Egypt’s Post Revolution Development Path

From A Dynamic Economy Wide Model

“ A Goal seeking Analysis”

Motaz Khorshid

Professor, Cairo University

Former Minister of Higher Education

and State for Scientific Research

Cairo, Egypt

Mobile: +(20122)2440988

Tel. Work: +(202)33358241

Mail: motaz.khorshid@gmail.com

Asaad El- Sadek

Ph.D. Student

Faculty of Computers and Information

Cairo University , Cairo, Egypt

The international Conference

on Economic Modeling (EcoMod13)

Prague, 1-3 July, 2013

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Introduction:Since January revolution of 2011, Egypt is witnessing a considerable slowdown of its economic activity, a drop in domestic and foreign direct investments, a sizable decline in industrial production, a notable deterioration in foreign reserves and foreign exchange revenues and a growing government deficit. To overcome these unfavorable effects of the revolution, the Egyptian ministry of planning (MOP) decided to formulate a new 10-year medium/long term socioeconomic development plan (2011-12- 2021-22). The general hypothesis of the 10-year development plan is that Egypt will succeed to double its per capita national income at the target year (2021-22) with full employment condition and insurance of social justice. Given high levels of uncertainty associated with the length of the recovery period, these optimistic goals are reduced to doubling per-capita real GDP and decreasing the unemployment rate to only 4%. The plan relies primarily on enhancing investments environment by relying on private, public and foreign direct investments (FDI). The plan suggests also an increasing role of government in revitalizing the economy – particularly during the post revolution transition period – with respect to investment spending, employment policy and promoting exports. When these policies are coupled with improved external balance and enhanced factors productivity, the hypothesis of doubling income and reducing unemployment is expected to be realized. To support the post revolution development planning process in Egypt, an extended dynamic economy wide model is constructed and implemented. The model is designed to capture on the one hand, the behavior of the economy wide variables during the recovery period of the economy and project on the other hand, its growth prospects up to 2021-22. The purposes of the paper are: (i) to assess the current status of the Egyptian economy and its performance, (ii) to briefly describe the accounting framework, economic rationale and mathematical structure of the economy wide model used to test the plan’s development scenarios, and (iii) to explain the main findings of the policy experiments based on a goal seeking analysis. Based on this rationale, the paper is centered around four sections. After an introductory part describing the post revolution economic performance, the second section outlines the structure and disaggregation level of the modeling database and its accounting framework determined by the Egyptian social accounting matrix (SAM). Section three explains the economic rationale, structure and implementation of the model as well as the policy measures amenable to analysis based on its structure. The final section highlights the results of the model with special emphasis on the feasibility and capacity to reach the planning targets based on the selected policy measures and development options.

Post-revolution economic performanceThe Egyptian economy is witnessing a significant decline in its overall performance since January 2011 revolution. This deterioration in performance is reflected in growth indicators, resource gaps, level of economic activity and citizen’s welfare measures. The deteriorated performance is explained not only by the absence of a clear post

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revolution vision but also because of the continuing political instability and security problems [13, 14]. As shown in Table 1, the growth rate of real GDP has slowed down since Hosni Mubarak stepped down in February 2011. In 2007/2008, economic growth rate reached a peak value of 7.2%. Then, it decreased to 4.7% in 2008/2009 because of the negative effects of the world financial crisis. Although the Egyptian economy stared to recover in 2009/2010 with an average annual growth rate of 5.1%, The devastating repercussions of January revolution have pulled the growth of real GDP down to only 1.8% in 2010/2011 and to 2.2% in 2011/2012., it comes the revolution with a catastrophic drop in the rate of growth of output because of irregular wheel rotation of production due to the of the January 25th revolution, which manifested itself in the cases of insecurity and factional protests and demonstrations and workers' demands and sit-ins and sectarian clashes.

YearGDP at constant prices

Value (bn LE) Growth rate (%)

2006/2007 855.62007/2008 798.1 7.22008/2009 835.4 4.72009/2010 878.4 5.12010/2011 893.9 1.82011/2012 913.8 2.2

Table 1: GDP at constant pricesGrowth rates of economic sectors – shown by Table 2 – showed however a fluctuated performance during the post revolution two years. In the first year following the revolution, the tertiary activities (composed essentially of productive and social services) were the main contributors to growth at an average rate of 3.1% due to the improved growth rate in Suez Canal income (reaching 11.5% per year) and increase in GDP of the information and communications sector of 6.5%. This positive performance has overshadowed the serious declining behavior of the tourism sector of -5.9% in 2011/2012. Secondary activities are ranked second with respect to their contribution to real GDP growth during the fiscal year 2010/2011 with an average annual growth rate of 2.4%. In spite of the negative growth rate of manufacturing estimated (-0.9%) - resulting from the decline in the production level of most manufacturing industries - the positive growth in public utilities (4.5%) and the construction sector (3.3%) contributed to reducing the overall negative impact on the secondary activities. Primary activities rank third with respect to their contribution to the growth prospects of Egypt’s economy due to low growth rates of agriculture and extractive activities (2.7% and 0.6%, respectively). During the second year of the revolution (2011/2012) the tertiary activities also came in the first place in contributing to the growth at an average rate of 3.1% but with a positive growth rate in tourism (2.3%) compared to (-5.9%) in 2010/2011 and a dramatic decrease in the rate of income growth of the Suez Canal (3.9% instead of 11.5%) and a slight decline in the growth rate of the communication and information sector (5.1% instead of 6.5%). During the same year also secondary activities came in second place in terms of contributing to the growth at an average growth rate of 3.2%,

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but with a slight positive growth in manufacturing (0.7% instead of -0.9%) and an increase in the rate of growth of public utilities (5.6% instead of 4.5%). Despite positive growth rates of all primary activities (agriculture and extractive activities) they came in third place in terms of their contribution to growth with an average growth rate of 1.5%, and with a significant decrease in the growth rate of the extractive activities (0.1% instead of 0.6%).

Economic activities 2010/2011 2011/2012

Primary activities

1. Agriculture 2.7% 2.9%2. Extraction 0.6% 0.1%

Secondary activities

3. Manufacturing -0.9% 0.7%4. Public utilities

(electricity, water and sewerage)

4.5% 5.6%

5. Building & construction 3.7% 3.3%

Tertiary activities

6. Wholesale and retail trade 1.6% 2.0%

7. Financial services 2.9% 2.4%8. Transportation &

storage 2.0% 2.8%

9. Communication and information 6.5% 5.1%

10.Suez Canal 11.5% 3.9%11.Tourism -5.9% 2.3%12.Real estate

ownership 3.3% 3.2%

13.Social services 2.8% 2.8%14.Government services 3.7%

Table 2: Growth rates of Production Activities (Real terms)Table 3 shows the evolution of total gross fixed capital formation in constant prices. Since the beginning of the 2000-decade, investments as a percent of GDP are relatively stable with an average ranging from 18 to 20% percent including the post revolution period. The only exception to this finding is the year 2007/2009 where this ratio reached an upper limit of 22%. These percents do not ensure however economic growth needed to enhance the welfare level of citizens and overcome unemployment difficulties.Growth rates of total investments in constant prices followed the same pattern of the real GDP. Investments in Real terms in 2011/2012 were around its level during the world financial crisis of 2008/2009. This deterioration in real investments as a percent of real GDP largely explains the slower growth experienced by the national economy and illustrates the importance of augmenting the rate of investment to boost economic growth in light of the strong correlation between the two. Notice here also that the increase in the growth rate of investments in 2011/2012 (5.8%) after the drop of (-2.2) percent in 2010/2011 is explained by the role of the Egyptian government – after the revolution – to sustain the growth prospects of the economy in light of the significant decline in private investments and foreign direct investments (FDI).

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YearTotal implemented investments in constant prices

Value (bn LE) Growth rate (%) Investments/Real GDP

2006/2007 155.3 18.22007/2008 179.3 15.5 22.52008/2009 163.0 -9.1 19.52009/2010 176.0 8.0 20.02010/2011 172.1 -2.2 19.32011/2012 182.1 5.8 19.9

Table 3: Total investments in constant pricesTable (6) summarizes the evolution of net foreign direct investment (FDI) in Egypt from 2007/2008 to 20011/2012 evaluated in foreign currency. Net FDI reached a peak in 2007/2008, decreased in 2008/2009 due to the world financial crisis and continues to decrease - but by a smaller percentage - during 2009/2010 – the year preceding the revolution. Then it declined sharply beginning from the year 2010/2011 to around 2.0 billion dollars. The volume of foreign direct investments in Egypt during the two successive years. In particular, the revolution year have witnessed a significant drop in net FDI (- 68%) because of both the inward and outward investments.

Year Net foreign direct investmentsValue (bn $) Growth rate (%)

2007/2008 13.22008/2009 8.1 -38.62009/2010 6.8 -16.02010/2011 2.2 -67.62011/2012 2.1 -4.5

Table 4: Net foreign direct investmentsTo properly estimate the loss in FDI, Table (5) shows inflows and outflows of FDI during the previous year of the revolution and the succeeding two years. It is clear from these indicators that the FDI outflows represent the critical factor in this equation. Investment out flows increased from 4.2 Billion Dollars in 2009/2010 to about 10 billion Dollars in 2011/2012. In this respect, Egypt needs to reconsider its post revolution investment policy with an orientation towards improving the performance of FDI as a necessary complement to domestic sources of gross fixed capital formation.

Year Net foreign direct investmentsIn (bn $) Out (bn $)

2009/2010 11.0 (4.2)2010/2011 9.6 (7.4)2011/2012 11.8 (9.7)

Table 5: Inflows and outflows of foreign direct investmentsGiven that the saving-investment resource gap is an important determinant of a country’s capacity to achieve economic growth, the analysis of this gap is essential in the post revolution transition period. Recent economic indicators show that this gap has considerably increased to 7.6% in 2011/2012 compared with its value in 2010/2011

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and 2009/2010, which ranged between 4% and 5%, respectively. Consequently, much more effort is needed to reduce this gap by adopting appropriate policies aiming at mobilizing domestic savings and enhancing Egypt’s investment capacity. To achieve this purpose, more innovative financing instruments coupled with complementary foreign investment sources are recommended.Table (6) shows the evolution of the balance of trade deficit over the last three years. The deficit in the balance of trade is witnessing a continuous increase over this period. During the fiscal year 2011/2012, trade deficit grew significantly to $31.7 billion. As a percent of GDP trade deficit reached 12.3% of GDP in 2011/2012 with an annual growth rate of 17%. Because of the drop in domestic production – resulting from the political instability and the unprecedented labor strikes requesting the adjustment of their salary level - imports of goods increased by 10.4% and 8.5% in 2010/2011 and 2011/2012, respectively.

Exports of Goods Imports of Goods Balance of trade deficit

Billion $ Growth rate Billion $ Growth

rate Billion $ Growth rate

2009/10 23.9 49.0 -25.12010/11 27.0 13.0 54.1 10.4 -27.1 8.02011/12 27.0 0.0 58.7 8.5 -31.7 17.0

Table 6: Deficit in the balance of tradeAs shown in Table(7) , the balance of services has followed a deteriorating performance as well. compared to 2009/2010, the surplus of the balance of services – in 2011/2012 - has significantly decreased by 48.1% (in two years). This reduction is mainly explained by the decline in exports of services by 11.4% - resulting from the deteriorated performance of tourism – and the increasing reliance on imports of services increased which grew by 17.4% during the two years following January revolution.

Exports of services Imports of services Balance of services

Billion $ Growth rate Billion $ Growth

rate Billion $ Growth rate

2009/10 23.6 13.2 10.4 2010/11 21.9 -7.2 14.0 6.1 7.9 -24.02011/12 20.9 -4.6 15.5 10.7 5.4 -31.6

Table 7: Balance of servicesThe only exception to the deteriorating performance of the foreign exchange indicators is the net worker’s remittances from abroad. During the two years following the outbreak of the revolution - as shown in Table 8 – this economic indicator witnessed an increase of 75.2% in 2011/2012 compared to its value in 2910-2011. This might be explained by the desire of Egyptian citizens living abroad to participate in redressing the Egyptian economy and helping in overcoming its current difficulties, despite the increasing level of uncertainty facing their country.

Net workers’ remittances

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Billion $ Growth rate

2009/10 10.5 2010/11 13.1 24.72011/12 18.4 40.5

Table 8: Net workers’ refinancesTo identify the overall impact on Egypt’s external balance, table (9) summarizes the balance of the current transactions with the outside world. The most striking impact of the revolution is the significant decline in the current account deficit, which increased from $ 4.3 Billion in 2009/2010 to around $ 8 billion in 2011/2012 with a growth rate reaching more than 80%. This considerable increase in the current deficit is attributed to the considerable deterioration in both the commodity and services trade balance that has overshadowed the positive results of worker’s remittances as a source of foreign exchange income to Egypt.

Account 2009/2010 2010/2011 2011/2012Balance of trade -25.12 -27.1 -31.7Balance of services 10.34 7.9 5.4Balance of goods and services -14.78 -19.2 -26.3

Transfers 10.46 13.1 18.4Current account balance -4.32 -6.1 -7.9

Table 9: Current Accounts of the Balance of PaymentsThe figures of Table (9) confirm the growing trend of the current account deficit from $ 4.3 Billion in 2009/2010, to $ 6.1 Billion in 2010/2011 and then to $ 8 Billion in 2011/2012. The deteriorated current external balance in the post revolution period, has led similarly to a serious decline in the foreign reserves in US $ as shown in Table 10. The steady decline in the net foreign exchange reserves during the last two years is due to using part of these reserves to finance on one hand, imports strategic goods and intervene on the other hand in the foreign exchange rate market to adjust the dollar-Pound relation. Compared with 2009/2010, Egypt’s foreign reserves decreased significantly by 28.6% and 39.6% in the years 2010/2011 and 2011/2012, respectively. Appropriate short-term policy measures are then urgently needed in order to overcome this growing foreign reserves difficulty.

Foreign Exchange Reserves Billion $ Growth rate

2009/10 36.0 2010/11 25.71 - 28.6%

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2011/12 15.53 -39.6%Table 10: Foreign Exchange Reserves of EgyptDespite the declining economic growth since the outbreak of the revolution, consumer spending in current prices - as shown in Table (11) – continues to occupy a large percent of GDP, This can be the outcome of the increase in consumer price index, the observed decline in investment spending as well as the drop on net exports. Based on the principal aggregates of national accounting, total final consumption expenditure as a percent of GDP represented 91% in 2011/12 whereas it is estimated as only 86% in the preceding two years.

GDP at current prices Final consumption expenditure at current prices % of GDP

Billion LE Growth rate Billion LE Growth rate2009/2010 1,206.6 1,034.5 85.72010/2011 1,371.8 13.7 1,190.9 15.1 86.82011/2012 1,542.3 12.4 1,402.2 17.7 90.9

Table 11: Final consumption expenditureTable 12 shows the impact of January revolution on the deficit of general government budget. During the financial year 2010/2011 total public spending increased by 9.8% whereas public revenues grew only by 1.1%. This performance has contributed to an increase in budget deficit to around LE 135 Billion with an average annual growth of 37%. In 2011/2012, despite the increase in public revenues of the state by 14.4% compared to the previous year, the increase in public expenditure by 17.2% resulted in a similar increase in government budget deficit 23.9% to reach LE 166.7 billion. As a percent of GDP, government deficit in 2011/2012 represented about 11%. That is why, reducing government deficit – via policies directed to diversify income and rationalize spending- is becoming a major current concern of Egypt’s government.

Year Government Budget Deficit (LE bn) Growth rate % to GDP

2009/2010 98.0 8.1%2010/2011 134.5 37.2% 9.8%2011/2012 166.7 23.9% 10.8%

Table 12: General Government budget deficit Among several post revolution factors, the large increase in government wages bill to respond to population demands and face unemployment difficulties, the growth of government subsidy and the decline in revenues from publicly owned activities are the main contributors to magnifying public deficit. The post revolution performance of domestic public debt is shown in table 13. This debt includes government treasury bills and bonds, the net balances of government financial accounts with the banking system, credit facilities from the social insurance fund in addition to borrowing from other local sources. During the transition period following the revolution government domestic debt increased by an average of 21 percent per year. As a percent per GDP, public sector domestic borrowing jumped from 55% in 2008/2009 to a around 73% in 2011/2012. This continuing post revolution

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growth of government domestic borrowing has considerably decreased on the one hand, government’s capacity to finance the growing domestic debt service fees and reduced on the other hand, the contribution of private gross fixed capital formation in total Egypt’s investment spending.

Year Domestic public debt (bn LE) Growth rate % to GDP

2008/2009 562.3 55.0%2009/2010 769.8 36.9 63.8%2010/2011 932.5 21.1% 68.0%2011/2012 1129.0 21.1% 73.2%

Table 13: public Borrowing from Domestic MarketOn the contrary, the data from the Central Bank show a 1.4% decline of total foreign debt in 2011/2012 compared to the previous years. This decline resulted in a total external debt of $ 34.4 billion in 2011/2012. About 95% of Egypt’s external debt pertains to public sector. There was Nevertheless a gradual rise over the last three years in the ratio of external debt service to exports of goods and services proceeds. It escalated from around 5.5% in 2010 to about 5.7% in 2011 and then to 6.1% in 2012.Finally, the slowdown of Egypt’s economic activity has aggravated the unemployment problem since the unemployment rate increased from 9 percent during the two years preceding the revolution to 11.8 and 12.6 percent in 2010/2011 and 2011/2012, respectively, in spite of the government policy to create jobs for new graduates. According to government official data, in 2011-2012 around 40 thousand graduates have been appointed in public institutions and agencies (this figure corresponds to accumulated university graduates since 2003).

The Accounting Framework of the modelThe accounting framework of the Egyptian model is primarily designed to support the within-period or static part of the planning model as well as to ensure its inter-period dynamic part. Based on this classification scheme a social accounting matrix (SAM) for the year 2008-09 has been assembled to capture the interactions among various economic actors and institutions in a consistent and comprehensive way within the benchmark year 2008-09 [15]. Non-SAM socioeconomic parameters have been however estimated in order to validate the dynamic adjustment mechanisms of the planning model. Given the medium-long term nature of the planning exercise, the modeling SAM represents an aggregate economy with three production activities with six factors of production accounts, five domestic institutions, public and private saving-investment accounts, commodity markets broken down by economic activity and sources of commodities (domestically produced, imported or exported) and the outside world. In this specific SAM, activities are broken down into primary, industrial and services activities. The composition of these three productive activities of the SAM are shown in table (14) below. Commodities are classified into; composite, domestic, imported and exported with each broken down into primary, industry and services. Factors are articulated in the SAM by two groups of accounts; labor compensation and capital

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services. Labor compensation accounts are further disaggregated into labor income from private and public enterprises as well as worker remittances from abroad.On the other hand, return on capital services are divided into earning from private and public companies in addition to investment income from the rest of the world. The SAM includes five domestic institutions; urban and rural households, public and private firms and government Consolidated account. The SAM includes however separate accounts for taxes and subsidies. Savings are broken down into two accounts; private savings (grouping households and private corporations) and public savings (consolidating public corporations and public government). Investments are similarly divided into private and public sectors. Finally, there is one account for the current transactions with the rest-of-world. In total, the SAM represents a square matrix of 34 rows and 34columns and its evaluated in LE millions.

Economic activities The proposed aggregation scheme

1. Agriculture

Primary2. Extraction of crude petroleum & natural gas

3. Other extraction4. Petroleum refinement

Industry

5. Other manufacturing6. Electricity and gas7. Water8. Sewerage9. Building & construction10.Wholesale and retail trade

Services

11.Financial services12.Insurance13.Transportation & storage14.Communication15.Information 16.Suez Canal17.Restaurants and hotels18.Real estate ownership19.Business activities20.Social insurance21.Education22.Health23.Other services24.Government25.NPISHs

Table 14: The productive activities of the constructed SAMIn order to identify the economic rationale of the SAM, we will divide its structure

into 6 sub-matrices as follows:1. Production process;2. Composition of demand for goods and services by economic activity and

sources of commodity supply;

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3. Distribution of production output and compensation of employees on domestic and foreign institutions (primary income distribution);

4. Redistribution of institutional incomes (secondary income distribution);5. Fixed capital formation accounts; and 6. Transactions with the outside world.

These sub-matrices are analyzed in the following six subsections [8].Production processTable (15) summarizes the inputs of the production process - per each non-government activity at market price - broken down into intermediate consumption and the components of gross value added.In Table (15), the gross value added at market prices – for the whole economy - represents 60.7% of total input whereas the percent share of intermediate consumption accounts only for 39.3%. The highest proportion

2008/2009

Activities Economy

totalPrimary Industry Services

Composite Commodities

Intermediate consumption

Primary 22,586.0 143,743.9 40,465.9 206,795.8

Industry 11,986.6 156,117.9 94,393.6 262,498.1

Services 15,676.9 57,458.2 62,793.2 135,928.3

Total intermediate consumption 50,249.5 357,320.0 197,652.7 605,222.2

Factors

Non-government Labor

Private 20,317.1 48,755.3 56,838.9 125,911.3

Public 2,547.1 18,082.4 18,466.7 39,096.2

CapitalPrivate 141,300.6 130,282.0 216,194.8 487,777.4

Public 119,266.1 28,193.0 99,529.5 246,988.6

Gross value added at factor cost 283,430.9 225,312.7 391,029.9 899,773.5

Indirect tax 5,323.3 31,414.2 28,322.8 65,060.3

Subsidies -2,964.5 -17,834.8 -10,348.1 -31,147.4

Gross value added at market prices 285,789.7 238,892.1 409,004.6 933,686.4

Total Input at market prices 336,039.2 596,212.1 606,657.3 1,538,908.6Table 15: Total input at market prices

of gross value added appears in the primary activities (85.1%) followed by the services and industrial activities (87.4% and 40.0%), respectively. The table reflects also a number a analytical points as follows; i) the capital intensive nature of the primary activities compared to the other two sectors. In this respect the share of capital income (or gross operating surplus) to gross value added in the three production activities are computed as 92% for primary activities, 70% for industry and 81% for services, respectively. ii) The primary activities contribution to the employment market is very limited when compared with industries and services. Based on table (15), the share of

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labor compensation to value added in the primary, industrial and services activities accounts for 8.1%, 29.6%, 19.2%, respectively. Finally, the contribution of primary, industrial and services activities to gross value added, at market prices (GDP) is 30.6%, 25.6% and 43.8%, respectively. This result explains the important role of services in generating Egypt’s national income. In fact, the tourism, transport and financial and real estate are the main factors for the contribution of services to economic growth. Table (16) shows the distribution of total output to domestic sales and exports for primary, industrial and services activities. On the economy wide level, domestic sales to total output at market prices exceeds 80% whereas exports is only around 17%. All non-governmental productive activities follow the same pattern with respect to contribution of domestic sales and exports to gross output. Despite minor variation among the three sectors, this finding highlights the fact that that a considerable effort is still needed to promote exports as an instrument to improve external balance, enhance the integration of Egypt in the world economy and enhance Egypt’s foreign reserves.

2008/2009

Activities

Economy totalPrimary Industry Services

Exports 44,329.6 94,870.4 120,900.0 260,100.0

Domestic sales at market prices 291,709.6 501,341.7 485,757.3 1,278,808.6

Total output, at market prices 336,039.2 596,212.1 606,657.3 1,538,908.6Table 16: Total output at market prices

Supply of and demand for Goods and ServicesFor analytical purposes, the model divides commodities markets into composite, domestic, imports, and exports. By definition composite commodities is composed of both domestic and imported goods. Note also that domestic sales are evaluated at market prices and imports includes import duties or taxes [11]. For the economy as a whole, domestic sales account for 78.8% of aggregate supply of composite commodities whereas imports represent only 21%. We notice however a slight variation on the sector level. For example, the percent share of imports in industry reaches 31% whereas the same percent for services does not exceed 15% of the aggregate supply. On the other hand, the industrial imports represent around 64% of total imported commodities compared to 9.7% and 26.2% for primary commodities and services, respectively. Finally, the share of industrial commodities in total domestic sales comes on top of the production sectors with 39.2%. These figures are typical to countries in the same stage of economic development as that of Egypt.

2008/2009

Composite commoditiesEconomy

totalPrimary Industry Services

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Domestic sales at market prices 291,709.6 501,341.7 485,757.3 1,278,808.6

Imports including import taxes 33,156.8 220,203.2 90,135.6 343,495.6Total supply of composite commodities

324,866.4 721,544.9 575,892.9 1,622,304.2

Table 17: Supply of composite commoditiesIn Table(18), demand for composite commodities is composed of intermediate consumption goods , household final consumption goods, government final consumption, and fixed capital formation (investment goods). This classification of demand for composite commodities is applied to the primary, industrial and services products, respectively.

Intermediate consumption Final consumption expenditure Investments

Tota

l dem

and

Prim

ary

Indu

stry

Serv

ices

Urb

an

hous

ehol

ds

Rura

l ho

useh

olds

Gove

rnm

ent

Priv

ate

Publ

ic

Prim

ary 22,586.0 143,743.9 40,465.9 62,452.4 50,277.5 2,757.1 1,276.6 1,306.9

324,

866.

4

Indu

stry

11,986.6 156,117.9 94,393.6 161,265.2 129,827.2 3,584.6 81,222.8 83,147.1

721,

544.

9

Serv

ices 15,676.9 57,458.2 62,793.2 215,357.4 173,920.3 17,834.1 16,234.1 16,618.7

575,

892.

9

Tota

ls

50,249.5 357,320.0 197,652.7 439,075.0 354,025.0 24,175.8 98,733.5 101,072.7

1,62

2,30

4.2

Table 18: Demand for composite commoditiesAs a percent of aggregate demand for composite commodities, household consumption expenditures come on top of the list with 48.9%, followed by intermediate consumption with 37.3% and gross investments spending which represents 12.32%. In fact, all the scenarios of Egypt’s development plan seek to increase the share of investment spending in aggregate demand and it’s percent in GDP as a major policy measure to achieve the desired economic growth prospects. Government final expenditure is the least contributor to total composite demand with a percent share reaching only 1.5%. Composite demand for industrial commodities and services follow the same pattern on the economy wide level. Given the nature of

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investment goods, Industrial commodities occupy their largest part with around 82% of the total quantity of investments. Given that the SAM is primarily assembled to reflect the pricing systems prevailing in various commodity markets, table (19) and (20) show the pricing system of domestically produced and imported commodities in the SAM. In table (19) domestic sales are evaluated at factor or basic cost. When indirect taxes and commodity subsidies are considered, we end up with domestic sales at market prices. Similarly in table (20), import taxes are added to imported goods evaluated at cif price in order to get imports at market price (or landed price of imports) [7].

2008/2009

Domestic sales

Economy totalPrimary Industry Services

Domestic sales at factor cost 289,350.8 487,762.3 467,782.6 1,244,895.7

Indirect taxes 5,323.3 31,414.2 28,322.8 65,060.3

Subsidies -2,964.5 -17,834.8 -10,348.1 -31,147.4

Domestic sales at market prices 291,709.6 501,341.7 485,757.3 1,278,808.6Table 19: Pricing System of Domestic Goods and Services.

2008/2009

Imports

Economy totalPrimary Industry Services

Imports (FOB) 31,347.2 213,552.8 84,400.0 329,300.0

Import taxes 1,809.6 6,650.4 5,735.6 14,195.6

Imports (Market Price) 33,156.8 220,203.2 90,135.6 343,495.6Table 20: Pricing System of imported Commodities.

Generation of Factors Income and its Distribution The Generation of factors income within the Egyptian economy and its distribution between compensation of employees, workers’ remittances from abroad, gross operating surplus and investment income from the outside world is shown in table(21). On the aggregate level, GNP is computed as L.E. 1,015.9 billion. In the year 2008/09, the share of gross operating surplus in the country’s GNP represents around 72 percent. The share of private and public enterprises in GNP accounts for 48 and 24 percent, respectively. This indicates that the contribution of the private sector to the capital accumulation process of the Egyptian economy is twice the public sector. The role of labor income – or the compensation of employees – in forming the factors income is computed as 26% in 2008/09. Of this aggregate share, the private sector labor accounts for 12% whereas the general government labor does not exceed 9.3%. based on the figures of table(21), the services activity is ranked first with respect to its

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role in the generation of labor and capital revenues as well as the generation of national income at large [5] .

2008/2009 Primary Industry Services Government Rest-of-world

Economy Total

Labo

r

Government labor 94,275.1 94,275.1N

on-

gove

rnm

ent l

abor Private 20,317.1 48,755.3 56,838.9 125,911.3

Public 2,547.1 18,082.4 18,466.7 39,096.2

Workers’ remittances 7,100.0 7,100.0

Capi

ta l

Private 141,300.6 130,282.0 216,194.8 487,777.4Public 119,266.1 28,193.0 99,529.5 246,988.6

Investment income 14,800.0 14,800.0Total factor income 283,430.9 225,312.7 391,029.9 94,275.1 21,900.0 1,015,948.6

Table 21: Generation of Factors IncomeOn the economy wide level, 38.5% of GNP in 2008/2009 is attributed to the services sector, compared to 27.9% for primary activities and 22.2% for industrial sector. General government contribution to GNP in this year is only 9.3% whereas the role of the outside world in generating national factors income is only 2.2%. Table(22) on the other hand, shows how gross factors income is allocated to various institutions or economic actors. Compensation of employees – regardless of their sources - are all distributed between urban and rural households. The part of the private sector’s gross operating surplus that belongs to the un-incorporated businesses is also allocated to the two groups of household sector. The gross operating surplus of the organized ( or Corporate) private business is distributed to current account of the private companies institutional sector. Finally, net investment income is transferred to urban households. According to this income distribution pattern, private and public sector firms as well as general government receive their part of the factor income from single source. Note here that the share of general government sector in the net income of public enterprises appears in the SAM as transfers from public firms to government as a secondary distribution of income.

Most of the factor income allocated to urban households come from their un-incorporated businesses (around 44.5%). Their second source of factor income (22.3%) is the compensations from their workers appointed to the private sector. The factor income mapped to the rural household sector follows a similar pattern as the urban households, but with different percentage shares. For both urban and rural households, income from the workers of government represents almost 18% of their total factor income.

2008/2009Labor Capital

Government Private Public Worker remittances Private Public Investmen

t incomeUrban households 47,986.0 60,815.2 24,074.3 3,429.3 121,312.9 14,800.0

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Rural households 46,289.1 65,096.1 15,021.9 3,670.7 129,852.5

Private sector firms 236,612.0 Public sector firms 242,689.0 Government 4,299.6 Economy total 94,275.1 125,91

1.339,096.

2 7,100.0 487,777.4

246,988.6

14,800.0

Table 22: Distribution of factor income to domestic institutions

Re-distribution of institutional incomeThe secondary pattern of income distribution is shown in table (23). This income transfer matrix represents a specific characteristic of the SAM as an economy wide accounting framework. The current account of domestic institutions generally includes income transfers such as interest payments to banks, profit and loss transfers, non-commodity subsidies and other redistributed income. Because the SAM has separate accounts for taxes and subsidies, direct taxes paid by domestic institutions do not appear in the institutional inter transfer matrix.

2008/2009 Urban households

Rural households

Private sector firms

Public sector firms

General government

Urban households 0.0 13,372.4 54,915.2 114,104.5 30,603.8

Rural households 13,372.4 0.0 36,610.2 76,069.6 17,973.7Private sector firms 3,704.7 4,831.5 0.0 1,758.7 68,840.2

Public sector firms 14,721.5 19,198.9 85,281.7 0.0 24,239.9

General government 0.0 0.0 25,687.9 77,465.2 0.0

Rest of the word 12.4 16.1 6,371.5 0.0 9,500.0Table 23: Re-distribution of gross factor incomes among different institutions

Saving- Investment BalancesTable(24) shows gross investments by economic sector (public versus private) and commodity group (primary, industry and services). Note here that gross investment is generally composed of gross fixed capital formation and changes in stock. Furthermore, based on the structure of the SAM , Public investments include the capital formation in both general government and public enterprises whereas private investments group both households and private firms gross capital formation. In year 2008/09, both private and public investments have almost the same magnitude. In this particular year, the Egyptian government decided to increase its gross fixed capital formation in order to reduce the negative impact of the world financial crises. Apart from this particular year, private investments generally exceeds public investments. In 2008/09 accordingly private and public investments are LE 99 Billion and LE 101 Billion, respectively. Since the gross capital formation in the SAM is broken down by sector of

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origin (or by type of investment goods), the industrial sector gets most of the investment spending (around 80% of total investments). The remaining part of spending is mainly allocated to trade and transport services applied to the investment goods.

2008/2009Private

investments

Public investments

Total Investment Spending

Primary commodities 1,276.6 1,306.9 2,583.5Industrial commodities 81,222.8 83,147.1 164,369.8Productive services 16,234.1 16,618.7 32,852.8Investments by sector 98,733.5 101,072.7 199,806.2

Table 24: Gross investmentsTable(25) on the other hand, shows the structure of gross savings (net savings plus the consumption of fixed capital) in Egypt. The structure of private savings is dominated by the private organized companies with 57.1 percent of total savings followed by urban households (28.5%) and rural households (17.1%). Government budget deficit (or negative savings) represents (59%) of gross public savings whereas public enterprises savings account for (159%) as shown in table(25).

2008/2009Private Savings

Public savings

Urban households 33,068.6 Rural households 21,892.2 Private sector firms 73,151.5 Public sector firms 74,945.10Government -27,735.6Economy’s total 128,112.3 47,209.50

Table 25: Public and Private Sector savingsThe balance of saving-investment accounts – or the capital transaction matrix - are articulated in Table(26). In the Egyptian context, private savings finance the majority of private investment ( LE 98,633 Million) whereas the public investments depend on public, private and foreign investments. The structure of financing includes 29.1% from private sector, 46.6% from public enterprises and general government and the remaining finance comes from the outside world (24.3%). According to the balance of the macroeconomic system – ensured by the SAM – foreign finance or external borrowings in the saving-investment table should equal to the balance of the current account of the balance of payments.

2008/2009 Private savings Public savings ROW TotalsPrivate investments 98,633.50 100.00 98,733.50Public investments 29,478.80 47,109.50 24,484.4 101,072.68

Totals 128,112.30 47,209.50 24,484.4 199,806.18

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Table 26: Investment-saving Macro Balances

Transactions with the rest of the worldIn table (27) receipts from and payments to the rest of the world are explained. Receipts from the rest of world include exports of goods and services, net workers’ remittances and investment income from abroad, transfers to urban and rural households and savings of the outside world (or the current account balance). The major source of Egypt’s foreign currency comes from exports of services (35% of total resource) followed by exports of industrial commodities (27%). Other income flows from the outside world does not exceed 13% of total receipts in foreign currency.

2008/2009Rest of world %

Exports of primary commodities 44,329.63 12.84Exports of industrial commodities 94,870.37 27.48Exports of services 120,900.00 35.02Workers’ remittances 7,100.0 2.06Investment income 14,800.0 4.29Urban households 23,225.80 6.73Rural households 15,489.80 4.49Public investments 24,484.38 7.09Total expenditure 345,199.98 100.00

Table 27: Receipts from rest-of-world (in Millions of $)

Model Structure and Economic RationaleTo support the socioeconomic development planning process in Egypt following the 25-January revolution, the Ministry of Planning (MOP) developed a 10-year plan directed to capture both the recovery period needed to reach the normal performance of the economy and analyze as well its growth prospects in the post recovery period up to 2021/22. To achieve this purpose a three-sector five-institution medium/long term economy wide model was constructed, implemented and used to formulate and test alternative socioeconomic development options and scenarios. The constructed model reflects the structural features of the Egyptian economy and its modes of functioning and it is implemented using the general algebraic modeling system (GAMS) software. The model is particularly designed to project Egypt’s socioeconomic indicators and assess the impact of alternative policy measures and external conditions such as: (1) Investment spending policies reflected in the allocation of private and public gross fixed capital formation, (2) foreign direct investment (FDI) flows needed to complement domestic investments in supporting the growth prospects of the economy, (3) government spending policies including; government wage bill and employment policy, final consumption spending as well as transfers to domestic and foreign institutions, (4) government fiscal policy including various taxes and subsidies, (5) government export promotion policy. (6) total factors productivity and labor efficiency policies, (7) external balance policy reflected in changes in investment income from abroad, worker

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remittances, interest on foreign assets and foreign transfers from abroad , (8) wage rate and commodity pricing policies and (9) alternative population, labor force and unemployment policies. The development planning model represents an economy with three productive activities (primary, industrial and services activities), six institutions (urban and rural households, private and public corporations, and general government) and the outside world. Domestic institutions have both current and capital accounts. Factors of production include labor and capital services. Labor factors (or compensation of employees) are broken down by economic activity ( private, public and government labor) and household area (urban and rural). Capital services include both public and private accounts. Commodities are composed of domestic, imported, exported and composite (merging domestic with imported goods ) with each of them divided into primary, industry and services. Gross capital formation is composed of private (households and private companies) and public ( government and public enterprises) investments as well as foreign direct investments (FDI). Government account disaggregates net tax income into direct and indirect taxes and subsidies. Finally, the rest of the world account includes net transfers from abroad in the form worker’s remittances, investment income, foreign direct investments and other current transfers to domestic institutions as well as imports and exports of goods and services.The Planning model is viewed as a consistent economy wide simulation model equipped with a set of dynamic adjustment mechanisms to ensure the generation of the medium to long term path of the economy. Most of the model structural parameters are computed from the SAM where as the behavior parameters are based on estimates of other models and similar studies for Egypt. The model represents an economy with an investment/saving macroeconomic closure rule that treats public and private gross fixed capital formations as exogenous variables, gross savings as an endogenous variables depending on institutional income and expenditure patterns and the foreign savings that clear the macroeconomic system. Production sectors apply a flexible price clearing mechanisms with an imperfect substitution between domestic and imported goods (Armington Elasticity function). Distribution of gross output between domestic sales and exports is based on a constant elasticity of transformation (CET) function. Transfers from the rest of the world are fixed in foreign currency whereas transfers of the domestic institutions to the outside world are a function of their disposable income. World prices and interest on foreign assets are determined exogenously in the model. Exports of commodities are computed as the equilibrium quantity between supply of and demand for exported goods and services. The ratio of domestic to world price of commodity and the elasticity of trade determines world demand for exports. Government income is composed of direct and indirect taxes, public enterprises transferred operating surplus and transfers from domestic and foreign institutions. Government final consumption spending is fixed in real term and public savings are computed as a residual. Households and companies expenditures are computed as a fixed share of their nominal income and household final consumption spending is computed by a linear expenditure system (LES) . The model is equipped with institutional capital flows matrix that balances exogenous

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investments with savings and capital transfers. Given market imperfection and high unemployment rates, wage rates are fixed within period but change between periods based on employment and wage policy. Natural growth rate of population and labor participation policies are used to dynamically adjust population and labor force size between periods. The dynamic adjustment of capital stock between periods - by production activity – is based on the initial capital stock, gross fixed capital formation in real term and the consumption of fixed capital. Similar dynamic adjustment mechanisms are derived for investment income from abroad and foreign direct investments (FDI).

Development of the Plan ScenariosEgypt’s development planning process was mainly based on a “ Goal Seeking Approach”. This approach is organized around three steps: a) postulate the aspiration levels or the long term goals of the plan up to 2021-22, b) develop alternative future scenarios or economic paths along with their selected policy measures directed to achieve the plan targets and c) apply the economy wide simulation model to determine the outcome of the adopted future scenarios (or development paths) that can satisfy on the one hand, the feasibility and consistency of the selected socioeconomic policies means and achieve on the other hand, the desired goals and quantitative targets of the plan. According to this approach, the constructed CGE model is used to conduct simulation experiments of the Egyptian economy within an overall goal seeking framework. The general hypothesis of the 10-year development plan is that Egypt will succeed to double its national income at the target year (2021-22) with full employment condition and insurance of social justice and improved welfare of citizens. Given high levels of uncertainty associated with the length of the recovery period as well as increasing repercussions of January revolution, these optimistic goals are reduced to doubling real GDP and decreasing the unemployment rate to only 4%. The 10-year plan relies primarily on enhancing investments environment in order to achieve these goals. It is assumed that the gross fixed capital formation in real term will gradually increase with the objective of maximizing the percentage share of investment per GDP. The enhanced investment environment would rely on private, public and foreign direct investments (FDI). The plan suggests also an increasing role of government – particularly during the first part of the planning period – with respect to investment spending, employment policy and encouraging private initiative via various incentives and promoting exports. When these policies are coupled with improved external balance and probably enhanced factors productivity, the hypothesis of doubling income and reducing unemployment rate to 4% is expected to be realized [12].

Based on the above rationale, the model is used to generate three development paths; the first path (the Laisser-Faire or reference path scenario) reflects the medium/long term performance of the Egyptian economy assuming the continuation of the same policy measures and development choices prevailed during the 1990 decade and the beginning of the twenty third century. This scenario is considered as a benchmark for comparing alternative development paths or scenarios. The second development path

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(Investment Growth scenario) relies on gradually increasing investment spending and attracting more direct foreign investments (FDI) from abroad in order to enhance the growth prospects of the economy with the objective of achieving the targeted per-capita real GDP and reducing the unemployment rate to a minimum level of 4 percent. The adopted growth in investment spending is coupled with a new government policy directed to support the demand for investment and final consumption goods, achieve the targeted employment policy and the rationalize subsidies and other expenditure spending. This government policy is particularly relevant during the economic recovery period following the January revolution given the expected drop in private investment as well as FDI . This scenario assumes also that Egypt will apply an export promotion and external balance policy with the purpose of increasing its income from the outside world. Finally, the government of Egypt will adopt various policy means to increase and sustain the welfare of its citizens measured by the per-capita income and spending. The third development path ( the Factor-Productivity scenario) adopts – in addition to the enhanced investment environment and the more growth oriented government policies - a comprehensive policy package for enhancing total factor productivity across the production sectors of the economy.

Experimental Results:This section discusses the results of applying alternative development scenarios directed to attain the plan targets. We begins with an analysis of the growth indicators of the economy in light of the selected socioeconomic strategies and policy measures and then with their impact on the structural features of the economy at the end of the planning period.

Growth Targets of the Economy:Tables(28), (29) and (30) summarize the impact of the three development scenarios on the medium/long term performance of the Egyptian economy in terms of the sources and uses of GDP in real terms and the per-capita GDP. Under the reference path scenario aggregate GDP would grow on the average by 4.2 percent per annum. As expected, this average growth rate coupled with the estimated natural annual growth of population would result in an increase of real per capita GDP from thousand 14 LE in 2011-12 to only 16.2 in 2021-22 with an average annual growth rate of 1.5 percent. Since the overall growth rate of the per capita GDP does not exceed 15 percent during the planning period, the assumptions and policies of the reference path scenario are far away from achieving the goals of the plan to double the per capita national income (table(30)). In table (28), the investment growth scenario succeeded to considerably enhance the growth prospects of the economy with an average annual GDP increase of 8.4 percent. This performance is mainly explained by enhancing the share of investments in GDP from 21 percent in the base year to 29 percent in 2016-17 and then to almost 50 percent in 2021-22. Despite this enhanced performance – which may be difficult to achieve in the Egyptian context - the estimated per capita GDP in real terms reached thousands 21 LE with no more than 49 percent total increase. This growth is just half way the targeted goal of doubling the per capita income. Given the

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difficulty to mobilize investments - from both domestic financing sources and FDI - more than the rates defined in the investment growth scenario, an additional development effort should be directed to improving factors productivity. Since total factors efficiency of the production sectors results generally in increasing output per unit inputs of the production process, the model is used to test alternative productivity enhancement scenarios – in addition to the growth investment strategy – with the objectives of achieving the targeted per capita GDP. Because the factors productivity growth results mainly in increasing output per unit production inputs, this would – in turn – contributes on the one hand to increase the percent share of domestic sales in total supply of commodities and enhance on the other hand the capacity of Egypt’s economy to export. The reduction in the demand for imported goods and services coupled with an increase in export earnings would necessarily improve the trade (or the external) balance as well as the growth of GDP in real terms. The results of the model reflect - to a great extend – this rationale in light of the model statistics as follows:i) Commodity exports in real terms – during the 10-year planning period – have

increased by (1.7%) per annum on the average when the assumptions of the reference path are considered. Total exports resulting from the investment growth scenario, have increased only by (1.6%) per year. When the factor productivity enhancement measures are included in the planning policy package, export earnings have grown significantly by an average annual rate of (6.9%).

ii) Table (28) shows also that the improved efficiency of the factors of production can reduce the dependence of the country on imports. In the reference path scenario, the demand for imports has increased annually by an average rate of (8.9%) whereas the investment growth scenario has significantly increased the demand for imported commodities to about 25% a year. This high growth rate of imports can be explained on the one hand by the considerable share of imports in the composition of the investment goods, and can be attributed on the other hand the extremely high growth rate of gross fixed capital formation needed to achieve the growth targets of the 10-year plan. Given the reduction in the demand for imports resulting from the productivity growth scenario, aggregate imports growth rate decreased to (18.8%) under this scenario compared to the (25%) resulting from the growth investment scenario (in 2021-22).

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LE Million

Economic indicators

Base year 11/12

Development scenariosReference path High investments High investments and productivity

16/17 21/22 Growth(%) 16/17 21/22 Growth(%) 16/17 21/22 Growth(%)Consumption private 827,993.9 997,247.1 1,252,047.7 51.2 1,043,174.6 1,626,741.5 96.5 1,184,057.4 2,120,566.8 156.1

Consumption public 132,184.6 157,485.5 185,167.4 40.1 192,466.1 318,544.5 141.0 192,466.1 318,544.5 141.0

Consumption total 960,178.5 1,154,732.6 1,437,215.1 49.7 1,235,640.7 1,945,286.0 102.6 1,376,523.5 2,439,111.3 154.0

Investment private 88,995.0 189,678.0 295,028.0 231.5 229,200.0 624,000.0 601.2 229,200.0 624,000.0 601.2

Investment public 148,005.0 149,033.0 196,681.0 32.9 180,000.0 416,000.0 181.1 180,000.0 416,000.0 181.1

Investment total 237,000.0 338,711.0 491,709.0 107.5 409,200.0 1,040,000.0 338.8 409,200.0 1,040,000.0 338.8

Exports 282,814.3 296,314.4 330,739.9 16.9 287,804.3 326,824.2 15.6 336,899.6 478,804.5 69.3- Imports 337,690.1 463,833.3 639,788.9 89.5 537,914.1 1,213,320.5 259.3 502,226.6 971,099.0 187.6GDP usage 1,142,302.7 1,325,924.7 1,619,875.1 41.8 1,394,730.9 2,098,789.7 83.7 1,620,396.5 2,986,816.8 161.5

Table (28) Uses of Gross Domestic Product in Real Terms

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LE Million

Economic indicators

Base year 11/12

Development scenariosReference path High investments High investments and productivity

16/17 21/22 Growth(%) 16/17 21/22 Growth(%) 16/17 21/22 Growth(%)GDP private 713,153.4 834,572.7 1,056,730.3 48.2 863,412.7 1,340,008.7 87.9 1,021,179.5 1,985,559.3 178.4GDP Public 319,061.6 362,341.8 414,458.5 29.9 371,074.7 493,669.6 54.7 438,973.5 736,146.1 130.7GDP Government 110,087.7 129,010.2 148,686.3 35.1 160,243.5 265,111.4 140.8 160,243.5 265,111.4 140.8

GDP source 1,142,302.7 1,325,924.7 1,619,875.1 41.8 1,394,730.9 2,098,789.7 83.7 1,620,396.5 2,986,816.8 161.5

Table (29) Sources of Gross Domestic Product in Real Terms

Economic indicators

Base year 11/12

Development scenariosReference path High investments High investments and productivity

16/17 21/22 Growth(%) 16/17 21/22 Growth(%) 16/17 21/22 Growth(%)Per capital GDP (real) 14,021.0 14,625.0 16,168.0 15.3 15,384.0 20,947.0 49.4 17,873.0 29,811.0 112.6

Per capita GDP (nominal)

19,164.0 25,061.0 32,764.0 71.0 28,550.0 56,875.0 196.8 28,441.0 52,489.0 173.9

Per capita GNP 19,326.0 25,457.0 33,273.0 72.2 28,945.0 57,385.0 196.9 28,836.0 52,999.0 174.2

Table (30) Per Capita Gross Domestic and National Products

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iii) Furthermore, table (28) confirms the positive impact of the productivity growth scenario on private consumption spending. In Principle, raising the efficiency of factors of production increases the output of the production sectors of the economy assuming no changes in the quantity of inputs (such as labor and capital services as well as the intermediate inputs). After excluding transfers and personal taxes, this effect would necessarily results in an increase in the disposable income of households. This enhanced income is distributed among consumption spending and gross savings based on the saving behavior of households. Similarly, the growth in investment spending contributes to increasing the value added and the national disposable income. This would again results in a growth of consumption spending. Based on this economic rationale, the reference path scenario - using the economy wide model - generated an average annual increase in private consumption expenditure of 5.1 percent whereas the investment growth scenario succeeded to increase this annual growth during the planning period to 9.6 percent. It should be stressed here again that increasing the share of investment to GDP in the investment growth scenario to almost 50 percent in 2021-22 needs necessarily non classical and diversified set of policies for raising funds from both domestic and foreign sources, which is considered as a difficult task given the Egyptian post revolution economic context. Finally, the enhancement of productivity of factors in addition to investment growth scenario have contributed to increasing the private consumption spending growth rate to an average of 15.6 percent per year. This very high growth rate of consumption expenditure requires a comprehensive national plan for training, reorientation and capacity building as well as the adoption of advanced technological progress. This can be only achieved if Egypt has a national development project and targets that are supported by its citizens coupled with considerable investments allocated to capacity building.

iv) Table(29) decomposes the growth of GDP between private, public and government sectors. As the results of the model indicate, the private sector is responsible of around 65 percent of this growth irrespective of the selected development scenario. Note in this respect that the increase in factors productivity is applied only to private and public activities. Based on these results the Egyptian government needs to encourage and motivate the private sector contribution to its development planning process.

v) Table (30) also provides the developments in the per capita GDP and GNP in nominal terms. Note here that the growth of nominal GDP and GNP are affected on the one hand, by the real economic growth generated by the selected development scenario and determined on the other hand, by the impact of this scenario on the pricing system. In this respect, the investment growth scenario has increased the real term growth rates as well as the price indices and deflators. Given that the major impact of the productivity scenario

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is mainly felt in real term side of the economy with much less effect on the growth of prices and inflation rate, the overall impact on nominal GDP and GNP appears in favor of the investment growth scenario. This means that the impact of the investment growth scenario on raising prices has reduced the positive impact of the factors productivity on the real growth of the economy as far as the nominal GDP is concerned.

Structural Changes: Given the medium/long term nature of the analysis and the important policy measures adopted in different development scenarios, one would expect to observe structural changes in the Egyptian economy. The structural relations of GDP components are shown accordingly in table (31). Based on the direction of the development planning policies towards increasing investments, they are expected to occupy a growing share in GDP as time advances. The percent share of total investments in GDP – under the reference path scenario – increased gradually from 20.7 percent in 2011-12 to 30.4 percent in 2021-22. At the end of the planning period, investment growth and factors productivity scenarios have significantly increased this ratio to 49.6 and 34.8 percent, respectively. Note here that in the investment growth scenario, the growth fixed capital formation is increased gradually – using an iterative process – in order to reach the targeted per capita GDP. In spite of this large share of investment to GDP (about 50 percent), we are still half way of doubling the per capita income. When the factors productivity measures are coupled with the investment growth we succeeded to achieve the desired per capita income growth and to have a share of investment to GDP that approaches 35 percent compared to 20 percent only in the base year of the plan. The difference in the share of investment to GDP between the investment growth and productivity scenarios is explained by the impact of the factors efficiency scenario on exports, imports and the private spending. Table (31) shows – for example - that in 2021-22 the share of imports to GDP in the growth investments and the productivity enhancement scenarios are respectively 57.8 and 32.5 respectively. This result comes from the positive impact of the factors efficiency scenario on the growth domestic output and hence the decline in the reliance for imports.

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% of GDP at constant prices

Economic indicators

Base year 11/12

Development scenariosReference path High investments High investments and productivity

16/17 21/22 16/17 21/22 16/17 21/22GDP UsesConsumption private 72.5 75.2 77.3 74.79 77.51 73.07 71.00

Consumption public 11.6 11.9 11.4 13.80 15.18 11.88 10.67

Consumption total 84.1 87.1 88.7 88.59 92.69 84.95 81.66

Investment private 7.8 14.3 18.2 16.43 29.73 14.14 20.89

Investment public 13.0 11.2 12.1 12.91 19.82 11.11 13.93

Investment total 20.7 25.5 30.4 29.34 49.55 25.25 34.82Exports 24.8 22.3 20.4 20.64 15.57 20.79 16.03- Imports 29.6 35.0 39.5 38.57 57.81 30.99 32.51Total GDP 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Table (31) The Structure of Gross Domestic Product (Real terms)

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Major FindingsThe outcomes and main findings of the development paths generated by the model in light of the selected assumptions and policy packages can be outlined as follows:

1. Under the reference path scenario aggregate GDP would grow on the average by 4.2 percent per annum. As expected, this average growth rate coupled with the estimated natural annual increase of population would result in a similar increase of real per capita GDP from thousand 14 LE in 2011-12 to only 16.2 in 2021-22 with an average annual growth rate of 1.5 percent. Since the overall growth rate of the per capita GDP does not exceed 15 percent during the planning period, the assumptions and policies of the reference path scenario are far away from achieving the goals of the plan to double the per capita national income.

2. The two other tested scenarios have considerably improved the performance of the economy and accelerated its return to normalcy, particularly with respect to the growth, employment and welfare prospects of the economy. Both scenarios succeeded to attain the economic recovery, unemployment targeted levels as well as the growth prospects of the economy. The investment growth scenario failed however to achieve the welfare target of doubling the real per-capita income (measured by the per-capita real GDP). This finding suggests that the enhanced investment growth scenario – despite its positive contribution to economic growth - should be coupled with a comprehensive package for enhancing total factor productivity in order to reach the target of doubling the per-capita income of the Egyptian citizen.

3. The per-capita real GDP – under the investment growth scenario –is expected to increase by only 49 percent from the base year (2011/12) to the target year (2021/22). The total factor productivity is expected however to reach more than 100 percent (112%) increase in per-capita real GDP. Based on these findings, the development target of doubling the per-capita income in real term can be achieved on one hand by allocating a yearly growth in investment spending - that begins with 8 percent in the first two years of the planning period and increases gradually to 12, 18 , 20 up to 22 percent at the end of the plan, and enhancing the accumulated rate of total factor productivity, on the other hand , from 1 to 3 percent in the starting years of the plan to an average of 20 percent during the target year. It is worth noting that the productivity increase is note equally distributed between production sector given the distinctive structural, technological and human capital features of each of them.

4. Both the planning development scenarios have succeeded to achieve the unemployment target in 2021/22. The proposed scenarios succeeded to reduce the unemployment rate considerably decreased to a level of 4 to 5 percent at the end of the planning period.

5. The economic growth measured by the performance of real GDP follows a gradually increasing pattern from 3.8 percent in 2014/15 to 6.6 percent in 2017/18 up to 11 percent in 2021/22. The GDP growth is not equally distributed among sectors. The industrial activities benefit more than other sectors with a

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13.9 percent annual growth rate in 2021/22 against only 10 percent for primary activities and 11 percent for services.

6. Achieving the plan targets is expected to contribute to a number of structural changes in the economy. Gross fixed capital formation (or investment spending) as a percent of real GDP is expected to increase from 20% in the base year to around 34% in the target year. Furthermore, the productivity scenario is expected to reduce the share of imports in GDP and slightly increase the percent of exports to GDP (compared to other scenarios).

7. the above results depend however on the success of the Egyptian government to mobilize domestic and foreign resources in order to achieve a surge in investment spending and a sizable growth in total factors productivity. This development effort should be assisted also by a strong political will and viewed as a national goal supported by the Egyptian citizens.

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[2] Dervis, K., J. De Melo and S. Robinson (1982) “General equilibrium Models for Development policy.” Cambridge University Press, New York.

[3] Drud, A., W. Grais and G. Pyatt (1986) “Macroeconomic Modeling Based on Social Accounting Principles. “Journal of Policy modeling. Vol. 8. No. 1:111-145.

[4] Khorshid, M. (1994) “A Dynamic Multi-sector Economy-wide Model for Egypt: Database, Structure and Policy Analysis.” The IBK Papers. The Industrial Bank of Kuwait. No. 41: 1-68.

[5] Khorshid, M. (1996) "A Multi-sector Population Economy-wide Simulation Model for Egypt. " Finance and Industry. The Industrial Bank of Kuwait. No. 12: 39-155.

[6] Khorshid M. (2002) “Issue-Oriented Social Accounting Matrices for Development Policy: Experience from the Middle East and North Africa Region”, The proceedings of the 14th International Conference on Input-Output Techniques, Montreal, Canada, October 10-15.

[7] Khorshid M . (2003) "Alternative Socioeconomic Development Scenarios for Egypt: Results from an Economy-Wide Simulation Model", published by the Economic Research Forum (ERF) for the Arab Countries, Iran and Turkey, December.

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[8] Khorshid M. (2008) "Social Accounting Matrices for Modeling and Policy Analysis-Development Issues from the Middle East" Proceedings of the International Conference on Policy Modeling, Berlin, Germany, July 2-4.

[9] Khorshid, M. and A. El-Sadek (2010) "An ICT Economy Wide Interaction Social Accounting Matrix for Egypt – Structure, Economic Rationale and Analytical Indicators" Proceedings of the International Conference on Policy Modeling, EcoMod10, Istanbul, Turkey, July 7-10.

[10] Khorshid M. and A. El sadek (2011) "An ICT Economy Interaction Model for Egypt – Impact on Growth and Productivity" Proceedings of the International Conference on Economic Policy Modeling (EcoMod11), Azores, Portugal, June 27-29.

[11] Khorshid M. and A. El sadek (2012) "A multi-sector ICT Economy Interaction Model For Egypt – The Path to Information Society" Proceedings of the International Conference on Economic Policy Modeling (EcoMod12), Seville, Spain, July 4-6.

[12] Ministry of Planning and International Co-operation (2010), "Strategic Framework for Socio-economic Development Plan until 2022", Ministry of Planning and International Co-operation, Cairo.

[13] Ministry of Planning and International Co-operation (2011), "Follow up report – 2010/2011", Ministry of Planning and International Co-operation, Cairo.

[14] Ministry of Planning and International Co-operation (2012), "Follow up report – 2011/2012", Ministry of Planning and International Co-operation, Cairo.

[15] Ministry of Planning and International Co-operation (2009), "National Accounts 2008/2009", Ministry of Planning and International Co-operation, Cairo.

[16] Pyatt, G. and J. Round (1985), "Social Accounting Matrices: A Basis for Planning, World Bank Publication.", Washington, D.C.

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