1

Policy Brief

Institutional Reform to the

Rescue of the Egyptian Economy:

The Silver Lining of Covid-19

December 2020

2

This study was commissioned by ECES as part of its project on Institutional Reform in Egypt. It

is authored by Abla Abdel-Latif, Executive Director and Director of Research, the Egyptian Center

for Economic Studies (ECES).

An earlier version of this paper was published by the Middle East Institute (MEI)

https://www.mei.edu/publications/rethinking-egypts-economy.

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any

form or by any means, mechanical, electronic, photocopying, recording or otherwise without the

prior written permission of ECES.

©2020 ECES. All rights reserved.

https://www.mei.edu/publications/rethinking-egypts-economyhttps://www.mei.edu/publications/rethinking-egypts-economy

3

Abstract

Most of Egypt’s current economic and social problems have their roots in institutional factors.

Getting out of a crisis situation every ten-year cycle through changes in fiscal and monetary

policies, only to have a boomerang effect means that it is time to adopt the proper institutional

reforms once and for all. As horrible as Covid-19 is, its silver lining in pushing for urgent changes

in that direction and the fact that we actually took quick steps in certain procedures and the positive

impact witnessed mean that we can do it if we commit enough. The positive impact on the Egyptian

economy in increased sustainability resilience and inclusivity will put Egypt on the high road of

development that it deserves.

4

INTRODUCTION

The Egyptian economy has been going along its path of growth for decades with over reliance on

fiscal and monetary policies. Solutions to all problems have always emerged from these two tool

boxes with everything else remaining unchanged. Being a rentier economy, primarily relying on

the combination of four exogenously demand driven sectors since 1974 - tourism, labor

remittances, Suez Canal and the oil sector- did not help much. Annual GDP growth was taking

place and foreign exchange revenues were flowing in, without the urgent need for deep structural

and institutional changes in the way the economy functions. The existence of a huge informal

sector and the fact that manufacturing industries and agriculture - along with their supportive

services – though the biggest employers- were not the core of the economy also pushed in the same

direction: more focus on the financial side of the economy and a lot less on the real side.

In specific, exchange rate policy has been the most frequently used tool. Sudden measures

of unavoidable devaluation took place, when the gap between the official and black market

exchange rates reached levels that literally paralyzed the economy. The repeated scenario

proceeds as follows, temporary relief of the problem, shortly after -in the span of approximately

ten years- the unavoidable downward turn of the economy takes place again, and the old symptoms

reemerge, namely an overpriced currency and accumulated debt due to overreliance on borrowing

in managing the economy. These symptoms of course coexist with Egypt’s persistent chronic

problems of: high unemployment, limited local and foreign investments, overreliance on imports

in everything, high trade deficits, mediocre human investment levels in education and health, low

social justice and increasing poverty.

All this indicates that we are in a vicious circle of reemerging problems, which is

perpetuated by the obvious fact that we are not addressing the roots of these problems every time

things go bad, but we are rather treating the symptoms thus the temporary impact. The objective

of this short paper is to present an evidence based argument that the root of all of Egypt’s problems

is institutional in nature. That unless it is addressed, the country will remain in the vicious circle

of poor performance, never living up to its potential, even if we get positive ratings for our

achievements at the macroeconomic level by all rating agencies.

The importance of raising this issue now is the fact that Covid-19 showed how deep these

institutional weaknesses are in every sector, and that their existence is behind the poor performance

5

of that sector in terms of output, quality, employment and linkages with other sectors. Post Covid-

19 Egypt needs to be free of these institutional constraints to be able to regain at a minimum its

competitive positioning in the world. In a slow growing world economy, the total GDP pie remains

almost fixed in size. This is what’s expected in the next few years. It would mean that the world

is almost back to Mercantilists’ time when the only way for countries to increase their share in the

world’s production and trade was by grasping part of somebody else’s share. At the time, these

disputes used to be settled by wars between countries, now it means fierce competition among

countries. Only the ones that are more efficient and thus have a bigger competitive edge over

others can keep or grab a bigger share of the world production and trade. Such competitive edge

simply cannot be achieved if the country is constrained by institutional obstacles.

This paper addresses institutional reform in Egypt. It consists of four sections: An

explanation of what is meant by institutional reform and why it is perceived as the mother of all

constraints and thus the rescuer of the Egyptian economy especially in the post Covid-19 era; A

presentation of a quick evidence based overview of institutional problems in Egypt giving

examples from few sectors; A proposed three staged approach towards implementation of a

comprehensive institutional reform program; and finally a delineation of the preconditions of

success for such an institutional reform action plan, and the extent to which Egypt has satisfied

any of them.

SECTION I:

Institutional reform is defined in many ways by different people, some focus on organizations and

how they function, others focus on the legal and regulatory frameworks, some focus on corruption,

and others see it as strictly administrative reforms. Institutional reform actually encompasses all

of the above, and any attempt to focus on one part and not the others makes the institutional reform

incomplete and thus not effective.

Institutional reform requires looking at the structure of the state and its governance system,

how decisions are taken, and how the various components (government, private sector, civil

society) connect. Table (1) presents the main questions that need to be answered as we assess the

impact of the existing institutional set up in any country and the need for reform.

6

Limited political commitment to institutional reform, limited inclusivity, and wide grey

zones in all rules and regulations combined with high informality and weak checks and balances,

are typically the main impediments to successful institutional reform.

Table 1. Question sheet to address the need for institutional reform

Priorities Has government identified its priorities amongst its desired outcomes and allocated resources

accordingly? Are allocations adhered to? What are the core policy and decision making

structures? What levels of expenditure can be afforded in the short, medium and long term?

What mechanisms are available to ensure that poor people’s views are taken into account?

Who sets priorities and in response to what interests? Can priorities be translated into

resource allocation?

Policies How effective are the core policy and decision making structures and processes? Are they

based on evidence and data? What is the availability and quality of data? What is the impact

of policy changes on the poor?

Incentives What is the current formal/informal incentive structure? Who benefits? What are the

incentives for state structures to deliver services; for the bureaucracy to attract and motivate

staff; for the development of national skilled human resources? What incentives direct or

indirect, if any, are there to modify behaviors of key players in support of the desired

outcomes? What incentives are there to review and improve performance?

Rules and Law Are formal rules and laws respected? Are there informal rules leading to corruption,

patronage, victimization, exclusion? Can rights be enforced through law? Are rules and law

subject to political interference? Are there informal systems of dispute resolution?

Culture National attitudes to risk, hierarchy, incentive systems, participation, donor interventions,

etc. Willingness to engage in consultation. Responsiveness to information, Issues of

community and individual identity.

Drivers for change What are the key drivers for change? Social, technological, economic or political? Are there

sponsors or champions for reform? Extent of their power and influence. Level of

commitment to reform. What benefits or incentives do they have to push a reform process?

Level of political stability. What are the implications of the current electoral cycle?

Voice and

Partnership

What mechanisms and structures are in place to promote the concerns of poor people?

Awareness raising, capacity building, joint manage of e.g. forestry or water resources,

participatory budgeting? How effective are they? What voice do people have to hold delivery

organizations to account? Report cards? Public audits?

Source: Extracted from (DFID 2003).

7

SECTION II:

In the case of Egypt, the institutional weaknesses are observed at all levels, both directly and

indirectly. It is seen directly in the governmental structure, interrelations between ministries,

operations of different organizations within each ministry and their interrelations, level of

decentralization and the level of involvement of the private sector and civil society in decision

making (few examples in table (2)).

Institutional weaknesses are also seen indirectly in all observed constraints and

complications in the business climate that the private sector constantly complains about,

inconsistency of policies, spread of corruption and informal arrangements and weakness of the

rule of law.

Table 2. Examples of specific institutional weaknesses in specific sectors

Sector Institutional Weaknesses

Health

Weak governance clearly demonstrated in the diversity of management,

regulation, financing and the level of quality of services provided by various

actors who follow differ rent administrative bodies and are governed by various

legislations

Ministry of Health plays four roles simultaneously: the planning role (through its

presidency of the Supreme Council of Health), the financing role, the executive

role, and the oversight role.

National Population Council is under the Ministry of Health although it is relevant

to all ministries

Communication

&Information

Technology

No publicly announced national strategy for digital transformation

Monopoly by telecom Egypt for all communication infrastructure

No information technology regulator to regulate and monitor adherence to quality

standards, and information security

The Minister of Communication and Information Technology is chairing NTRA,

the communication regulatory body. He is also the president of Telecom Egypt

Tourism Multiple supervisory authorities for tourist facilities (about 32) and poor

coordination between them.

8

Cinema Industry Loose affiliation with four Ministries: Culture, Trade and Industry, Planning and

Finance

Food Industries Supervision of their daily activities by at least 9 Ministries

Source: ECES 2020.

SECTION III:

A four staged approach towards implementation of a comprehensive institutional reform program

in Egypt is proposed. The rationale behind such stag ed approach is threefold: First, to build

momentum with quick wins before proceeding to tougher changes, especially that tougher

institutional changes – likely to face a lot of resistance- are easier to approach after seeing the

positive fruits of the first steps; Second, to capitalize on the silver lining of Covid-19, as short cuts

in few typically bureaucratic procedures were successfully adopted to facilitate business activities;

And third, it allows for timely interventions by positively influencing ongoing reforms, such as the

one taking place for improving database structure under the umbrella of the Administrative Control

Authority, and the opportunity for improving detailed data collection on investors through the

efforts of the new service centers for investment1.

The four stages are as follows: Stage zero: laying the foundation for improved policy

making capabilities; Stage one: Completing the circle of ease of doing business; Stage two:

Sectoral institutional reforms; and Stage three: Restructuring the entire governance system of the

government.

Stage zero of the proposed institutional reform program focuses on building digitized,

comprehensive, interconnected, and up to date databases at all levels. Without information and

statistics, policymaking is haphazard and subject to higher error than acceptable levels. At this

point, as far as personal information is concerned, there are scattered pieces of such database in

different ministries namely the Ministry of Social Solidarity, Ministry of Interior and Ministry of

Supply. Complete profiles of individuals do not exist since tax file, asset ownership, education

and skill level are not there. A similar situation exists in the case of land and other resources and

infrastructure. Updated information on different kinds of investments are supposedly available at

1 At this point these centers are used for providing services to investors without benefitting from the opportunity for

collecting information about investors that can help in policy making

9

the Investment Authority but are not readily available in complete profiles to be useful for policy

making and the search for information is a problem for all.

Stage one focuses on the facilitation of all procedures associated with the ease of doing

business including construction permits, getting electricity, registering property, to enforcing

contracts and resolving insolvency. Steps have been taken by the government to improve things

but the process has been slow and too piecemeal for investors to appreciate2. In fact as shown in

Figure 1, the improvement in the process of starting a business and a couple of other indicators in

2020 in comparison to2019 is accompanied by a deterioration in five other critical indicators

namely registering a property, resolving insolvency, dealing with construction permits, enforcing

contracts and getting credit.

Figure 1. Egypt's Rank in Doing Business Indicators - 2019 vs. 2020

Source: Collected and analyzed by ECES.

There is an urgent need to speed up the process and complete it. In addition, all steps taken

to cut the bureaucracy during Covid-19 such as facilitation and speeding up of customs clearance

need to become permanent procedures in doing business. The most critical of all in stage one

2 According to the Doing Business indicator 2020, Egypt’s rank in 114 out of 190 with an improvement of six positions

in comparison to previous year due to a couple of new laws improving the process of starting a business. It is still,

however, very low rank in comparison to other countries in the region which are making huge jumps in this area such

as the United Arab Emirates and Saudi Arabia. This immediately translates into receding of Egypt’s competitive

positioning in comparison to these countries.

10

though, is to resolve once and for all the complexities of state-owned land administration

considered at this point to be the number one complaint of local and foreign investors alike. The

problem is mainly due to the multiplicity of entities entrusted with the authority to own, use, or

dispose of state land depending on its location. These vary between governorates, ministries or

public authorities reporting to specific sectoral ministries. To increase the complexity of the

system there is a huge spectrum of laws and bylaws resulting in different regulations and pricing

mechanisms, even definitions of similar terms. The one key solution to all these problems is to

have one unified entity in charge (ECES 2018).

Stage two involves the restructuring of a number of key entities regulating activities at the

sectoral level. For example in the case of industry, IDA, EOS, ICA, and GOEIC3 are the

responsible entities. All manufacturing industries are achieving way less than their potential in

investment, production, exports, and employment because of impediments emerging from these

entities. The smaller the enterprise the higher the transaction costs involved in trying to overcome

the heavy red tape, old processes, huge bureaucracy, weak human capital, unnecessary complexity

of procedures, and numerous laws and ministerial decrees.

All sectors suffer from similar problems emerging from counterpart entities. If we add to

the institutional reform agenda at this stage the Egyptian Tax and Customs Authorities that would

support businesses in all sectors.

Stage three digs deep into institutional reform working on the core of the problem. It

focuses on: restructuring of the cabinet4, involvement of all stakeholders in the decision making

process, achieving checks and balances and most important separating between planning,

execution, and assessment. Figure 2 illustrates the process. Each of the suggested specialized

individual Councils (health, education, and industry….etc.) is meant to put the sector’s strategy

and KPIs for its implementation. The KPIs are measured by CAPMAS and assessed by the

Parliament and the President. In its work, the Council is relying on all available expertise in the

country. It does not implement programs, it only puts the strategies and relevant policies.

Implementation is done by ministries, private sector, and civil society. An application of such

3 The Industrial Development Authority (IDA), The Egyptian Organization for Standards and Quality (EOS), the

Industrial Control Authority (ICA), the General Organization for Import and Export Control (GOEIC) 4 Involving reduction of the number of ministries and having strong technical office at the cabinet level

11

system in the case of population control would take out the National population Council from

under the Ministry of Health, as it is now, to the level of the cabinet with implementation of

population control programs done by the Ministry of Health among others with designated roles

played by the private sector and the civil society5.

Figure 2. Institutional Structure that achieves Good Governance (Separation of Planning from

Execution & Assessment)

Source: Developed by author.

Three key concepts are implicit in such institutional structure: decentralization of

authority, separation of regulator from executive role of ministers, and keeping strategic direction

of the sector at a higher level than the Minister in charge.

Decentralization of authority is in the 2014 Constitution. It is a precondition for improved

efficiency and governance as illustrated in Figure 2 especially at the level of the preparation and

implementation of program based budgeting. Besides the advantages of such budgeting in

specifying targets and making sure they get implemented, it also forces ministries to work together

in the implementation of projects so their success is interlinked and not separate. Such implicit

coordination means working together and not separately in silos as is the case now.

Separation of regulator of the sector from the person of the Minister in charge, is critical;

as the entity that puts the rules cannot be the one that implements them and have oversight on

5 A detailed analysis is presented in (ECES 2019).

12

itself, which is currently the case not only in the communication sector, as seen in Table 2, but also

in electricity, all utilities and housing as well.

Keeping the strategy above the Minister’s level means that it doesn’t change with the

change of ministers. Ministers are supposed to be there to implement an already existing strategy,

and if there is a needed change in such strategy and its relevant policies, it is to be done through

the specialized Council, and on the basis of detailed studying by government officials and experts

for information supported by close follow up of performance.

SECTION IV:

In this last section, we attempt to answer two key questions: what are the preconditions of success

for such an institutional reform action plan? And to what extent has Egypt satisfied any of them?

Six pre-conditions for success are presented below along with the extent to which Egypt has

actually taken steps in every one of them:

1) To Cascade the top- level political commitment down to the entire government structure,

as implementation of institutional change typically takes all stakeholders out of their

comfort zones and there are always interest groups benefitting from the vague complexity

of the system that often impede the process. In the case of Egypt, the Presidents and Prime

Minister’s interest in and commitment for institutional reform exist but the cascading of

this commitment is lower from the Prime Minister’s level downwards and disappears as

the bureaucracy level is reached.

2) To empower the authority in charge of championing the change. For example, it is not

logical that a Minister enjoying a certain level of power in his ministry is asked to take this

power from himself and pass it on to others. This needs to be done at a higher level. To

that effect, one of the latest changes in the cabinet, 2019, was very positive in that direction,

specifically: Moving the administrative reform function up from the ministerial level –

under the ministry of planning- to the Prime Minister’s level.

3) To benefit from the domino effect of institutional reform by working on key drivers of

change, i.e. start with reforms that are likely to automatically lead to other reforms in many

directions thus have a broad impact. This applies to the cancellation of the Ministry of

13

Investment and upgrading the Investment Authority to be directly under the Prime

Minister, thus allowing for a wide range of improvements in the ease of doing business.

4) The existence of a clear publicly announced implementation plan of action with KPIs, not

for the outcome, but rather for the process of implementation itself, with acceptable

achievements within a certain time range and clear spelling out of what is not acceptable

and a corrective mechanism in a timely way in case of its occurrence. Such exercise needs

to be done for every KPI. This step hasn’t taken place yet in Egypt. In fact, more generally

the overall plan for institutional reform beyond small steps in many directions is not clear.

5) To adopt clear rules and regulations that account for all details at all levels, eliminating

room for improvising or personal interpretation, and applying same rules on all economic

agents irrespective of their nature, with no exceptions.

6) Finally, to add an article to the budget law/procedure that an increase of a certain

percentage over the planned budget deficit would have to get approval from the parliament.

This is both an institutional reform in its own right and a pre-condition for proper checks

and balances.

In conclusion, most of Egypt’s current economic and social problems have their roots in

institutional factors. Getting out of a crisis situation every ten-year cycle through changes in fiscal

and monetary policies, only to have a boomerang effect means that it is time to adopt the proper

institutional reforms once and for all. As horrible as Covid-19 is, its silver lining in pushing for

urgent changes in that direction and the fact that we actually took quick steps in certain procedures

and the positive impact witnessed means that we can do it if we commit enough. The positive

impact on the Egyptian economy in increased sustainability resilience and inclusivity will put

Egypt on the high road of development that it deserves.

14

REFERENCES

Department for International Development (DFID). 2003. Promoting institutional appraisal and

development: A sourcebook of tools and techniques. London: Department for International

Development. (https://gsdrc.org/document-library/promoting-institutional-and-

organisational-development-a-source-book-of-tools-and-techniques/)

The Egyptian Center for Economic Studies (ECES). 2018. The state’s land management system:

Current situation and development proposals. ECES Working Paper Series, WP196-A. The

Egyptian Center for Economic Studies (ECES). Cairo, Egypt.

———. 2019. Egypt’s population policy: Analyzing the ingredients for success and the optimal

institutional form – a comparative study. ECES Working Paper Series, WP203-A. The

Egyptian Center for Economic Studies (ECES). Cairo, Egypt.

———. 2020. Impact on the tourism sector in Egypt. ECES Views on the Crisis Series, issue no.3.

The Egyptian Center for Economic Studies (ECES). Cairo, Egypt.

———. 2020. The communications and information technology sector in Egypt. ECES Views on

the Crisis Series, issue no.8. The Egyptian Center for Economic Studies (ECES). Cairo,

Egypt.

———. 2020. The impact of the crisis on the health sector. ECES Views on the Crisis Series, issue

no.10. The Egyptian Center for Economic Studies (ECES). Cairo, Egypt.

———. 2020. Grocery retail trade. ECES Views on the Crisis Series, issue no.12. The Egyptian

Center for Economic Studies (ECES). Cairo, Egypt.

———. 2020. Cinema industry. ECES Views on the Crisis Series, issue no.15. The Egyptian

Center for Economic Studies (ECES). Cairo, Egypt.

https://gsdrc.org/document-library/promoting-institutional-and-organisational-development-a-source-book-of-tools-and-techniques/https://gsdrc.org/document-library/promoting-institutional-and-organisational-development-a-source-book-of-tools-and-techniques/