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‘Egyptian president must convince public to trust government’

By Reuters - Jul 22,2014 - Last updated at Jul 22,2014

CAIRO — The economist behind a plan to unlock at least $380 billion worth of assets from Egypt's black market says President Abdel Fattah Al Sisi must first restore another asset that has depreciated over the years: The trust of a wary public.

That is a tall order in a country where the government has chronically neglected basic duties, in many cases leaving citizens to fend for themselves and find ways around laws and bureaucracy that hinder more than help.

But Peruvian economist Hernando de Soto, who has been consulted by dozens of world leaders on private property reform over the last 25 years and has met with Sisi three times since May, is confident the president will use a narrow window of opportunity to address Egyptians' pervasive suspicion of government.

"Egyptians don't trust their own administration," de Soto told Reuters. "They're not going to hand in names or data, so you've got to start by establishing credibility."

He has given Sisi a plan outlining specific changes to the bureaucracy and legal code needed to integrate an estimated 60 per cent of the population into the system by registering and documenting ordinary Egyptians' assets.

He predicts such reforms could more than double economic growth rates within five years by giving people access to credit and the protections of legal status. Forecasts for Egypt's growth this year range between 2.0 - 2.5 per cent.

De Soto's initiative is part of efforts to restore public finances, attract foreign investment and revive an economy battered by three years of political turmoil and unrest, and is expected to be implemented alongside others including from US consultancy Strategy and investment bank Lazard.

Sisi is also standing by other ambitious initiatives, such as one to build 48 new cities in the desert.

De Soto said in an interview that Sisi had begun appointing officials to form an agency which would run a communications campaign aimed at building consensus for the reforms and ensuring their implementation.

The presidency did not respond to Reuters' requests for comment. But a statement from Sisi's campaign released two weeks before elections in May said the candidate had met with de Soto to discuss "a vision for the future of the informal economic sector in Egypt".

Sisi, who ousted elected president Mohamed Morsi last year following protests against his rule and won 93 per cent of votes cast in May, has already expended some political capital on tax hikes and subsidy cuts.

Previous governments have talked about reforming the economy without much effect. De Soto met with officials from President Hosni Mubarak's government a decade ago and all the candidates in the 2012 presidential elections, including Morsi of the banned Muslim Brotherhood.

Obtaining buy-in from a public that may not like the status quo but has repeatedly felt cheated by empty government promises is the first step of de Soto's plan — and likely its biggest obstacle for Sisi. De Soto predicts it will take about a year.

"I think he has realised what his historic moment is and he really wants to turn the country around," de Soto told Reuters by telephone from Lima. "It's got to be relatively quickly because you've got to take advantage of expectations being high now."


Break the inertia


The symptoms of informality, which de Soto calls "a disease of government", are unavoidable in Egypt.

Unlicenced vendors flood the streets, hawking everything from clothes and electronics to vegetables and seafood. The microbuses that many Egyptians rely on for transport skirt meaningful regulation.

Whole districts spring up inside major cities and operate beyond government control, a phenomenon that has become regarded as normal.

Meanwhile, Egypt's massive public sector puts up red tape in the way of millions of Egyptians who resort to living and working beyond the law.

Loss of faith in central government was a main cause of the 2011 uprising that ended Mubarak's 30 years in power. Mistrust only increased in the following years, as police abandoned their posts, and officials avoided making decisions they feared could land them in jail.

The key to his plan, indicated de Soto, is for Sisi to "create enough enthusiasm for the idea of being able to work within a system where everybody obeys the law... That allows you to break the inertia."

Since he announced he would run for office, Sisi has adopted a rhetoric which appeals to Egyptians to help him save the country from collapse through hard work and sacrifice.

"The president would be saying and identifying for them what the obstacles are, how government intends to go about [removing them], and he will ask for help," said de Soto.

If Sisi succeeds, the economist says he has prescriptions available based on five years' of research on Egypt's informal sector conducted before the 2011 uprising, which a team from his Institute for Liberty and Democracy (ILD) think tank has recently updated.

"It's very precise: Point by point, office by office, norm by norm," he said, declining to reveal details. Legal revisions and changes to bureaucratic protocol are clearly part, but not all, of the programme.

The ILD's website lists among its achievements implementing or inspiring property titling initiatives from Thailand to Russia which it says have increased access to credit and reduced poverty.

"This is where most of the country's resources that can give you... the high growth rates are," said de Soto. "It's the informal economy."

In an another interview, Egypt’s Supplies Minister Khaled Hanafi told Reuters that a new smart card system for bread distribution launched in April is now operational in five provinces and should be implemented nationwide by October.

Egypt, the world's top wheat importer,  recently pointed out that  reforms to its bread subsidy programme alongside an improved storage system should cut its import needs by as much as 30 per cent.

"We took quick steps towards the new bread system and overcame a lot of the bureaucratic obstacles...," Hanafi said in the interview. "With the completion of the new system our imports will fall around 30 per cent." 

Egypt spends more than $4 billion a year on food subsidies, on which millions of poverty-stricken Egyptians depend. One cash-strapped government after another has resisted tackling problems in the system, fearful of a backlash from the public.

But in an effort to rein in its budget deficit to 10 per cent of the gross domestic product in the next fiscal year, Egypt's new government slashed subsidies for car fuel and natural gas, increasing their prices by more than 70 per cent earlier this month.

Sisi and Prime Minister Ibrahim Mehleb have not announced similar drastic cuts to the food subsidy system but reforms to the way the government hands out the subsidy have been in the making since April in an attempt to decrease waste and corruption.

Under the new system, Egyptians use electronic smart cards for bread purchases and around 20 different subsidised goods at grocery stores across the country.

The cards follow a points system which raises incentives for Egyptians to buy only as much subsidised bread as they need, helping reduce spending on wheat by as much as 5 billion Egyptian pounds ($699 million), Hanafi said.

Food and energy subsidies traditionally eat up a quarter of state spending.

Officials say wheat consumption is kept artificially high in part by citizens who purchase subsidised loaves for the equivalent of one US cent and feed them to their livestock because the bread is cheaper than animal feed.

Under the old system, Egyptians only have the option of buying infamously poor quality rice, sugar, and oil but Hanafi said the list of items available to purchase would now be expanded first to 20 and then to 100 within months. Meat and poultry will be among the new products on the initial list.

He added that smart card holders would accrue points if they bought less than the quota of five loaves per family member per day, a number that officials hope can later be reduced. The points would allow them to purchase other subsidised goods.

Hanafi, who retained his position after Sisi took office earlier this month, has been outspoken about the need to reform wasteful subsidies.

Egypt imports around 5.5 million tonnes of wheat annually for its bread subsidy programme. The country also bought 3.7 million tonnes of local wheat in the 2014 season.

Hanafi said Egypt's enhanced storage capacity should help it increase its local wheat purchases and cut waste.

Egypt is making progress in increasing local storage capacity with the help of one of its major Gulf backers, the United Arab Emirates (UAE).

The UAE has committed to funding silos that can store up to 1.5 million tonnes of wheat.

"We purchased from farmers all the quantities that were available to us and we aim to buy four million tonnes next year," he said.

Separately, Egypt's central bank raised key interest rates last week in an apparent attempt to curb inflation pressures after the government cut energy subsidies.

The central bank raised the overnight deposit rate to 9.25 per cent from 8.25 per cent and the overnight lending rate to 10.25 per cent from 9.25 per cent, it said in a statement.

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