VIII Privatization and Restructuring the Public Sector
Author: Mr. Howard Handy
Language:
English
Keywords:
OP; exchange rate; rate; enterprise; loss-making company; privatization effort; electricity distribution company; market value; company equivalent; Privatization; Public enterprises; Civil service
Download PDF (2.6 MB)

Abstract

The principal objectives of this section are to (1) review the size and operations of the Egyptian public sector; (2) assess the major changes of the public sector contribution to economic activity and the performance of state enterprises over the stabilization period; and (3) assess the performance of the privatization program, particularly in the period from early 1996 when the program was more aggressively promoted.

The principal objectives of this section are to (1) review the size and operations of the Egyptian public sector; (2) assess the major changes of the public sector contribution to economic activity and the performance of state enterprises over the stabilization period; and (3) assess the performance of the privatization program, particularly in the period from early 1996 when the program was more aggressively promoted.

In broad terms the following conclusions are reached:

  • The public sector accounts for a large share of economic activity:—about one-third of economic output and employment:—in Egypt, which has not really diminished over time.

  • The scope of Egypt’s current privatization plan will increase the share of the private sector economic activity, although an intensification of the effort:—in downsizing the civil service, in divesting the banking and insurance sectors, and in widening the privatization program to encompass infrastructure:—will be required to maximize its benefits.

  • The performance of the public enterprise sector (under Law 203) in the late 1980s and 1990s was very poor, as reflected in a number of financial and economic indicators. Aggregate profits declined sharply and indebtedness rose, while rising unit labor costs and a striking decline in total factor productivity averaging about 3 percent a year signaled deteriorating competitiveness.

  • The magnitude of the recent privatization effort since January 1996 has been remarkable: the divestiture so far represents about 35 percent of the initial portfolio, and the market value of companies privatized accounts for about 7 percent of GDP. The pace of privatization that has been established also compares very favorably with recent international experience.

Scope and Operations of Public Sector

In Egypt, the public sector encompasses a wide variety of entities and economic activities. The main elements of the public sector in early 1996, at the start of the intensified reform program were:

  • the central government, comprising all the line ministries, and local governments;

  • the service authorities, about 100 in number and consisting of (1) various regulatory bodies in agriculture, industry, transportation and communication, trade, finance (including the capital market authority), housing and reconstruction, and health; (2) the educational institutions, including the universities; and (3) assorted other bodies in culture, tourism, and presidential services;

  • the economic authorities, over 60 in number including those responsible for power generation, telecommunications, the Suez Canal, the petroleum company (EGPC), the railways and national airline, the post office, government supplies, and water and port authorities;

  • the nonfinancial public economic enterprises, about 314 in number (called affiliated companies) and covered by Law 203, which are largely concentrated in the industrial sector, but also include hotels, electricity distribution companies, and transport and port-related companies. These affiliated companies are distributed between and controlled by 17 holding companies. The affiliated companies in turn own holdings in about 184 joint-venture companies, which are partnerships between the private and the public sectors. In addition, a few large industrial enterprises:—military production, iron and steel, and so forth:—that fall under Law 97;

  • the banking sector, comprising the 4 public commercial banks, 26 joint-venture banks, and 21 public specialized banks, which are in turn supervised by the CBE;

  • the insurance sector comprising the three public insurance companies, a reinsurance company, and five joint venture insurance companies, which are supervised by the Egyptian Insurance Supervisory Authority (EISA); and finally,

  • the public pension fund and social security systems, and the National Investment Bank (NIB), which invests the surplus of contributions to social funds over payments.

Public Sector Output Contribution

The public sector entities enumerated above can be roughly mapped by economic sectors in order to gauge their contribution to total output as follows:

  • central and local governments and service authorities correspond to the economic category of government services;

  • economic authorities correspond to the agglomeration in the national accounts of petroleum, electricity, construction, transport and communication, Suez Canal, and public utilities;

  • the Law 203 companies and other publicly owned enterprises under Law 97 correspond to the category of industry and mining, trade, housing, and restaurants and hotels; and

  • banking, insurance, and pension funds are the main components of financial services.49

The overall quantitative contribution of the public sector in GDP has remained virtually unchanged in the last decade (Table 18). The relative stability of the public sector share can be analyzed through a decomposition into a privatization effect and a composition effect. The privatization effect relates to the change in the contribution of the private sector within each sector of activity. The private sector:’ role has been increasing in virtually every sector except petroleum, with relatively large increases in participation in industry, mining, construction, trade, and finance.

Table 18.

Gross Domestic Product by Ownership 1

(In percent)

article image
Sources; Data prodded by the Egyptian authorities; and IMF staff estimates.

Figures for 1987/BB are at 1986/87 prices, while those for the other years are at 1991/92 prices.

Includes petroleum.

Despite the increasing privatization of economic activity, owing to the composition effect, the overall output of the private sector in the economy has not posted commensurate gains. Output growth has been skewed toward sectors where the public sector has a higher-than-average share of activity and away from sectors where public sector activity is low. The composition effect is most pronounced in relation to agriculture, which is almost entirely in the hands of the private sector, where output has declined from 20 percent to 16 percent of GDP. By contrast, in the petroleum sector, where the public sector is increasingly dominant, the share of output has increased from 3 percent in 1987/88 to 9 percent in 1995/96. The composition effect has worked in favor of raising the aggregate share of the private sector in both government and social services sectors whose weight in GDP has declined modestly.

In terms of the size of the government as an employer, in 1995/96, 34 percent of the labor force was employed in the government, slightly below the public sector share of value added (see Table 19). Within the public sector, over 4 million were employed in the central and local government and service authorities, 0.96 million in the public enterprise sector, and economic authorities employed about half a million personnel.

Table 19.

Size and Composition of Public Sector by Type of Entity

article image
Sources: Central Bank of Egypt. Annual Report, 1994/95; and IMF staff estimates.

Includes petroleum, electricity, transportation and communication, Suez Canal, and public utilities.

Includes industry and mining, construction and building, trade and restaurants, and tourism and hotels

Includes agriculture and real estate.

In all likelihood, the data presented understate the size of the public sector. In relation to GDP, the underestimation arises because the national income accounts do not include grant-financed military expenditures, which constitute about 3 percent of GDP. Also, the joint-venture companies in the industrial sector (about 184) are classified as private sector, whereas in reality some of them are majority owned or controlled by the public sector. In relation to employment, the underestimation of the size of the government arises because military personnel (estimated at about 450,000–500,000) are excluded.

The largest contributors to GDP are the economic authorities (18 percent of total GDP), which account for less than 3 percent of the total labor force. At the other extreme, the civil service (comprising the central and local governments and service authorities) accounts for about 7 percent of total economic activity but a disproportionate share (24 percent) of the total labor force and nearly two-thirds of total government employment. The public enterprise sector, including the Law 97 companies, produces about 10 percent of the economy:’ GDP, while employing about 6 percent of the total labor force. Thus, within the government, labor productivity as measured by the output per employee is the highest in the economic authorities and lowest in the civil service.

Financial Operations Within the Public Sector

Financial relations between the various public sector entities are complex and, in some cases, not particularly transparent or conducive to efficient use of public resources. The ongoing rationalization of financial relations will contribute toward enhancing the efficiency of the public sector and assist in deepening the privatization program. Table 20 summarizes the nature and magnitude of financial relations between different government entities.

Table 20.

Financial Transactions Between Public Entities

article image
Source: Data provided by the Egyptian authorities.

Central, total government, and service authorities.

Budget

The budget encompasses the activities of the central and local governments and the public service authorities. It also includes the investment expenditures of the economic authorities and their associated financing.50 The budget, until recently, guaranteed the loans contracted by the economic authorities. Public investment in the budget is financed by borrowing from the NIB, which really amounts to captive government borrowing from the pension funds.

Public Enterprises

Since 1992/93, public enterprises have been excluded from the budget and have not received explicit budgetary transfers or subsidies, although budgetary arrears to these enterprises remain. Public enterprises:’ outstanding debt to the banking system amounts to about LE 32 billion, of which about 60–70 percent is estimated as doubtful or bad debt. These debts are expected to be settled from privatization proceeds. There are also unresolved financial issues between the public enterprises and the economic authorities, especially between the electricity distribution companies and the electricity authority. Public enterprises also have outstanding financial obligations to the NIB estimated at about LE 10 billion, some of which is being progressively converted from debt to equity.

Social Insurance and Pension Funds

The social insurance and pension fund receives employer contributions from the central government and annual payments to compensate beneficiaries for the inflation-induced erosion in their benefits. The excess of inflows (including the returns on investments with the NIB) over current payments is transferred to the NIB, which is the de facto pension fund manager. These surpluses are lent to the government to finance public investment. The outstanding deposits of the pension fund with the NIB amount to about LE 67 billion and are currently remunerated by the NIB at about 13 percent. The NIB in turn charges the government about 13 percent interest for loans, which is well above the current treasury bill rate of about 8.8 percent, offering scope for rationalization. Between 1981–89, the average return on the pension funds (in turn reflecting NIB:’ lending to government, the economic authorities, and the public enterprises) was minus 12 percent in real terms.

The Reform Agenda

A central objective of the Egyptian Government:’ program of economic reforms is to increase the level of real growth, with a greater role for the private sector envisioned as one of the principal policy instruments. The description above facilitates an assessment of the likely quantitative impact of the policy reforms undertaken by the Egyptian Government. The elements of the reform that would have an impact on the size and role of the government are:

  1. Civil service reform: The government envisages a reduction in the size of the civil service by 2 percent a year. This would affect 7 percent of output and 25 percent of the labor force.

  2. Privatization of nonfinancial enterprises: The government is committed to reducing the size of Law 203 companies by about one-third in each of the two years of the program. If successful, this would reduce the public sector:’ role in industrial sector activity by about 25 percentage points, from 38 percent to about 13 percent; and in total output by about 6.4 percentage points of GDP from about 9,6 percent to 3.2 percent.

  3. Privatization of the banking system: The government:’ reform program, envisaging the privatization of the joint-venture banks and one of the public sector banks, would bring roughly half the sector into private sector control from the current 70 percent. In terms of overall GDP, about 1 percent to 2 percent of additional output would pass from public sector to private sector control.

  4. Privatization of insurance companies: The government:’ reform effort would bring another third of the sector into private hands.

  5. Privatization of infrastructure: Although not strictly part of the Stand-By Arrangement, the government has avowed greater private sector involvement in relation to a number of infrastructure sectors, which together account for about 18 percent of GDP. One difference from the other privatization initiatives is that in relation to infrastructure, private sector involvement is likely to take the form of acquisition or management of new rather than existing assets. Thus, in electricity, airports, and some port facilities, new investments will be open to the private sector in the form of build-operate-transfer (BOT) projects.

The Public Enterprise Sector, Law 203

To improve public enterprise performance, a public enterprise law was approved in 1991, known as Law 203; it aimed to increase commercial orientation, management accountability, and autonomy of public enterprises. Most public enterprises were delinked from the line ministries and brought under 27 newly created holding companies. A further reorganization was implemented in 1993 to reduce the number of holding companies to 17 and to prevent sectoral concentration under any one holding company. The holding companies were responsible for approving the business plans of the public enterprises, assessing their restructuring needs, and initiating the plans for their privatization. In addition, a Public Enterprise Office (PEO) was established in November 1991 as part of the newly created Ministry of Public Enterprises.

Financial and Economic Performance of Law 203 Companies

Variable standards of accounting and reporting complicate the assessment of the true financial health of the Egyptian public sector. Since the late 1980s, the financial performance of Law 203 companies has been poor and has deteriorated over time (Table 21). Of the 314 companies that constituted the initial portfolio, 54 were financially unprofitable compared with about 100 companies today, that is, about one-third of the current portfolio comprises loss-making companies. Aggregate profits, about LE 1.2 billion in 1989/90, have declined to LE 0.7 billion, representing a drop of over 70 percent in real terms; as a result, the accumulated losses carried on the balance sheets have increased from LE 2 billion in 1989/90 to LE 12 billion at the end of June 1996. The variance of profits among Law 203 companies has also risen from a combination of sharply rising profits in some companies and sharply rising losses in others.

Table 21.

Indicators of Public Enterprises’ Financial Performance

(in billions of Egyptian pounds, unless otherwise specified)

article image
Source: Data provided by the Egyptian authorities.

After tax.

Net of provisions for depreciation and for accounts receivable

Includes trade credits and about 50 percent of accounts payable.

Includes reserves.

In addition, the return to capital for Law 203 companies shows a deteriorating trend as indicated by Galal (1996). The ratio of net current surplus to revalued capital employed, which measures the returns to capital if it were purchased at market prices today, was about 5–5.5 percent during the 1990s, and the ratio of after-tax profits to net worth declined from about 11 percent in 1988/89 to 7 percent in 1993/94. Rising indebtedness (including accounts receivable) during the 1990s, from LE47.1 billion in 1990/91 to about LE 75 billion today, also points toward a less comfortable picture than suggested by aggregate profit figures. Loss-making companies, comprising about one-third of the total portfolio, accounted for close to 70 percent of overall debt, which not only accords with anecdotal evidence of weak corporate governance but also reflects indirect subsidization of the public sector through the banking system.

The weak financial performance of public sector enterprises has been reflected in adverse developments of broader economic indicators of public sector performance (Table 22). Over the past six years, gross value added of all Law 203 companies has grown on average at about 11 percent, and in real terms has declined at about 7 percent a year. Declining efficiency is reflected in sharp adverse movements in a number of productivity indicators. Since 1989/90, unit labor costs in the public sector have risen by about 16 percent a year in local currency terms. Relative to U.S. dollar unit labor costs in partner countries, competitiveness of the Egyptian public sector has deteriorated cumulatively by about 86 percent. Another indicator of declining profitability is the ratio of prices to unit labor costs in the public sector that has reduced the returns to capital, a symptom also reflected in the rising share of wages to value added. Most tellingly, total factor productivity during the early 1990s declined at about 3 percent a year, notwithstanding an employment decline of about 2.6 percent a year.

Table 22.

Indicators of Public Enterprises’ Economic Performance

(In annual percent change, unless otherwise specified)

article image
Source Data provided by the Egyptian authorities

Nominal value added deflated by price deflator for industry.

Capital stock series obtained from Galal (1996); capital deflator from IMF’s World Economic Outlook database; capital’s share in output, following Sarel (1997) was assumed to be 0,308

Growth in unit labor cost of Egyptian public sector against that in partner countries measured in a common currency. Rising value denotes deterioration in competitiveness.

Galal (1996). Understates saving because it excludes certain provisions for taxes.

Lackluster export performance in Egypt has its roots in an inefficient public sector, which has accounted on average for about 50–60 percent of Egypt:’ non-oil exports. Stagnant public sector exports, coupled with a relatively small, albeit dynamic private sector, have entailed poor export performance in the aggregate.

Real wages in the public sector have remained constant through the 1990s, while employment has declined significantly:—by about 180,000 (almost 20 percent of the public sector workforce). Although this accomplishment results in part from a change in composition, namely, the transfer of public sector companies to private hands, downsizing of the labor force without social discontent ranks as one of the major accomplishments of the reform program.

The public sector:’ contribution to national saving (including taxes paid) declined from about 4 percent of GDP to 2 percent (Galal, 1996); in the late 1980s, the public sector exerted a large claim on economy-wide resources as high investment (at about 6–8 percent of GDP) exceeded savings. Since 1990/91, the demands of stabilization and attendant fiscal adjustment compressed investment in the public sector so that by the early 1990s, it became a net saver. Nevertheless, in light of its inefficiencies, substantial scope for generating more savings in the public sector remains (see Box 3).

Review of Privatization

The total privatization effort has involved the sale of interests in 84 companies with a market value of about LE 17.7 billion, which represents about 7 percent of GDP, and about 35 percent of current market value of the initial privatization portfolio. Privatization can be divided into two phases. During the first phase running from 1993/94 to January 1996, 3 companies were sold outright to the private sector (anchor investor sales) and 16 were partially divested (proportions ranging from 5 percent to 20 percent), through the stock market. The second phase has seen a discernible acceleration in the pace of privatization, with 65 companies sold, supported by a deepening of the preparatory effort, as well as broadening in the types of companies sold and the modalities employed. Table 23 summarizes the achievements of the program so far.

Table 23.

Privatization Program, January 1993-September 1997

(In millions of Egyptian pounds, unless otherwise specified)

article image
Source: Data provided by the Egyptian authorities.

In column 4. the entire market value of a company is deemed as the privatization effort for majority privatizations; for minority privatizations, only the amount sold is included in the privatization effort.

Impact of Privatization on Increasing Saving

The Egyptian Government:’ objective of achieving a consistent rate of growth of 7 percent hinges on raising the level of investment and domestic saving. The latter is estimated to rise from the current level of about 18 percent of GDP to about 24:—25 percent of GDP in the medium term. A bulk of this increase is expected to come from nongovernment saving, in particular, aided by the privatization program. What orders of magnitude can be expected in the Egyptian case?

Privatization is likely to take two forms: privatization of the profitable companies and liquidation of the loss-making companies the latter involving stripping and selling a company:’ assets, as well as retrenchment and redeployment of labor. The impact on savings in the first case will arise from more efficient operation, yielding higher profits and savings, including through greater investment. This impact could take time as changed ownership and improved management practices take effect. On the other hand, the impact on saving (rather on dissaving) through liquidation could have an immediate impact as unprofitable operations are discontinued.

This impact, which needs to take account of the severance payments that would have to be paid out to the labor that is rendered redundant, can be approximated as follows. The losses of loss-making enterprises in 1994/95 amounted to about LE 3.3 billion (1.6 percent of GDP). Liquidation could arrest dissaving of this magnitude. Offsetting the reduced dissaving would be the one-off severance costs, which would be about LE 4 billion at the current rate of compensation (LE 16,000 per employee for about 250,000 employees). Donors, through the Social Fund, are expected to defray about 30 percent of these costs. The burden on the budget (directly or through foregone privatization receipts) would be about LE 2.8 billion (1.4 percent of GDP). Hence, for a one-off reduction in savings of 1.4 percent of GDP, there would be an annual (permanent) reduction in dissaving of about 1.6 percent of GDP. The impact of liquidation can therefore be significant.

The impact of increases in saving through privatization of profitable companies has been estimated by Galal (1996). According to his estimates, privatization of 50 percent of public enterprises could augment saving by about 2.1 percent of GDP, a large part of which would be accounted for by an assumed increase in investment that is expected to result from privatization, and the rest by an increase in total factor productivity of about 1.5 percent a year. Total saving from the above two channels could therefore yield about 3–3.5 percent of GDP in the medium term.

Out of the original portfolio of 314 companies, the government has sold controlling interests in 68, and minority interest in another 16:

  • Majority interest privatization has been effected through sales to anchor investors (7), flotations through the stock market (32, the predominant modality), liquidation of companies (18), sales of constituent assets of companies (1), and sales to Employee Shareholder Associations (ESAs) (10). The current market value of these privatized companies is about LE 14 billion (about 5.6 percent of GDP). Majority privatization involved selling, on average, a substantial portion:—about 78 percent:—of the government:’ stake in the enterprises, well above the minimum of 51 percent, to assure investors about the government:’ seriousness in this area. The companies that have been privatized have been spread over a number of sectors including agriculture, real estate and construction, food and beverages, milling, pharmaceutical, cement, chemicals and fertilizers, engineering, retail, and textiles.

  • Sale of minority interest involved an average divestiture by the government amounting to about 34 percent. The market value of these companies is about LE 9.9 billion (about 4 percent of GDP).

Proceeds from the privatizations completed between January 1996 and the end of June 1997 amounted to LE 5.2 billion (a little over 2 percent of GDP). Of this amount, about 40 percent was used to settle debts owed to the banking system, 55 percent has been transferred to the banking system en route to being transferred to the budget to retire debt; the remainder has been used to restructure labor.

How does Egypt:’ current privatization effort compare with recent international experience? Table 24 shows the receipts from privatization for a number of countries:—industrial, developing, and transition:—since 1980. A number of European and Latin American countries have undertaken large programs as reflected in the receipts from privatization. However, when the effort is normalized to take account of a country:’ relative size and the pace of privatization:—the indicator being privatization receipts a year as a share of GDP:—Egypt:’ recent experience ranks among the top four countries. Its privatization rate, of about 1.5 percent of GDP a year, is bettered only by Hungary, Malaysia, and the Czech Republic. The performance is especially remarkable because a major share of privatization receipts for many of the countries in Table 24 emanated from privatizing the infrastructure sector, which has yielded large revenues, involving few transactions. Egypt:’ privatization effort so far does not encompass this sector, yet it has been able to establish a pace of privatization that compares very favorably with recent international efforts at privatization.

Table 24.

Cross-Country Privatization Record

(In billions of U.S. dollars, unless otherwise specified)

article image
Sources: World Bank Privatization Database; and data provided by the Egyptian authorities.

GDP figure is average for the/ears covered by the privatization and is obtained from the IMF’s World Economic Outlook database.

Outstanding Issues in Privatization

The Egyptian privatization effort since 1996 has been remarkable. Can the pace be sustained and can the government achieve its target of divesting its stake in two-thirds of the public sector by the end of 1998? The deteriorating quality of the remaining portfolio gives reason to anticipate a deceleration in the pace. Of the 84 companies sold thus far, about 60 percent have involved privatization of profitable companies. To be on course for the overall target, an increasing share of the privatization effort will need to involve unviable or marginal companies, which will be more difficult; for unviable companies, job losses and the associated financial costs will have to be incurred. On the other hand, for marginal companies, successful sales can be effected only if the sale price is low enough to reflect the underlying financial situation of the company or, if financial restructuring is undertaken, large costs may need to be incurred prior to sale.

Owing to the relatively low wage rates, the costs of restructuring in Egypt are not high and do not pose an insurmountable obstacle to privatization. The average annual wage (and benefits) per employee in 1995/96 amounted to LE 6,500. Given the norm that voluntary redundancy entails a payment of three years:’ salary and benefits and assuming that about one-third of the labor force is excessive, the total costs of labor restructuring will require a onetime expenditure of LE 6 billion ($1.7 billion) which amounts to about 2.5 percent of GDP, an amount that can be absorbed by the government without great difficulty. Donors through the SFD have committed to defraying about $200 million of these costs, ameliorating to some extent the fiscal burden of labor restructuring.

One of the major difficulties in initiating the privatization program, and in gaining public acceptance for it, relates to the pricing of public sector assets. The government had to strike a balance between setting a price that would be attractive for investors in a new, unfamiliar market, and high enough to convince the public that assets were not being sold too cheaply. The response to this dilemma was heavy recourse to the stock market to effect the initial sales, where a relatively transparent process of attracting investors ensured that the public:’ fears could be allayed. The relative lack of anchor investor sales in the overall privatization effort, which involves a less transparent process of bilateral negotiations with investors, reflects in part the continuing need to establish credibility on the issue of asset valuation.

The problem of pricing may be critical in the case for companies that are marginal. Given that the government has correctly ruled out the restructuring of marginal and unviable companies prior to sale, privatization of such companies would necessarily entail setting low, even negative, prices to foster investor interest. Another impediment to efficient pricing relates to the role of the Central Auditing Agency (CAA), the government:’ watchdog, which has often assessed Law 203 companies beyond investor perception of reasonable value, complicating the task of the government in setting prices. To some extent, the government has overcome problems related to pricing by instituting a tripartite committee, comprising representatives from the PEO, CMA, and the CAA, which is able to balance the conflicting requirements and arrive at a workable solution.

Possible approaches to overcoming problems related to anchor sales include publicly announcing regulations and guidelines pertaining to these transactions. Committing to transparency and certainty of procedure, by imposing ex post costs for reneging on this commitment, could avoid arbitrariness in decision making and attendant loss in credibility.

Labor participation in and endorsement of the program of privatization was seen as essential to its success, as evidenced by the lack of social discontent in the face of employment reductions. Initially, labor participation took the form of selling minority stakes to ESAs:—ranging from 5 percent to 10 percent. While this was seen as an essential palliative for furthering privatization, majority sales to ESAs were seriously questioned. Legal, economic, and political concerns underlie the perception that sales to ESAs did not represent genuine transfer of ownership to the private sector.

There is reason to believe that sales to ESAs may be an efficient mode of privatization. First, although purchases by ESAs are paid for over an eight-year period, legally they are deemed to be the owners, as evidenced in the transfer of the enterprise from Law 203 to Law 159, which governs private enterprises. Moreover, an ESA:—as an entity:—can immediately sell a share of the company equivalent to the portion of the loan repaid. Second, notwithstanding the fact of deferred purchase, which at first sight is different from and arguably less onerous than a regular privatization transaction, the terms of an ESA sale involve financing costs of about 8 percent, which is close to market rates of interest. Third, the decision to sell to an ESA is based on an evaluation of all possibilities of divestiture and is not politically motivated. Often, the decision to sell to an ESA is the only option available given the lack of investor interest in the company concerned. In some cases, liquidation, which is socially expensive and politically sensitive, may be the only alternative to the ESA sale.

The empirical evidence indicates the financial performance of the companies that were sold to ESAs in 1994 has improved post privatization. Table 25 indicates that in seven of these ten companies, profits improved by a substantial margin:—over 60 percent on average:—after privatization, which supports the view that ESA sales lead to the efficiency gains that are a central objective of privatization.

Table 25.

Performance of Employee Shareholder Association-Held Companies

(In millions of Egyptian pounds, unless otherwise specified)

article image
Source: Data provided by the Egyptian authorities.

Average for 1991/92 and 1992/93.

Average for 1994/95 and 1995/96.

Public sector enterprises are heavily indebted to the Egyptian banking system and a portion of their loans is known to be nonperforming. Insofar as banks have provisioned against these debts, the banking system does not need to be reliant on proceeds from privatization to secure its financial position. However, the proceeds from privatization will contribute to strengthening the banking system. Thus far, about LE 2.1 billion, of total proceeds of LE 5,2 billion, has been used to settle public enterprise debts with the banking system.

Lessons from a number of recent experiences with privatization demonstrate that privatization need not of itself inject more competition into the economy. It could easily lead to public monopolies being transformed to private ones; in some cases, the aggrandizement of new owners has provoked a popular backlash against the entire program of privatization. Attention must therefore be paid to market structure. In Egypt, contestable markets depend most crucially on removal of barriers to trade, which remain high, with exposure to foreign competition constituting the most effective and immediate way of engendering efficient resource allocation. In nontradable sectors, trade liberalization may not be adequate, which raises die need for a regulatory framework that can provide the legal basis for facilitating greater competition. Speedy passage of the draft competition law would help in this regard.

Within Same Series

Other IMF Content

Other Publishers Content

Cover Egypt
Egypt
Beyond Stabilization. Toward a Dynamic Market Economy
Author: Mr. Howard Handy
ISBN:
9781557757203
ISSN:
0251-6365
Publication Date:
01 May 1998
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557757203.084
Pages:
95

  • Ali Sonia M. Richard H. Adams, Jr. 1996 “The Egyptian Food Subsidy System: Operation and Effects on Income Distribution,” World Development Vol. 24 (November) pp. 1777–91

    • Search Google Scholar
    • Export Citation

  • Alonso-Gamo Patricia Susan Fennell, and Sakr Khaled 1997 “Adjusting to New Realities: MENA, The Uruguay Round, and the EU-Mediterranean Initiative,” IMF Working Paper 97/5 Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Barro,Robert, 1995, “Inflation and Economic Growth,” Quarterly Bulletin, Bank of England Vol. 35 (May), pp. 166–76.

  • David B. Gordon 1983. “A Positive Theory of Monetary Policy in a Natural Rate Model,” Journal of Political Economy, Vol. 91 (August), pp. 589–610

    • Search Google Scholar
    • Export Citation

  • Berthelemy, Jean-Claude, and Aristomene Varoudakis 1996 Financial Development Policy and Growth Paris: Development Center of the Organization for Economic Cooperation and Development).

    • Search Google Scholar
    • Export Citation

  • Bisat Amer Mohamed A El-Erian, and Mahmoud E Gamal 1997 “Arab Economies Savings and Investment: Lessons from the Past and Torchlights for the Future”Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Mongelli Francesco P. 1996 “Investment and Growth in the Middle East and North Africa,” IMF Working Paper 96/124 Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Bisat, Amer, Mohamed A. El-Erian, and Thomas Hel-bling 1997 “Growth. Investment and Saving in the Arab Economies,” IMF Working Paper 97/85 Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Bruno Michael, and William Easterly 1995 Inflation, Crisis and Long-Run Growth, National Bureau of Economic Research Working Paper Series, No. 5209 (August)

    • Search Google Scholar
    • Export Citation

  • Calvo, Guillermo, Leonardo Lciderman, and Carmen M. Reinhart, 1993 “Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors,” Staff Papers, International Monetary Fund Vol. 40 March 1993 pp. 108–51

    • Search Google Scholar
    • Export Citation

  • Cardiff, Patrick W. forthcoming, “Poverty and Inequality in Egypt,” Research in Middle East Economies Vol. 2 Cairo: Middle East Economic Association

    • Search Google Scholar
    • Export Citation

  • Clark Peter 1994, Exchange Rales and Economic Fundamentals: A Framework for Analysis, IMF Occasional Paper No. 115 Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Edwards, Sebastian 1989, Real Exchange Rales, Devaluation and Adjustment: Exchange Rale Policy in Developing Countries Cambridge, Massachussets: MIT Press

    • Search Google Scholar
    • Export Citation

  • 1994, “Real and Monetary Determinants of Real Exchange Rate Behavior; Theory and Evidence from Developing Countries,” Ch. 4 in Estimating Equilibrium Exchange Rales, ed. Williamson John Washington: Institute for International Economics 1994

    • Search Google Scholar
    • Export Citation

  • Elbadawi, Ibrahim A., 1994, “Estimating Long-Run Equilibrium Real Exchange Rates,” Ch. 5 in Estimating Equilibrium Exchange Rates, ed. John Williamson Washington: Institute for International Economics, 1994

    • Search Google Scholar
    • Export Citation

  • Fischer, Stanley, 1993, “The Role of Macroeconomic Factors in Growth” Journal of Monetary Economics, Vol.32 (December) pp. 485–512

    • Search Google Scholar
    • Export Citation

  • 1996 “Central Banking: The Challenges Ahead, Maintaining Price Stability,” Finance Development, Vol. 33 (December) pp. 34–37

  • Francois, Joseph, and 1995 “Assessing the Uruguay Round,” paper presented at a World Bank conference on the Uruguay Round and Developing Countries, January 1995.

    • Search Google Scholar
    • Export Citation

  • Frankel, Jeffrey, 1993, On Exchange Rates Cambridge, Massachussets: MIT Press

  • Frenkel Jacob A., and Assaf Razin 1982, Fiscal Policies and the World Economy Cambridge, Massachussets: MIT Press

  • Galal, A, 1996 “Savings and Privatization,” Egyptian Centre For Economic Studies (ECES), Working Paper No.8 Cairo, Egypt: ECES

  • Goldin, Ian, and Emmanuel van der Mensbrugghe, 1995, “The Uruguay Round: An Assessment of Economy-Wide and Agricultural Reforms,” paper presented at a World Bank conference on the Uruguay Round and Developing Countries, January 1995

    • Search Google Scholar
    • Export Citation

  • Goldstein M., and J. Frenkel, 1996 Functioning of the International Monetary System Washington: International Monetary Fund

  • Guitian Manuel and Saleh M. Nsouli, 1996 Currency Convertibility in the Middle East and North Africa Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Handoussa, Heba, 1990, “Egypt’s Investment Strategy, Policies, and Performance Since the Infttah,” Investment Policies in the Arab Countries, by El-Naggar Said Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Hansen, Bent, and Karim Nashashibi 1975, Egypt, a special conference series on Foreign Trade Regimes and Economic Development Vol. 4 New York: National Bureau of Economic Research

    • Search Google Scholar
    • Export Citation

  • Havrylyshyn, Oleh, 1997 A Global Integration Strategy for Mediterranean Countries: Open Trade and Market Reforms Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Hertel,Thomas, and others, 1995, “Liberalizing Manufactures Trade in a Changing World Economy,” paper presented at a World Bank conference on the Uruguay Round and Developing Countries, January 1995.

    • Search Google Scholar
    • Export Citation

  • 1996, Growth, Globalization and the Gains from the Uruguay Round Washington: World Bank

  • Ikram, Khaled 1980 Egypt: Economic Management in a Period of Transition Washington: Johns Hopkins University Press for the World Bank

  • International Monetary Fund 1994 Official Financing for Developing Countries, World Economic and Financial Surveys Washington International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • 1996 World Economic Outlook, World Economic and Financial Surveys Washington October

  • Marty, Alvin L., and Daniel L. Thornton, 1995, “Is There a Case for ‘Moderate’ Inflation?” Federal Reserve Bank of St. Louis Review, Vol. 77 July/August pp. 27 37

    • Search Google Scholar
    • Export Citation

  • Mongardini, Joannes, 1998 “Estimating Egypt’s Equilibrium Real Exchange Rate,” IMF Working Paper 98/5 Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Pesaran M., Hashem, and Bahram Pesaran, 1996, Working with Microfii 4.0: Interactive Econometric Analysis Cambridge, England: Camfit Data Limited

    • Search Google Scholar
    • Export Citation

  • Pesaran, M. Hashem, and Yongcheol Shin, 1995, “An Autoregressive Distributed Lag Modeling Approach to Cointcgration Analysis,” DAE Working Paper No. 9514 Cambridge, England: Department of Applied Economics, University of Cambridge, February

    • Search Google Scholar
    • Export Citation

  • Quirk Peter, and Owen Evans, 1995 Capital Account Convertibility: Review of Experience and Implications for IMF Policies, IMF Occasional Paper No. 131 Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Ramaswamy, Ramana, 1997, “Monetary Frameworks: Is There a Preferred Option for the European Central Bank?” IMF Paper on Policy Analysis and Assessment 97/6 Washington: International Monetary Fund June

    • Search Google Scholar
    • Export Citation

  • Sarel, Michael, 1996 “Nonlinear Effects of Inflation on Economic Growth,” Staff Papers, International Monetary Fund, Vol. 43 March pp. 199–215

    • Search Google Scholar
    • Export Citation

  • 1997 “Growth and Productivity in ASEAN Countries,” IMF Working Paper 97/97 Washington: International Monetary Fund

  • Schadler Susan, Maria Carkovic, Adam Bennett, and Robert Kahn, 1993 Recent Experiences with Surges in Capital Inflows, IMF Occasional Paper No. 108 Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Selody, Jack, 1990, “The Goal of Price Stability: A Review of the Issues,” Bank of Canada Technical Report, No. 54 May

  • Shiells, Clinton, Arvind Subramanian, and Peter Ui-monem “Effects of the Uruguay Round on Egypt and Morocco,” IMF Working Paper 96/7 Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Stein, Jerome L., 1995 “The Fundamental Determinants of the Real Exchange Rate of the U.S. Dollar Relative to Other G-7 Currencies,” IMF Working Paper 95/81 Washington International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Subramanian, Arvind, 1997 “The Egyptian Stabilization Experience: An Analytical Retrospective,” IMF Working Paper 97/105 Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Tsikata, Tsidi, 1998, “Aid Effectiveness: A Survey of Recent Empirical Literature,” IMF Paper on Policy Analysis and Assessment 98/1 Washington: International Monetary Fund

    • Search Google Scholar
    • Export Citation

  • Wijnberger, Sweder van, 1986, “Aid, Export Promotion and the Real Exchange Rate: An African Dilemma,” World Bank DRD Discussion Papers, Washington: World Bank

    • Search Google Scholar
    • Export Citation

  • Williamson, John, ed. 1994 Estimating Equilibrium Exchange Rates Washington: Institute for International Economics