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EXCLUSIVE-Egypt turns to Western economic advisers, signalling possible reforms under Sisi - sources

Source: Reuters - Fri, 6 Jun 2014 15:46 GMT
Author: Reuters
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* Advisers Strategy&, Lazard operating in Egypt for months

* Reforms could include privatisation, energy subsidies overhaul

* Signals Sisi could take bold steps to fix state finances

* UAE says provides consultancies, welcomes IMF role

By Maggie Fick, Stephen Kalin and Sophie Sassard

CAIRO/LONDON, June 6 (Reuters) - Western advisers are drawing up plans for reshaping the Egyptian economy, sources said, with the apparent blessing of president-elect Abdel Fattah al-Sisi who so far has spoken only vaguely in public about reviving the state's finances.

The driving force behind the consulting project is the United Arab Emirates, which along with Saudi Arabia and Kuwait has showered Egypt with billions of dollars in aid since Sisi removed the Muslim Brotherhood from power last year, sources familiar with the exercise and businessmen told Reuters.

If Egypt were to accept reforms proposed by U.S. consultancy Strategy& and international investment bank Lazard, this could be used as a basis for reopening talks on a loan deal with the International Monetary Fund which ousted Islamist President Mohamed Mursi failed to seal, unwilling to impose unpopular reforms.

Gulf allies opposed to the Muslim Brotherhood have extended a lifeline exceeding $12 billion in cash and petroleum products to help Egypt stave off economic collapse.

The hiring of Lazard and Strategy& - formerly called Booz & Company - suggests the Gulf states want to ensure aid is spent efficiently in a country where past leaders with military backgrounds have often mismanaged the economy.

"UAE are involved in the process, as they are among the country's lenders. Lending money is not enough in itself. You also need to make sure the government has the means to identify what needs to change and execute it," said one of the sources familiar with the situation.

An IMF deal could help to inspire confidence among foreign investors who have been unnerved by three years of turmoil and a range of other problems ranging from costly energy subsidies to a lack of transparency in economic management.

It's unclear if Sisi, who stood down as military chief in March before winning a presidential election last month, has met the Western consulting companies. But advisers to the man who has been de facto leader of Egypt since Mursi's fall have almost certainly been closely involved in the project, which has been underway for several months.

SISI'S INTENTIONS

The discussions are the strongest indication that Sisi may restructure an economy suffering from corruption, red tape, high unemployment and a widening budget deficit aggravated by the fuel subsidies that cost nearly $19 billion a year.

Officials forecast economic growth at just 3.2 percent in the fiscal year that begins July 1, well below levels needed to create enough jobs for a rapidly growing population and ease widespread poverty.

The consultants have assigned sector teams to look at issues such as privatisations and other reforms, said the source.

The toughest problem will be the energy subsidies. Raising fuel and electricity prices could provoke unrest in a country where street protests have helped to depose two leaders in three years.

"This should be changed but that's a political decision. Lazard and Booz can only make recommendations but in the end the government will decide," said the source.

Interim president Adly Mansour suggested in April that Egypt was open to resuming privatisation of state firms, a policy pursued by President Hosni Mubarak before his fall in 2011.

Timing of the announcement of any reforms was "a political decision," the source said, adding that it was not clear whether the government would announce anything before parliamentary elections expected later this year.

A spokeswoman for Strategy&, which was acquired by Price Waterhouse Coopers in April, said she could not comment. A spokesman for Lazard also declined to comment.

However, UAE minister of state Sultan Ahmed al-Jaber, who handles aid to Cairo, said his country is "providing Egypt with technical support for the development of an economic recovery plan".

In a statement emailed to Reuters, he said the assistance the UAE had provided included work by "world-renowned consultancies", without giving further details.

The Gulf allies have indicated they will continue to support the new government, with Saudi Arabia hosting a donor conference shortly after Sisi takes office on Sunday.

GULF EFFICIENCY

During his election campaign, Sisi did not spell out how he would steer Egypt's economy.

But businessmen who have met Sisi say his calls for "hard work" were a signal he was willing to consider the kind of austerity measures that past leaders have avoided.

The project began well before Sisi's election. "Booz has been working for the past seven months on a reform plan in collaboration with the Egyptian military," said Tarek Zakaria Tawfik, deputy chairman of the Federation of Egyptian Industries (FEI), who said he talked with the consultants this year and met Sisi in May.

Although Sisi won strong public support for removing Mursi, failure to revitalise the economy could quickly strip away his popularity and bring Egyptians back onto the streets.

The military, which has a budget shielded from public oversight, has accrued a business empire ranging from bottled water to petrol stations. It is regarded as effective in implementing large-scale projects such as those funded by the UAE since Mursi's overthrow.

An army spokesman was not immediately available for comment.

One businessman who met Sisi twice before the election said the incoming leader knew about the consultants' activities. "(Sisi) will be the one to announce the plan. He's well aware of (the consultants)," said Tamer Abu Bakr, chairman of Mashreq Petroleum, who discussed energy policy with Sisi.

No one on Sisi's staff was immediately available for comment.

Other prominent businessmen consulted about the plan told Reuters that the international advisers were working with officials from Egypt's central bank and ministries of finance and trade, industry and investment.

One businessman said he met the consultants this year at the request of a government official, discussing changes he hoped to see in licensing regulations.

A spokeswoman at the central bank declined to comment. The finance ministry and the ministry of trade, industry and investment could not be reached immediately.

WELCOME REFORMS

Businessmen are encouraged by hints of economic reform that could help Egypt to secure an IMF loan, unlocking billions of dollars more in foreign aid and investment which dropped off after the 2011 uprising against Mubarak.

"If Sisi had intentions of maintaining the status quo regarding the unbalanced economic situation, he never would have entertained Booz," said Salah Diab, an Egyptian tycoon familiar with the consulting project and met Sisi last month.

"Booz is preparing the Egyptian side ... If we are going to sit with the IMF, we would be prepared to have an intelligent argument," he added.

Mursi's government failed to secure a $4.8 billion IMF loan after several rounds of talks, which analysts attributed to its unwillingness to impose austerity reforms as a condition.

Proposed steps included cutting fuel subsidies, raising the sales tax on goods and services, and taxing flotations on the stock exchange.

Masood Ahmed, director of the IMF's Middle East-Central Asia department, told Reuters the Fund had not yet been approached by Egypt about restarting loan negotiations, but was open and eager for that possibility.

UAE foreign minister Sheikh Abdullah bin Zayed said his country would welcome partners including the IMF to participate in a plan it has to revive Egypt's economy.

Tawfik, of the FEI, said he supported the strategy the consultants were drafting which he learned about at a meeting with them to discuss reforms of the agro-industrial sector.

"We saw eye-to-eye on almost everything ... I feel very comfortable that what they are recommending is what needs to be done," he said. (Additional reporting by Maha El Dahan in Abu Dhabi, Martin Dokoupil in Dubai, Shadia Nasralla and Asma Alsharif in Cairo; Editing by Michael Georgy and David Stamp)

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