a legal judgement) declaring, in very strong language, that shopping at Sainsburys was "sinful". The fatwa received much publicity in Britain but was hardly reported in Egypt. It had no effect on the company’s sales.

Privatisation

A further push has been given to the economy since 1993 by a programme of privatisation, though this has been pursued by the authorities with rather lukewarm enthusiasm. When it began the government drew up a list of 314 state enterprises to be offered for sale. This represented less than half of some 700-800 state holdings which were potentially privatisable. In the seven years running up to the end of 1999 it managed to sell all the shares or majority stakes in just 114 companies, and minority stakes in 22. The government has congratulated itself on the progress it has made and has produced some figures which make the programme look quite impressive, but the reality is that by international standards - and especially by eastern European standards - it has moved very slowly. Only in 1996 and 1997, when there were 78 sales, did the programme appear to gather any momentum.

During 1996 and 1997 the preferred method of sale was an offering of shares on the stock exchange, but after some failed offerings and a fall in the market the government switched to negotiating sales with "anchor" or "core" investors. In these cases the investors have been both foreign and Egyptian, and typically they have bought large majorities of companies. At all stages of the process there have been sales to employee stock associations. Generally this has involved a management buy-out.

The job of finding anchor investors has been given to a group of banks and independent selling agents. The list includes the major international investment banks, which have shown little interest in the work because they consider most of the companies unattractive and the prices asked too high. Most of the selling has been done by Egyptian banks and independent selling agents with contacts in the local private sector and among Egyptians with capital abroad.

In the second half of 1999 the sale of four cement companies followed a different pattern. A number of international buyers - major players in the current consolidation of the global cement industry - approached the government with offers. Egypt experienced its first take-over war, in which bids and counter bids were made not only for the government shares but in some cases for the minority stakes held by individual investors. Although the government had a controlling stake in each of the four companies, all were already quoted on the stock exchange. One result of the bidding was that the government has been forced to promise to bring its rules into line with international practice, which obliges bidders in take-over battles to offer for all the shares and not just a majority.

The rather ambivalent attitude of the government towards privatisation was shown by its hesitation half way through the take-over battle. At this point it became nervous about losing control of "strategic assets" and thought of withdrawing Amariyah Cement from the sale. There was an outcry both from the buyers and the minority shareholders, so the deal was allowed to proceed. Even so the government had Suez Cement, a company it owns outright, buy Torah Cement, which it had originally thought of privatising.

Whatever some of its officials - the few who really believe in a free enterprise economy - may have said, the main motive for privatisation in Egypt has been the government’s need for money. It has wanted the revenues it has got from sales, and it has recognised since it was forced to reschedule its debts in the late 1980s that it is no longer able to sustain the losses of its companies. Before this the public sector was used as a means of providing jobs for young Egyptians. Little thought was given to making it profitable and its losses were financed by government grants or the lending of government controlled banks.

Working against the programme has been an equally pressing set of government worries. There is great concern that privatisation - especially where it involves sales of weak companies - will lead to workers being laid off, which will increase unemployment and might increase the support given to militant Islamists. It has been estimated that government companies are over-staffed by anything between a third and seven times.

There is similar concern about the idea of making companies more saleable through the banks being asked to forgive the debts they are owed. It was estimated by the IMF in 1998 that 70 per cent of the debt owed by state companies to the state banks was doubtful. If this debt were to be written off the government knows that its banks would be shown to be insolvent.

Another problem is the illusion of much of the government establishment that the state companies are things of important value. From the point of view of stimulating economic growth in the medium and long terms, it would probably be a good idea for the government to sell many of the remaining companies for whatever it can get for them. It could even try public auction, particularly where a company might draw international bids, which would make it difficult for local buyers to decide in advance among themselves who should buy what company, and for what price. The government has a horror of such ideas. It is instinctively against the principle that the price of a company should be determined by the market. It feels that the price should be set by the seller or by local business appraisers, acting under the supervision of the government’s audit agency. The government has the appraisers use well known Western valuation formulae, such as the replacement value of fixed assets or the net present value of future cash flows, but it is applying them to inappropriate cases.

Unless the government can relax its views on valuation, it may be that there will not be many more privatisations. Some 80 companies, in textiles, a particularly weak sector, pharmaceuticals, construction and shipping, have been set aside to be restructured. The suspicion is that this means they will be removed from the privatisation list indefinitely.

The four big state banks, Banque Misr, Bank of Alexandria, National Bank of Egypt and Banque du Caire, are regarded for the moment as being too sensitive to be privatised. The problem is partly that they would be seen to be bankrupt, which would be embarrassing and would probably cost the government a large sum of money. Their sale would certainly lead to many redundancies. It would bring protests about Egypt being taken over by foreigners - because sales would certainly involve foreign banks as core investors and managing shareholders. It would expose much corruption. It would lead to demands for the repayment of some loans made to both private and state companies, and from the state’s point of view it would remove the banks as an automatic source of funding for its big projects and budget deficits. A little while ago it was being suggested that one institution, the Bank of Alexandria, might be privatised, but it is understood this idea has now been dropped. Instead the Banque du Caire has been given a new chairman with a brief to restructure the bank, root out corruption and clean up the balance sheet. If he lasts in the job, and is reasonably successful, it may be that the government will look again at the idea of privatisation.

The government’s current plan is to privatise the state owned insurance business. It has already sold its stakes in two joint venture companies, in one case to the German firm Allianz. Now it is having the four wholly owned state companies valued by foreign investment banks, an unusual procedure. No decision has yet been made on what method of sale will be used. There is talk of the first company to be offered being Egypt Re.

There are only a few more companies which might have international appeal, if and when they are offered for sale. One is Egypt Telecom. The government is intending to float up to 20 per cent of this in an international and domestic offering. Other enterprises are the remaining three cement producers and, if it wants to sell them, the electricity companies.

Stock Market

Privatisation has provided a great stimulus to the stock exchange, and it was the boom on the exchange in 1996 and Egypt’s arrival as an "emerging market" that got the word "tiger" temporarily attached to the country.

The early privatisations of 1994 and 1995 were minor affairs in which small minority stakes in companies were floated. Investors were invited to subscribe through advertisements in newspapers. Little was disclosed about the companies whose shares were being sold. Most of the buyers were private Egyptian investors.

The market took off in 1996 when for the first time the government offered a large majority stake in a company - 75 per cent of the Nasr City Housing Company. Later that year and in 1997 there were 33 further offerings of majority stakes, along with nine sales of minority stakes, five sales to employee stock associations and several offerings by the private sector. Then, towards the end of 1997 international confidence in emerging markets started to weaken and Egypt suffered a special blow in November when a group of Islamist gunmen massacred 53 tourists in Luxor. The stock market fell and continued downwards through 1998. It picked up sharply in the autumn of 1999 and in January 2000 hit a point close to its peak of 1997.

The market is now vastly bigger than it was at the beginning of the 1990s. In 1991 it was capitalised at the equivalent of $2.6bn, in February 2000 the figure was $40bn. Turnover grew from $69m in 1991 to $8.8bn in 1999.

About a thousand companies are listed, but only a hundred are traded with any regularity. The four most popular stocks as of April 2000 were: MobiNil, the mobile phone operator in which the Sawiris family has a big stake; Media Production City, a studio complex which is still 90 per cent government owned; Orascom Construction Industries, another Sawiris backed company; and the Commercial International Bank, which is 80 per cent private sector and 20 per cent government. Brokers say that the enthusiasm for Media Production City does not reflect well on the market. Little detail is known about the company - the government has released minimal information on its performance and prospects - but it has the magic word "Media" in its name and everyone is aware that it is the biggest studio complex in the Middle East. (Egypt produces most of the Arab world’s popular culture, particularly its films and soap operas.) The company’s shares have risen to such dizzy heights that it now has a price/earnings ratio of 250. If one excludes Media Production City from the calculation, the average price/earnings ratio of the market is a bit over 9. The private sector banks, with earnings growth figures of 10-20 per cent, have p/e ratios of 5-8. By international standards the Egyptian market looks cheap, but recently there has been no rush of foreigners to buy because of the uncertain overall economic picture.

The "Real Economy" and Standards of Living

It is not easy to relate economic reforms, privatisation and the development of the stock market to the standards of living of the ordinary Egyptian people, but among economists and others who are interested in the subject some fairly definite impressions have emerged.

At the bottom of society the people remain very poor. For the last 20 years or more they have been suffering from the steady deterioration of state education and the health service, but they are now benefiting from an improvement in the country’s infrastructure. The roads, water and sewerage systems have been considerably repaired and expanded in the last decade. Public transport is a bit more efficient. For those who have access to it, the telephone system is better. In some areas the progress has been quite striking. The new cities which the government began to develop in the desert in the later 1970s, to take the pressure off the Nile valley, have now reached a take-off point where they have a critical mass of people and are starting to generate economic activity of their own. The oasis of Fayoum, west of the valley, is prospering, though here, as elsewhere in the country, the prices land commands are out of proportion to what it is able to produce. (The reason for this anomaly, which is found throughout the Arab world, is that society seems more interested in putting its capital into something which it considers a store of wealth, or a speculative investment, than into businesses which are difficult to run and involve high costs and dealings with the bureaucracy.)

The skilled and semi-skilled Egyptian working class seems to be doing a bit better than it was a few years ago. Its members are getting jobs in the new companies that are being established. It seems that most of the 1.5 million Egyptians who come onto the labour market every year are getting jobs. Unemployment is falling slightly. The government claims the rate is around 8/9 per cent, though independent sources suggest 15 per cent plus would be a more likely figure. Ten years ago the rate would have been 20 per cent.

Among the middle classes many people are suffering. Most young men and women who come out of high school and university still go into the civil service or other parts of the public sector and earn salaries that are less in real terms than were being paid twenty years ago. They also suffer from the decline in social prestige of the educated middle class. Those people - perhaps 10 per cent of graduates - who find jobs in the "new" economy, in businesses such as computers or financial services, are doing very well. Salaries in these areas are quite attractive - high enough to attract foreigners and some of the Egyptians who have been working in Europe or America.

An indicator of the anxiety of the middle classes has been the development of a parallel education system, to supplement the very poor quality state system. Many of the universities have set up "language sections", branches run in association with foreign universities where fee paying students can study law, economics, business or some technical subject in a foreign language. Some of the teachers are foreign. A number of hotel management institutes have been established, in response to the recent boom in tourism.

New Economic Difficulties

The period of success that began with the reform programme of 1991 lasted without any serious break until the autumn of 1997. At that point several things went wrong together. The terrorist attack in Luxor temporarily closed the Egyptian tourist business. Oil prices fell suddenly and then continued a slow decline until by March 1999 they were below $10 a barrel. This cut Egypt’s own oil export revenues and greatly reduced the flow of remittances coming from its expatriates working in the Gulf. The Asian financial crises damaged trade between the Far East and Europe and led to a drop in revenues from the Suez Canal. Together these difficulties brought a big fall in Egypt’s foreign exchange revenues and in due course a check to activity in the private sector - particularly in real estate and construction.

It happened at the same time that the government was increasing its spending on a series of what are known as "mega-projects". The most famous of these is an agricultural scheme for the development of the Toshka depression in the western desert, using Nile water pumped from Lake Nasser. The first phase of the infrastructural work, which is what the government is paying, is set to be finished by 2002 and is expected to cost about $1.4bn. There is a similar but smaller project being built at East Oweinat near the Sudanese border. It is hoped that eventually these two schemes will increase the area of agricultural land in Egypt from 5 per cent of the country’s surface to 25 per cent. The aim is to achieve this by 2017, when the country’s population is expected to be 80 million.

Other mega-projects - the Gulf of Suez petrochemicals zone, the Port Said industrial zone and the East Port Said container port and free zone - are clustered around the Suez Canal. Here the government is spending some $3.5bn on infrastructural work, including land reclamation.

These projects have certainly been the engine that has maintained the country’s growth in the last two and a half years. If an estimate of the effect of government capital spending is taken out of GDP figures for 1998 and 1999 the economy can be seen to be in recession. This is certainly the impression of many private businessmen, even though in some sectors, notably tourism, there was a recovery last year. There has recently been a big lengthening of the credit terms being given by building contractors and consumer durables suppliers.

The government has been financing much of its capital spending by borrowing from the Central Bank and the four state owned banks. In the twelve months to November 1999 it is estimated by foreign bankers that Central Bank lending to the government was equivalent to 7 per cent of GDP - a figure which is not compatible with the government’s own reported budget deficit of 1 per cent of GDP. According to the IMF’s report of 1998 a number of items are excluded from the government’s budget.

The Central Bank’s lending has been financed partly by drawings on the local banking system and more importantly by running down the government’s foreign currency assets.

Government borrowing has pushed up interest rates to a point where corporate borrowers are having to pay 11 to 13 per cent. The government has a somewhat ambivalent attitude to this. It is aware that the rates are difficult for borrowers and an impediment to economic growth, but it sees them as keeping a check on inflation and supporting the Egyptian pound. Ever since it embraced economic reform in 1991 the government has been preoccupied with the idea that it has been low inflation, a stable pound and high or fairly high interest rates that have attracted Egyptian capital held abroad back into the economy. This in turn is what has financed much of the growth of the last decade. Now the government seems to have a horror of making any change to its policy. The recent comment of a financial journalist in Cairo was that "having taken the IMF’s medicine in the early 1990s and seen it work, it is as if the government has become addicted".

It is not only with interest rates that the government supports the currency. Since the pound was devalued and exchange controls removed in stages in the early 1990s, the currency has officially been floating and anybody has been able to buy foreign exchange for current or capital transactions. This, at least, is the theory, but the practice is different. The pound has been held very close to £E3.4 to the dollar since 1991 and the government has exercised careful control over sales of its foreign exchange. In early 1999, for example, it cut the outflow of dollars by insisting that anyone opening a letter of credit should deposit 100 per cent collateral in Egyptian pounds with his bank. It still imposes a licensing system on certain types of imports.

The problem for Egypt now is that high interest rates risk pushing the economy into recession. If the fall in the government’s foreign exchange reserves leads to a slow down in its spending on the mega-projects, which is what already seems to be happening, the recessionary effect will be increased. In early 1999 foreign exchange reserves stood at some $20bn, but early in 2000 the Minister of the Economy and Foreign Trade, Yousef Boutros Ghali, said that $10bn - eight months’ import cover - would be adequate. This would imply he thought the total was headed in that direction.

The private sector, and even foreign investors, would welcome a devaluation. For the foreign investors the capital loss of, say, a 10 per cent devaluation would be offset by a more buoyant economy and a stronger stock market. Both they and the Egyptian private sector would like to see consumers being given a stronger incentive to buy local products and the country’s emerging export industries being made more competitive. There have been suggestions, notably by the investment bank, Robert Fleming, that the devaluation should be as much as 40 per cent. More often bankers suggest 25 or 10 per cent. On the free market, where much of the private sector’s own foreign exchange is traded quite legally, the rate has recently been around £E3.7 to the dollar, which suggests that a 10 per cent devaluation would be about right.

The government is extremely reluctant to contemplate this course. The reasons are not only pride and its commitment to a stable currency, but its fear of restarting inflation and increasing the price of basic commodities, such as wheat, which would have an immediate impact on the poor. The government acknowledges that the country’s non-oil exports would benefit, but because the volumes of goods involved are still very small it feels the benefits here would not outweigh the shock of an increase in import prices. What seems possible is that if the gap between the official exchange rate and the free market rate grows wider, the government will undertake a devaluation in small stages.

Lack of Commitment to Reform

The major problem for Egypt is that much of its government is not really committed to a free market economy. This is true even under the new government of Atef Obaid, a reform minded Prime Minister who used to be the minister with responsibility for privatisation. It is not only that the privatisation programme is moving rather slowly; the economy remains protected by import controls - official and covert - and by high tariffs. The government sticks to the terms of its agreement with the World Trade Organisation but finds pretexts for delaying each step towards liberalisation for as long as possible. Negotiations for a new association agreement with the European Union are making very slow progress.

The fundamental reason for the resistance to reform is that a large body of the people at the top - in the cabinet, the upper echelons of the civil service, the People’s Assembly and the state corporations - were brought up, or had their first experience of politics, under Nasser or Sadat and still have basically socialist instincts. The same goes for much of the rest of the population of the older generation. There is a mistrust of the private sector and a feeling that it is natural and right for most aspects of an economy to be state controlled.

There are obvious vested interests within the establishment in things remaining as they have been. There are many officials who have several posts in government or state companies and who are living rather well by drawing salaries from each. The more important officials control extensive networks of patronage. Ministers, senior military officers and other functionaries have their own constituencies which back them in their manoeuvrings with their rivals, and which they in turn are bound to protect. Sometimes if a quite minor but very sensible piece of reform threatens the interests of such a person it will be stopped or delayed.

Another break on reform comes from much of the establishment seeing Egypt as a rentier economy, which to a large extent is what it has become in the last forty years. The country earns almost all its foreign exchange from five sources over which it has only partial control - tourism, oil, remittances of its workers abroad, the Suez Canal and aid. Together these bring it some $12bn a year,

which is four times what it earns from all its non-oil visible exports. The rentier income is what pays for the country’s imports. The conscious or unconscious view of much of the Egyptian establishment has been that the country’s prosperity does not depend so much on its own efforts, in the sense of it developing export industries, but is determined by its success in sending its workers abroad, encouraging foreign governments to give it aid and hoping that the state of the world economy will bring it good revenues from tourism and the Suez Canal. It is only in the last year or so, as imports have risen steadily and the volume of oil exports has been reduced by the country consuming more, that the government has become concerned to encourage exports.

The Egyptian government is remarkably unresponsive to foreign pressure to reform. The only occasion on which it moved fast was in 1991, when it was promised a large amount of debt relief. It does not feel itself very much connected to the global market. It is much more focused on domestic concerns - both public opinion and vested interests. What impresses foreign bankers and diplomats is how good the government is at avoiding having to reform while persuading them, in a charming way, that it is just about to do much more than it has any intention of doing.

Mubarak’s View of Politics

Just as the government is reluctant to change the economic system, so its instinct is to preserve the status quo in politics. President Mubarak is an intelligent and able man. (This is despite his being the butt of jokes throughout the Arab world that portray him as stupid.) What he lacks is vision. Hardly anybody in Egypt believes his promise that democracy will be his priority during his fourth term as President, which began last autumn. A comment often heard in Cairo is that "all he wants is to keep the political boat afloat - he is not so concerned about where it is going".

His attitude stems from his being unconvinced intellectually that change - in particular greater democracy - is necessary. He believes that it is more important for the government to build the economy and deal with some of the country’s social problems, and that freer politics, with a noisier opposition, might hinder the process. He has sometimes claimed that economic development is "preparing" society for political change. He and his ministers like to point to the chaos, crime and economic breakdown seen in Russia as an example of what over-rapid change can do.

Mubarak’s way of thinking was seen in the government changes made at the end of 1999. The President promised a "new cabinet" but what actually emerged was no more than a reshuffle.

Many of the personalities in the new body had been in ministerial jobs for ten years. Two had been in the cabinet for almost twenty years. And the new Prime Minister, Atef Obaid - admittedly a man known as a reformer - had been a minister for most of the time since the late 1970s.

Mubarak’s less dangerous critics - those in the establishment press and in the non-Islamist political opposition - are co-opted into the system. The President is quite accessible to journalists and other members of the Cairo intelligentsia. He meets the press often and has got to know many of the journalists by name. Periodically he telephones the editor of one of the major newspapers, which are state owned but relatively independent. He may argue with the editor and try to persuade him to change his paper’s policy, but he does not go beyond this. Nasser’s régime, in contrast, exercised actual censorship. Anwar Sadat used to telephone the editor of Al-Ahram, the best known paper, al-most daily, to lecture him on his headlines and lead stories. Both Nasser and Sadat regularly fired editors.

Politicians are made reasonably loyal by being given opportunities to make money. The people who have been allowed to establish the small secular opposition parties benefit from government grants to their parties of £E200,000 ($60,000) a year. They participate in the system in the sense that they are allowed to run in the elections and if they or their colleagues are elected, as a few are, they gain all the benefits of being a member of the People’s Assembly and having links with the centre of power. There are many perquisites that come to a member of the People’s Assembly. He has immunity from prosecution and he is able to enrich himself by, for example, purchasing government land at competitive prices or securing government supply contracts. It is accepted that members of the Assembly quickly become millionaires.

Political Parties and Elections

The political system as it operates at present in Egypt has evolved from the later years of President Sadat. In 1978 Sadat set up the National Democratic Party, to be his own supporting party in the People’s Assembly (Maglis As-Shaab), and this body has dominated the Assembly ever since. During the remaining three years of his presidency Sadat kept a tight rein on politics, because while he was regaining the Sinai peninsula in stages from Israel he was anxious that there should be no domestic disturbances that might worry the Israelis and halt the process.

After Sadat was assassinated in October 1981, Mubarak gradually liberalised the system. Various opposition parties were allowed to establish themselves, though in almost every case their applications for licences were at first refused by the government’s Political Parties Committee and they had to resort to the Supreme Administrative Court to have the decisions overturned. The initial refusals were based on the Political Parties Law of 1977, which banned parties based on religion and said that new parties had to be significantly different from each other in their ideologies and programmes.

There are now fourteen little opposition parties, of which only four are of any significance at all. These are: the Wafd, which is a revival of the liberal nationalist party established to campaign for independence after the First World War; Tagammu, a left wing party that harks back to the Nasser era; the Democratic Socialist Nasserite Party, which is similar but more moderate; and Amal, the Labour Party. The last of these was established as an official socialist opposition under Sadat, in 1978, and it was later allowed to take under its wing the more moderate elements of the Muslim Brotherhood and run these people in elections as its own candidates. The party now defines itself as "Islamist nationalist" and says that in the Islamic tradition it is concerned with looking after the poor.

None of the parties has made a significant political impact. In 1987 they won 95 seats in the People’s Assembly, out of a total of 454. In the most recent election, in 1995, they won just 14.

The reason for the parties’ failure is partly that the government restricts their activities. They are allowed to hold meetings only in buildings that they own - inevitably very few - or in private buildings they may hire. But they are not allowed to hire government owned buildings or hold demonstrations in the street. They are given little time on the state television and radio. In elections the provincial governors, who are appointed by the President, give the National Democratic Party candidates practical assistance with their campaigns and appear with them in public, which gives the people the feeling that the men with influence - who might be able to help them and their villages - are the government candidates. (It is noticeable that in elections there is normally a much higher turnout in the country areas than in Cairo, because it is in the country that patron-client relationships operate most effectively.)

The other problem for the opposition parties is that the people are not clear about what they stand for and do not take them seriously. The parties all have their own papers, which are free to attack the government as harshly as they like, but few people buy them. The popular view is that most of the little parties are indistinguishable from each other and represent no more than the groups of intellectuals and retired politicians who have founded them.

In March this year a new law was passed giving judges, rather than the Ministry of the Interior, responsibility for administering elections at a regional level. Much fuss was made about the reform, and certainly the Egyptian judiciary is independent, but it is still not expected to make a big change to actual results. Another new piece of legislation has removed the old stipulation that half of the members of the People’s Assembly should be workers or farmers. This should put more businessmen into the Assembly to be elected this autumn, which may have an effect in accelerating economic reform.

So far nothing has been said about changing the way the President is elected. From Sadat’s time the law has said that any candidate for the Presidency should be nominated by a third of the Assembly members, endorsed by two thirds and then approved by the people in a referendum. The second stage of the process makes it impossible for there to be more than one candidate put to the people. Hosni Mubarak has been in the happy position of being the single candidate on four occasions, in 1981, 1987, 1993 and 1999. On the last occasion official figures gave him 94 per cent approval on a turnout of 84 per cent.

There is some speculation about what will happen when Mubarak either dies or becomes too old to stand. The President is now in his seventies and is in reasonably good health, but he has appointed no vice President. Occasionally it is suggested that he might be thinking of handing power to his son, Gamal, a young man in his thirties, who is a member of the political bureau of the National Democratic Party. The pretext for this appointment is that he represents "Youth". The consensus among the intelligentsia is that Gamal as a successor would be unacceptable, because Egypt is too sophisticated a country for this sort of blatant nepotism.

Emerging Civil Society

Civil society is in much the same semi-free state as parliamentary politics. In April this year the government renewed for another two years the Emergency Law, which was passed in the aftermath of Sadat’s assassination in 1981 and has been in force ever since. Two of the Law’s most important clauses stipulate that permission is needed for political assemblies of more than five people, and that civilians can be tried in military courts. The Law, of course, is used selectively. It bears down far harder on the Islamists, who are its principal target, than it does on secular politicians. It is Islamist militants who have been put on trial in military courts.

Non-Governmental organisations (NGOs) have recently been given a little more freedom, but by normal democratic standards they are still heavily regulated. Until the passing of Law 153 of 1999 an NGO in Egypt could only operate if the government turned a blind eye to it, as it did most of the time to a branch of the Arab Organisation for Human Rights. This Organisation could not have a building registered in its own name, nor open a bank account. Now the Organisation and a number of other bodies are allowed an independent legal status, but they are obliged to register with the Ministry of Social Affairs and declare to it the source of their funds. If the Ministry does not approve it has the right to block the funds. This regulation, once again, is directed mainly against the Islamists. Several of the institutions that have benefited from being able to operate on a fully legal basis have been women’s organisations, such as the National Council for Women and the National Council for Childhood and Motherhood. Women’s rights were strengthened last year by the passing of a law - very controversial in conservative quarters - which made it possible for the first time for women to institute divorce proceedings.

Any person who wants to campaign on any liberal issue - religious tolerance, minorities, human rights, women - still has difficulty in making his voice heard. The press, like the judiciary, is undoubtedly free, but the television and radio are cautious and seldom move far from what they know is government policy. If a person wants to speak out on something he will do best to go to Qatar and be interviewed on the extraordinarily independent Al-Jezira satellite channel.

Declining Islamist Influence

One of the strongest reasons for President Mubarak’s reluctance to let the political process operate more freely has been his fear of Islamist violence, which killed his predecessor. The theme has become an obsession with Mubarak. He refers frequently to the chaos, amounting almost to civil war, which has gripped Algeria since 1993 and which had its origins in an over-rapid process of democratic reform in 1989 and 1990. Although the President mentions the subject less often, Egypt in the last twenty years has itself been hit hard by Islamist violence. This has taken the form of assassinations of political figures and policemen, attacks on Coptic Christians and attacks on foreign tourists. In the 1980s the main group responsible was known as Islamic Jihad In the 1990s it was the Gamaa Al-Islamiyya.

The last two major episodes of violence were in 1996 when extremists machine gunned tourists outside the Egyptian Museum in Cairo and in November 1997 when 53 tourists were killed in Luxor. In the last two and a half years the government seems to have brought the problem under control. Money has been put into the development of Middle and Upper Egypt, which were the principal areas of Islamist-Coptic tension. And sheer heavy-handed repression seems to have resulted in a very large number of militants being killed or locked up. At times in the early and mid-1990s the security forces fought pitched battles with militants in the towns and villages of Upper Egypt. On one occasion a battle raged for nine hours, with the police using rocket propelled grenades. In Cairo a raid on the poor suburb of Imbaba led to the arrest of six hundred. Since 1997 things have been much quieter. The general view in Egypt is that the remaining militants are mostly abroad, and although they might organise attacks from time to time they are no longer a serious threat.

The violence of the extremists has cost the Islamist movement as a whole much popular support. As they often say themselves, the Egyptians are a peaceful, patient people, religious by nature since ancient times, but not inclined to extremism. It would be difficult to measure accurately what level of support there is for Islamist political groups, violent and non-violent, among the poor, but it seems to be declining.

The process has certainly been helped in the last five years by a stream of soap operas on the three state owned national television channels. All the soaps show Islamism and its followers in an unappealing light. Typically an Islamist will try to murder the hero or heroine, or brainwash the hero, who will come to his senses just before he commits a terrible crime. Nothing is said about how the Islamists in the story have come to adopt their extremist views. The television channels do not write all the soaps themselves. Many are by independent writers who have discovered that putting an anti-Islamist theme into their work helps them sell it.

The soap operas are hugely popular. They normally run once a day for a month, and as the channels make sure their timings do not overlap, it is often possible for a person to watch two or three a night. In most cases people watch in their own homes. Nowadays even the poorest households in Egypt have TV.

The Islamist political parties, meanwhile, have split. In the 1980s and early 1990s one could divide the movement into three streams: the violent militants in Islamic Jihad and Gamaa Al-Islamiyya; the Muslim Brotherhood members, who operated in the world of religious charities and professional associations, but were not allowed a political party of their own; and the few Brothers who had attached themselves to the parliamentary party, Amal.

The peak of the Brothers’ influence was in the late 1980s and early 1990s. It was then that their charities, generally attached to mosques, seemed to be making most progress in poor areas. They provided schooling and medical services - often of a better standard than the government provided. They were much more effective than the state organisations in setting up relief centres after an earthquake hit Cairo in 1992. They dominated elections in all the professional associations or "syndicates", except that of the journalists. These bodies are more important in the Arab world than they appear at first sight, because they are the only places where politics is free. All political views and parties can be represented in them - not just those licensed by governments. The problem in using them as an indication of the popular mood is that they tend to be dominated by activists, rather than the "silent majority".

The government moved against the Brotherhood in the early 1990s. After the earthquake it issued an Emergency Law decree which stated that disaster donations had to be approved by the Minister of Social Affairs. Then in 1993 it passed a law which required the presence of an absolute majority of electors for a syndicate board to be formed. And in 1995 it rounded up the Brotherhood’s leadership put it before a military court and sentenced its members to between three and five years in prison.

Now there is a split in the Muslim Brotherhood between those who are still implacably opposed to any compromise with the government and those who feel that continual confrontation is pointless because it results in the best and brightest of the members spending large parts of their lives in prison. In 1996 a moderate group, headed by Abo Elela Maadi, a leading figure in the engineers’ syndicate, established El-Wasat (The Centre) as a political party which it hoped would operate within the Egyptian parliamentary system. So far the government has refused to give El-Wasat a party licence, and its members are being accused by some of their former colleagues of weakness and treachery. The leading members of the Brotherhood seem to be roughly equally divided between the two factions.

Cultural Islamism

What is not changing is the influence of "cultural Islamism". In Egypt, as in the rest of the Muslim world, the revival in interest in Islam in the last thirty years has had both a political and a social aspect, and while the political tide is now ebbing the social tide may still be slowly rising. There are more people, especially from the better off classes, going to the mosques on Fridays, performing the daily round of prayers and fasting during the month of Ramadan. Many young women have adopted Islamic dress (without veils) in public, though as political militancy has weakened it seems that young women who think otherwise - who want to wear tight jeans and tops - feel freer to dress as they please than they did a few years ago.

There has been a growth in the numbers of religious book shops. It is now more common to find men and women separated at weddings, funerals, circumcisions and birthday parties. Small businesses are being created to cater for these tastes. There are Muslim musical groups to sing appropriate songs at weddings, and shops specialising in Islamically acceptable women’s fashions and make up. And where they are not political and their funding has been approved, Islamic schools, clinics, nurseries and other charities still operate in the poor quarters of the big cities.

At the same time there has been a noticeable change in the character of Egyptian Islam. In recent centuries there have not been different Islamic sects in Egypt, but the Sunni Islam practised in the country has drawn some of its rituals and attitudes from Pharaonic, Christian and Shia ideas. Egypt, like much of the rest of North Africa, was a Shia state under the Fatimid dynasty in the later tenth, eleventh and twelfth centuries, and the great university of Al-Azhar, founded in 970, was originally a Shia university. The influence of the old religions is seen in the way people visit and pray at the tombs of relations, in the popular interest in saints, and in the habit a few people have of praying to saints in both mosques and churches. There are many mosques named after Shia saints.

The new trend is towards a pure, austere Sunni Islam - strictly unitarian and influenced by Saudi Arabia. The people who have taken to saying their prayers in recent years, or who can be seen on busses or waiting in government offices rocking to and fro and mumbling the Koran, are of the new breed. The same goes for those who have cultivated a zebeeba, the dark mark on a person’s forehead which comes from repeated contact with the prayer mat - or the secret use of abrasives.

The growing influence of Saudi Arabia, felt throughout the Islamic world, comes partly from the Kingdom’s wealth which has allowed it to finance missionary activities and flood Muslim countries with free Korans and unitarian religious studies. It has also come from the globalisation of information - particularly television broadcasting in the Middle East - and through the huge growth in numbers going on the pilgrimage to Mecca and Medina in the last twenty years. These developments have made Saudi Arabia the world centre of a religion which used to have many holy places (above all Mecca) but nowhere which could claim to be a doctrinal capital. Among moderate Muslims holding to traditional attitudes in Egypt, the Maghreb countries of north Africa and other parts of the world where Islam has acquired some slightly unorthodox ideas, the modern dominance of Saudi Arabia is resented.

Muslim/Christian Tensions

The rise of Islamism since the 1970s has had the unhappy consequence of creating tension in some areas between the Coptic Christians and the Muslim majority. Traditionally the Copts, who account for about 8 per cent of the population, and Muslims have had quite good relations. The leaders of the two religions attend each other’s major festivals. In the month of Ramadan the Coptic Pope gives an Iftah banquet at sunset one evening for the senior members of the Muslim clergy. And Muslims have adopted the day after the Coptic Easter Sunday as a national holiday called Sham en-Neseem, which means literally "smelling the breezes". The intelligentsia of both communities likes to stress that the Copts are every bit as much Egyptians as the Muslims. Indeed, because the Copts (the word has the same root as "Egyptian") embraced Christianity in the third century and the country remained mainly Christian until the arrival of the Fatimids in 969, the Copts can claim to be heirs to an older tradition than the Egyptian Muslims.

The origins of the recent tension - and of Islamist violence in general - go back to the early 1970s when President Sadat encouraged the Muslim Brotherhood and other Islamist groups, especially in the universities, as a counter-weight to what he thought was a greater threat from the Left. It was in 1971 that Sadat jailed several of his socialist colleagues who had been leading figures in Nasser’s government. The policy brought clashes between Copts and militant Muslims almost straight away, and there have been periodic episodes of violence ever since.

The big cities have been peaceful and violence in the towns of the Nile delta has been relatively rare because here the Coptic communities are in a very small minority and are normally careful to keep a low profile. The main trouble has been in Upper Egypt where in some towns and villages the Copts make up 30 per cent of the population. A few villages have Copt majorities. The Copts here tend to be richer and better educated than their Muslim neighbours. They look down on the Muslims because they feel socially superior, and the Muslims look down on them because they see them as a minority in a Muslim state. In the minds of young militant Muslims here the Copts are quite easily associated with what they believe is the malign influence of the West, America and Israel, and they are an accessible target. As a retired government minister puts it, "instead of fighting America, the youths can attack the Copt jeweller or pharmacist in their own street".

The Copts have not been too worried by odd attacks on them carried out by the same type of fanatics who did the killings outside the Egyptian Museum or in Luxor. What has worried them more is where small incidents have led to mobs of their Muslim neighbours attacking them and their property. They refer to "self-righteous, ignorant young men" - the products of the "new Saudi Islam" - coming out of the mosques after prayers shouting "Jihad". The words are those of a Coptic journalist. An episode of the type they fear occurred on 31st December last year in the Upper Egyptian village of Kosheh, when a dispute over credit between a Muslim woman and a Christian textiles merchant led to several hours of rioting and more than twenty dead. The authorities have since brought charges against some 140 Muslims and Christians and have renamed the village El-Salaam, "Peace".

Some of the Coptic leaders and others concerned with human rights have claimed that police investigations into the incident were unnecessarily brutal - with torture used to extract confessions. There have been proposals that tensions between the communities should not be regarded purely as a police matter, but should be made the concern of a special standing commission. Such a commission might be formed of Muslim and Coptic leaders, religious and secular, and academics, lawyers and officials concerned with education policy, and put under the chairmanship of one of the President’s assistants. There has been no response to the idea from the President.

Conclusion - the Need for Political Change

The reluctance of the Mubarak government to reform politically, in any area, might not be seen as a serious fault. After all Egypt is becoming gradually more prosperous, it is stable and the government, though hardly democratic, is much less harsh than many other Arab governments.

But there are many among the intelligentsia who are dismayed by the stagnation of politics in the country. They admit that there is freedom of expression and a free press, but they say that what is said and written - what seems to be the consensus view of the educated classes - has no effect on the government. As a former minister of Sadat’s government says, "freedom of expression has become just a rather sterile human right …..we are left talking to ourselves…..it is as if the government accepts that the public is free to criticise but feels that it is free to ignore the public".

Increasing numbers of Egyptians, whose hopes were raised by a movement towards freer politics in the late 1980s and early 1990s, are now losing faith in their government. It is notable that there is very little interest in the elections for the People’s Assembly which are due this November, and comparisons are being made with the much more "real" elections that have taken place recently in Morocco and Iran.

One fear is that just at a time when Egypt is making progress economically, frustration with the immobility of politics will lead to violence from some quarter, the government will counter with repressive measures, politics will become even less free than it is at present and foreigners’ faith in the economy will be damaged. This analysis is most often put forward by liberal intellectuals, who are the people most frustrated by the present situation but are not themselves likely to do anything about it. A more likely possibility, given the long suffering character of the Egyptian people, is that static politics will hold back the country’s development socially, slow the growth of the economy and delay a rise in the people’s standard of living.

© Friedrich Ebert Stiftung
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fes-library | Januar 2001