After just six months in office, Egypt's cabinet has won over business with a raft of economic reforms and is even gaining confidence among savers, who have been increasingly switching dollar funds into Egypt's pound. Since mid-July, the cabinet has reduced customs duties, announced plans to cut income and corporate taxes by roughly 50 percent and relaunched a stalled privatisation drive.
The latest move was the launch of a foreign exchange interbank market, which proved a catalyst for the pound to strengthen against the dollar for the first time since a botched currency float in 2003 under the previous government.
Economists say behind the reforms is a pressing need to encourage private business and reduce unemployment, which officially stands at around 9 percent but which economists say is worse than that, particularly when underemployment is included.
"They (the cabinet) recognise what the issues are and they are doing more than just talking about it. We have actually seen some action," said James McCormack at Fitch ratings agency.
But reforms are so far not tackling the nagging worry of a hefty budget deficit, which economists say is only likely to get worse in the short term due to reductions in taxes and duties.
With parliamentary elections due later this year, few expect any major effort by the cabinet to implement painful spending cuts beyond the recent modest cut in diesel fuel subsidies.
The new cabinet has said it expects the impact on revenues from cuts to taxes and customs duties to be quickly offset by revived business activity and better tax collection. Economists say government forecasts may be a bit rosy but not by too much.
"There is a legitimate suggestion that they can raise tax revenues by improving compliance ... I think in the short term there are going to be revenue losses," said McCormack.
By some estimates, the budget deficit will be more than 7 percent for the financial year 2004/5, but McCormack said the figure drops to 3.3 percent when the social security fund surplus is included - a level that is not too worrying.
"Those kinds of deficit figures are not particularly alarming. There seems to be sufficient liquidity in the banking system that they will be able to finance that," McCormack said. Even though big spending reforms have been put aside for now, the government has won praise from foreign investors, particularly in the Gulf, who have helped the stock market's benchmark index surge more than 60 percent since July.
But economists say it is not only investors with "hot money" eyeing quick stock market gains that are looking at Egypt.
"The large companies looking to invest and set up in Egypt for the medium term ... are looking seriously," said Daniel Hanna, Middle East economist at Standard Chartered bank.
Any new foreign inflows would be good news for a country that attracted a paltry $407.2 million in direct investment from abroad in 2003/4, according to central bank figures.
BUYING INTO THE RECOVERY: But Egyptians are starting to gain confidence. Until recently, those with dollars were reluctant to switch to pound accounts with better interest rates even as rising hard currency revenues from tourism, export and other sources flowed in.
That changed when the central bank launched a foreign exchange interbank market on December 23, enabling banks to sell dollars in the confidence that they could buy them back if needed. The pound has strengthened by about 5 percent to the dollar, a surge that prompted increasing numbers of savers to buy pounds.
"Domestically now Egyptians may be buying into the recovery which I don't think they have been," said Hanna.
The economy is expected to grow by more than 5 percent this year, its highest level since the mid-1990s and close to the kind of levels economists say Egypt needs to create enough new employment for its youths and improve living standards.
Much of the growth has come from rising exports and a surge in visitors, which hit a record 8 million in 2004, both helped by the pound's slide against the dollar since the 2003 float.
But economists say tourism and exports will feel little impact from the pound's recovery against the dollar because many tourists are Europeans and Egypt's main trading partner is Europe and both sectors are being helped by a strong euro.
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