Identifier
Created
Classification
Origin
05CAIRO6703
2005-08-31 13:07:00
CONFIDENTIAL
Embassy Cairo
Cable title:  

THE NEW CABINET ONE YEAR LATER: REFORMS AND

Tags:  ETRD EAGR EAID EG ECON PGOV USTR 
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C O N F I D E N T I A L SECTION 01 OF 03 CAIRO 006703 

SIPDIS

USTR FOR SAUMS
TREASURY FOR MILLS/NUGENT/PETERS
USDOC FOR 4520/ITA/MAC/SAMS, TALAAT AND JACOBS/WIEHAGEN
USDA FOR FAS/SHEIKH/BERNSTEIN

E.O. 12958: DECL: 08/31/2015
TAGS: ETRD EAGR EAID EG ECON PGOV USTR
SUBJECT: THE NEW CABINET ONE YEAR LATER: REFORMS AND
REFORMERS ON THE MARCH

Classified by A/DCM Michael Corbin for reasons 1.4 (b) and
(d).

-------
Summary
-------

C O N F I D E N T I A L SECTION 01 OF 03 CAIRO 006703

SIPDIS

USTR FOR SAUMS
TREASURY FOR MILLS/NUGENT/PETERS
USDOC FOR 4520/ITA/MAC/SAMS, TALAAT AND JACOBS/WIEHAGEN
USDA FOR FAS/SHEIKH/BERNSTEIN

E.O. 12958: DECL: 08/31/2015
TAGS: ETRD EAGR EAID EG ECON PGOV USTR
SUBJECT: THE NEW CABINET ONE YEAR LATER: REFORMS AND
REFORMERS ON THE MARCH

Classified by A/DCM Michael Corbin for reasons 1.4 (b) and
(d).

--------------
Summary
--------------


1. (C) One year after the cabinet shuffle that placed Ahmed
Nazif and other economic reformers into significant
ministerial positions, President Mubarak (and in the
background, his son Gamal) have gained strength from the
concrete results of the economic reform agenda. Overcoming
skepticism from pundits and resistance from the "old guard,"
the new ministers enacted urgently needed reforms, balancing
unpopular moves, like cutting subsidies on basic commodities,
with more popular ones, like lowering tariffs on imports.
The list of reforms is impressive, especially when compared
to the anemic performance of every previous government.
Investor confidence is up, GDP growth is expected to achieve
five percent this year and the Nazif group will almost
certainly be returned to the cabinet after the upcoming
parliamentary elections. However, every major reform
initiative requires the acquiescence of the powerful security
and old guard voices in the cabinet (Defense, Interior,
Intelligence, Foreign Affairs, and Parliamentary Affairs) and
whether the new cabinet shifts the balance further in favor
of the reformers is a question that looms large as elections
begin. End summary.

-------------- -
Setting the Bar High: One Year to Get Results
-------------- -


2. (C) The success of the reformers over the past year
surprised skeptics, and even some reformers, who questioned
whether they could overcome resistance from the old guard and
show tangible results before the 2005 presidential and
parliamentary elections. The one-year deadline for results
was set by the reformers themselves, but understood to also
be the expectation of President Mubarak. The goal was
ambitious, even audacious, given the years of economic

problems the new cabinet inherited. One prominent
businessman, a close friend and political ally of Anwar
Sadat, noted that the reformers were not left with just the
economic baggage of the previous government, but with
problems 50 years in the making.


3. (C) Understanding that they had to win over not only the
president, but also the public, the reformers moved quickly
to enact urgently needed reforms designed to make the economy
more market-based and globally oriented. Nazif and his
cabinet allies understood that pain of the reform process
would fall on the average Egyptian fast and hard, while the
benefits would take longer to materialize. They therefore
tried to balance unpopular moves, like cutting subsidies on
basic commodities, with more popular moves, like lowering
tariffs on imports.

--------------
The Reforms: Changing Laws, Changing Minds
--------------


4. (C) The list of reforms undertaken over the past year is
long. Since the installation of the new economic reform
cabinet, the GOE has:

- Developed and implemented an inflation-targeting monetary
policy framework.

- Established an inter-bank foreign exchange market that
helped end foreign currency shortages and virtually eliminate
the black market for foreign currency.

- Signed and implemented an MOU with U.S. on financial sector
reform, which includes privatizing one of the public banks,
and addressing non-performing loans.

- Taken concrete steps to privatize the Bank of Alexandria
(the smallest of the public banks) by the end of 2005 or
early 2006.

- Sold shares in joint-venture banks such as National Societe
General Bank and Egyptian Commercial Bank.

- Enforced new minimum capital requirements for banks and
have set a goal of reducing the banking sector from 52 to 21
banks over a 3-5 year period.

- Cut subsidies on basic commodities including diesel (a 50%
increase in the subsidized price),industrial natural gas (an
almost 18% increase in the subsidized price) and water in
Cairo (an almost 100% increase in subsidized price).

- Simplified the import tariff regime by reducing the number
of tariff rates from 27 to 6. Decreased tariffs on a range
of imports, which reduced the average weighted tariff from
14.6% to 9.1% and moved Egypt from 75th to 30th place on the
World Bank's ranking of countries with the lowest tariffs.

- Passed a new income tax law which cut personal income tax
rate from 32% to 20%, standardized deductions for all
taxpayers, and created a flat corporate tax rate of 20%
(reduced from an average rate of 40%).

- Set up a "one stop shop" for foreign investors starting
businesses in Egypt.

- Published the GOE budget using IMF-approved accounting
standards to provide greater transparency.

- Privatized 19 public companies, including enterprises the
previous government had deemed "strategic" and thus
ineligible for privatization. Plans are underway to
privatize Eastern Tobacco Company and sell shares of Telecom
Egypt on the New York Stock Exchange.

- Broadened commercial relations with Israel by concluding
with its neighbor the Qualifying Industrial Zones agreement
and a gas export agreement.

- Resolved long-standing trade and business issues of U.S.
companies, including eliminating excessive sales taxes on
soft drinks and removing restrictions on the import of U.S.
beef products.


5. (C) In addition to these concrete steps, the reform
ministers have pushed hard on changing the mindset of
government officials and bureaucrats. They have promoted
government decentralization, by undertaking efforts to move
some decision-making and control over budgetary resources
from the central government to the local level. They have
tried, with mixed success, to overcome resistance within
their own bureaucracies, which are chock-full of surplus
workers who see reforms as a threat to their jobs and
authority.

--------------
Tangible Results and New Momentum
--------------


6. (C) Under any assessment, the breadth and depth of
reforms accomplished in just one year would be an
achievement. But when judged against the anemic record of
the previous governments, and recognizing the resistance put
up by the old guard in the NDP and fearful bureaucrats in
their own ministries, the reformers record is rather
astounding. GDP growth, which hovered around 3.2 percent
from 2000-03 and only reached 4.3 percent last year, is
expected to hit 5 percent in 2005. Proceeds from
privatization of public enterprises has generated $500
million over the past year, as compared to only $14 million
over the previous 16 months. The Cairo and Alexandria Stock
Exchange is the best performing stock exchange in the world
among emerging markets. The Egyptian pound has stabilized
against the dollar and would likely appreciate if not for
suspected Central Bank intervention to keep the pound stable.



7. (C) The best indication of the reformers' success,
however, may lie less in the numbers than in a change in
perception. Few may remember now that when the cabinet
shuffle was announced a year ago, speculation was rife that
the reformers would not be able to deliver. Rumors were
circulating that the old guard was setting up the reformers
to take the fall for not resolving the economic problems that
their stability-promoting policies had in fact precipitated.
Failure seemed more likely than success, as every major
initiative had to pass "the old guard test," and some
reforms, like eliminating major subsidies, were completely
off-limits from the start. Field Marshall Tantawi openly
resisted many of the reforms, and he found plenty of support
in the cabinet parliament from those who saw reform as a
threat to their political and personal interests.


8. (C) One year later, however, perceptions have changed.
As a result of the reforms, the business climate has
noticeably improved and investor confidence is surging.
Local businessmen have remarked on streamlined customs
procedures and greater responsiveness from ministries in
addressing their business concerns. A lawyer at one of
Egypt's premiere law firms noted a dramatic increase in the
number of inquiries from foreigners interested in setting up
operations in Egypt. As for the public, which the old guard
predicted would react strenuously to disruption brought about
by reforms, the reaction has been decidedly low-key. Though
facing higher prices and economic uncertainty, the public
seems grudgingly resigned to accept the immediate pain for
the promise of change.


9. (C) The reformers have been strengthened by their success
and will almost certainly be returned to office following the
upcoming elections. The looming question, however, is
whether President Mubarak will add to their number. Rumors
abound that the President will appoint new ministers after
the parliamentary elections. The betting is that the
powerful defense and security ministers will remain in the
cabinet, with the exception of Minister of Interior El Adly,
the final casualty of the Sharm bombings. Even then,
however, no one expects anyone other than a trusted,
like-minded ally of the President to take El Adly's place.
With less than a third of the cabinet considered reformist or
reform-friendly, there is ample opportunity among the
remaining dozen or so portfolios to increase the reformers
presence and power in the cabinet. The decision, however,
rests with Mubarak, who has been touting the desirability and
value of reform in his recent election appearances, but will
balance the push for reform with his perennial concerns over
security and stability.


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JONES