Interim evaluation : sector policy reform program and technical support for sector policy reform project -- Egypt

It has succeeded in pushing forward the Government of Egypt"s (GOE"s) Economic Reform and Structural Adjustment Program (ERSAP), while accommodating the constraints imposed on policy lending by the special political circumstances of U.S. aid to Egypt. Despite the earmark and its implications for the credibility of conditionality, the GOE/World Bank/IMF program for reforms has been strengthened by USAID backup, and USAID itself has become a more significant and effective partner in policy dialogue. In the past decade, and especially the past 3 years, the GOE has stabilized the economy and has made extraordinary progress toward economic liberalization and the reduction of distortionary economic policies. Following the wide-ranging reforms in agricultural policy that began in the mid-1980s, macroeconomic and broad sectoral reforms were introduced in 1991 with Bank-Fund support, under the ERSAP. Since 1991, exchange rates have been unified and exchange controls dismantled, real interest rates have become positive, the trade regime has become more open, and financial markets have been made more open and competitive. A beginning has been made in privatization. USAID has contributed to this movement toward freer markets and increased efficiency of resource use. USAID was the chief sponsor, along with GOE, of the agriculture sector reforms. Through the SPR, it has provided support for ERSAP by reinforcing its conditionalities and complementing them by sponsoring new or related policy measures. The SPR policy measures were generally well-designed to meet the targets of the program. Compliance has been good though uneven. The most consistent compliance has been in the financial and fiscal areas. The biggest gap between commitments and performance has been in privatization. Compliance was cosmetic in some cases; most notably, the GOE invented a way to comply formally with ERSAP conditionality by shifting state-owned enterprise (SOE) shares to so-called Employee Shareholder Associations while leaving unaffected SOE control and introducing no management changes. The SPR will have special priority in the post-debt relief years (after 1994). The promise of substantial Paris Club debt and debt service relief has been the main incentive for GOE adherence to the reform program. But this will be gone once the Bank and Fund certify compliance with ERSAP policy conditionalities, probably in a few months. An additional peril for policy reform is the comfortable budget and balance of payments posture of GOE. The temptation to pursue more expansionist, less prudent, macroeconomic and sectoral policies will surely increase. The relative importance of USAID"s SPR program will thus increase substantially, because it will be the only cash-backed multi-sectoral policy reform program. Implementation of SPR has been extremely demanding. Conditionality could not be pushed so hard that it became "burdensome," given the large reform agenda that was already on the table. Nor could it be based entirely on the Bank-Fund policy matrix without risking the charge that the same reforms were being "paid for twice." Decision-making is centralized, policy analysts few, the flow of information sluggish, and habits of open debate and policy dialogue embryonic. Some ministries are uninterested, even hostile, to policy discussion with donors. Despite all this, and by dint of persistence and ingenuity, the Economic Analysis and Policy Directorate has succeeded in tracking compliance with the policy measures of SPR. In the process, they have learned a great deal about the Egyptian economy and about obstacles to reform, and have nudged the policy reform process forward. (Author abstract)