egypt economic report 2006
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8/12/2019 Egypt Economic Report 2006
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CONTE
NTS
EgyptEconomicReport
SUSTAINING A HEALTHY GROWTH MOMENTUM
The Egyptian economy registered in fiscal 2006 its best performance yet this decade, spurred by
increased domestic private consumption and investment demand, surging foreign direct
investments and capital inflows, and the increasing pace of governmental efforts aimed at
bolstering economic activity and reducing unemployment. Such upbeat happenings have
translated into a robust real GDP growth rate of 6.8% in the past fiscal year. Within such a
favorable context, inflation has surged to 7.3% in fiscal year (FY) 2006, triggering the Central
Banks intervention to contain pressures on prices.
The performance of the agricultural and industrial sectors, accounting altogether for almost half
of the countrys GDP, sustained the countrys economic development process, with a good growth
in FY 2006. While the agriculture sector recorded a real growth of 3.2% year-on-year, the mining
sector reported a strong 20.8% growth and the manufacturing sector progressed by 5.8% in FY
2006.
Construction activity was a major growth driver in FY 2006, registering a 14% real growth rate
that fuelled overall economic expansion. Implemented private and public investments in the
sector amounted to LE 4.1 billion, growing by a striking 246% year-on-year. Cement executed
sales, a coincident indicator of the sector, reported a significant yearly surge of 19.5% to total 38.5
million tons in FY 2006.
Tourism, a pillar of the Egyptian economy and the second largest source of foreign exchange,
generated US$ 7.2 billion in receipts growing by 12.5% year-on-year, yet was somewhat affected
by adverse security incidents in FY 2006. The growth in the number of tourists slowed down,registering 0.5% year-on-year, against a much higher 15.1% in FY 2005.
The external sector expanded in FY 2006, within a context of increased aggregate spending and
economic growth. Total trade movement increased by 30% when compared to FY 2005. Egypts
structural trade deficit widened a bit in FY 2006, as the growth in imports in volume was higher
than that of exports. The countrys trade deficit has been nonetheless regularly offset by the
services account (tourism and transport through the Suez Canal) and by workers remittances,
keeping the current account in surplus. The latter, standing at US$ 1.8 billion in FY 2006, along
with record high FDIs at US$ 6.1 billion, led to a balance of payments surplus of US$ 3.3 billion.
The public finance sector in Egypt witnessed a good year in FY 2006. Total revenues progressedby 34.9% to stand at LE 149.5 billion in FY 2006, while public expenditures increased by an
important but lower 26.5%. As such, the overall fiscal deficit dropped by 5.2% to LE 49.0 billion,
accounting for 7.9% of GDP in FY 2006. Domestic debt rose by 16.2% to LE 593.5 billion, while
foreign debt slightly increased by 2.2% over the covered period to LE 29.6 billion, which pushed
total debt up by 12.6% to LE 763.7 billion in FY 2006. The debt increase has been nevertheless
outpaced by accrued economic growth, leading to a continuously declining debt to GDP ratio of
123.7% in FY 2006.
Research DepartmentBank Audi sal - Audi Saradar GroupBanque Audi Plaza, Bab Idriss
Riad El Solh - Beirut - LebanonP.O.Box : 11 - 2560Tel : (01) 994000Cable : BanaudiTelefax : (01) 985622Swift : AUDBLBBX
Bank Audi saeHeadquarters: 104 El Nile Street, Dokki, CairoP.O.Box 757. Postal Code 11511
Tel:(20-2) 3362516Fax:(20-2) 3362647E-mail: contactus.egypt@banqueaudi.com
Real Sector p2
External Sector p5
Public Sector p7
Financial Sector p8
Conclusion p12
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Egypts banking sector has shown in FY 2006 signs of
receptivity to the positive growth momentum reigning
over all economic sectors of activity, yet its expansion has
somewhat slowed down while economic activity
continued to pick up. Banking activity, measured by total
assets, progressed by 8.2% to LE 761.6 billion, yet lower
than the 13.0% average recorded over the previous five
years. Customer deposits increased by 9.5% to LE 571.5
billion, while total credit facilities rose by 5.1% to LE324.0 billion, thus reflecting the increasing financing
activity of the banking sector. In parallel, shareholders
equity grew by 14.6% in FY 2006 to reach LE 40.5 billion.
The Cairo and Alexandria Stock Exchanges (CASE)
ended the year 2006 with a positive growth in activity,
despite the severe price corrections on the regions stock
exchanges as of the first quarter of 2006. The Egyptian
stock exchange is in fact one of the very few Arab capital
markets to have registered a positive variation year-on-
year, underpinning the CASEs resilience to the adverseevents on the regional stock exchanges. The Arab
Monetary Fund (AMF) price index for the Cairo and
Alexandria stock exchanges rose by 5.6% year-on-year,
from 162.9 at end-December 2005 to 172.0 at end-
December 2006. In parallel, the bond market was very
active in 2006, with the trading value reaching LE 11
billion, up by 23.6% from LE 8.9 billion in 2005.
1. ECONOMIC CONDITIONS
1.1. REAL SECTOR
1.1.1. Agriculture and Industry
The diversified Egyptian economy has adequate natural
resources to benefit agricultural production and expand
manufacturing activity. The performance of the
agricultural and industrial sectors sustained the
countrys economic development process, with a
reasonable growth in FY 2006.
Agriculture in Egypt is distinguished for its high fertility,
rich soil, warm climate supporting crop growth, intense
use of fertilizers, limited arable land, and significant
dependency on the Nile river water, which is increasingly
2
2001/2002 2002/2003 2003/2004 2004/2005 2005/2006
3.2%
4.1% 4.5%
6.8%
Real GDP growth CPI
0%
2%
4%
6%
8%
2.7%
-2%
0%
2%
4%
6%
8%
10%
12%
7.3%
11.2%
3.1%
4.7%
3.9%
Real GDP Growth & Inflation
coming under pressure. Building on such favorable
characteristics and working around the challenges, Egypt
has been putting significant efforts in expanding and
reforming its agricultural sector. Implemented public
and private sector investments in agriculture and
irrigation totaled almost LE 8 billion in FY 2006, up by
7.6%.
Agriculture production at current prices was estimated atLE 81.8 billion in FY 2006. The real growth rate of the
sector was estimated at 3.2%, almost the same rate as the
previous year. Agriculture continued to account for
some 15% of GDP at factor cost, employing around one
third of the labor force, and contributing to one fifth of
foreign exchange earnings. Self-sufficiency and surplus
for exports has been achieved in rice, vegetables, fruits,
and cotton.
Although production of rice, a major staple crop,
declined by 3.6% to 6.12 million tons in FY 2006, ricefarmed land productivity was the highest worldwide (4.2
tons per feddan). Maize and wheat production grew by
16.6% and 1.6% to 7.27 million tons and 8.27 million
tons respectively, yet all other cereals reported a decline
in FY 2006. Egypt is still only 50% to 60% self-sufficient
in wheat. This is quite a challenge for a country with a
huge population still growing at high rates and
overridden with poverty. The government plans to
expand wheat-farmed land by 10%-15%, yet will remain
a net wheat importer, since policies will focus more on
other crops with better comparative advantage.
Horticulture and vegetables are perceived as promising
crops especially after the conclusion of the EU trade
agreement. Fruits production reached 8.97 million tons
up by 6.4% from the previous year, while vegetables
production amounted to 19.6 million tons, up by 2.0%.
Likewise, sugar cane and sugar beet are considered
strategic crops in Egypt. In FY 2006, sugar cane
production amounted to 16.25 million tons, almost the
same as the previous year, but its productivity was still
ranked among the top in the world. Sugar beet
production climbed by 44.3% to 4.13 million tons, with
its productivity going up from 20.7 tons per feddan in FY
2005 to 25.6 tons per feddan in FY 2006.
Cotton is a very important export crop in Egypt, offering
a relative advantage, in terms of high quality and
productivity (7.1 metric qentar per feddan in FY 2006).
Total production reached about 691 thousand tons in FY
2006, and Egypt achieved self-sufficiency with export
surpluses of this crop. Egyptian cotton attracts high-end
international brand names and demand is expected to
increase, once the US, a leading competitor cottonexporter, eliminates its farmers subsidies that distort
pricing and international demand and supply, to meet
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the World Trade Organizations obligations.
Indeed, with greater liberalization of developed nations
agricultural markets, Egypt's agricultural exports are
expected to get a boost, especially with the intensive
efforts put to increase the sectors potential. The aim is to
reach an annual growth rate of agriculture production of
4.1%, by focusing on a more efficient use of natural
resources, increasing output of leading crops, enhancingmarketing and credit access, and most importantly
developing irrigation and water resources. In parallel, the
government has been working on land reclamation, since
arable areas are threatened by urbanization in a high
population growth environment. The farmed area in FY
2006 reached about 8.47 million feddans, or 3.5% only of
the countrys area. Egypt plans to add about 3.4 million
feddans of new reclaimed farmlands by 2017.
Egypts agricultural sector provides for a growing
manufacturing sector, particularly when considering thetextile and food processing industries. Egypt has also
important oil and gas based industries, such as
petrochemicals and fertilizers manufacturing. Egypts
industrial sector consists of mining and manufacturing.
The two sub-sectors reported a real growth rate of 20.8%
and 5.8% respectively, and accounted for around 16%
and 17% of FY 2006 GDP at factor cost.
Oil and gas reserves are estimated at about 3.7 billion
barrels and 58.5 trillion cubic metres respectively,
according to the US Energy Information Administration.The FY 2006 witnessed, according to official sources, the
highest production ever. Crude oil and gas production
reached about 73.7 million tons, including about 36.7
million tons from crude oil, condensates and butane gas
and about 37.0 million tons from natural gas in FY 2006.
Total minerals and oil products exports amounted to
US$ 10.43 billion, almost double the previous years
value and accounted for 57% of total exports. The big
leap is the result of higher prices and a surge in
production. Investments in mining, crude oil, and
natural gas amounted to LE 23.1 billion in FY 2006,
rising by 33.7%. Egypt is aggressively pursuing
exploration by luring international oil firms through tax
incentives, and at the same time, expanding the refining
business, and privatizing oil companies.
Egypt's expanding oil and natural gas sectors have led to
the development of other industrial activities, such as
petrochemicals and manufacturing. The government-
established Egyptian Petrochemicals Holding Company,
in charge of developing and implementing a master plan
for the sector, plans a US$ 10 billion investment over the
next 20 years to complete 14 complexes, with anestimated output of up to 15 million tons per year and a
value of US$ 7 billion in a bid to maximize the potential
3
of the recent natural gas discoveries. The aim is to create
value-added national industries, provide feed stock for
existing concerns, and meet domestic needs, as well as
earning a projected US$ 3 billion from exports, especially
that Egypt can benefit from its geographical proximity to
Europe, a net importer of petrochemicals. Fertilizers
production is a similar sector benefiting from the
availability of natural gas (accounting for 30%-40% of
production costs) and playing an important role inagriculture. Official figures show that phosphatic
fertilizers production amounted to 1.4 million
tons in FY 2006, up by 5.5%. Azotic fertilizers
production amounted to 11.1 million tons in FY
2006, up by 4.0%.
Textiles and ready-made clothing are other
sectors with similarly strong backward linkages
with the primary sector, namely high-quality
Egyptian cotton. Cotton yarn production
totaled 301.6 thousand tons in FY 2006, up by 4.0%, andready-made clothes production amounted to 306 million
pieces, up by 1.0% from the previous year. Receipts from
cotton textiles exports fell to US$ 226.3 million in FY
2006, i.e. by 26% year-on-year, but ready-made clothes
exports generated US$ 350.3 million from exports, up by
18% year-on-year. Indeed, although this sector is the
non-oil second largest in Egypt, it has not been operating
at full potential, yet. It is suffering from stagnation and
neglect, with most spinning and weaving activities still
government-owned. Public entities are over-staffed and
lack technical skills, creativity and upscale designers.Egyptian textiles also suffer from international obstacles,
such as unfair competition from US cotton dumping,
and Chinese and Indian similarly low cost production.
The sector, however, is perceived to have a promising
outlook due to a number of comparative advantages.
Egypt can benefit further from low-cost labor, cheap
energy prices, not to mention its high quality cotton
input. The Egyptian government set an export
development strategy targeting particular markets for
textiles exports. The government also started the
privatization of its textile business, with private sector
textile businesses proving more profitable.
The above-mentioned strategies of Egypts major
industrial sectors fall under a comprehensive
modernization process stretching over the next 20 years.
The government started the Industrial Modernization
Programme (IMP) with support from the European
Union to upgrade its industrial base and diversify the
economy. The Industrial Development Authority was
also established to form industrial policies, set up
industrial areas, and attract industrial investment. In FY2006, the Industrial Development Authority agreed on
allocating lands for 120 industrial projects with an
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2006
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investment cost of LE 2.7 billion, providing about 70
thousand job opportunities. Egypt also set a program to
be carried out during 2006-11 to encourage the
partnership between the private sector and the banking
sector and build one thousand big factories following
international standards or expanding the working
factories with investments of more than LE 15 million.
Egypt is, thus, working hard to become moreinvestment-friendly. Public and private investments in
manufacturing and oil products amounted to LE 16.4
billion in FY 2006, rising by 29.1%. The industrial
modernization process, however, is still at its onset.
Obstacles such as a complex bureaucracy, corruption,
weak standardization and quality measures will take time
to be overcome. More importantly, Egypt will need to
strike the right balance between economic liberalization
of the old style strongly managed economy,
implementing the necessary reforms, while at the same
time taking into account social constraints, especiallyemployment.
1.1.2. Construction
Construction activity was a major growth driver in FY
2006, registering a 14% real growth rate that fuelled the
overall economic expansion. The construction and
building activities share out of GDP (at factor cost) is
estimated at 4.1% during the said year. Implemented
private and public sector investments in the sector
amounted to LE 4.1 billion, during FY 2006; a striking
growth of 246% year-on-year.
Cement executed sales, a coincident indicator of the
sector confirming the upward trend in construction,
reported a significant surge of 19.5% year-on-year to
total 38.5 million tons in FY 2006. However, this is not
only for local consumption. Cement companies that
have been privatized since the end of the nineties are also
exporting, with sales abroad amounting to 8.7 million
tons (22.5% of the total) in FY 2006. Indeed, the cement
sector, benefiting from its access to local natural gas, has
been upgrading its facilities, especially that consolidationand privatization allowed entry of multinational players,
in a context of growing demand.
The construction boom is the result of spiraling foreign
direct investments, large infrastructure projects, such as
building power stations, water supply and irrigation
projects, refineries, airport expansion, and land
reclamation, not to mention the regular need for new
housing units. The tourism sectors recently observed
resilience against adverse security developments has also
propped construction activity. Tourism is projected toincrease, with the government aiming for 14 million
annual visitors by 2011, necessarily leading to the
expansion of the hospitality industry. The government
aims at increasing hotel rooms by 15,000 per year. Large
real estate developers also revealed gigantic mixed use
projects in Egypt, such as a new US$ 1.7 billion project by
Emaar, called Marassi, expected to take more than five
years to complete, and the US$ 4 billion Egyptian-
Kuwaiti Madinat Al Salam city project that is expected to
take ten years to complete.
Moreover, regulatory amendments and improved
government relations with contractors create a
conducive setting for project development. The
government has also clearly announced a number of
major public infrastructure investments to be carried out
in the coming years. Add to all these projects, the high
population growth that should also continue to fuel
demand for new residential buildings. Hence, for all
these long-lasting reasons, demand is expected to climb
over the short and medium term, suggesting a positive
outlook for the construction sector.
1.1.3. Trade and Services
The trade and services sectors, a cornerstone of the
Egyptian economy, captured around 43% of GDP (at
factor cost) and reported a real growth of 6.4% to reflect
the favorable economic performance of FY 2006. The
most important growth in FY 2006 was in
communications (10.3%), and storage and
transportation and Suez Canal activity (8.3%).
Implemented investments in these sectors increased by
20.5% in FY 2006 to reach LE 23.1 billion.
Transport is an important sector in Egypt being a
primary source of foreign exchange, thanks to the Suez
Canal. In FY 2006, the Canal generated some US$ 3.56
billion up by 7.6% year-on-year, due to both increased
traffic and higher fees. The number of ships transiting
the canal increased by 6.6% year-on-year to 18,476 ships.
Overall, the ship tonnage climbed by 8.7% to 702.3
million tons during the said year. The Suez Canal activity
registered, thus, a real growth rate of 9.4% (at factor
cost), over FY 2006. While the Suez Canal terminal isconsidered quite developed, many of Egypts other 14
ports require overhauling, especially if the government
wants to reach its objectives of increasing the maritime
cargo handling capacity and expanding its role in
international transit.
Likewise, the air and land transport sectors require
significant upgrading. Land transport, particularly
railways, is characterized by limited productivity and
mismanagement. The Egyptian government, fully aware
of these problems, has been investing in transportinfrastructure. Aviation is witnessing a series of reforms
to increase capacity and meet international competition.
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At the same time, a new terminal is being built at the
Cairo International Airport. Massive highways projects
and railway extensions across the country are also either
under serious consideration or already initiated in FY
2006. However, despite these major efforts, the transport
sector in Egypt will continue to face new challenges with
time, as the economy becomes more and more export-
oriented, tourism - a promising business - continues to
expand, and population growth remains high.
Tourism is, indeed, a pillar of the Egyptian economy. It
absorbs a large share of labor force and is closely related
to many complementary industries and services sectors.
More importantly, tourism is the second largest source of
foreign exchange (after oil exports receipts) with FY 2006
tourism receipts going up by 12.5% year-on-year to
reach US$ 7.2 billion and cover some 60% of the years
trade deficit. Investments in the hospitality sector
increased by a good 24% to LE 3.4 billion in the said year,
notwithstanding a relative stagnation in tourism activityin FY 2006, as the sectors outlook was still favorably
perceived.
However, tourism was not at its best in FY 2006, because
of the bombings of a Red Sea resort last April. The
impact was not drastic, since activity did not completely
deteriorate but only slowed down. The number of
tourists increased by 0.5% year-on-year to reach around
8.7 million and the number of nights spent in hotels was
still on average 10.4 days, the same as the previous year.
European travelers that constitute the majority (67%)were less by 2.7% this year, while Middle Eastern tourists
increased by 5.2% to account for 21.1% of the total. The
largest growth (17.4%) by nationality was that of tourists
from the American continent, yet these still account for a
mere 3.7% of the total. Hotels and restaurants activity, a
sector closely related to tourism, accounted for 3.2% of
GDP in FY 2006 and reported a modest growth of 4.3%
5
during the said year, compared to a remarkable 21.1%
the previous year.
Although FY 2006s adverse events delayed the
development of the tourism industry, Egypt still has a lot
of attractions and competitive advantages to boost this
vital sector, especially in an environment of security and
stability. In addition, the government has been
aggressively upgrading the infrastructure for tourism,launching promotional campaigns, training employees
of the sector, diversifying the hospitality
services, and attracting international developers
and contractors that have already started
gigantic tourist projects construction. This is all
part of a six-year strategic plan to increase the
number of tourists to 14 million per year,
increase tourist nights to 140 million nights, and
increase the capacity of hotels to 240,000 rooms.
With such ambitious objectives, it is expected
that Egypt tourism could become a catalyst forsustainable economic development.
1.2. EXTERNAL SECTOR
The external sector expanded in FY 2006, within a
context of increased aggregate spending and high
economic growth. Total trade movement increased by
29% when compared to FY 2005. Egypt has a structural
trade deficit that widened a little bit in FY 2006, as
growth of imports in volume was higher than that of
exports. The trade deficit went up by 15.7% year-on-yearto reach US$ 11.98 billion in FY 2006, the equivalent of
11.2% of GDP.
Imports rose by 25.8% on an annual basis, to reach US$
30.4 billion in FY 2006. This growth is the result of a surge
in oil prices, free-trade agreement that cut tariffs, and an
Year
2006
Real Sector
Agricultural Production of Main Crops (000s tons)
Vegetables
Sugar Cane
Bank Loans to Agricultural Sector (in LE million)
Industrial Production
Iron Production of Main Co. (in 000s tons)
Electricity Generated & Purchased (in millions of KWh)
Electricity Uses (in millions of KWh)
Construction Activity
Domestic Sales of Cement (executed - normal-white) (in 000s tons)
Exports of Cement and Clinker (grey) (in 000s tons)
Bank Loans to Industrial Sector (in LE million)
Trade and Services
Tourist Arrivals (in 000s)
No. of ships transiting Suez CanalShip tonnage (in millions of tons)
Bank Loans to Trade & Services Sectors (in LE million)
2002/2003 2003/2004 2004/2005 2005/2006 Var 04/03 Var 05/04 Var 06/05
66,871 68,623 71,686 74,425 2.6% 4.5% 3.8%
16,379 18,242 19,189 19,582 11.4% 5.2% 2.0%
16,031 16,245 16,230 16,245 1.3% -0.1% 0.1%
4,946 5,565 6,391 5,682 12.5% 14.8% -11.1%
1,809 2,905 2,946 3,090 60.6% 1.4% 4.9%
88,852 94,064 100,064 107,463 5.9% 6.4% 7.4%
74,281 78,692 85,718 92,814 5.9% 8.9% 8.3%
26,155 24,457 24,948 29,804 -6.5% 2.0% 19.5%
4,667 11,242 - 8,681 140.9% - -
98,008 101,151 103,064 101,866 3.2% 1.9% -1.2%
5,239 7,512 8,650 8,693 43.4% 15.1% 0.5%
14,610 16,174 17,334 18,476 10.7% 7.2% 6.6%499.9 578.7 646.2 702.3 15.8% 11.7% 8.7%
131,828 134,530 133,480 139,752 2.0% -0.8% 4.7%
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overall boost in domestic demand, particularly in
investment spending since the country has embarked on
the modernization of its industrial sector. In fact,
investment goods imports surged by a notable 61.2%
year-on-year to account for some 26% of the total, and
when adding intermediate goods, these two categories of
imports increased by 39.4% to take more than half of
total imports. Crude oil petroleum imports, which
account for less than 10% of total imports, alsocontributed to the total growth, as they rose by 73.5%
during the year. Consumer goods imports grew by 10.3%
to US$ 3.5 billion and account for 11.6% of the total.
Exports, in parallel, grew by 33% to reach US$ 18.5
billion in FY 2006. This growth was mostly driven by
fuel, mineral oil and related products exports which
went up by 90.4% to reach US$ 10.5 billion and account
for 57% of total exports. Semi-finished goods export
increased by 53.1% mainly on account of metal and
aluminium products. In contrast, finished goods exports,
that account for 28% of the total, declined by 3.3% in FY
2006 (after reporting important growth rates exceeding
30% over the previous two years). These changes in the
volume of export commodities highlight the importance
of diversifying the economy to strengthen non-
petroleum manufacturing and reduce oil dependency,
especially as Egypts oil reserves are not abundant.
Egypts main trade partner is the European Union (EU)
that accounted for circa 37% of total imports and exports
in FY 2006. Egypt is part of the Euro-Med partnership
with the trade provisions of this agreement enforced
since the beginning of 2004, leading to a gradual removal
of trade barriers. The second largest trade partner is the
US with 19% of imports and 31% of exports in FY 2006.
The US and Egypt also have a trade agreement under the
Qualified Industrial Zones (QIZ) which allows
conditional free access of Egyptian goods produced in
these zones to the US markets. The QIZ protocol wasexpected to be a step towards a Free Trade Agreement
between the two countries, yet bilateral free-trade
negotiations were halted. The benefits from the QIZs,
however, will be eroded if the US decides to open its
markets to large players such as China and India that are
highly competitive. In addition to bilateral trade
agreements, Egypt is a member of the WTO, and has
been abolishing trade barriers since 1999, to comply with
WTO commitments. It has agreements with other Arab
countries, as well as East and South African countries
under the COMESA agreement.
Within this context, Egypt continued to register
widening trade deficits. In FY 2006, it totaled US$ 11.985
billion, up by 15.7% from the previous year. However,
Egypts structural deficit has been regularly offset by the
services account (tourism and transport through the
Suez Canal) and by current transfers, namely workers
remittances, keeping the current account
in surplus. Tourism receipts amounted to
US$ 7.2 billion, up by 12.5% year-on-
year. Remittances of Egyptians workingabroad were a second source of current
inflows amounting to US$ 5.0 billion in
FY 2006, rising by 16.3% year-on-year.
Suez Canal receipts provided US$ 3.6
billion in FY 2006, up by 7.6%.
Investment income receipts likewise
spiraled to US$ 2 billion in FY 2006, more
than double their previous years US$ 0.9
billion value, as a result of the rise in
international interest rates earned abroad.
The current account, thus, registered asurplus of US$ 1.752 billion, yet lower by 39% due to the
rising merchandise trade deficit and lower official aid at
almost half their previous years level.
The surplus of the current account was coupled with a
surplus in the capital and financial account which
reached US$ 3.5 billion, up by 4% year-on-year. Foreign
direct investments (FDI) were the main reason behind
the surplus. They totaled US$ 6.11 billion (5.7% of
GDP), rising by 56% year-on-year to attain a record high
level. The largest contributor to the high FDI is the USA
with US$ 4.6 billion, or 50% of FDI inflows. Investments
in the oil sector totaled US$ 1.8 billion, only 30% of the
total, reflecting increased economic diversification.
Remarkably, privatization is also not the main recipient
for FDI, accounting for almost 15% of FDI only (up from
11% the previous year).
The important growth in FDI was actually rather coming
in the form of new establishments and issued capital. The
latter investments increased by 262% to US$ 3.4 billion,
the equivalent of 55% of total. Real estate investments
share, in contrast, remained unchanged at less than0.5%, in a region where property investments are usually
the most attractive FDIs, especially for Arabs from the
6
Exports/Imports Current Account / GDP
48.6%
43.1%
55.4% 57.2% 57.2% 60.6%
0.0% 0.7% 2.4% 4.3% 3.3% 1.6%
2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006
0%
10%
20%
30%
40%
50%
60%
70%
-20%
-10%
0%
10%
20%
30%
Foreign Sector Indicators
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Gulf. These developments reflect a perception of an
improved business environment in Egypt. Net portfolio
investments also rallied in FY 2006 by 233% to more
than US$ 2.7 billion, mainly as a result of increased
subscriptions by financial institutions in government
securities. Hence, the capital and financial account along
with the current transfers surplus have led to a balance of
payment surplus of US$ 3.3 billion, lower by 27.3% than
the previous years, mainly on account of the wideningtrade deficit.
1.3. PUBLIC SECTOR
The public finance sector in Egypt witnessed a good fiscal
year. The overall favorable economic conditions, coupled
with timely measures implemented by the Egyptian
authorities, triggered a rise in public revenues that
outpaced that of total expenditures, leading to a
tightening in the overall fiscal deficit for the first time in
recent years.
Total revenues progressed by 34.9% to stand at LE 149.5
billion in FY 2006, up from LE 110.9 billion in the
previous year. Such an enhanced performance on the
revenues side is due to the improved economic activity in
Egypt and to the efficient measures adopted by the
government. The authorities have lowered individual and
corporate income tax rates to a maximum of 20% as of
July 2005, in addition to simplifying tax procedures,
which led to a widening of the tax base and increased
compliance. Indeed, tax revenues, accounting for aroundtwo thirds of total revenues, rose by 29.4% year-on-year
to LE 98.0 billion.
In details, taxes on income and profits climbed by 53.6%
to LE 48.5 billion, and customs duties surged by 23.5% to
LE 9.6 billion (mainly due to enhanced imports), both
constituting the main drivers of the said progression in
tax receipts. Other revenues, representing the majority of
the remaining one third of revenues, grew by 54.7% to LE
49.9 billion, mostly owed to a doubling in property
income to LE 36.4 billion. On the other hand, grantsretreated by 44.5% to LE 1.6 billion.
The positive effect of the reported rise in fiscal revenues
on public accounts was nonetheless accompanied by an
important increase in public expenditures. The latter rose
by 26.5% year-on-year, moving from LE 161.6 billion in
FY 2005 to LE 204.5 billion in FY 2006. Such a hike in
public expenditures is mainly attributable to three
factors. The still elevated worldwide oil prices drove fuel
subsidies upwards, the latter almost quadrupling to LE
54.3 billion, and thus accounted for above 25% of totalexpenditures. Public sector salaries and wages, the second
largest expenditure in Egypt, rose by 14.7% to LE 37.5
billion. Last but not least, and as the deficit has been
historically financed by government borrowings, total
debt service increased by 12.1% to LE 36.8 billion, driven
by a 14.0% progression in domestic debt service.
As such, the overall fiscal deficit, including sales of
financial assets, dropped by 5.2% to LE 49.0 billion, and
represented 7.9% of GDP in FY 2006, versus a higher
9.6% in the previous year. Excluding debt service, whichhas registered a 12.1% rise in FY 2006, Egypts primary
deficit retreated by a more important 35.3% to
LE 12.2 billion. It is worth stressing that if it
werent for the substantial proceeds from
privatization during FY 2006, the overall fiscal
deficit would have registered an 8.3% yearly
increase to LE 54.9 billion. Indeed, sales of
financial assets stood at LE 6.0 billion in FY
2006, and such proceeds are viewed to be one of
the essential means of alleviating the growing
stock of domestic debt.
The need to finance the public finance deficit led to the
government increasing its domestic borrowings, given its
historic cautiousness as to securing financing from
abroad. Domestic debt rose by 16.2% to LE 593.5 billion,
while foreign debt slightly increased by 2.2% over the
covered period to LE 29.6 billion. Total debt thus
amounted to LE 763.7 billion, recording a 12.6% rise as
compared to LE 678.1 billion in FY 2005. The ratio of
total debt to GDP nonetheless pursued its decline,
standing at 123.7% in FY 2006, against 126.0% in FY2005, 127.7% in FY 2004 and 131.3% in FY 2003, yet
thanks to the accrued economic growth that has been
constantly outpacing the debt increases.
In light of such fiscal imbalances, the Egyptian
authorities came up with a handful of reforms targeted at
reducing the fiscal deficit by 1% of GDP per annum for
five years, and that are expected to be gradually
implemented starting FY 2007. The main constituents of
said plan include reforms at the level of revenues, as well
as expenditures.
On the revenues side, the General Sales Tax is to be
reformed into a unified VAT, while property and stamp
tax rates are to be streamlined and their base broadened.
On the expenditures side, authorities are targeting the
reform of fuel subsidies by focusing on low income
categories, and encouraging the switching to natural gas,
while streamlining and enhancing the product targeting
of food subsidies. The government also aims to
implement wage and employment measures to prevent
public salaries from increasing too much and contain the
wage bill. Egyptian authorities seek to improve debtmanagement and go through with public private
partnerships to fund the provisions of public investments
Year
2006
7
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8
(mainly for schools and health clinics), among other
measures.
The IMF actually commended the Egyptian government
on its medium term fiscal consolidation and reform
program and believes it should ensure a sustainable
declining path for the public debt to GDP ratio, provided
it is entirely and promptly implemented, while
simultaneously bolstering the efficiency of publicspending. The Fund yet believes that a more ambitious
fiscal consolidation program, backed by the strong
economic activity and focused on subsidy reduction and
the early introduction of a modern VAT, could very well
reverse debt dynamics without jeopardizing economic
growth.
1.4. FINANCIAL SECTOR
1.4.1. Monetary Situation
The buoyant economic activity and the record high level
of FDI flows witnessed in Egypt during the FY 2006,
along with the continued confidence in the monetary
policy, positively affected the monetary sector, yet were
accompanied by an increase in prices that triggered the
Central Banks intervention to contain inflationary
pressures.
The strength of FDI and other substantial capital inflows,
along with the surge of the countrys total exports,
altogether prompted a significant rise in the CentralBanks net international reserves from US$ 19.3 billion at
the end of FY 2005 to US$ 22.9 billion at the end of FY
2006, well above the 1997 record level of US$ 20.3 billion,
thus covering nine months of imports. The said reserves
of US$ 22.9 billion accounted for 23.6% of the money
supply (M2) at the end of FY 2006, versus a lower
coverage ratio of 22.6% at the end of the previous FY.
Such favorable conditions were also one of the main
contributors to a growth in money supply during FY
2006. In fact, the expansion in the narrow measure ofmoney supply (M1) reached 21.8%, moving up from LE
90 billion at the end of FY 2005 to LE 109 billion at the
121.0%
458,774
548,588
131.3%127.7%
2001/2002 2002/2003 2003/2004 2004/2005 2005/2006
LE million
Public Debt/GDPPublic Debt
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
0%
20%
40%
60%
80%
100%
120%
140%
620,308
126.0% 123.7%
678,097 763,719
Public Indebtedness
end of FY 2006, while the broader measure (M2) reported
a 13.5% increase at the end of FY 2006 relative to the
previous fiscal year.
The overall favorable economic conditions and robust
foreign currency inflows, the sustained confidence in the
Central Banks monetary policy, but also the
establishment of an inter-bank foreign currency market
increasing the perception of foreign currency availabilitywithin the banking system, resulted in an overall
appreciation of the Egyptian pound versus the US Dollar
in 2006. The rate stood at LE 5.75 per US Dollar at end-
June 2006, against a higher LE 5.78 per US Dollar at end-
June 2005.
These favorable monetary developments however could
not prevent inflationary pressures from arising
progressively. The consumer price index inflation, quite
moderate till March 2006, started to accelerate as of April,
reaching 7.3% in FY 2006, versus a lower 4.7% in FY2005, and surging to 12.4% year-on-year in December
2006.
The rising inflationary pressures since April 2006 are
attributed to the strengthening of domestic demand
fuelled by large cuts in income tax rates and robust
economic growth, the avian flu in early 2006 that has led
to a general increase in the prices of meat and non-
poultry protein, and the reduction in state fuel subsidies
that has boosted fuel prices by 30%, with spillovers on
many sectors such as transport, recreation and culture.
During the moderate inflation period, the Central Bank
of Egypt loosened its monetary policy, by reducing the
overnight deposit rate from 9.50% in the FY 2005 to
8.00% in the FY 2006 and lowering the lending rate from
12.50% in the FY 2005 to 10.00% in the FY 2006.
However, the strong upsurge in inflation witnessed since
April 2006 led the Central Bank of Egypt to increase its
key intervention rates later on, in order to contain the
increasing inflationary pressures in the medium term.
The Central Bank also resorted to indirect open market
tools to absorb the liquidity surpluses. It introduced new
19.3%
54,936
63,806
91,887
19.4%
23.4%
2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006
LE million
Gross Official Reserves / Money Supply M2Gross Official Reserves
15,000
30,000
45,000
60,000
75,000
90,000
105,000
120,000
135,000
0%
5%
10%
15%
20%
25%
89,874
21.1%22.6%
23.6%
111,660
132,027
Exchange Market Indicators
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instruments, namely certificates of deposits (CDs) with
maturities of up to one year, and Central Bank of Egypt
notes with maturities of over one to two years. The
Central Bank sold these two instruments to banks
through outright sales. The balance of open market
operations totaled around LE 93.7 billion at end of FY
2006, against LE 72.4 billion at end of FY 2005.
As such, the Central Bank managed to meet its primaryobjective of maintaining stability of prices, and keeping a
relatively steady local currency, in a context of solid
economic growth and abundant capital inflows. The
Central Bank has actually been undergoing a reform
process to increase its autonomy and enhance policy
formulation in order to have sound management of
inflation and the monetary framework at large.
However, as the Egyptian economy is expected to
continue benefiting from an upbeat activity and surging
capital inflows, a new challenge would arise in the nearand medium term. In such a strong aggregate demand
environment driving prices upwards, the monetary and
economic authorities would need to contain inflationary
pressures and, at the same time, keep the foreign
exchange rate at an adequate level so as to maintain
Egyptian exports competitiveness as the economy is
turning more and more towards export orientation, in
the ultimate aim of ensuring monetary stability at large.
1.4.2. Banking Activity
Egypts banking sector has shown in FY 2006 signs of
receptivity to the positive growth momentum reigningover all economic sectors of activity, yet its expansion
has somewhat slowed down while economic activity
continued to pick up. The major banking aggregates,
namely assets, deposits, loans, and especially
shareholders equity, all reported a positive performance
in FY 2006. Banking activity, measured by total assets,
grew by 8.2% to LE 761.6 billion, as compared to a
higher 13.0% average recorded over the previous five
years.
Customer deposits, the main driver behind the sectors
growth and representing nearly three quarters of total
assets on the liabilities side, progressed by 9.5% to LE
571.5 billion, against a more important 14.0% average of
the previous five years. Non-government sector
deposits, accounting for over 85% of total banking
deposits, rose by 12.7% year-on-year in FY 2006, and
were responsible for the said increase in total deposits,
mostly owing to the large scale capital inflows to the
country. Government deposits -mainly those in local
currency- retreated by 6.4% over the period.
Total credit facilities, another growth driver in theindustry, increased by 5.1% to LE 324.0 billion in FY
2006, close to the 6.4% five-year growth
average, thus reflecting the expanding financing
activity of the banking sector, mainly catered
for the funding of large scale projects in a
booming economy. In parallel, shareholders
equity rose by 14.6% in FY 2006 to reach LE
40.5 billion, and recorded one of its highest
growth rates of these past few years. The
progression in shareholders equity was mainly
owed to the current restructuring of the sector, and thesubsequent entries of private sector and foreign players
injecting new funds into the banking industry.
The overall healthy performance of the banking sector
has pushed banking coverage ratios upwards. Indeed,
deposits per branch totaled LE 194.1 million in FY 2006,
up by 5.7% from LE 183.6 million in the previous year.
Deposits per capita likewise progressed by 7.5%,
exceeding the LE 8,000 threshold. With above 24,000
people per branch, retail banking activity in Egypt is thus
currently intensifying, with banks seeking to market
retail products and services to their clientele at large.
The upbeat conditions prevailing in Egypt, coupled with
intensified reform measures on the part of the Central
Bank, have also had positive spillover effects on the
sectors financial soundness. The sector regulator has
indeed launched, as of September 2004, a plan aimed at
overhauling the sector and increasing its
competitiveness. The Banks agenda focuses on
consolidating the sector, ameliorating capital adequacy,
and tackling the issue of non-performing loans, in
addition to going through with privatizations and
bolstering the efficiency of state-owned banks, among
other measures.
The Central Bank decided to raise the minimum capital
Year
2006
9
Monetary Indicators
in LE million
Var M2 (LE million)
Consumer price index
Cleared checks (LE million)
Income velocity of money (GDP/M2) (times)
2002/2003 2003/2004 2004/2005 2005/2006 Var 04/03 Var 05/04 Var 06/05
55,534 50,649 58,973 66,472 -8.8% 16.4% 12.7%
3.9% 11.2% 4.7% 7.3% 7.3% -6.5% 2.6%
244,581 248,224 262,423 288,715 1.5% 5.7% 10.0%
1.09 1.12 1.09 1.10 2.8% -2.7% 0.9%
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requirements of banks to LE 500 million for local banks
and US$ 50 million for foreign banks, in order to render
them more competitive and help them meet the
stringent Basle II requirements. Consequently, some
banks were forced to exit the market or merge with other
players in order to meet said capital requirements. The
total number of banks operating in Egypt has
progressively declined to 43 at the end of FY 2006,
against 52 in the previous year and 61 in the year before.Also, capital adequacy ratios strengthened, with total
equity accounting for 5.6% of total assets at the end of
FY 2006 and the BIS ratio at a higher 14.5% as per the
latest IMF figures.
Liquidity witnessed an improvement as well, as the share
of credit facilities in total deposits has retreated to the
advantage of more liquid uses. Credit facilities
represented 56.7% of total deposits, against a higher
59.1% at the end of the previous fiscal year. The
regression was actually on the local currency side, as the
ratio of credit facilities in LE to total deposits in LEdropped from 62.8% to 59.2%, while that of credit
facilities in FC to deposits in FC slightly nudged up,
moving from 49.9% to 50.7% at the end of FY 2006.
Profitability ratios continued their upward trend, in line
with the favorable conditions and within the context of
accrued net profits for the sector. Return on equity stood
at 12.3% in FY 2006, versus a lower 10.6% in the
previous year, while return on average assets reached
0.7%, against 0.6% in the previous year, thus depicting
enhanced banking profitability. Both ratios nonetheless
remain poor compared to emerging and global averages.
Indeed, the former ratio stood much lower than the
17.8% emerging countries average and the 17.6% global
average, and the latter ratio compared unfavorably to a
1.7% emerging countries average and a 1.5% global
average.
In order to boost the profitability and overall efficiency
of banks performance, a major pillar of the Central
Banks reform agenda, privatization, has been gaining
momentum recently. The proceeds of such operations
are anticipated to be utilized to fund the restructuring of
the banking system, and deal with the lingering asset
quality issue in the remaining state-owned banks. For
instance, the privatization of Bank of Alexandria took
place early in FY 2007, with an 80% stake awarded to
Italys Sanpaolo IMI for a more important than expected
US$ 1.6 billion. The Italian firm has outbid severalEuropean and Arab banks. Likewise, a number of public
shares in joint venture banks were sold to privately-
owned players for several hundreds of millions of US
Dollars. As such, the Central Bank is seeking to gradually
streamline the sector, in an aim to optimize its yet
untapped potential, and elevate banking activities to
advanced and international standards.
1.4.3. Equity and Bond Markets
The Cairo and Alexandria Stock Exchanges (CASE)
ended the year 2006 with a positive growth in activity,
despite the severe price corrections on the regions stock
exchanges as of the first quarter of 2006. The Arab
Monetary Fund (AMF) price index for the Cairo and
Alexandria stock exchanges rose by 5.6% year-on-year,
from 162.9 at end-December 2005 to 172.0 at end-
December 2006. However, over the first half of the
calendar year, the price index fell by 25.6% only to
resurge by 42.0% over the second half of 2006.
Banking Sector Indicators
Banking Coverage
Total assets / GDP
Total deposits / GDP
Total credit facilities / GDP
Deposits / Branches (LE million)
Deposits / Population (LE)
Population / Branches (000s)
Growth ratios (YOY)
AssetsCredit Facilities
Deposits
Capital + Reserves
2002/2003 2003/2004 2004/2005 2005/2006 Var 04/03 Var 05/04 Var 06/05
138.4% 130.5% 130.9% 123.3% -7.9% 0.4% -7.6%
97.1% 95.5% 96.9% 92.5% -1.5% 1.4% -4.4%
68.2% 61.0% 57.2% 52.5% -7.2% -3.8% -4.7%
156.9 166.6 183.6 194.1 6.1% 10.2% 5.7%
6,020.6 6,757.3 7,453.5 8,014.9 12.2% 10.3% 7.5%
26.1 24.6 24.6 24.2 -5.7% -0.1% -1.6%
16.6% 9.6% 11.1% 8.2% -7.0% 1.5% -2.9%7.0% 4.0% 4.0% 5.1% -3.0% 0.0% 1.1%
18.3% 14.5% 12.6% 9.5% -3.8% -1.9% -3.1%
26.0% 6.1% 11.2% 14.6% -19.9% 5.1% 3.4%
Financial Soundness Indicators
2005/2006
ROA*
ROE*
Capital/AssetsBIS ratio**
NPLs/Total loans**
* net profits realized in the last approved FY
** as at end-December 2005
Egypt
0.7%
12.3%
5.6%14.5%25.0%
Emerging
Countries
1.7%
17.8%
10.2%15.9%
7.7%
Total
World
1.5%
17.6%
9.1%15.1%
6.4%
10
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The Egyptian stock exchange is one of the very few Arab
capital markets to have registered a positive variation
year-on-year, underpinning the CASEs resilience to the
adverse events on the regional stock exchanges. The
AMF composite index for all the MENA bourses actually
registered a 42.5% yearly drop in 2006. The positive
year-on-year performance in 2006 was mainly driven by
the strong momentum characterizing the Egyptian
economy and its accrued FDI flows, together with theactive implementation of the privatization program and
the series of mergers and acquisition deals with regional
and international financial institutions, executed via the
stock exchange.
Along with the rise in prices year-on-year, the market
capitalization improved by 17.1%, moving up from LE
456 billion at year-end 2005 to LE 534 billion at year-end
2006. The market capitalization came to represent 80%
of GDP at year-end 2006, up from 74% at year-end 2005.
In parallel, the total trading value for the year 2006
amounted to LE 286.7 billion, up by 78.5% from the
value reported in the year 2005, with foreign and Arab
investors accounting for around 30% of the total.
Subsequently, the turnover ratio rose from 31.1% in
2005 to 50.8% in 2006, further reflecting the positive
momentum that reigned over the countrys stock
market.
The price drop on the CASE during the first half of
calendar year 2006 resulted in a decline in valuation
ratios, yet still to sustainable levels. The latter remained
strong in absolute terms yet lower than but close to
regional benchmarks. In fact, the CASE price-to-
earnings ratio fell from 31.5 times in FY 2005 to 14.3
times in FY 2006, lower than an average MENA P/E ratio
of 18.2 times, and the price to book value ratio dropped
from 8.02 times in FY 2005 to 3.20 times in FY 2006,close to an average P/BV of 3.7 times in the MENA
region.
The CASE authorities have continued their
efforts targeted at improving the efficiency and
infrastructure of the stock market, by
introducing new legislation, at the image of the
elimination of the 5% daily limit on share price,
and modern technology, such as the launching
of a new blue-chip, namely the Dow Jones
CASE Egypt Titans 20 Index, in an ultimate aim to enticeforeign investors. Moreover, the CASE became the first
Arab bourse to become a full member of the World
Federation of Stock Exchanges in 2006, thus highlighting
the serious steps made to improve the quality, efficiency
and infrastructure of the CASE.
In parallel, the bond market was very active in 2006.
According to CASE figures, the trading value reaching
LE 11 billion, up by 23.6% from LE 8.9 billion in 2005.
The traded volume surged from 9 million
bonds in 2005 to 12 million bonds in2006. The total amount of listed bonds
reached LE 65,725 million in FY 2006,
versus LE 35,313 million in FY 2005, up
by a significant 86.1%.
As such, the strong capital inflows
pouring in and the subsequent high
levels of liquidity expected to prevail in
the near term, coupled with the
governments plans for the country to
become a regional center of financial
activities, provide the countrys capital
Year
2006
AMF Price Index (in US$) (Dec 95=100) Turnover Ratio
35.8
54.1
36.0
43.4
74.2
162.9172.0
37.8%
22.0% 21.1%
13.4% 15.5%
31.1%
50.8%
2000 2001 2002 2003 2004 2005 2006
12
36
60
84
108
132
156
180
-10%
0%
10%
20%
30%
40%
50%
60%
Stock Market Performance
Financial Sector (non banks)
Market Capitalization (LE billion)
Market Cap/GDP (in %)
Total value traded (in LE million)
Foreign participation as %
of total value traded
Total volume of traded securities (million)
Total number of transactions (000s)Turnover ratio (in %)
No. of listed companies
No. of traded companies
2002 2003 2004 2005 2006 Var 03/02 Var 04/03 Var 05/04 Var 06/05
122 172 234 456 534 41.0% 36.0% 94.9% 17.1%
29% 35% 43% 74% 80% 6.0% 8.0% 31.0% 6.0%
34,176 27,764 42,374 160,635 286,740 -18.8% 52.6% 279.1% 78.5%
17.3% 12.7% 20.5% 16.4% 16.6% -4.6% 7.8% -4.1% 0.2%
904 1,422 2,435 5,310 9,081 57.3% 71.2% 118.1% 71.0%
834 1,229 1,744 4,210 6,821 47.4% 41.9% 141.4% 62.0%21.1% 13.4% 15.5% 31.1% 50.8% -7.7% 2.1% 15.6% 19.7%
1,151 978 795 744 595 -15.0% -18.7% -6.4% -20.0%
671 540 503 441 407 -19.5% -6.9% -12.3% -7.7%
11
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This publication is undertaken in the aim of informing and should not be considered as an encouragement to any form of financial or commercial activity.
Although Bank Audi Sal considers the contents very reliable, it declines any responsibility for any action or decision based on contents herein.
The Egypt Economic Report can be accessed via Internet at the following web address :http://www.banqueaudi.com
markets with lucrative prospects, thus underlining the
important dual role they could play as an efficient
financial intermediation vehicle catering to funding the
needs of economic agents, and hence as a catalyst for
economic activity at large.
2. CONCLUSION
Over the past year, Egypts economic growth gained
additional momentum and investment picked up
relatively. A healthy foreign exchange position was
maintained, while financial sector reforms were gaining
pace gradually. The country witnessed the conclusion of
a number of important privatization projects, with flows
in foreign direct investment exceeding expectations.
Confidence in the depth and pace of structural reforms
was the main factor behind such developments.
An in-depth growth analysis confirms that the leadinggrowth drivers are still the natural gas industry and the
construction boom, fuelled by expansionary policies and
petrodollars from oil exporting countries in the region.
The question that thus arises is whether the nature and
composition of growth can put the Egyptian economy
more at risk of overheating and hard landing at a later
stage.
Among the most important rising challenges is the pick
up in inflation recently. The growing inflationary
pressures are partly attributed to supply factors, of which
the adjustments in fuel prices, but also partly tied to
demand factors within the context of a buoyant
economic activity. According to the IMFs last mission
report, monetary policy remains vigilant and is apt to act
appropriately to contain inflation expectations and
ensure market confidence.
Although real interest rates are still negative, higherinterest rates rekindled carry-trade interest in the
Egyptian Pound. The currency is fundamentally
competitive as the Egyptian Pound is some 25% below
its 10-year mean in trade-weighted terms vis--vis its
trading partners. As such, the Egyptian Pound would
likely remain under appreciation pressure. If some
currency appreciation is allowed by authorities, it might
represent a considerable tool to contain runaway
inflation.
Maintaining price stability over time and sustainingeconomic growth requires also a tightening of fiscal
policy. Persisting fiscal imbalances are a source of
inflation and a threat to durable growth. The
government has actually embarked on a reform program
that aims at reducing budget deficit to GDP by at least
1% per annum over five years through both revenue and
expenditure measures. It is the timely implementation of
such a program that would determine the pace of
sustainability of government indebtedness relative to the
size of the domestic economy in the medium term.
12
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