AmCham invited Minister of Finance Youssef Boutros-Ghali to speak on the current state of the economy and its direction at a luncheon on February 27. Nearly 600 members and guests attended the luncheon, which was held at the Grand Hyatt Hotel in Cairo.

The minister began by recapping the economic progress Egypt has made in the past year, pointing out that the country achieved an impressive 7-percent growth in the first half of the 2006-07 fiscal year, with a $3 billion surplus in the balance of payments. He explained that although the trade account is in deficit, it does not necessarily have negative implications. “The trade deficit is bigger and that’s good... [because] when the current account goes into deficit it means we are importing more.” A survey of these imports shows that a growing percentage of them are investment goods such as machinery, raw materials and intermediate goods, which are used to create final products for the local market and exports.

Boutros-Ghali attributed the country’s recent economic growth to improved exports, investment and overall consumption. “The growth comes from increased exports [as] competitive industry is managing to put more of its products on the international market; increased investment, which in the first half of this year has increased by 35 percent; and consumption, [which] has increased by 8 percent. All of these are drivers of economic activity.”

He explained that domestic investment is growing at 35 percent, while foreign direct investment (FDI) is growing at an impressive 93 percent when year-on-year figures are compared. “In the first half of FY 2006-07, foreign direct investment reached $6.6 billion, which is more than all of last year. Granted there are one-off affairs such as the third mobile license, but nevertheless it is money coming in. It is money that will find its way into somebody’s pocket and will eventually find its way into your pocket, ultimately leading to growth and greater economic activity.”

Moving on to the labor market, the minister discussed the pressing issue of unemployment. Based on the results of a survey commissioned by the ministry, he noted that while the official unemployment rate is 8.8 percent, it is not uniform throughout the country. Surprisingly, Upper and Lower Egypt have the lowest rates of unemployment, while Cairo has the highest, especially among university graduates and those in the 20-25 age bracket.

Boutros-Ghali addressed a key factor contributing to the unemployment problem: that of the “unemployable.” He pointed out that a significant investment will be made toward skills development, including the allocation of LE 500 million to the Ministry of Trade & Industry to “reshape graduates and make them employable.”

In the financial sector, Boutros-Ghali offered evidence that international investors are becoming increasingly confident about the Egyptian economy. “We’ve had over $6 billion in foreign investment the first half of the [fiscal] year and Egyptian treasury bills have become popular in international markets. I have sold Egyptian T-bills to international investors totaling $7 billion. Our currency is stable and the economy is growing. Our official reserves are on the order of $27 or $28 billion; if you include the $7 billion of T-bills, we’re at over $30 billion.”

The minister noted that although the inflation rate has reached 12.4 percent, the external shocks that caused it to rise steeply have passed and prices have begun to settle. “The inflation rate is reflecting the measures that we took last summer on energy and the supply shocks that we survived on cattle and poultry, with mad cow disease and the avian flu, respectively, all of which created inflationary pressures. The peak was an inflation rate of 2.7 percent per month – that was in October [2006] – and it has been coming down ever since,” he said.

Following his comprehensive review of the economy, the minister outlined the policies that need to be implemented for further improvement. On the issue of employment, he stressed the need for retraining programs and improving labor mobility. “Increasingly, we will have jobs being created where labor is not. Unless you find housing and infrastructure, they will not be able to fill those jobs. An important chunk of our investments will go to improving labor mobility including improving the transfer of information between labor markets so that people in Aswan know that there is demand for labor in Alexandria. And when they realize that such a situation exists, they are able to move from Aswan to Alexandria and find somewhere to live.”

The minister said it was important to continue improving credit markets and the banking system, particularly by boosting lending to small and medium enterprises (SMEs). “The banking system has had structural problems. Lending rates are still high compared to borrowing rates. Credit growth is anemic at 6-8 percent. We need to do something and we need to do it quickly. These are not policy-based, these are structural problems. We’ve addressed a number of them by eliminating LE 20 billion in non-performing loans in the banking system and now banks need to focus on small and medium enterprises. The Vodafones and the General Motors and the Mobinils are nice, but it’s the LE 1 million, 5 million and 10 million loans that drive an economy.”

Regulatory issues remain problematic, he said, announcing that he was collaborating with investment minister Mahmoud Mohieldin on a proposal aimed at eliminating significant bureaucracy in this area. Meanwhile, his ministry is working on areas such as economic tribunals, sales tax and pensions, and social spending in general.

The minister went on to outline three key principles he deems necessary to govern economic policies: order, competence and eliminating bureaucracy. “These are the principles that guide our day-to-day policy formulation. From the experience I have seen in many countries, this is what it boils down to,” he said. “Whatever happens, we will build on these principles that govern our behavior together.”

In the question and answer session that followed, Boutros-Ghali responded to issues raised regarding subsidies, the real estate tax law, the impact of inflation on exporters, the natural gas household conversion plan, the budget deficit and sales tax.