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Leave room for private sector to flourish, IMF advises Egypt

The International Monetary Fund is cautioning Egypt not to allow its military-affiliated businesses to grow even larger at the expense of the private sector.
A worker is seen at the Helwan Company for Engineering Industries (Factory 99) in Cairo, Egypt July 6, 2017. Picture taken July 6, 2017.    To match Special Report EGYPT-MILITARY/ECONOMY    REUTERS/Stringer - RC19DBF6CF70

CAIRO — Even as the Egyptian military is expanding its business dealings in various sectors, the International Monetary Fund is warning that it's time for the government to pull back its reach and allow the private sector room to grow.

The most recent expansion comes this week in the lucrative field of extracting minerals from black sand — an industry expected to generate billions of dollars. The military-affiliated Egyptian Black Sand Company (EBSC) signed a memorandum of understanding with a leading Chinese company Weiyuan Minerals on June 18 in a bid to boost EBSC efficiency in extraction.

The IMF has warned the government — and not for the first time — that military businesses pose unfair competition to the private sector. The military owns several companies in the sectors of supply commodities, agricultural reclamation, fish farming, livestock and construction. Some Egyptian media outlets and economists have also accused the state of favoring these businesses, which are exempt from customs and taxes. Their employees are compulsory recruits who receive a pittance as salaries, without any health or social insurance.

Subir Lall, the head of the IMF mission to Egypt, told Al-Monitor that although Egypt's military economic activities "aren't particularly in contradiction with the IMF policy," it's up to the state to establish a "fast-growing economy whose main pillar [ought to be] the private sector rather than the public sector or the state.”

In fact, he said, the government should "reduce the state’s control in general, not specifically the military, over economic activities, in line with the agreed objectives of the economic reform plan.” 

The IMF agreed June 12, 2016, to a $12 billion loan to support the government's economic reform plan. The loan is being delivered in four tranches over three years. The government said June 18 that it will receive the third payment, worth $2 billion, in late July.

Lall explained to Al-Monitor the need for a strong private sector, especially in light of Egypt’s rapid population growth. The country should "aim to create 700,000 jobs a year," he said. "But given Egypt’s heavy debts, it's difficult for the state to expand to hire more workers. This is only feasible through the expansion of the private sector to lead the Egyptian economy and investment growth."

The Egyptian Ministry of Manpower and Immigration said in December that the state provided 486,000 job opportunities to the domestic market through the Egyptian private sector.

Lall said, “Economic reform experiences in many developing countries show that excessive state intervention in the economic sector doesn't affect competition as [much as] some might claim." State-affiliated companies don't necessarily put private-sector firms out of business, but can intimidate them so they never emerge for fear of overwhelming competition "from the state and all its resources."

“The state has to encourage competition and remove any obstacles facing investors in acquiring lands and investments. It has also to work on increasing economic transparency by passing legislation to this effect, eliminating bureaucracy and developing infrastructure, which will help the private sector increase investment, develop the economy and create the required job opportunities," he added.

The IMF did praise the military's efforts to develop infrastructure. David Lipton, the IMF's first deputy managing director, said during a May 8 symposium at the American University of Cairo Business School that military involvement in the economy has helped with such projects. Yet, he said, Egypt must reduce government investments in general in the agricultural and industrial sectors, giving more leeway to the private sector to invest in these areas.

“Previous experiences of developing countries show that pinpointing and removing obstacles while increasing transparency can protect the Egyptian market from [acute] shortage of some products, which always prompts the state to intervene to fill that deficit,” Lall concluded.

In a December 2016 speech, Egyptian President Abdel Fattah al-Sisi said the armed forces' participation in the economy aimed to help the poor in the face of high prices resulting from the depreciated Egyptian pound and the shortage of foreign currencies. During 2015 and 2016, those problems had caused a shortage of products such as baby formula and sugar, among other commodities.

Farag Abdel Fattah, a Cairo University economics professor, doesn't agree with the IMF’s vision about the roles of the state and the private sector. Abdel Fattah told Al-Monitor that the state’s presence in different economic fields, whether via the public sector projects or the military's businesses, is the only way to protect Egyptians from the greed of some businesspeople who seek to monopolize certain goods and services.

Meanwhile, Mamdouh al-Wali, a former economic editor for Al-Ahram newspaper, sees many downsides to military intervention in the economy. “The competition between the military businesses and the private sector isn't fair. This also prevents the military from focusing on its main mission, which is to defend the homeland,” he said.

Khaled al-Shafei, an economic adviser to several investment institutions, told Al-Monitor he supports allowing the private sector to expand and safeguarding fair competition between the private sector and the military.

He noted, however, that the military can't withdraw from economic endeavors at this point because that would open the door to individuals to monopolize several areas. He stressed that military businesses will remain involved in the Egyptian economy until the economic system is reformed to prevent monopolies and protect consumers.

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