Economy of Egypt

"From an International Prespective"

A series of International Monetary Fund arrangements, coupled with massive external debt relief resulting from Egypt's participation in the Gulf War coalition, helped Egypt of egypt improve its macroeconomic performance during the 1990s.

Through sound fiscal and monetary policies, the Government of Egypt tamed inflation, slashed budget deficits, and built up foreign reserves.

Although the pace of structural reforms, such as privatization and new business legislation, has been slower than the IMF envisioned, Egypt's steps toward a more market-oriented economy have prompted increased foreign investment. Lower combined hard currency inflows - from tourism, worker remittances, oil revenues, and Suez Canal tolls - in late 1990s resulted in pressure on the Egyptian pound and sporadic dollar shortages, but external payments were not in crisis.

At the turn of the millennium, monetary pressures have eased, however, with the continued oil price rise since 2002, increased natural gas exploration and production and a moderate rebound in tourism.

Economy in Egypt reform record has substantially improved since Nazif government came to power. Egypt has made substantial progress in developing its legal, tax and investment infrastructure. The reform programme is still a work in progress.

Macroeconomic trend

The Economy in Egypt is the most stable economy in the Middle East and North Africa enjoying continuous growth, averaging 4%-5% in the past quarter-a-century.

The economy in Egypt embarked on various stages during which the public and private sectors played roles varying in relative importance:

Import Substitution and Nationalization, 1952-1967, during which the first program of industrialization in 1957 was established and led by the public sector in heavy industries such as iron and steel and chemical industries, and the nationalization which receded the relative importance of the private sector.

Inter-war, 1967-1973, adversely affected the performance of the economy of Egypt and public sector role in import substitution.

Openness Euphoria, 1974 - 1981 during which policies were introduced to encourage Arab and foreign investment through a series of incentives and liberalizing trade and payment; the economy expanded but this proved unsustainable and growth consequently scaled back.

The economy of Egypt Reform, 1991-2007, were introduced under the terms of International Institutions, lenders and donors, including wider incentives to the role of the private sector in all economic activities. Under comprehensive economic reforms initiated in 1991, The economy of Egypt has relaxed many price controls, reduced subsidies, reduced inflation, cut taxes, and partially liberalized trade and investment.

Manufacturing become less dominated by the public sector, especially in heavy industries.

A process of public sector reform and privatization has begun to enhance opportunities for the private sector.

Agriculture, mainly in private hands, has been largely deregulated, with the exception of cotton and sugar production. Construction, non-financial services, and domestic wholesale and retail trades are largely private.

This has promoted a steady increase of GDP and the annual growth rate.

The Government of Egypt tamed inflation bringing it down from double-digit to a single digit. Currently, GDP is rising smartly by 7% per annum due to successful diversification.

Among Arab countries, The economy of Egypt GDP has been for long second only to Saudi Arabia's but stepped back in 2003 to third after Saudi Arabi and United Arab Emirates, and since 2004 to fourth after Saudi Arabi, United Arab Emirates and Algeria.

However, the economy of Egypt relies heavily on tourist revenues.

The tourism sector suffered tremendously following wicked terrorist attacks on tourists in Luxor in October 1997, Sharm al-Sheikh in July 2005, and the town of Dahab in Red Sea resort in April 2006. Moreover, the September 11, 2001 attacks against the United States, affected the economy as a whole too.

The economy of Egypt Gross domestic product (GDP) per capita based on purchasing-power-parity (PPP) increased fourfold between 1981 and 2006, from US$ 1355 in 1981, to US$ 2525 in 1991, to US$ 3686 in 2001 and to an estimated US$ 4535 in 2006.

Based on national currency, GDP per capita at constant 1999 prices increased from EGP 411 in 1981, to EGP 2098 in 1991, to EGP 5493 in 2001 and to EGP 8708 in 2006.

Based on the current US$ prices, GDP per capita increased from US$ 587 in 1981, to US$ 869 in 1991, to US$ 1461 in 2001 and to an estimated US$ 1518 (which translates to less than US$ 130 per month) in 2006.

According to the World Bank Country Classification, The economy of Egypt has been promoted from the low income category to lower middle income category.

The reform programme is a work in progress.

Noteworthy that the reform record has substantially improved since Nazif government came to power.

The economy of Egypt has made substantial progress in developing its legal, tax and investment infrastructure. (See Nawar 2006) Indeed, over the past 5 years, Egypt has passed, amended and admitted over 15 legislative pieces. The economy is expected to grow by about 7.5% in 2007/2008. Energy subsidies, and privatization of state-owned banks -- Alexandria and Cairo-- perhaps, are the most controversial economic issues in 2006/2007 - 2007/2008.

External trade

The economy OF Egypt exports in 2006:

Egypt's trade balance marked US$-10.36 billion FY2005 compared to US$ -7.839949276423 and a half, billion Egypt's main exports consist of natural gas, and non-petroleum products such as ready-made clothes, cotton textiles, medical and petrochemical products, citrus fruits, rice and dried onion, and more recently cement, steel, and ceramics. Egypt's main imports consist of pharmaceuticals and non-petroleum products such as wheat, maize, cars and cars'spare parts.

The current account of the balance of payments grew from 0.7% of GDP in FY2002 to 3.3% at FY2005. Egypt's Balance of Payments made a surplus of US$4478 million in FY2005 compared to a deficit of US$158 million in FY2004.

Italy and the USA are the top export markets for Egyptian goods and services.

Monetary policy

There have been several favorable conditions that allowed the Central Bank of Egypt to accumulate net international reserves, which increased from US$ 20 in FY2005 to US$23 in FY2006, contributing to growth in both reserve money and in broad money (M2).

Credit extended to the private sector in the economy of Egypt declined significantly reaching about EGP 5 billion in FY2005. This credit crunch is due to the non-performing loans extended by the banks to business tycoons and top government officials.

Lending criteria have been tightened following the passing of Money Laundry Law 80 in 2002 and Banking Law 88 in 2003.

Interest rates are no longer the dominant factor in banks' lending decisions.

In fact, both the inefficiency and absence of the role of the Central Bank of Egypt in qualitative and quantitative control as well as implementing banking procedures and standards was almost entirely resopnsible for the non-performing loans crisis. Banks steadily reduced credit from its peak of about EGP 30 billion in FY1999 and alternatively invested in more liquid no-risk securities such as treasury bills and government bonds.

Improving private sector access to credit will critically depend on resolving the problem of non-performing loans with businesses and top government officials.

Exchange rate policy

The Egyptian Pound has been linked to US Dollar since the fifties of the 20th century.

Several regimes were adopted including initially the conventional peg in the sixties, regular crawling peg in the seventies and the eighties and crawling bands in the nineties. Over that time period, there were several exchange rate markets including black market, parallel market and the official market.

With the turn of the new millennium, Egypt introduced a managed float regime and successfully unified the Pound exchange rate vis-à-vis foreign currencies.

The transition to the unified exchange rate regime was completed in December 2004.

Shortly later, Egypt has notified the International Monetary Fund (IMF) that it has accepted the obligations of Article VIII, Section 2, 3, and 4 of the IMF Articles of Agreement, with effect from January 2, 2005. IMF members accepting the obligations of Article VIII undertake to refrain from imposing restrictions on the making of payments and transfers for current international transactions, or from engaging in discriminatory currency arrangements or multiple currency practices, except with IMF approval.

By accepting the obligations of Article VIII, The economy of Egypt gives assurance to the international community that it will pursue economic policies that will not impose restrictions on the making of payments and transfers for current international transactions unnecessary, and will contribute to a multilateral payments system free of restrictions.

In the fiscal year 2004 and over most of the fiscal year 2005, the pound depreciated against the US Dollar. Since the second half of the fiscal year 2006 until the end of the fiscal year 2007, the pound graduallay appreciated to EGP 5.69 per USD.

It is likely to remain close to this appreciated level in the short-term

External debt

Gross external debt of the economy of Egypt, including the total public and private debt owed to non-residents repayable in foreign currency, goods, or services—based on The World Factbook—is estimated at US$29,590 million at the end of FY 2006

Natural resources

Land, agriculture and crops

Warm weather and plentiful water permit several crops a year. Land is worked intensively and yields are high. Cotton, rice, wheat, corn, sugarcane, sugar beets, onions, and beans are the principal crops. Increasingly, a few modern techniques are applied to producing fruits, vegetables and flowers, in addition to cotton, for export.

Further improvement is possible. The most common traditional farms occupy one acre (4,000 m²) each, typically in a canal-irrigated area along the banks of the Nile. Many small farmers also own cows, water buffalos, and chickens.

Several researchers questioned the domestic (and import) policies for dealing with the so-called the "wheat game" since the former Minister of Agriculture Youssef Wali was in office.

In 2006, areas planted with wheat in Egypt exceeded 400 thousand acres (1,600 km²) producing approximately 8 million metric tons. The domestic supply price farmers receive in Egypt is EGP 1200 ( US$ 211) per ton compared to approximately EGP 1940 ( US$ 340) per ton for import from the USA, Egypt's main supplier of wheat and corn.

The economy of Egypt is, in fact, the U.S.'s largest market for wheat and corn sales, accounting for US$1 billion annually and about 46% of Egypt's needs from imported wheat.

Other sources of imported wheat, include Kazakhstan, Canada, France, Syria, Argentina and Australia. There are plans to increase the areas planted with wheat up to nearly 3 million acres (12,000 km²) by 2017 to narrow the gap between domestic food supply and demand.

The Western Desert accounts for about two-thirds of the country's land area. For the most part, it is a massive sandy plateau marked by seven major depressions. One of these, Fayoum, was connected about 3,600 years ago to the Nile by canals. Today, it is an important irrigated agricultural area.

Practically all Egyptian agriculture takes place in some 25,000 km² (6 million acres) of fertile soil in the Nile Valley and Delta.

Some desert lands are being developed for agriculture, including the controversial but ambitious Toshka project in Upper Egypt, but some other fertile lands in the Nile Valley and Delta are being lost to urbanization and erosion. Larger modern farms are becoming more important in the desert.

The agriculture objectives on the desert lands are often questioned; the desert farm lands which were offered regularly at different levels and prices were restricted to a limited group of elites selected very carefully, who later profiteered retailing the granted large desert farm land by pieces.

This allegedly transforms the desert farms to tourist resorts, hits all government plans to develop and improve the conditions of the poor, and causes serious negative impact on agriculture and the overall national economy over time.

One company, for example, bought over 70 hectare of large desert farm for a price as low as EGP 0.05 per square meter and now sells for EGP 300 per square meter. In numbers, 70 hectares bought for about US$6,000 in 2000 sells for over US$3.7 million in 2007. Currently, no clear solution exists to deal with these activities.

Agriculture biomass, including agricultural wastes and animal manure, produce approximately 30 million metric tons of dry material per year that could be massively and decisively used, inter alia, for generating bioenergy and improve the quality of life in rural Egypt. Unfortunately, this resource remain terribly underutilized.

Water resources

"Egypt," wrote the Greek historian Herodotus 25 centuries ago, "is the gift of the Nile."

The land's seemingly inexhaustible resources of water and soil carried by this mighty river created in the Nile Valley and Delta the world's most extensive oasis.

Without the Nile, Egypt would be little more than a desert wasteland.

The river carves a narrow, cultivated floodplain, never more than 20 kilometers wide, as it travels northward toward Cairo from Lake Nasser on the Sudanese border, behind the Aswan High Dam. Just north of Cairo, the Nile spreads out over what was once a broad estuary that has been filled by riverine deposits to form a fertile delta about 250 kilometers (150 mi) wide at the seaward base and about 160 kilometers (100 mi) from south to north.

Before the construction of dams on the Nile, particularly the Aswan High Dam (started in 1960, completed in 1970), the fertility of the Nile Valley was sustained by the water flow and the silt deposited by the annual flood.

Sediment is now obstructed by the Aswan High Dam and retained in Lake Nasser. The interruption of yearly, natural fertilization and the increasing salinity of the soil has been a manageable problem resulting from the dam. The benefits remain impressive: more intensive farming on thousands of square kilometres of land made possible by improved irrigation, prevention of flood damage, and the generation of millions of gigajoules of electricity at low cost.

Mineral and energy resources

Egypt's mineral and energy resources include petroleum, natural gas, phosphates, and iron ore. Crude oil is found primarily in the Gulf of Suez and in the Western Desert.

Natural gas is found mainly in the Nile Delta, off the Mediterranean Sea shore, and in the Western Desert. Oil and gas accounted for approximately 7% of GDP in fiscal year 2000–01.

Export of petroleum and related products amounted to $2.6 billion in the year 2000. In late 2001, Egypt's benchmark "Suez Blend" was about $16.73 per barrel ($105/m³), the lowest price since 1999.

Crude oil production has been in decline for several years since its peak level in 1993, from 941,000 bbl/d in 1993 to 873,000 bbl/d in 1997 and to 696,000 bbl/d in 2005.

At the same time, the domestic consumption of oil increased steadily (531,000 bbl/d and 616,000 bbl/d in 1997 and 2005 respectively).

It is easy to see from the graph that a linear trend would project that domestic demand would outpace supply in the near future (2008-2009), turning Egypt to a net importer of oil. To minimize this potential, that the Government of Egypt has been encouraging the exploration, production and domestic consumption of natural gas. Natural gas output continues to increase and reached 34.7 billion cubic meters in 2005.

Over the last 15 years, more than 180 petroleum exploration agreements have been signed and multinational oil companies spent more than $27 billion in exploration companions. These activities led to the findings of about 18 crude oil fields and 16 natural gas fields in FY 2001.

The total number of findings rose to 49 in FY 2005. As a result of these findings, crude oil reserves as of December 2006 are estimated at 3.7 billion barrels, and proven natural gas reserves are 1,940 cubic kilometers with a likely additional discoveries with more exploration campaigns.

In August 2007, it was announced that signs of oil reserves in Kom Ombo basin, about 28 miles (45 km) north of Aswan, was found and a concession agreement was signed with Centorion Energy International for drilling.

The main natural gas producer in Egypt is the International Egyptian Oilfield Company (IEOC), a branch of Italian ENI-AGIP. Other companies like BP, BG, Texas-based Apache Corp. and Shell carry out activities of exploration and production by means of concessions granted for a period of generally ample time (often 20 years) and in different geographic zones of oil and gas deposits in the country.

Egypt's excess of natural gas will more than meet its domestic demand for many years to come. The Ministry of Petroleum and Mineral Resources has established expanding the Egyptian petrochemical industry and increasing exports of natural gas as its most significant strategic objectives.

Egypt and Jordan agreed to construct the Arab Gas Pipeline from Al Arish to Aqaba to export natural gas to Jordan; with its completion in July 2003, Egypt began to export 1.1 km³ of gas per year. Total investment in this project is about $220 million.

In 2003, Egypt, Jordan and Syria reached an agreement to extend this pipeline to Syria, which possibly could mean a future connection with Turkey, Lebanon and Cyprus. In addition, the East Mediterranean Gas (EMG), a joint company established in 2000 and owned by Egyptian General Petroleum Corp. EGPC (68.4%), the private Israeli company Merhav (25%) as well as Ampal-American Israel Corp.

(6.6%), has been granted the rights to export natural gas from Egypt to Israel and other locations in the region via underwater pipelines from Al 'Arish to Ashkelon which will provide Israel Electric Corporation (IEC) 1.7 km³ of gas per year. Gas supply is expected to start in the first half of 2007.

With respect to nuclear energy, Egypt's President Hosni Mubarak on October 29, 2007, a few days before the Egyptian ruling party's annual conference, proudly gave the go ahead for building several nuclear power plants.

Egypt's nuclear route is purely peaceful and fully transparent, but may face technical and financing obstacles in the future. Many other countries in the region, including Libya, Jordan, Morroco, and Yemen aspire to build nuclear power plant

The emerging ICT sector

The Egyptian information and communications technology sector has been growing significantly since it was separated from the transportation sector.

The market for telecommunications market was officially deregulated since the beginning of 2006 according to the WTO agreement.

While the move could open the market for new entrants, add and improve the infrastructure for its network. and in general create a competitive market, the fixed line market is de facto monopolized by Telecom Egypt.

The Cellular phone market was doupoly with prices artificially high but witnessed in the past couple of years the traditional price war between the incumbents Mobinil and Vodafone.

A 500 minutes outbound local and long distance calling plan currently costs approximately US$30 as compared to approximately US$ 90 in 2005. While the current price is not so expensive, it is still above the international price as plans never allow "unlimited night & weekend minutes."

A third GSM 3.5G license was awarded in April 2006 for US$3 billion to a consortium led by the UAE company Eitesalat (66%), Egypt Post (20%), the National Bank of Egypt (NBE) (10%), and the NBE's Commercial International Bank (4%), thus moving the market from duopoly to oligopoly.

On September 24, 2006 the National Telecommunication Regulatory Authority (NTRA) announced a license award to Egyptian-Arab private sector consortium of companies to extend a maritime cable for international traffic. The US$120 million cable project will serve the Gulf region and south Europe.

The construction of the cable should decrease the currently high international call costs and increase domestic demand on internet broadband services, in importantly increase exports of international telecommunication services of Egyptian companies, mostly in the Smart Village.

It is expected that NTRA will award two licenses for international gateways using open technology and deploy WiMax technology enabling the delivery of last-mile wireless broadband access as an alternative to ADSL

Investment

The stock market capitalisation of listed companies in Egypt was valued at $79,672 million in 2005 by the World Bank.[1]

Investment climate

The Egyptian equity market is one of the most developed in the region with more than 633 listed companies. Market capitalization on the exchange doubled in 2005 from USD 47.2 billion to USD 93.5 billion, with turnover surging from USD 1.16 billion in January 2005 to USD 6 billion in January 2006.

Private Equity has not been widely used in Egypt in the past as a source of funding for businesses.

The government, however, has instituted a number of policy changes and reforms specifically intended to develop internal private equity funds and to attract private equity funding from international sources.

The economy of Egypt has a population of about 90 million, with the population concentrated to a region within 20 miles on either side of the Nile River. The nation has a GDP growth rate and a per capita income of about $4,200.

The inflation rate is moderately high at 7.7%. The majority of the population is employed in the services sector, followed by agriculture and industrial production. The major industries include textiles, hydrocarbon and chemical production, and generic pharmaceutical production. Unemployment is high at about 10.5%.[5]

Until 2003, the Egyptian economy suffered from shortages in foreign currency and excessively elevated interest rates. A series of budget reforms were conducted in order to redress weaknesses in Egypt’s economic environment and to boost private sector involvement and confidence in the economy.

Major fiscal reforms were introduced in 2005 in order to tackle the informal sector which according to estimates represents somewhere between 30% to 60% of GDP. Significant tax cuts for corporations were introduced for the first time in Egyptian history. The new Income tax Law No 91 for 2005 reduced the tax rate from 40% to 20%.

According to government figures, tax filing by individuals and corporations increased by 100%.

Many changes were made to cut trade tariffs. Among the legislator’s goals were tackling the black market, reducing bureaucracy and pushing through trade liberalization measures. Amendments to Investment and Company law were introduced in order to attract foreign investors. For example, the number of days required for establishing a company was dramatically reduced.

Significant improvement to the domestic economic environment increased investors’ confidence in Egypt. The Cairo & Alexandria Stock Exchange is considered among the best ten emerging markets in the world.

The changes to the policy also attracted increased levels of foreign direct investment in Egypt. According to the UN Conference on Trade and Development’s World Investment Report, Egypt was ranked the second largest country in attracting foreign investment in Africa.

Given the large number of amendments to laws and regulations, Egypt has succeeded to a certain extent in conforming to international standards. Very recently the Cairo & Alexandria Stock Exchange (CASE) was welcomed with full membership into the World Federation of Exchanges (WFE)—the first Arab country to be invited.

Enforcement of these newly adopted regulatory frameworks remain, sometime problematic. Problems like corruption hamper economic development in Egypt. Many scandals involving bribery were reported during the past years.

“In 2002 alone, as many as 48 high-ranking officials—including former cabinet ministers, provincial governors and MPs were convicted of influence peddling, profiteering and embezzlement.”

Maintaining good relations with politicians is sometimes a key to business success in Egypt. Based on the 2006 Corruption Perception Index developed by Transparency International (where the higher the ranking the greater the level of corruption), Egypt ranked 70 out of 163. On a scale from 0 to 10 (with 0 being highly corrupt), Egypt scored a 3.3 .

Labor force and employment

Approximately one-third of Egyptian labour is engaged directly in farming, and many others work in the processing or trading of agricultural products.

Unemployment rate increased from 10.3% in FY2004 to 11.2% in 2005. The average rate of growth of employment in the publicly-owned enterprises sector was -2% per year between FY1998 and FY2005 as a result of aggressive privatization program.

On the other hand, private sector employment grew at an average rate of 3% over that period. In addition, the government sector employment grew by almost double the rate of the private sector over the same period.

Unemployment among those with non-university degee or higher decreased from 23% in FY1998 to 16% in FY2000 and to 14% in FY2005.

Perhaps this decrease reflect the migration of educated persons to work abroad (as statistics does not include the figure of those working abroad).

In general, the average weekly wage in the private sector is, in many instances, higher than that of the public sector. In some other instances, e.g. whole sale and retail trades, the weekly wage is lower by half of that in the public sector.

As a result of the weakness role of the Ministry of Manpower and Trade Unions to create a balance between the rights of workers and the interests of owners of companies in the private sector, privatization has led to worsening employment problems and deterioration in their working environment and health, and many workers have recently resorted to strike and picketing.

Poverty and income distribution

According to the 2005 Household Income, Expenditure and Consumption Survey (HIECS), estimated per capita poverty lines vary across the regions.

Data from a World Bank and Ministry of Economic Development poverty assessment based on comparisons between actual expenditures (and the cost of a consumption basket securing 2470 calories per day per person), shows that individual Egyptians who spent less than EGP 995 per year in 2005 are considered extreme poor, those who spent less than EGP 1423 are poor and .those who spent less than EGP 1853 are near poor.

Overall about 44% of the Egyptian population are in the range of extreme poor to near poor:

19.6% of the Egyptian population was poor, meaning that about 13.6 million Egyptians (one out of every five) had consumption expenditure below the poverty line and could not therefore obtain their basic food and non-food needs.

3.8% of the Egyptian population was extreme poor, meaning that about 2.6 million of the Egyptian poor could not obtain their basic food requirements even if they spent all their expenditure on food.

21% of the Egyptian population was near poor, meaning that about 14.6 million Egyptians can obtain their basic food requirements in addition to some basic services.

Poverty has a strong regional dimension in Egypt and concentrates in Upper Egypt region, both urban (18.6%) and rural( 39.1), while metropolitan areas are the least poor (5.7%). The government is currently employing recently completed poverty map as tool for geographic targeting of public resources.

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