Saturday, April 23, 2011

Egypt: Finding the Balance Between Fighting Corruption and Retaining Investors

FT: Probes Spread Alarm in Egypt’s Businesses
AP: Egypt Stocks Extend Decline Amid Corruption Probe
The Economist: Staggering in the Right Direction

With the ousting of Hosni Mubarak, Egypt’s long-term autocratic leader in February, the country’s officials have been under pressure to stomp out corruption. In mid-April, Hosni Mubarak and his two sons were detained and charged with amassing illegal wealth as a result of their political positions. Furthermore, senior officials, including the prime minister and some ex-cabinet members were detained and imprisoned on charges of corruption and amassing illegal wealth. Protestors expressly demanded that senior officials be brought to justice, and have praised the efforts of the Egyptian military and civilian leaders in bringing to justice those who have abused and received illegal benefits during Mubarak’s rule.

Corruption probes, however, have not been limited to senior officials but have extended to other businessmen. Moreover, an investigation of a businessman of one company can leave a significant mark on companies not under investigation. For example, Ahmed Ezz of Ezz Steel is currently under investigation for fraud and corruption. The investigation of Ezz Steel has created serious problems for its subcontractor, Bahna Engineering, who has not been paid and cannot make plans for the future. Throughout the country, businessmen are being charged with corruption or are being investigated. This has sent a wave of panic throughout the business community. Additionally, the political authority has imposed restriction to limit capital flight putting further pressures on the Egyptian economy (capital flight occurs when proceeds from domestic businesses are taken out of the country, thereby shrinking the capital available in the country). This week, Egypt’s struggling stock market fell in the first half of the week, in response to news of additional corruption probes.

Insiders have noted that while fighting corruption is essential to putting the country back on the path of democracy, officials must tread a thin line between frightening off investors and fighting corruption. As John Sfakianakis, chief economist with the Riyadh, Saudi Arabia-based Banque Saudi-Fransi suggested, activity in fighting corruption should focus on creating a system of transparency going forward. He noted that going after businessmen in Egypt will only lead to the tightening of capital in the country, when investment and capital is most needed. Indeed, the country’s finance minister has asked the World Bank and the IMF for several billion dollars of loans to provide the economy with more capital. Commentators suggest that holding much of the business community hostage to corruption charges is counter-productive given that the system under Mubarak was corrupt, not the individual businessmen. As the Egyptian government takes on corruption and holds accountable those who have abused the system in previous years, it will have to be cautious not to frighten off investors to the detriment of Egypt’s economic recovery.

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