THE LAST 25 years of the nation’s economy have been a seesaw of frenzied activity and stagnant repose marked by a rush of new private businesses, a faltering privatization process and the bold float of the Egyptian pound some 18 months ago.

Following the 1973 war, President Anwar Sadat decided, with enormous clarity of vision, that Egypt had suffered enough through conflict and Gamal Abdel Nasser’s experiment with socialism. The end of the 1970s ushered in what became known as Infitah (Open-Door policy), a series of economic liberalizations engineered to ease the country out of the socialist grip and entice foreign direct investment (FDI).

It worked. The 1980s saw a new era in Egyptian socio-economics, one that gave rise to a new social class and provided endless material for cartoonists and entertainers alike.

The wave of liberalization saw the market open up to imports, and with them came a heady rush of slipshod entrepreneurship. Small traders clamored to become wholesale importers of cheap goods; on the consumer end, people tried to make money buying and selling just about anything, while larger businessmen clawed for tawkeelaat (agencies) the right to represent a foreign company in Egypt.

This fervent, and largely unregulated, economic activity gave rise to a new social class, a nouveau riche that had, through the successful manipulation of a sloppy, nascent market economy, migrated from the lowest socio-economic class up the proverbial social ladder. In the view of the established elite, they brought with them money but none of the cultural tools needed to assimilate into their newfound social status. The films of the 1980s were full of jokes about butchers driving Mercedes and illiterate car dealers buying villas in Zamalek.

Economic strains mirrored the social ones. By the mid-1980s, the word “businessman” had acquired a slightly seedy air. Several confidence schemes, the most famous of them being that of Al-Rayyan, only reinforced the image.

Reformer Youssef Boutros-Ghali was rewarded with an appointment as finance minister.

Fathi Al-Rayyan was a businessman whose vision was to profit from the latent piousness of Egyptians. He set up a pyramid scheme, promising investors that their money would be traded according to Islamic principles; there would be no interest, and clients would take a proportional cut of the overall profits. The schemes offered returns at astonishing rates of up to 35 percent; banks, with rates of a maximum 11 percent, couldn’t begin to compete. The schemes appeared to offer the best of both worlds: riches in this world, and the next.

The initial profits encouraged hordes of new investors to hand over their cash. As any observer of pyramid schemes can tell you, their dodgy reputation is well-founded; returns are paid out of the funds provided by new investors. Any drop in investment translates into a corresponding drop in returns for the investors.

Less scientifically, but just as accurately, if the head of a pyramid is having a bad day, so will the investor.

In October 1987, Fathi Al-Rayyan had a very bad day. The company lost an estimated LE 1 billion in the stock market crash. Classic investor hysteria followed: Pandemonium erupted in the streets outside the company’s headquarters. A few months later, the People’s Assembly passed Law No. 146 of 1988 prohibiting any company from receiving public money unless it was a joint-stock venture.

Al-Rayyan, among others, couldn’t liquidate its stock, although it insisted it could cover everyone’s losses. The government decided enough was enough, and Al-Rayyan and his brother Ahmed were both arrested, along with half a dozen other businessmen spinning the same web.

“Part of the problem was that the economic laws failed to keep up with the violations that are characteristic of an open market economy,” explains legal analyst and lawyer Mohamed Zaki. “As a matter of fact, until 1999, the definitions of companies and their financial behavior were still being defined according to a law passed in 1883. When the Infitah law was passed, the government didn’t amend other laws that affect economics, and so you got a whole lot of loopholes. Whether we’re talking about corporate fraud or other violations, the legal framework simply couldn’t keep up.”

If the 1980s was the decade of trial and error, then the 1990s, which kicked off to an excellent start with the opening of the Damietta Port in 1990, was the decade of trying to get it right.

In 1991, Egypt embarked on the Economic Reform and Structural Readjustment Program (ERSAP) designed by the IMF and the World Bank. The program included a stringent package of reforms that aimed to stabilize the macroeconomic environment, right the balance of payments and implement fiscal and monetary reforms, all designed to increase investment and output.

ERSAP was an enormous success; in fact, Egypt became an IMF poster child. And the rewards started trickling in, slowly, but surely.

In September 1993, Commercial International Bank (CIB) went public. Response was overwhelming: the stock was 150 percent oversubscribed in just 10 days. Its release generated LE 585 million, the largest transaction to date on the stock exchange.

Growth went from 2.5 percent in 1993, to 3.9 in 1994, to 4.7 in 1994, and then, in 1995, it reached a vibrant 4.9.

In April of 1995, the government took a bold step, issuing LE 3 billion worth of treasury bonds, giving birth to a new bond market. The following year saw the introduction of corporate bonds.

The government went all out trying to attract FDI. By 1995, the latest buzzword on everyone’s lips was “ISO 9000” for a quality-control certificate. Foreign companies wouldn’t invest if they couldn’t ensure that what was rolling off the production lines would be saleable elsewhere. Soon, everyone was doing it. Later that year, in a splashy ceremony attended by CEO Luciano Benetton, the clothing giant Benetton opened up a plant in Borg Al-Arab, just outside Alexandria.

In July of that year, the internet arrived in Egypt. Only a few had access, and even fewer were convinced it would amount to much as a business tool. “To tell you the truth,” businessman Osama Hussein said at the time, “the internet is a toy.” It would be five years before Ahmed Nazif, appointed the nation’s first minister of communication and information technology in 1998, would push for the start of e-government.

By the mid-1990s, the government had woken up to the fact that exports were a sorely overlooked goldmine. Agriculture in particular had been neglected, with an astonishing 40 percent of output being lost through poor handling. To rectify the situation, the government set up offices to help companies with export issues.

The biggest efforts however, were directed toward privatization and the build-own-operate-transfer (BOOT) sector (a similar build-operate-transfer, or BOT, scheme was also common). These were a way for the government to acquire colossal projects (most notably in the power-generation field) without sinking enormous quantities of scarce capital into them. The privatization initiative took off with much fanfare and showed early successes, most notably in the cement sector. By the end of the 1990s, it faced the same problem as today: The good stuff had already been sold, and the remaining companies, overstaffed and heavily in debt, were more difficult to move despite the early retirement schemes the government created to absorb manpower from the sold-off businesses.

The BOOT and BOT projects showed a similar curve; early successes, most notably the Intergen power plant in Sidi Kreir, soon became the exception rather than the rule.

There was an understanding that none of these initiatives would be much good without the right legislation; enter the Unified Companies Law in 1996. The law, long awaited by local and foreign investors alike, included a new system for establishing companies and mergers, arbitration, and new tax exemptions for investors. Finally, businesspeople felt they were on solid ground.

Encouraged by the response to the investment initiatives, the government began to branch out. Mobile phones made their debut in 1996, with French firm Alcatel scoring the deal of the decade to build a network for Cairo, Alexandria and parts of Upper Egypt. A year and a half later, the government accepted bids for a private mobile phone franchise. MobiNil, owned by telecom giant Orascom, came into being, only to discover that the government had put out a tender for another mobile phone franchise Click, majority-owned by telecom giant Vodafone.

Over those 18 months, serious strides had been made; 53 laws had been introduced to eliminate the burden on investors and consumers alike. Tariffs, which had originally been at 100 percent, had been slashed to 50 percent, and there was talk of doing away with them altogether. Inflation had been dragged down from 30 percent to 4 percent over a four-year period, a claim not many countries could make. Credit cards had made their first, coy appearance on the market.

That didn’t mean that everything was rosy, though. Savings in the late 1990s were at a meager 17 percent of GDP, utterly insufficient to maintain 5 percent growth rates. And while significant reforms were introduced over the next couple of years, the savings rate never did climb very far; people can’t save very much if they’re not making money. As a result, there was a substantial middle class whose declining economic status was reflected in political apathy. A much-needed mortgage law began to be debated.

The seeds of social unrest were being sown even as the country was receiving accolades from its economic advisors. But Egypt did make the IFC Investable Composite Index (IFCICI), giving investment a boost by suggesting the country to portfolio managers.

1997 brought twin shocks, however. Investment law No. 1 of 1973 had guaranteed investors serious incentives, like tax exemptions on the first five years. Law No. 8 of 1997 promptly removed them, terrifying fast food franchises, the main recipient of those incentives. The new legislation appointed the General Authority for Free Zones and Investment (GAFI) as the sole body responsible for investor incentives and guarantees. The law allowed 100 percent foreign ownership of ventures and guaranteed the right to remit income earned in Egypt and to repatriate capital.

In late fall, business was dealt a far heavier blow when Islamist militants massacred foreign tourists in Luxor, sending the tourism industry into a nosedive.

The following year saw the introduction of Law No. 5 of 1998 covering all sectors not included in the 1997 legislation. It also removed the restriction that 49 percent of shareholders must be Egyptian, allowed 100 percent foreign representation and introduced a new set of accounting standards.

The past few years have seen a number of laws passed including the new tax law, article 118 of which removed the tax exemption from moveable capital, causing many a CEO to consider a warm bath and a razor. The article was eventually amended to satisfy both the government and businesses.

Law No. 17 of 1999, better known as the New Check Law, changed regulations governing checks, effectively making post-dated checks illegal. The law eased the prison penalty by allowing cancellation of the lawsuit if the accused paid the money back to his creditor, even if it was after the case had been heard. Five years later, most businesses in Egypt still use post-dated checks.

By 1999, there was no denying the liquidity crunch. Businesses were struggling and, according to IMF figures, the number of people living below the poverty line had gone up from 39 percent a decade earlier to 43 percent. The real estate market started to freeze.

And the mortgage law was put on hold.

However, Ahmed Nazif’s efforts had started to pay off. The People’s Assembly approved a 20 percent IPO for Telecom Egypt in September 1999, Banque Misr proudly announced online payment that year and the insurance sector was overhauled. But the mortgage law was put on ice, yet again.

July of that year saw the wrapping up of one of the decade’s biggest financial scandals: what became known as the Loan Deputies Scandal, so named because several of those involved were members of the PA. Essentially, several banks made unsecured loans that were never repaid. Under threat of imprisonment, several of them skipped the country allegedly with the cash. Among them was Mahmoud Azzam, who had allegedly received a LE 179 million loan from Nile Bank Vice President Aliya Al-Ayyouti. The fact that she just happened to be his wife probably helped. In a stroke of judicial genius, the government asked Azzam to return to Egypt. He did, handed over the money, and promptly got 15 years, leaving no incentive whatsoever for anyone else to return money. It proved that not only was Justice blind, she was dumb as well.

By 2001, the recession was well and truly here. CASE underwent a horrific period of public inquiry into its $8 million renovation, and CASE Chairman Sameh El-Torgoman was pilloried in the press. It didn’t help CASE any.

Egypt’s draft antitrust law, drafted in 1995, has since gone through at least 11 drafts and was only first debated in 2001. It is designed to regulate monopolies, but because of resistance from the powers that be to privatization, the legislation is still pending.

Still, Egypt, relying on the brilliant skills of its negotiating team, led by Amb. Gamal Eddin Bayoumi, did manage to hammer out a 12-year FTA with the European Union in July of 2001 to further liberalize trade in agricultural, maritime and process agricultural projects. The agreement includes implementation of WTO and GATT regulations against anti-dumping laws and subsidies and is projected to increase the flow of foreign capital, expertise and technology. The one with the United States is still a matter of enormous anticipation, somewhere along the lines of the Second Coming.

The terrorist incident of September 11, 2001 knocked a delicate economy badly and has not brought us any closer to an FTA with the US. Matters were not helped by a local, grassroots boycott of American goods in protest of US foreign policy when America invaded Afghanistan the next month. The attacks effectively dissuaded US and European investors from tapping into Middle East and Arab markets and caused an acute slowdown of the privatization program.

The first murmurs about the devaluation of the Egyptian pound had been heard back in 1997. Seven years and considerable damage later, it finally happened. Former PM Atef Ebeid boldly declared in January 2003 that the Central Bank of Egypt would allow the pound to float freely against the dollar. Eighteen months later the pound has lost 25 percent of its value while exchange rates on the black market have skyrocketed. The economy suffered a further setback a few months later with the US-led invasion of Iraq, which cost Egypt an estimated LE 1 billion in export revenue.

The latest cabinet shuffle, with its inclusion of younger business leaders, has given hope that the economy will begin to shake off the lethargy it’s been suffering from for the past several years the business community is cautiously optimistic.

At press time, the mortgage law was still on hold.  et