North Africa: Waiting Game

A Tunisian clothing market

As new and emerging governments establish political office in Egypt, Libya and Tunisia, strategies to tackle economic exclusion are still lagging.

From the self-immolation of 26 year old Tunisian fruit trader Mohamed Bouazizi in protest at the confiscation of his stall, the Arab Spring has economic roots. For the last year, North Africa’s focus has been on political reform and with old regimes toppled, the world’s eyes are on elections, which are now concluded in Tunisia, underway in Egypt and scheduled in Libya. Governments and emerging parties must now start grappling with the issues of corruption, unemployment and rising inequality, but there is still little sign of how the region’s leaders plan to deal with the economic problems that gave rise to the revolutions.

“From after the uprising, when the political scene started to reform, up until today, I would say 99 percent of the discussion in Egypt has been on political reform. I don’t think I have seen any of the parties put forward their economic policies or programmes,” says Sherif Kamel, dean of the business school at the American University in Cairo. “What are the parties planning to do about the economy once they get into parliament?”

Barring the initial rejection of a $3.2bn IMF loan (which is now being reconsidered), a tightening of money transfer rules to stem capital outflows, and the mulling of an Islamic bond issuance, Egypt’s interim military government has mostly sought to reassure foreign investors that Africa’s second largest economy will not shift course sharply. Minister of Industry and Foreign Trade, Mahmoud Eisa, told the US Chamber of Commerce there would be “no change” in economic policy, and the government is in talks with the World Bank over a $1bn loan.

Egypt’s Freedom and Justice Party – the political arm of the Muslim Brotherhood which looks likely to take a major share of power – supports a free market model but without ‘manipulation or monopoly’. Tunisia’s coalition government, dominated by the moderate Ennahda party, with the centre left parties Congress for the Republic and Ettakatol, has cleaved to a liberal path. Ennahda’s intellectual leader Rachid Ghannouchi has assured the business community not to fear the new order, and in October party members met stock market representatives to emphasise the party’s support for business.

Reluctance to publicly discuss policy change is in part due to fear about further economic contraction. Greenfield foreign investment in Egypt dropped from around $11- $12bn per year in 2008 and 2009 to $2bn in 2011. The central bank is spending $2bn in foreign reserves every month to plug its balance of payments deficit, while keeping the currency stable against the dollar. It desperately wants to avoid an IMF bailout, which could be conditional on potentially incendiary subsidy reform, although dismantling regressive subsidies on under-performing national assets, including oil and gas, electricity, mining and the Suez Canal, could free up $50bn for social spending.

Resource-poor Tunisia has been equally hard hit by its revolution, which cost the economy between $5 and $8bn, with FDI falling and over 80 foreign companies shutting down. While there are billions of dollars of finance and real estate holdings held abroad by the Ali family, none has yet been recovered. In May 2011, then-prime minister Caïd Essebsi said the government would need $5bn of aid annually for five years to finance infrastructure and job creation.

In both countries, economic declarations to date have centred on individual, vote-winning interventions. The Tunisian leadership has pledged infrastructure spending to reduce the inequity between coast and interior, and promised to boost agriculture through the sale of state land. Egypt’s military generals raised public sector wages to counter food price inflation, and gave 450,000 contract workers permanent jobs. But there is no sign of a markedly different economic policy stance.

Dr Paul Salem, director of the Middle East Centre at the Carnegie Endowment for International Peace, convened with members from the Islamist parties of Morocco, Tunisia, Egypt and Jordan in an economic policy conference, and claims none espoused a radical economic outlook. “They have a vision based on globalisation, market forces, encouraging private investment, and increasing productivity. It’s not socialist, it’s not autarky, it’s not revolutionary in any way.” However, there is a desire to fine-tune the liberalisation model, he claims, highlighting cronyism and corruption as central issues; a sentiment echoed by the business community.

“Profits in the Egyptian business community have been disproportionate to effort,” says Ahmed Galal, managing director of the Economic Research Forum, a regional research institute. Entrepreneurship, innovation and initiative have lost out to “soft capitalism”, with endemic bribery and land speculation. Small to medium sized businesses, which provide 40 percent of Egypt’s jobs, face widespread corruption, red tape and financial exclusion. Mohamed Ashour, co-founder of a frozen yogurt company, says lengthy time frames for granting business licenses is enabling public officials to offer bribes to expedite the process.

While the previous government simplified some procedures, reducing the costs of starting a business and eliminating the capital requirements for doing so, many entrepreneurs are underwhelmed. “Everyone is talking about improving the environment and helping SMEs, but it is just talk,” says Iman Bibers, vice president for Ashoka Global, a not-for-profit group supporting social entrepreneurship. While Egypt had dropped several places in last year’s Transparency International index, signalling improvement, many claim they have not seen reduced corruption. “There is no doubt that the revolution has sparked innovation among young people”, says Mr Bibers. “But the current system is not living up to the expectations of the youth.”

In Tunisia, corruption pertained mainly to the very top, but at a serious scale. “It is not the formal administration that was involved in corruption, it was the relatives of Ben Ali who targeted proprietors in the business of importing goods,” says Mr Noureddine Zekri, general manager of Tunisia’s Foreign Investment Promotion Agency. Mohamed Malouche, president of the NGO Tunisian American Young Professionals, says bribery to speed up business permits and licenses was common. “The time of a person starting a business or the manager of an SME is a precious resource that needs to be devoted to doing business and that cannot be wasted in complying with unnecessary regulations or in building up political instead of business relationships,” says Ania Thiemann, senior economist at the OECD.

While corruption is a critical issue, ill-conceived business regulation has also held economies back. Surveys by Transparency International and the World Economic Forum-African Development Bank jointly found that restrictive labour regulations were higher on the list of obstacles. In Egypt, draconian bankruptcy laws carrying jail terms for failed businessmen, and multi-year bans to stop them re-entering business, have stifled new firm formation. New businesses are set up at a fraction of the pace of the likes of Brazil, South Africa and Mexico, and below even Algeria, according to the OECD. Severance pay for established employees amounts to 132 weeks of final salaries, strongly discouraging firms from hiring.

Growth strategies

Wages as a share of GDP have declined, and a rise in the minimum wage has been a key demand of protesters. North Africa’s population is young, so work opportunities must expand rapidly not just for those out of work, but for the millions coming up behind them. Since unemployment is highest among the most educated, education reform is also important to ensure the young population has the right skills for today’s economy. All of these issues require growth.

Tunisia has frequently topped African competitiveness surveys, with the most efficiency- rather than factor-driven economy in Africa; on par with South Africa, and globally with the likes of Turkey and Mexico. Growth clipped along at an average of over 4.7 percent between 1990 and 2010, and the country was one of Africa’s best performers in health and primary education, devoting a higher share of spending to tertiary education than the OECD average in some years, and scoring high on gender equity in enrolment. The problem has been a mismatch between the skills of graduates and the opportunities waiting for them in the job market.

External investment will help resuscitate the economy. Tunisia’s Foreign Investment Promotion Agency’s Mr Zekri says there has been increased interest from foreign companies looking to invest from the UK and US, as well as Arab, Asian and Scandinavian regions. Efforts are underway to strengthen bilateral economic ties, with Tunisia looking to build on relations with Turkey and the US.

Turkey provides an attractive model both for Tunisia and other governments in the region, says Carnegie’s Dr Salem. “The Turkish model shows you can have a conservative, previously Islamist-type party lead very successful economic development and job creation in a non-oil producing Middle Eastern country. That is their proof of concept.” Qatar also looms large, with delegates attending Tunisia’s one year revolution anniversary, and signing several contracts.

But some international demand trends are working against Tunisia. Most of the country’s exports are to recession-hit high income countries, with Europe accounting for over 70 percent, especially France and Italy. Tunisia’s tourism receipts are back up, but Europeans are not splashing out on holidays. Even Turkey, the primary market for chemicals, has begun turning to other suppliers as Tunisia’s reputation for reliability was shaken.

Both Egypt and Tunisia are at the mercy of geopolitical shocks. As EU sanctions on Iran start to bite, and Israel’s nuclear rhetoric ratchets up, the risk of a rising oil price, and even the potential closing of the Hormuz Strait, could hurt oil importers such as Tunisia. A flare-up of the Israel-Palestine conflict may be met by a different stance from Cairo than under Mubarak, which could stoke diplomatic fires. Al Qaeda, while failing to mobilise any popular support in the Arab world this year, still stands to benefit operationally from security breakdowns in North Africa. Conversely, some geopolitical trends may be helpful. Europe has long sought to diversify gas imports from Russia, and the prospects of a deepening integration with North Africa’s gas producers is on the agenda.

At Europe’s door

The last of the North African trio to revolt, Libya was the only country in the region to resort to all-out warfare to oust its leader – the continent’s longest serving. It was also alone in eliciting outright military support from foreign powers. With liberation achieved in late October and elections scheduled for June, the country’s economic future remains hazy.

Prior to the revolution, Libya had enjoyed the third highest per capita gross national income and the highest human development indicators in Africa. After decades of socialist policy, the economy was tentatively liberalising, with a third of state-owned companies privatised in the decade to 2010. But hydrocarbons still accounted for over 54 percent of Libya’s GDP in 2010, according to the African Economic Outlook, and with the economy now recovering from near shut-down, the next government faces problems well beyond economic diversification. Immediate issues of soaring youth unemployment and low female economic participation will be at the top of the list.

Oil production is back on stream and expected to hit 1.5m barrels a day by June, and the UN Security Council’s lifting of sanctions on the Libyan Central Bank will provide some fiscal stability; but the judicial system is still suspended, and it remains unclear how the commercial environment will change.

The country’s interim government – the National Transitional Council – is not elected and does not have the power to pass laws, but has stressed a broadly pro-business, private-sector led growth attitude. Their approach is generally reassuring, says Robin Lamb, director general of the Libyan British Business Council: “They are also clear that the existing law continues, that they want to resume existing contracts, discuss losses or money owed by the previous government to business enterprises, and come to a negotiated decision on those.”

Over the longer-term this will necessitate a continuation of previous policy to privatise more than 50 percent of state assets over 10 years. “A number of the state industries that we are talking to are expecting privatisation – not straight away, but in due course,” he says.

Some changes do look likely in the country’s legal framework. Within its draft constitution, the NTC has pledged to liberalise property ownership – a shift from highly restricted ownership frameworks of the last regime. The implications for foreign individuals and businesses – which previously could not own property – would be substantial. Based on the NTC’s liberation speech and the draft constitution, Sharia also looks likely to become the major source of law under the next government. It is unclear how Islamic law would affect commercial legislation, though the NTC has commented specifically on a potential shift away from conventional financing.

However, a shift toward Sharia should not imply a radical overhaul in the way companies do business in Libya. Under the last regime, the payment of interest was acceptable between companies, but not individuals. If this changes, alterations to the way deals are structured are easily made, lawyers argue. “Previously, there was an investment law which was not based in Islamic law,” explains Mike Pullen, EMEA head of competition and trade at DLA Piper. “Sharia will be a source of legislation for Libya now, but it is a source of legislation in most Islamic countries; and where Sharia tends to really kick in is family law, law on morals and behaviour and so on, rather than in terms of the commercial world.”

In February, the country published the final draft of its election law – which will reserve two fifths of seats for political parties – and swore in its national electoral commission. The steps now allow preparations for June elections of a National Congress, which will be tasked with enshrining Libya’s new constitution.

Having been banned under Muammar Gaddafi’s rule, numerous new parties are now emerging, with agendas stretching well beyond the Islamist. But Libya’s electoral picture has been clouded by persistent insecurity, with the NTC struggling to contain a new bout of protests over the pace of change and the lack of compensation for rebel fighters. Tribal rivalries are simmering, and the emerging leadership itself contains considerable militia elements; with the Zintan militia even using their capture of Saif Gaddafi as a bargaining chip to attempt to win the defence portfolio.

The national agenda is far from cohesive. At a conference on North Africa at UK-based think tank Chatham House, one analyst said the NTC has failed to properly communicate its activities to the public. Meanwhile, wartime rebel prime minister Mahmoud Jibril has also expressed concern that Libyans will shy away from the country’s first free elections in four decades if more is not done to educate them about the vote.

Little by way of economic strategy has been laid out by emerging parties. “At the moment, policy only really stretches as far as an unstated consensus for a private sector-led environment, in which people can build businesses and get jobs, but there are a lot of issues to overcome in the meantime,” LBBC’s Mr Lamb explains. “First, returning oil revenue has got to be applied to reconstruction.” But comprehensive new wage and employment policy will be needed promptly to address the needs of a young, swelling and disenchanted labour force.

Libya’s transition will continue to impact on the rest of the continent and beyond, with the country’s $65bn sovereign wealth fund, the Libyan Investment Authority – which invests heavily in Africa – currently reviewing its portfolio. In November, LIA’s acting chief executive said that the fund will be used to find domestic reconstruction, though it is unclear what assets would be sold to finance this. Tensions over who will head up the fund, which has suffered considerable mismanagement, are running high.

Yet international confidence in Libya’s long-term economic prospects seems strong, with trade delegations, including that of Britain, wasting no time in visiting the country. “Libya is a country in dire need of infrastructure – social infrastructure, energy… and that’s where opportunity lies,” argues Mohammed Al Hashemi, head of asset management at the Abu Dhabi Investment Company (Invest AD), which established its first Libya fund a year ago. “With the changes we have seen, there is a greater political will to improve the lifestyle of the population with some basic needs like low cost housing, electricity and water supply. The case for this is now even stronger – much more so than before.”

“Out of jail and into office”

The combination of these mountainous challenges, and the growing impatience of populations who risked their lives to forge the new orders, have led some to describe 2012 as ‘year zero’. David Welch, a former US diplomat, calls for patience. “There is not a long track record of governance on the part of these parties. We have to give them a chance to show what their agenda is.”

Carnegie’s Dr Salem points out that many emerging campaigners and new governments in North Africa have been clandestine for decades. “Many are coming out of jail and into office,” he says. “They are going to have to learn on the fly, very quickly.”

The indication so far is of a continuation of liberalisation, but with important re-balancing. “This is not about doing anything fundamentally new, but about doing things better and more coherently,” says Dr Salem, “maintaining an eye on social justice and the moral responsibility of government to provide stability while development is taking place.”

While 2012 will likely see a few more turns of the North African wheel, some entrepreneurs believe the current instability should not undermine the deep and long-lasting shift that has taken place. Eldin Sadek, co-founder of Egyptian start-up Bey2ollak, says that people’s way of identifying with their country has changed profoundly. “Before the revolution, everyone treated Egypt like a hotel,” he says. “No one was really attached to the country; children would grow up, travel, make some money abroad and then return to Egypt to make more money.” Since the revolution, this attitude has changed, in spite of all the challenges and uncertainties: “Egypt is now our home,” he says.

Source: All Africa.Com – 5 March 2012