Guest Post: Egypt A Playground For High Rollers

[caption id="attachment_486" align="aligncenter" width="614"] Egypt Stock Exchange has become a playground for high rollers, Photo by Ahmed Nawawi, for Flickr[/caption]

Guest post by Karim Malak, a research assistant at the Political Science department at the American University in Cairo. He is the former political assistant at The Carter Center Democracy Program.

As talk of Egypt’s monetary meltdown dominates headlines, the renewed debate on Egypt’s regulatory authorities has propelled finance and economy into the spotlight.

Not only is there a new programme on OnTV dedicated to the Egyptian Stock Exchange (ESE) called “the stock market today” but the Stock Market Guild has repeatedly called for reform.

The Guild argues that the existing legislation was designed to serve those in power.

But unfortunately, this debate is misplaced.

Not only is insider trading handled with just a penalty and mild jail sentences, but in some cases the law permits the head of the Capital Market Authority, which monitors financial dealings in Egypt,  to drop charges in the case of reconciliation and the 100,000 pound ($16,389) penalty.

When Egypt was under the Mubarak regime the CMA could be pressured to look the other way. It also lacks the capacity to investigate off-shore tax havens, hidden profits, tax evasion and other elaborate means of embezzlement.

Though the biggest cases of embezzlement are usually confined to New York, Singapore, Shang Hai and to a lesser extent London, the biggest investment bank in Egypt this year brought the problem crashing home.

The greatest story known to all Egyptian stock brokers is the one of EFG Hermes.

The chief executives of Egypt’s biggest investment bank, Yasser El Mallawany and Hassan Heikal,  along with the sons of former President Hosni Mubarak and five others were earlier this year charged for alleged insider trading on the country’s stock market.

They are alleged to have made an illegal profit of more than 2 billion Egyptian pounds ($331 million) through corrupt stock exchange transactions.

The prosecutor general, who referred the case to the Cairo Criminal Court, accused El Mallawany, Heikal, Gamal and Alaa Mubarak, and five other businessmen of breaking stock market regulations by buying a controlling stake in Al Watany Bank of Egypt and then selling it without ever declaring their ownership.

The charges allege they hid their transactions through a web of affiliated offshore companies and other funds.

Though the accused will face trial later this month, the case appears to have hit a dead end with the evidence unclear.

It’s a reflection of the sorry state of the CMA, which is now widely regarded as toothless and has little impact on major deals. 

It also showed how the Egyptian stock exchange continues to be the playground of major rollers who manipulate stock prices illegally. 

The case begs the question:  Will the economic debate continue to be dominated by a neo-liberal agenda that measures growth by Foreign Direct Investment and continues to strike down tax reform?

It is not a surprise that such cases never see the light of day.

Instead there remains a continued fixation about a currency devaluation. It would be wise for readers to look to the example of the Asian financial crisis of the 1990s and the involvement of the World Bank which forced the devaluation of currencies and promoted unpopular privatization schemes.

Egypt’s economic debate needs to move past this neo-liberal impasse that the World Bank and International Monetary Fund institutions can do no wrong.

The wrong questions are also being asked vis-a-vis Egypt’s economy.  

– No one is talking about the potential fallout and social cost of actually lifting subsidies instead of subsidy augmentation (most people agree subsidies rarely go to their users and that a vibrant blackmarket of basic commodities exists because of them).

– No one has mentioned the need for planning, budget oversight, reversing urban migration and consumption patterns of basic foods that have changed over the past years; making it harder for the average Egyptian to buy food.

– No one is talking about the need to bolster Egypt’s agricultural industry and the reversal of Egypt’s agricultural industry from a vibrant economy to one that is a great Western market.

The economic program presented by the Egyptian government to the IMF instead focuses on cutting costs at a time where arguably the social cost would guarantee no stability for execution.

Picture an IMF loan that is accepted: it cuts farmers’ fertilizer subsidy and in response they go on strike and the police shoot. That 1977 bread riot-style crisis is a very probable outcome unless the government can guarantee society’s buy-in.

Before a decision is made to reject or accept the loan Egyptians would be well advised to answer these questions first and take a look at where Egypt will be 30 years from today should it carry through with this economic policy.

The pedagogical debate around Egypt’s economy only serves the interest of those who already lead a comfortable lifestyle; instead new options must be explored and this ‘dead-end’ must be deconstructed.

All these questions have so far been quietly shrugged off by a provision for ‘development’ projects and aid; something that does not help at all. The much hyped ‘investor confidence’ that the IMF loan would bring should instead be measured against all the debt-swaps that have been pledged.

Egypt is still among the top countries in the world that has the regulations that allow for the cheapest ways to raise capital and issue profit for shareholders.

Capturing debt-swaps, like the close to $1 billion of debt relief being negotiated with the US, and allocating them to ventures would go some way to plugging some of the budget deficit.

A perfect example of what an alternative could look like is the newly signed $3.7 billion Egyptian Refining Company (ERC) deal, that will upgrade a key oil refinery.

It is a scheme developed by local private equity house Citadel Capital and is a key project for Egypt as it will reduce the country’s import bill by producing valuable light fuel products

Such a deal is slated to decrease Egypt’s energy imports by nearly 50% upon completion – lifting some burden on Egypt’s energy requirements.

Not only was this deal signed amidst Egypt’s ‘turbulent economic climate’ but it demonstrates the potential for infrastructure and energy potential in Egypt. There is no denying Egypt needs the liquidity but there must first be a sober debate about food, energy policies in Egypt and planning.

One Comment

  • Posted September 6, 2012 at 10:45 am | Permalink

    Excellent post. However, I think those in power are more aware of what political suicide it would be to cut the subsidies substantially. I think they will probably give the IMF the diesel/energy subsidies as a token sacrifice and a deal will go ahead.

    Of course there is more to the deal than the subsidies. In any case, the IMF deal has been about to happen, apparently, since April of last year. The difference I guess is that now Morsy is here and in charge. He’s already shown however, that he is not stupid. In fact he’s shown himself to be quite an operator, and someone who is fully aware of Egypt’s inherent diplomatic clout.

    I don’t see him signing a deal he knows full well will have rioters with pitchforks outside the door in a day. I think we will see one of the softest deals the IMF has ever signed, if we see a deal, and that probably won’t happen any time soon – maybe by the end of the year, maybe.

    The times they-are-a-chaaaaaaaanging.

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