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COUNTRY REPORT

Egypt

May 2000

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

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Egypt 1

EIU Country Report May 2000 © The Economist Intelligence Unit Limited 2000

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2000-017 Political forecast8 Economic policy outlook

11 Economic forecast

14 The political scene

17 Economic policy

22 The domestic economy22 Economic trends24 Oil and gas25 Infrastructure26 Financial and other services

28 Foreign trade and payments

List of tables

11 International assumptions summary14 Forecast summary19 Foreign-exchange reserves23 Commercial Banks28 Balance of payments30 External debt stock

List of figures

14 Gross domestic product14 Egyptian pound real exchange rate22 Inflation22 Stock exchange23 Exchange rate

Egypt 3


Summary

May 2000

The legislative election will dominate the political agenda, leading to a periodof political limbo until November. The National Democratic Party (NDP) willretain its dominance of parliament. Foreign policy will focus on the Middle Eastpeace process and continuing Egypt’s leadership role in the region. Economicpolicy will take account of social and political considerations. The budgetdeficit will remain at around 1.5% of GDP. The fixed US dollar peg may beretained in the absence of severe monetary pressures. Growth will rise towards6% and the current-account deficit will narrow to around 1.1% of GDP.

The ruling NDP has reshuffled its leadership. Parliament has extended theemergency laws and amended the electoral laws. The National Accord Partyhas gained legal recognition. The Middle East peace process has continued todominate foreign policy concerns. Egypt has hosted the Common Market forEastern and Southern Africa (COMESA) and the Euro-Africa summit.

The budget for the fiscal year 2000/01 (July 1st-June 30th) projects a 14% risein social spending and a budget deficit of around 1% of GDP. The cabinet hasapproved a draft mortgage law. The investment law has been amended to in-clude 13 new activities. Monetary policy has remained consistent. Privatisationhas garnered over E£14bn (US$48bn). Cement sales have been delayed, as hasbanking. The state authorities have been encouraged to become self-sufficient.

• Tourism posted record results in 1999. Inflation remained at around 3%.The Cairo interbank offered rate (Caibor) has a launch date of July. Thegovernment has agreed with Israel to resume gas-export negotiations. LNGexport schemes have also come under consideration. A solar power plant andRas Sudr airport have been offered to investors on a build-own-operate-transfer (BOOT) and build-operate-transfer (BOT) basis, respectively. The Cairometro will undergo extension. TelecomEgypt has bought FLAG access.

• Agreements have also been reached with major US IT firms to developEgypt’s technological base. Orascom has expanded its telecommunicationsempire. The UK investment house Robert Fleming, the commercialinternational investment company (CIIC) and the commercial internationalbank (CIB) have merged their asset management operations.

External debt has reached US$28.2bn. Egypt plans to issue a sovereign bond.The current-account deficit narrowed in the second quarter of 1999/2000.

Editor: Andrew GilmourEditorial closing date: May 5th 2000

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

May 5th 2000

Foreign trade andpayments

The domestic economy

Outlook for 2000-01

The political scene

Economic policy

4 Egypt


Political structure

Arab Republic of Egypt

Based on the constitution of 1971

Unicameral Majlis al-Shaab (People’s Assembly) of 444 directly elected members and10 additional members nominated by the president. Deputies serve for a five-year term.All candidates contesting the elections now run as individuals. The president maydissolve the assembly only if he gains the support of the people in a referendum.The National Democratic Party has a decisive majority in the assembly

Universal direct suffrage

October 1999 (presidential); next elections due by November 2000 (legislative) andOctober 2005 (presidential)

President, nominated by a two-thirds majority of the assembly and elected by referendum.Currently Hosni Mubarak, who was re-elected for a fourth six-year term in 1999

Council of Ministers headed by the prime minister. The president is responsible forappointing and dismissing ministers. The assembly can require a minister to resign ifit passes a motion of no confidence. Should a motion of no confidence in the primeminister be passed against the president’s wishes, the matter may be put to areferendum. Last cabinet reshuffle: October 10th 1999

National Democratic Party (NDP, the ruling party); Socialist Labour Party (SLP);Socialist Liberal Party; New Wafd Party; National Progressive Unionist Party;Democratic Nasserist Party

Prime minister Atef ObeidDeputy prime minister & minister of agriculture & land reclamation Youssef Amin Wali

Defence Mohammed Hussein TantawiEconomy & foreign trade Youssef Boutros-GhaliElectricity & energy Ali al-SaidiFinance Medhat HassaneinForeign affairs Amr MoussaHousing & new communities Mohammed Ibrahim SuleimanIndustry & technological development Moustafa al-RifaiInformation Safwat al-SherifInterior Habib al-AdliPetroleum Sameh FahmyPlanning & international co-operation Ahmed al-DarshPublic enterprise Mokhtar KhattabPublic works & water resources Mahmoud Abdel Halim Abu ZeidSocial affairs & social insurance Amina al-GuindySupply & internal trade Hassan KhedrTelecommunications & information technology (minister of state) Ahmed NazifTourism Mamdouh al-BeltagiTransport Ibrahim al-Demiri

Ismail Hassan

Official name

Legal system

National legislature

Electoral system

National elections

Head of state

National government

Main political parties

Senior members of the Councilof Ministers

Key ministers

Central Bank governor

Egypt 5


Economic structure

Annual indicators

1995 1996 1997 1998 1999a

GDP at market pricesb (E£ bn) 205.0 228.3 256.3 280.2 302.2

Real GDP growthb (%) 4.7 5.0 5.5 5.6 5.0

Consumer price inflation (av; %) 15.7 7.2 4.6 4.2 3.1

Population (m; mid-year) 59.23 60.60 62.01 63.25a 64.52

Exports fob (US$ bn) 4.67 4.78 5.53 4.40 5.24

Imports fob (US$ bn) 12.27 13.17 14.16 14.62 15.20

Current-account balance (US$ bn) –0.25 –0.19 –0.71 –2.57 –1.49

Reserves excl gold (US$ m) 16,181 17,398 18,665 18,124 14,484

Total external debt (US$ bn) 33.3 31.3 29.9 32.0 31.0

Debt-service ratio, paid (%) 13.1 12.2 9.4 10.0 10.1

Exchange rate (av; E£:US$) 3.39 3.39 3.39 3.39 3.40c

May 2nd 2000 E£3.43:US$1

% of % ofOrigins of gross domestic product 1998/99b total Components of gross domestic product 1997/98b total

Agriculture & irrigation 17.4 Private consumption 70.0

Industry & mining 19.5 Government consumption 11.2

Petroleum & electricity 6.1 Gross fixed capital formation 22.9

Construction 5.9 Exports of goods & services 28.5

Trade, finance & insurance 22.2 Imports of goods & services –32.6

Transport & communications 9.3 Total 100.0

Total incl others at factor cost 100.0

Principal exports 1997/98b US$ m Principal imports cif 1997/98b US$ m

Petroleum & products 1,278 Transport equipment & machines 4,530

Cotton yarn, textiles & garments 759 Livestock, food & drink 2,506

Engineering & metallurgical goods 445 Fats & minerals incl fuels 2,188

Other agricultural goods 140 Chemicals, rubber & leather 1,840

Raw cotton 103 Wood, paper & textiles 1,566

Total incl others 4,930 Total incl others 14,718

Main destinations of exports 1998/99b % of total Main origins of imports 1998/99b % of total

US 38.3 US 18.2

EU 29.3 EU 43.1

Arab countries 13.4 Afro-Asian countries 17.5

Afro-Asian countries 11.2

a EIU estimates. b Fiscal years ending June 30th. c Actual.

6 Egypt


Quarterly indicators

1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

PricesConsumer prices (1995=100) 114.7 116.6 117.7 118.4 119.0 120.0 120.9 121.7 % change, year on year 4.1 4.5 4.4 4.0 3.7 2.9 2.7 2.8Wholesale prices (1995=100) 114 115 114 116 114 115 116 n/aCotton pricesa (US cents/lb) 49.26 50.27 54.85 49.82 43.46 43.03 37.42 36.82Petroleum prices Suez Blend 32 (US$/barrel) 12.05 10.62 10.22 9.15 9.82 13.74 18.79 22.41

Financial indicatorsExchange rate E£:US$ (end-period) 3.388 3.388 3.388 3.388 3.395 3.396 3.396 3.405Interest rates (%) Deposit rate (av) 9.6 9.3 9.4 9.2 9.2 9.2 9.3 9.2 Discount rate (end-period) 12.25 12.25 12.25 12.00 12.00 12.00 12.00 12.00 Lending rate (av) 12.8 13.1 13.0 13.1 13.2 12.9 12.8 13.0M1 (end-period; E£ m) 48,248 51,593 51,660 58,577 61,620 58,174 57,592 59,066 % change, year on year 7.7 8.4 6.9 20.3 27.7 12.8 11.5 0.8M2 (end-period; E£ m) 199,671 207,058 211,434 221,372 225,833 226,465 228,223 233,910 % change, year on year 8.8 6.4 7.7 10.8 13.1 9.4 7.9 5.7EFG stockmarket index (end-period; Jan 1993=1,000) 5,240 4,505 4,150 4,004 4,375 4,273 4,172 5,759

Sectoral trendsCrude oil production (m barrels/day) 0.88 0.88 0.88 0.88 0.87 0.86 0.85 0.84

Foreign trade (E£ m)Exports fob 2,418 2,953 2,177 3,096 2,653 3,122 2,908 n/aImports cif –12,448 –13,969 –13,367 –14,987 –13,337 –14,610 –13,518 n/aTrade balance –10,030 –11,016 –11,190 –11,891 –10,684 –11,488 –10,610 n/a

Foreign reservesReserves excl gold (end-period; US$ m) 18,443 18,611 18,420 18,124 17,531 16,761 15,907 14,484

a US domestic grade 41, average of 10 markets, mid-month.Sources: IEA, Monthly Oil Market Report; IMF, International Financial Statistics; Oil Market Intelligence.

Egypt 7


Outlook for 2000-01

Political forecast

The forthcoming parliamentary election, expected in early November, hasalready begun to dominate the political scene, and will continue to do so forthe rest of 2000. The overwhelming political priority until November will be tokeep the country calm. This suggests Egypt will now enter a period of politicallimbo, as the government of the National Democratic Party (NDP) feels the needto keep the peace both within the party and in parliament, so that electionplanning can move ahead. However, within the NDP the shake-up will continue,following the leadership reshuffle in February. The government will try toaddress widespread public resentment and dissatisfaction with the NDP bychoosing its candidates more carefully than in the past. This may backfire,though, as local machine politicians, removed from the official NDP list, stand asindependents and then rejoin the party once re-elected. Once the election is outof the way, the government will turn its attention to some outstanding butpolitically sensitive issues. These include elections for the trade unionsrepresenting lawyers and engineers—two of Egypt's largest. The official focus willbe on ensuring that the Muslim Brotherhood does not regain the controllinginfluence it once had.

Despite President Hosni Mubarak's reluctance to appoint a vice-president andsuccessor, his son's elevation into the upper ranks of the ruling party (thepolitibureau and general secretariat) is not necessarily the prelude to some sortof dynastic succession. While there has been an obvious search for an approp-riate political role for Gamal, there will be no tolerance within the Egyptianelite for such a step. For his part, the president will continue to argue thatpolitical stability is assured by the constitutional mechanisms already in place.

A cabinet reshuffle is possible in the aftermath of the parliamentary election,but the EIU expects this to be limited. It will most likely concentrate on thesocial portfolios, for which ministerial performance has been roundly criticisedby the public. The few poor technocratic appointments made in the Octoberreshuffle may also be abrogated.

The November parliamentary election will be vigorously contested by the15 recognised opposition parties, as well as the country's largest Islamic group,the banned Muslim Brotherhood. However, there are reasons to suggest thatthe poll will produce no major changes. The traditional opposition parties areweak, divided and lacking grass-roots support. In addition, political Islam is onthe wane and the Muslim Brotherhood's effectiveness has been undermined bya major schism between its younger radical activists and its ageing, con-servative and passive leadership. The NDP's overwhelming dominance of theassembly will be maintained, assisted by government intervention if necessary.Faced with public admiration for the degree of democracy in Iran's electoralprocesses, and mindful of the president's public promise of a “free and fair”election, as well as of Egypt's international image, the government will chooseto tread more warily than in the past. However, state intolerance of political

Domestic politics

Election watch

8 Egypt


Islam will persist. The government will allow a slightly larger oppositionpresence in the new parliament, to improve the regime’s democraticcredentials and therefore head off public dissent. This opposition will beformed only from the secular, officially sanctioned opposition parties, whichthe government is adept at manipulating. Moreover, the government willencourage the presence of a greater number of deputies from the businesscommunity. Many will stand as NDP candidates, as they will lend strongsupport to the government’s economic reform programme, and are lessconcerned with political liberalisation.

Egyptian policymakers are confident that the Middle East peace process is nowin its final stages. This is despite Israel undertaking a unilateral withdrawalfrom Lebanon; outside the structure of a peace agreement; the continuingdeadlock in Israeli-Syrian peace negotiations; and a perceived Israeli reluctanceto abide by its signed agreements with the Palestinians. Egypt worries thatwithout a comprehensive and just peace, the potential for regional instability isgreat. Therefore, improved relations with regional heavyweights Turkey andIran will become important parts of a strategy to reduce volatility in the regionand place pressure on Israel. Also of particular concern is Egypt’s future role inthe region once its mediating skills no longer guarantee it regional prom-inence. The overwhelming priority of Egyptian foreign policy will continue tobe the preservation of Egypt’s traditional leadership role both in the region andin the developing world, which affords it stature and influence on the worldstage. Therefore, despite the opportunity provided by the EU’s Barcelonaprocess to move towards Europe and a proposed Mediterranean-focused order,Egypt will choose to stay within its Arab context. We expect it to push for pan-Arab development and solidarity in order to prevent Israeli regional hegemony.There will be efforts to revitalise the Arab League, including annual Arabsummits, and end the isolation of Iraq, as well as further moves towards theestablishment of an Arab common market by 2007. However, given thereluctance of Gulf states to integrate Iraq, differing attitudes towards Israel andthe lack of political will to align divergent trade regimes, Egypt's task will behighly challenging. The government will also be keen to prevent theemergence of a “Middle East Benelux”—comprising Israel, Syria, Lebanon,Jordan and Palestine—which would leave Egypt isolated and without a viableregional role.

Economic policy outlook

Despite the appointment of a new, reformist economic team in October,progress on liberalisation has proved slow. Economic policy has taken a backseat to social concerns, as the government has attempted to tackle strongpublic grievances over poverty and social inequality. At the same time, officialsmaintain that it has taken considerably longer than expected to sort out theeconomic disorder left by the previous government and to initiate reform. Thisis particularly pertinent to the banking sector. There have been a number ofsmall incremental changes for the better, and this is expected to continue,along with a policy of gradually placing people in positions of influence where

International relations

Policy trends

Egypt 9


they are able to push forward reform. However, officials must await the propertime for reforms, and the combination of volatility in world capital markets andthe political considerations of an election year ensures that any major economicinitiatives are highly unlikely to occur before 2001. The government may,though, be prepared to address the disappointment in its performance felt byinternational investors and reflected in the poor stockmarket results. Thissuggestion is based on President Hosni Mubarak’s April 24th directive to hiseconomic team to speed up privatisation in order to attract foreign investmentand activate the money market. There will also be a strong push, backed by thepresident, towards technological development and the greater availability ofinformation technology. However, consistent strong directives from the topwill be required if influential and entrenched vested interests are to beprevented from delaying the liberalisation of certain sectors.

We expect fiscal discipline to prove challenging. This is for a number ofreasons: significantly higher social spending in the budget for fiscal year2000/01 (July 1st-June 30th); continuing high state-subsidies for basic goodsand services—the bread subsidy alone costs US$815m annually; the fiscalburden of the major national infrastructure projects—despite a state reassess-ment of this expenditure and promises not to tolerate budget overruns; andthe government's recently stated intention to make monthly repayments ofUS$730m on its internal debts. In the face of this the government's target ofkeeping the budget deficit to around 1% of GDP appears unlikely to be met.The government has said it will rationalise state expenditure. The budget willbe assisted by determination to transform the 67 poorly performing stateeconomic authorities into corporate entities which must stand alone fin-ancially. These have been reliant on state subsidies of at least US$1.5bnannually. Moreover, reforms to the taxation system are due, in order to raiserevenue without increasing the existing rate of tax or imposing new taxes.These include a review of tax holidays, a slight reduction in corporate tax rates,the extension of the sales tax into a full value-added tax (VAT), tougherpenalties for tax evasion and improved tax administration. However, thesemeasures have not yet been formally announced and many will needParliamentary approval before the Majlis al-Shaab (the People's Assembly)adjourns in June, if they are to have any impact on the coming fiscal year. Theproposed draft law exempting exporters from tax, a remnant of the previousadministration, has been dubbed "not feasible" by the minister of finance, andthe government is expected to look instead at improving incentives to boostexports. The budget deficit is therefore expected to widen in comparison withprevious years, but will still stay at under 2% of GDP.

Privatisation is liable to remain problematic over the forecast period. In partthis is owing to social constraints and the quality of the remaining publicenterprise portfolio, with some 60 state companies struggling with bad debts,excess labour and outdated technology, and therefore in need of radicalrestructuring. Vested interests have also fought back and there remains withinthe ruling elite a strong fear of foreign domination of the economy. Thegovernment now appears to desire major public-sector players to act as quasi-regulators. There is also an absence of a clear pricing policy giving officials

Privatisation policy

Fiscal policy

10 Egypt


pricing flexibility and protecting decision-makers from possible future chargesof treason for “selling off the family silver.”

Nevertheless, there is an understanding of the benefits privatisation brings tothe economy, in terms of management efficiency and capital inflows, and ofthe fact that it remains the litmus test of the reform programme for theinternational community. Therefore Egypt’s first large flagship utility sale, aninitial 10% of TelecomEgypt, should take place in June, although the need forrestructuring may see this timetable slip. TelecomEgypt possesses E£5.5bn(US$18.9bn) in assets, which would make this Egypt’s largest privatisation sofar. However, the sale of minority stakes in the seven regional electricitydistribution companies has been postponed, because of large debts and thelack of an effective regulatory structure, and will not now take place until atleast mid-2001.

Monetary policy during the forecast period will focus on maintainingexchange-rate stability. Given the political constraints of an election year, nosignificant flexibility can be introduced into exchange-rate policy. The CentralBank of Egypt (CBE) will, though, continue to allow a modest degree ofdepreciation of the Egyptian pound against the US dollar. Market liquidity,both pound and US dollar, should be assisted by much improved tourismreceipts, continuing high oil prices and the recent lifting of the guided-pricesystem regulating rates at the exchange bureaus. More importantly, it will alsobe helped by the government's decision to repay its internal debts on a strictschedule, as well as to seek overseas financing for the foreign component ofmajor build-operate-transfer (BOT) projects. However, many of the proposedprivatisation sales in hard currency may not come to fruition this year. It is, asyet, too early to assess the impact of the president's recent directive, and thehighly conservative Central Bank will be loath to run down reserves muchbelow current levels in order to add liquidity to a market which is stillcharacterised by high pent-up demand. As a result, monetary policy isexpected to remain uncomfortable throughout 2000, although not in crisis.This “muddle through” scenario, assisted by an improving balance ofpayments position, may well continue throughout 2001. There is an officialunderstanding that the maintenance of long-term monetary stability requires amore transparent and flexible monetary policy. In addition, the government isaware that Egypt—as a substantial economy with a growing involvement inthe international capital markets, a trade pattern not heavily focused on theUS and with strengthening links to Europe and the region—is not a naturalbeneficiary of a US dollar peg. In spite of this, any adjustment, even to amanaged float system, will prove politically contentious. Amid fears that anychange in monetary policy would erode public confidence in the currency, thegovernment may well decide to delay any decision until other reforms havebeen accomplished. However, in its usual tactic when going againstinternational investor sentiment, the government will move faster in otherareas of the economic reform programme, to allay concerns about itseconomic management.

Meanwhile, the creation by the latter half of 2000 of the Cairo interbank offeredrate (Caibor), Egypt's first real benchmark for short-term lending, should lead to

Monetary policy

Egypt 11


greater transparency and less volatility in the market. The authorities willattempt to push Treasury-bill rates down further, in line with the improvedbalance-of-payments position. Although Egypt’s high domestic interest rateshave proved useful to support the pound, they are negatively affecting bothinvestment and growth. Downside potential is limited, however, as US rates willrise over the same period.

Economic forecast

International assumptions summary(% unless otherwise indicated)

1998a 1999a 2000b 2001b

GDP growthUS 4.3 4.2 4.9 3.1OECD 2.4 2.8 3.6 2.8EU 2.6 2.1 3.0 2.7

Exchange ratesUS$ effective (1990=100) 119.3 116.3 115.9 110.9¥:US$ 130.9 113.9 108.0 105.0US$:€ 1.12 1.07 0.99 1.09

Financial indicatorsUS$ 3-month commercial paper rate 5.3 5.2 6.3 6.1¥ 2-month private bill rate 0.7 0.3 0.1 0.6

Commodity pricesOil (Brent; US$/b) 12.8 17.9 22.0 18.8Gold (US$/troy oz) 294.1 278.8 290.0 300.0Food, feedstuffs & beverages

(% change in US$ terms) –13.9 –18.6 –2.1 4.9

Industrial raw materials (% change in US$ terms) –19.6 –4.3 17.5 9.4

a Actual. b EIU forecasts.

Egypt will remain heavily import-dependent over the forecast period, but cantake heart from an expected 2.1% decline in the world import price of food,feedstuffs and beverages in 2000. However, other factors are not favourable.Food, feedstuff and beverage prices are expected to bounce back to4.9% growth in 2001, while import prices for industrial raw materials shouldrise by 17.5% in 2000 and 9.4% in 2001. Offsetting such pressures on importcosts will be the positive outlook for oil export prices. Prices for the benchmarkdated Brent softened to some US$23/barrel, following OPEC’s late-Marchdecision to increase its production limits by 1.45m barrels/day. Given, though,that compliance on the previous OPEC quota was already slipping, the newdeal does not actually add much more oil to the market. Consequently weexpect average prices to remain relatively robust at US$22/b in 2000, slippingto US$18.8/b in 2001.

As well as benefiting from high oil prices, Egypt’s merchandise and servicesexports, particularly tourism, will gain from the rapid expansion in the worldeconomy and world trade growth. We now expect world growth in 2000 toaverage 4.4% (measured on a PPP weighted basis), faster than the pace seenimmediately before the Asian crises. Growth is projected to slow slightly to

International assumptions

12 Egypt


4% in 2001 owing to a policy-driven deceleration in the US. One downside ofthe rapid growth in the US is the need for a tightening in monetary policy inorder to cool the economy before headline inflation takes off. We thereforeproject US 3-month interest rates to rise to 6.3% in 2000 before easing back to6.1% in 2001. Such a rise will hamper Egypt’s efforts at reducing its owndomestic interest rates during 2000.

The strong recovery in tourism, higher oil revenue, the improving externalenvironment and a generally stable domestic macroeconomic climate willassist growth prospects in 2000-01. However, the reappraisal of economicpolicy by the new government, together with government concerns over socialjustice, lingering foreign-exchange liquidity problems and the resultant highinterest-rate environment has been dampening growth in 1999/2000. Therewill also continue to be tighter conditions for credit, as more stringent bankingsupervision comes into force. This is in the wake of the recent suddendeparture of a number of large creditors from the country, which has focusedofficial attention on the high level of non-performing loans in the bankingsystem. Overall, economic growth is forecast to fall to around 4.5% in1999/2000 before reviving to 5.6% in 2000/01. During 2000 the knock-oneffects of poor foreign-exchange liquidity and related high overnight interbankinterest rates will act as a drag on activity. However, the situation will improveover the year, with some progress on privatisation likely to see an injection offoreign-exchange flows as well as a steady recovery in tourism and oil-exportearnings. In the interim, the government will release more of its foreign-exchange reserves, within limits, to help ease shortages. Should the govern-ment choose to move to a more flexible exchange-rate regime in 2001, thiswould also improve the outlook for growth, as will the prospect of lowerinterest rates. Ongoing public and private investment in major nationalprojects, together with an improvement in the global environment, willprovide a further impetus.

Average annual inflation fell to 3.1% in 1999, reflecting the government’s tightfiscal policy, as well as lower world import prices and exchange-rate stability.We expect inflationary pressures to rise over the forecast period, in line with anincrease in world import prices. In addition, the potential adjustments to theexchange-rate regime could lead to some depreciation, accentuating theinflationary effect of higher world import prices, and producing a temporarysurge in prices. Progress on reform and liberalisation should have a beneficialimpact on the costs of certain goods and services in the medium term.Therefore, although we expect inflation to accelerate in 2001, averagingaround 5.6% for the year (with the year-on-year rate likely to touch 7% at itspeak), rates will decline once the one-off effects drop out of the calculations.

Egypt’s currency has been stable since 1991, after the fluctuations of the pre-reform era, and this is a source of considerable national pride. Despite concernsthat the currency is overvalued—even if not to the extent controversiallysuggested by the UK stockbrokers Robert Fleming, in a report which put thedegree of overvaluation at 40%—any moves to alter monetary policy in adirection which could lead to devaluation against the US dollar will be highly

Economic growth

Inflation

Exchange rates

Egypt 13


controversial. However, the CBE in 1999 allowed a modest degree ofdepreciation of the official exchange rate, from E£3.39:US$1 to E£3.40:US$1.This trend is expected to accelerate in 2000. Facing no major monetarypressures, the government may well decide to take the politically easier routeof maintaining the current exchange-rate regime in 2001, particularly if itchooses to move faster in other sensitive areas of the economic reformprogramme. IMF projections that the US dollar will, over the next few years,correct down against the euro will also assist the government's case forstability, as this would make the current fixed-US-dollar-peg regime con-siderably more comfortable. Nevertheless, it is still possible that Egypt willfollow the successful examples of Morocco and Tunisia, and begin a shift to amanaged float system—under the guise of adjusting to the forecast strength ofthe euro—by around mid-2001. The change to a float system against a basketof currencies dominated by the euro, to reflect Egypt’s major trading partners,would probably include a downward adjustment of the Egyptian poundagainst the US dollar. This would see the average exchange rate move from aprojected E£3.43:US$1 in 2000 to E£3.70:US$1 in 2001.

We expect to see improvements in Egypt’s export performance. These will bethanks to government efforts to develop both the business environment andthe country's trade infrastructure, as well as movement on privatisation.Exports should also grow as local industry gradually realigns itself to takeadvantage of the raft of tax and other incentives the government is expected tooffer to exporters in 2000-01. These include the setting up of an Egyptianexporters federation, to increase finance available for export-oriented invest-ments. Higher oil prices will raise the value of Egypt’s exports, while theincrease in world trade will help non-oil export growth—export revenue grewby 19% in 1999 to an estimated US$5.2bn. However, the import bill is also setto increase, reflecting higher global non-oil commodity prices, the demands ofthe major investment projects and the stimulation of demand resulting fromincreased economic activity. Although the ensuing trade deficit will be large,the current-account deficit will remain manageable. This will be owing to agreatly improved services performance, as tourism continues to recoverstrongly, Suez Canal receipts pick up with the revival in world trade, and moremedia, financial and accounting services are exported to the region. Workers’remittances will also stay high, buoyed by the improvement in the Gulf oileconomies. Available data indicate that the current-account deficit declined toUS$1.5bn in 1999. We expect this to fall further to just over US$1bn in both 2000and 2001, equivalent to just over 1% of GDP.

Increased investment opportunities, provided by the accelerating privatisationprogramme and business restructuring will lead to high inward investmentflows, both direct and portfolio. Through a combination of this increasedinvestment and continued concessional borrowing from bilateral and multi-lateral lenders, the current-account deficit will be financed with relative ease.In addition, there should be a steady flow of aid, both from the US (which hasreduced Egypt’s aid allocation by US$80m, to US$735m in the US 2000/01 fiscalyear) and the EU, in the run-up to the establishment of the Euro-Med free-trade

External sector

14 Egypt


zone. Finally, we expect a modest run-down of foreign-exchange reserves in2000, which will begin to be replenished in 2001.

Forecast summary(US$ m unless otherwise stated)

1998a 1999b 2000c 2001c

Real GDP growthd (%) 5.6 5.0 4.5 5.6

Consumer price inflation (av; %) 4.2 3.1 3.5 5.6

Budget deficitd (% of GDP) –1.0 –1.3 –1.4 –1.5

Public domestic debt (% of GDP) 52.5 53.5 54.3 52.2

Merchandise exports fob 4,403 5,235 5,849 6,209

Merchandise imports fob –14,617 –15,200 –16,112 –17,127

Trade balance –10,214 –9,965 –10,263 –10,919

Current-account balance –2,566 –1,490 –1,052 –1,123 % of GDP –3.1 –1.7 –1.1 –1.1

Reserves excl gold 18,124 14,484 14,000 14,500

Total external debt (US$ bn) 32.0 31.0 30.5 30.2

Debt-service ratio (%) 10.0 10.1 9.8 9.5

Exchange rate (av; E£:US$) 3.39 3.40a 3.43 3.70

a Actual. b EIU estimates. c EIU forecasts. d Fiscal years ending June 30th.

The political scene

The forthcoming parliamentary election, due in early November (although anofficial date has yet to be set), has dominated the political scene this quarter. Inan attempt to rejuvenate the ruling National Democratic Party (NDP) ahead ofthe poll, President Hosni Mubarak instituted a reshuffle of the leadership—thepolitbureau and general secretariat—in early February for the first time since1993. This is believed to be in response to the president's growing dissatis-faction with the poor public image and performance of the NDP, of which he ishead. This image led the president to speak of the need for political reform.The aim of the reshuffle appears to be to make the NDP more efficient and

The NDP ruling cadresundergo change

Egypt 15


representative of Egyptian society. Thus, more women, Coptic Christians—inthe aftermath of Egypt's worst sectarian violence in recent times inJanuary 1999—businessmen and a younger generation of leaders, including thepresident's son Gamal, have been brought into the NDP's upper ranks. Anumber of party stalwarts remain, notably Youssef Amin Wali, the deputyprime minister, agriculture minister and NDP secretary-general; Safwat al-Sherif, the information minister and NDP assistant secretary-general; andKamal al-Shazli, the parliamentary affairs minister. However, the inclusion ofthe liberal minister of economy and foreign trade, Youssef Boutros-Ghali, andtwo leading businessmen, Ibrahim Kamel and Ahmed Ezz, in the generalsecretariat highlights the focus on economic rather than political liberalisationand a presidential determination to build a stronger political base for economicreform. The prime minister and 11 ministers are now in the party's upperranks, which suggests the president intends the party and cabinet to worktogether more harmoniously than was the case under the previous admin-istration of Kamal al-Ganzouri. Finally, the change reflects official concern togroom a new generation of leaders, including sons of high officials, andconfirms that no new political forces will be allowed to contest the generalelection. Since mid-1999 there had been persistent rumours that the presidentwould allow his son to establish a new loyal opposition party, cleaner and morebusiness-oriented than the NDP, as an alternative to the ossified ruling party.Instead, the NDP, popularly perceived as corrupt, tired and remote, will bereformed from within.

On February 26th, parliament approved a presidential decree extending Egypt'semergency laws for another three years. These have been in forceuninterruptedly since the assassination of President Sadat in October 1981,despite a greatly improved security situation thanks to the cessation of militantIslamist violence. The laws have been roundly criticised by the opposition andhuman rights groups for restricting meetings and allowing the security forcesvirtually unlimited powers of search and arrest, and are therefore seen as amajor factor in controlling dissent. The government claims that the emergencylaws are necessary to maintain stability and fight the increasing incidence ofdrug-related crime. However, their extension also highlights the regime'sintention to maintain its grip on political life.

A new party licence—the first for 22 years—has been granted by the PoliticalParties Committee to the National Accord Party, whose political platformdiffers little from that of the government. This brings Egypt's legally recognisedpolitical parties to 15. The application was ratified a mere two weeks afterfiling, in contrast with the other opposition parties, which have undertakenlengthy battles through the courts for recognition. Applications by themoderate Islamist Al Wasat (Centre) party, the neo-Nasserist Dignity Party andthe Islamic Law Party, backed by the radical Islamist Jihad group, have allrecently been rejected. The National Accord Party is headed by AhmedShohayeb, a member of the Free Officers movement, which overthrew themonarchy in 1952. The majority of its 94 founding members are discontentsfrom other parties, notably the Democratic Nasserist Party—the only party tohave opposed President Mubarak's renomination in the September presidential

The National Accord Partygains a licence

Parliament extends theemergency laws

16 Egypt


referendum—and the Islamist-oriented Socialist Labour Party (SLP). Neitheryoung, nor dynamic nor Islamist, and failing to reflect any significant strand insociety, the National Accord Party poses no threat to the regime. However, itsformation highlights the government's usual tactic of “divide and rule”. Thegovernment seems to have decided to split the opposition vote in theforthcoming election, while giving the impression to the international com-munity that it is enhancing its democratic credentials.

Parliament passed two amendments to its electoral laws on April 11th. The firsthanded supervision of the election process from the interior ministry to thejudiciary—a longstanding demand of the opposition. This followedPresident Hosni Mubarak's promise to parliament on November 13th that thenext election would be clean and fair. However, as only 5,661 judges, out of atotal of 9,949, will be available to supervise Egypt's 42,000 polling stations, fulljudicial supervision will prove impossible. Each major polling station will possessa Judicial Supervision Committee, but analysts note that most vote rigging andintimidation takes place at the smaller stations. The opposition parties havedenounced the change as merely cosmetic, because it restricts judicialsupervision only to the day of voting. However, the government has refusedrequests by the opposition for further precautions against fraud, such asallowing the voting to take place over several days, providing identity cards,making the signing of names obligatory for all voters and the use oftransparent ballot boxes.

The second electoral amendment clarifies the previously ill-defined terms“worker” and “farmer.” Under the constitution, workers and farmers areentitled to one-half of parliamentary seats, but the clause has been widelyabused to include local businessmen and landowners. The opposition parties,lacking the NDP's extensive powers of patronage, are now expected to havegreater difficulty meeting the new definitions, as their candidates tend to belawyers or other professionals. The opposition has consistently called for thequota system to be abolished, considering it obsolete now that Egypt is dis-banding its socialist system. However, the government, viewing any concessionon the constitution as the first step towards losing control, has firmly refused.

The Middle East peace process has continued to dominate Egyptian foreignpolicy concerns, but the focus has swung towards the Lebanese track. PunitiveIsraeli air raids on Lebanon in February provoked domestic outrage and asurprise solidarity visit by President Mubarak on February 19th—the first by anEgyptian leader in 40 years. Hailed by the Egyptian press as a masterstroke ofdiplomacy, the Beirut trip neatly placed Egypt at the heart of the peacemakingprocess once again. Earlier in 2000 the government had felt sidelined by theresumption of Syrian-Israeli negotiations. However, while Egyptian-Lebaneserelations have never been so good, Egyptian-Syrian relations have suffered.Syria, concerned by Egypt's growing influence with Lebanon, its satellite, hasalso criticised Egypt's support for Israel's stated unilateral withdrawal from itsself-declared “security zone” in southern Lebanon by July 7th. In return, Egypthas robustly stated that it cannot ask Israel to continue to occupy Arab land,but has admitted it shares Syrian concerns about security in the absence of a

Judicial supervision ofelections becomes law

Lebanon becomes ofconcern

Egypt 17


comprehensive peace settlement. Faced with this new challenge, Egypt hasattempted once more to forge a joint Arab stance on the peace process and topush peace negotiations forward on all tracks, while also conceding that theoutlook seems bleak. Following President Mubarak’s annual consultations inWashington in late March, Farouq al-Shara, the Syrian foreign minister, YasserArafat, the Palestinian president, Ehud Barak, the Israeli prime minister,Jordan’s King Abdullah and the Lebanese president Emile Lahoud all came toCairo during April. Their discussions on the peace process, conductedalongside various Western and regional leaders, confirmed Egypt’s centralmediating role.

Egypt has been the venue for a number of high-level conferences this year,most recently, the first summit of the Common Market for Eastern andSouthern Africa (Comesa) from February 28th-29th and the first Europe-Africasummit on April 2nd-3rd. Little substance came out of either, although thegroundwork was laid for the proposed Comesa free-trade zone, due to comeinto effect by October 31st. At the least both summits have served to showcaseEgypt's talents as a world political go-between and have allowed Egypt to showoff its recent economic progress.

Economic policy

The cabinet approved the budget for the fiscal year 2000/01 (July 31st-June 30th) on March 20th and presented it to the People’s Assembly Budgetand Planning Committee on April 16th. Discussions are ongoing, and fewdetails have been released. In any case, the budget is traditionally prone to con-siderable amendment before the final figures—which tend to be more fiscallycautious than those passed by parliament—are published in the OfficialGazette. However, the minister of finance, Medhat Hassanein, told parliamentthat public expenditure will increase by 11.4% to E£111.7bn (US$32bn),compared with E£100.3bn in 1999/2000, owing to government determinationto improve the lot of the poorer sectors of society. The budget emphasis,therefore, is on social spending, implementing the prime minister's promiseson enhancing social welfare made to parliament on December 18th. Socialexpenditure is set to rise by 14.1% to E£44.5bn, or 40% of total expenditure.Health has been allocated 11% more than last year at E£6bn, while socialinsurance rises by 22.5% to E£11.3bn, subsidies jump by 7.4% to E£5.8bn,youth and sports increase by 10.3% to E£3.2bn and education receivesE£18.1bn, compared with E£16.2bn in 1999/2000. Public-sector wages, 26% oftotal budgeted spending, are to increase by 12.9% to E£28.8bn. Debt paymentsare estimated to cost E£27.58bn, up from E£25.7bn last year, in order to servicean external debt of US$28.2bn and a domestic debt of E£147.1bn. Nobreakdown of figures has been given for revenue, which is forecast to rise by7.1% to total E£97.7bn, compared with E£91.4bn in 1999/2000.

The finance minister, Mr Hassanein, has stressed that there will be no newtaxes or increase in existing taxes, although a tightening of measures to combattax evasion and efforts to incorporate the informal economy into the tax

Egypt hosts Comesa and theEuro-Africa summit

Social spending rises in the2000/01 budget

18 Egypt


system are expected to raise revenue. According to Mr Hassanein, the budgetdeficit will remain around 1% of GDP, and this will be financed by the issue ofE£3.67bn in Treasury bills and bonds. A further E£5bn is to be raised fromprivatisation proceeds. The minister expects GDP to reach E£305.8bn by theend of the current fiscal year, a 7.3% increase on the previous fiscal year. Other2000/01 budget assumptions include a target GDP growth rate of 7%, aninflation rate of 3% and unemployment at 6.7%.

On April 11th the cabinet approved a draft mortgage law, which lawyers say iscomparable to a basic Western mortgage law, bar a few insignificant quirks.Prohibited by Islamic beliefs on usury, the government had previously hesitatedto enact it owing to concerns about the effect of the inevitable negativepublicity when low-income families were evicted for payment defaults. Aprevious draft stumbled last year over arguments about the collateralisation ofloans. Article 1,052 of the Civil Code does not allow a confiscation ofmortgaged public or private property.

However, the government has come under increasing pressure, first to revitalisea real-estate market depressed by the surplus of luxury housing developments(thus allowing developers to repay the hefty loans received from public-sectorbanks) and second to make home ownership affordable to a much largersegment of the population. This will help ease the social pressures comingfrom youth unable to marry owing to the high cost of housing. The draft lawtherefore makes repossession possible, but under a strict timetable. Expected tohave a radical impact on the housing market, the law focuses on the residentialsector, although commercial property may yet be included, and appears toallow the renting of mortgaged property. However, following the insistence ofthe Sheikh of Al-Azhar that the extension of credit is only permissible for“necessities”, a body of opinion within parliament is expected to lobby torestrict mortgages to the “needy”. Under the draft, the minister of economy isto set loan terms, something normally left to the discretion of the mortgagor.This appears to highlight government concern over imposing greaterregulation on the extension of credit as part of moves to strengthen thefinancial sector.

Prime ministerial decree 740 of 2000, published on April 8th, amended theexecutive regulations of Egypt's main Investment Law 8 of 1997. The law,under which the vast majority of foreign investors choose to incorporate, hasbeen amended to include 13 new activities. According to this amendmentcompanies will be eligible to receive the guarantees and incentives of Law 8,which are mainly tax holidays. The new sectors include natural gas plants;power plants and associated distribution networks; telecommunicationssatellites and networks (but not for radio or television transmission); audio,video and written data-transmission networks (excluding mobile telephones);metro lines within cities or inter-city; tunnels for vehicles; the planning andestablishment of new towns and industrial zones and providing the associatedutilities and services; software design; technological zones and technologytraining centres; credit agencies; factoring the debts of small and medium-sizedcompanies; river transportation; garbage collection and treatment. These new

The investment law isamended

The cabinet approvesEgypt’s first mortgage law

Egypt 19


activities can be viewed as a snapshot of the major concerns and priorities ofthe new Egyptian government.

Despite the continuing shortage of both US dollar and Egyptian poundliquidity in the market, and the still large pent-up demand for US dollars,monetary policy has remained consistent over the past quarter, with thegovernment showing no sign of willingness to inject flexibility into Egypt’sfixed exchange-rate regime. Prime minister, Atef Obeid, admitted to parliamenton March 25th that there had been a foreign-exchange shortage over the pasttwo years, which he blamed primarily on the use of foreign currency to“import without insight” unnecessary quantities of cheap goods. However, hesaid the situation had been firmly dealt with. The government is rationalisingforeign currency expenditure by giving priority to locally produced goods, andis “moving in all directions” to increase the sources of foreign currency,including expediting projects to export natural gas. However, the minister ofeconomy and foreign trade, Youssef Boutros-Ghali, also stated on April 9th thatgovernment delays in repaying domestic debts were responsible for theongoing Egyptian pound liquidity shortage and that the private sector bore noresponsibility. The government is now believed to be spending E£1.5bnmonthly to repay its outstanding debts to the public sector, notably to the statecontracting firms, which are reportedly owed E£12bn.

Meanwhile, the ongoing pound shortage has been exacerbated by interventionfrom the Central bank of Egypt (CBE) to address a lack of US dollar liquidity, asscarce local currency has been used to buy US dollars released by the bank.These tight market conditions have driven up overnight interbank rates onpounds to around 17% over the past quarter. Stabilisation in the foreign-exchange market, though, has allowed the rate to drop to around 12-14% sincelate March. However, the CBE has been pressured into issuing ever larger repos,in a bid to ease interbank rates down from such unsustainably high levels. TheCBE’s US dollar injections lessened during the latter half of April in the wake ofdeclining foreign-exchange reserves. Despite high oil prices, improved tourismand privatisation receipts, and a narrowing of the trade gap and current-account deficit (see Economic trends), Egypt's foreign-exchange reserves havecontinued to decline for the 17th consecutive month, to US$15.18bn inJanuary. This was from US$15.63bn in December and US$19.5bn inJanuary 1999, according to the latest Central Bank figures (these are slightlyhigher than those quoted in the IMF’s International Financial Statistics—seebelow).

Foreign-exchange reserves(US$ m)

1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 qtr 3 Qtr 4 Qtr

Total reserves 19,052 19,150 18,961 18,665 18,072 17,237 16,383 14,959 Foreign reserves 18,443 18,611 18,420 18,124 17,531 16,761 15,907 14,484 Golda 609 539 541 541 541 476 476 475

a National valuation.Source: IMF, International Financial Statistics.

Focus continues on theexchange-rate peg

20 Egypt


By March 13th 2000 the government had privatised 133 of the 314 public-sector companies originally targeted for privatisation, according to the latestfigures from the Public Enterprise Office (PEO), the state body overseeing theprocess. Transactions included the sale of majority stakes in 37 companies,minority stakes in 16 others through public offerings, the asset sale orliquidation of 27 companies, 23 anchor investor sales and 30 companies soldto employees’ shareholder associations (ESAs). According to the PEO, saleproceeds from the privatisation programme stood at E£14.28bn (US$4.2bn), ofwhich E£11.21bn had been collected.

Privatisation revenue has been boosted over the past six months by a series ofsales of cement companies to international firms. In the past quarter, investorshave been preoccupied with a fierce seven-week bidding war for the stateAmeriyah Cement. This has pitted the newly formed Al-Ahram CementCompany, a consortium of public and semi-public local cement companies,against the French-Greek consortium of cement producers, Lafarge/Titan, andthe local-Portuguese joint venture of Orascom Construction Industries andCimpor. By late February, Al-Ahram appeared poised to succeed. However,faced with investor outrage reflected in a plunging stockmarket, Al-Ahramwithdrew from the contest and the government announced that in order toprotect minority shareholder rights, tender offers would only be accepted for ashareholding of at least 95%. This left the offer for 90-95% by PenrodInvestments, an affiliate of Cimpor, as the only valid outstanding bid and thesale of a 91% stake, of E£1.66bn, was finalised on March 13th. However,Mr Obeid promptly announced on February 29th that there would be nofurther cement privatisations until local cement output reached28m tonnes/year. Greeted with dismay by the international investmentcommunity, the statement was taken as a signal that the privatisationprogramme would slow down in response to local concerns about foreigndomination. In the wake of the recent aggressive buying by internationalcement companies, foreign companies now control some 25% of Egypt's totalcement production capacity of 25 million t/y.

Similar international investor disappointment in the slowing pace ofprivatisation was caused by the mid-April statement by Mr Boutros-Ghali. Hestated that privatisation of one of the four major state commercial banks wouldbe delayed owing to hostile public opinion. This is nothing new. Egypt hasbeen committed to, but failed to implement, this step since its 1993 IMFagreement and President Hosni Mubarak in August 19999 flatly denied anybank sell-off would take place. With privatisation viewed by foreign investorsas the litmus test of the success of the economic reform programme, anyslowdown provokes investor concern. The political decision to privatise a statebank has yet to be made, although joint-venture sales are continuing, despitesome state bank reluctance to drop to the 20% ownership limit imposed by thegovernment. However, a major problem with bank privatisation lies in the factthat the public-sector banks are important tools of government policy. Theyoffer unprofitable banking services to remote areas, finance agricultural crops,are a major partner in the large national infrastructure projects such as Toshka,and are the largest buyers of T-bills and bonds. Moreover, officials argue that

Privatisation nets aroundUS$4.2bn

Cement sales are put onhold

Banking privatisation willbe delayed

Egypt 21


privatisation cannot move ahead due to the problems faced by the state banks,notably over non-performing loans. Initially, the state banks need restructuringand this would require a total overhaul of management.

In the first of what is expected to be a series of high-level management changesin the state banking sector over the coming year, bringing in Egyptian bankerswith international experience, a former Citibank regional director for NorthAfrica, Ahmed al-Bardai, has been appointed chairman of the state Banque duCaire. Mr al-Bardai denies he is there to expedite the privatisation of Banquedu Caire, but says he has a “clear mandate” to complete the privatisation of itsjoint venture—Misr American International Bank—within three months.

No political decision to privatise the three state insurance companies and statereinsurance company has been made. However, to push the process along,Mr Boutros-Ghali announced in early-April that an agreement had beenreached between the UK’s Robert Fleming and its Cairo joint venture Fleming-CIIC for the valuation of Misr Insurance and Egypt Reinsurance. Al CharkInsurance and National Insurance will be valued by Morgan StanleyInternational and the local HC securities. Insurance-sector privatisation, whileopposed by strong vested interests, is generally deemed not as contentiouswith the public as the privatisation of state banks.

The government appears determined to transform the 67 poorly performingstate economic authorities into corporate entities, which must stand alonefinancially. On March 7th the prime minister stated that these publicauthorities had been costing the government E£5bn in annual subsidies,against inadequate revenue of only E£200m. On February 3rd the transportminister, Ibrahim al-Demiri announced that the government was studyingproposals to turn the national airline, EgyptAir, into a holding company, withup to 16 subsidiaries. This has been interpreted as a preliminary step towardsprivatisation. The government is also reported to be encouraging EgyptAir intopartnerships with the new local private airlines in order to rationalise domestictransport. Renowned for its inefficiency, and reeling from a series of recentdisasters, EgyptAir announced on February 24th agreements to overhaul theairline with Sabre Holdings and Lufthansa of Germany. According to Mr Al-Demiri, Cairo Airport and the Civil Aviation Authority are also to be re-structured into independent entities. Moreover, the Egyptian NationalRailways, a major recipient of state subsidies, which has reportedly been givenfive years to be self-sufficient, has said that it intends to farm out themanagement of major railway stations, starting with central Cairo's RamsesStation, to the private sector; sell or rent some 500,000 feddans(1 feddan=0.42 ha) of unused land to investors; lease station buildings toinvestors for commercial development; use the build-operate-transfer (BOT)system for any major capital expenditure; gradually hand over upgrading andmaintenance duties to the private sector; and place the cargo-transportationservice under private management. On April 16th Egypt signed a loan accordwith the Arab Fund for Economic and Social Development for a 22-yearUS$52m loan, at 3% interest, to modernise Egypt's railway services.

State authorities arepushed to be independent

Insurance evaluationmoves ahead

22 Egypt


The domestic economy

Economic trends

Consumer price inflation has remained stable at around 3%, with anannualised rate of 3.2% in December 1999, 2.9% in January 2000 and 3% inFebruary, according to the latest official figures from the state statisticalagency, the central agency for public mobilisation and statistics (CAPMAS).This brings the average inflation rate for 1999 to 3.1%, compared with 4.2% in1998 and a high of 19.7% in 1991. The average inflation rate for the fiscal year1999/2000 (July 1st-June 30th) comes to 2.8% so far, compared with 3.7% in1998/99 and 3.8% in 1997/98.

In the wake of a slightly calmer foreign-exchange market, Egypt’s exchangebureaus lifted their voluntary restraints on exchange-rate movements in earlyMarch. While US dollar rates at the money-changers rose to E£3.49:US$1 byend-March, the rates have since stabilised to around E£3.47:US$1 by the latterhalf of April. This still offers a small positive differential over the official bankrate, closely monitored by the Central bank of Egypt (CBE), which remains atE£3.43:US$1. The exchange rate quoted by Bloomberg has also begun to steadyat close to the E£3.43:US$1 official rate, having gone through a period ofvolatility in February, when the quoted rate hit E£3.45:US$1.

The convergence of the exchange rates would seem to indicate that a period ofadjustment in the foreign-exchange market is beginning to come to an end,offering the prospect of greater stability. This adjustment reflects the satisfyingof pent-up demand for US dollars, which developed during 1998-99 when theprevious government essentially rationed US dollars. The situation began toease towards end-1999, aided by the willingness of the new government toprovide greater liquidity through drawing on foreign-exchange reserves. Oneconsequence of this has been that, having worn down their foreign assetsduring 1998 and the first half of 1999, commercial banks began to replenishthem in late 1999 and reduce their foreign liabilities. This accounts for much

Inflation remainsaround 3%

The exchange rate holdssteady

Egypt 23


of the surge in other investment outflows recorded in the last quarter of 1999and the second quarter of 1999/2000 (see Foreign trade and payments).

Commercial banks(US$ m)

1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Foreign assets 8,244 9,318 8,485 7,815 7,517 7,186 6,998 7,441

Foreign liabilities –4,057 –4,797 –4,769 –4,995 –4,805 –5,141 –5,120 –4,318

Net foreign assets 4,186 4,520 3,717 2,820 2,712 2,045 1,878 3,123

Source: IMF, International Financial Statistics.

Some 23 local and international commercial banks, including the four largepublic-sector commercial banks, are to join forces under the auspices of theEgyptian Banker’s Association to establish a benchmark Cairo interbank offeredrate (Caibor). Projected for a July 1st launch, the participating banks will setovernight, weekly, monthly, 3-month, 6-month and 1-year Caibor rates, whichwill be posted daily on Reuters. Bankers say Caibor will radically improvetransparency in the Egyptian market, as it will expose problems andinconsistencies in market practice, and will provide a reference rate from whichto price other products. This will allow the development of hedging instru-ments, such as swaps, which have not previously been possible because of thelack of independent benchmarks. Caibor should also help to attract investorsto the Egyptian market by allowing more efficient pricing. Bankers also stressthat Caibor will improve the flow of information to the CBE, and this im-proved transparency will make it easier for the government either to remove orinject liquidity. However, the major challenge lies in winning credibility andacceptance for Caibor and participants say this, in turn, will depend on it beingperceived as independent, responsive and truly reflective of the market rate. Itis expected to take at least three months before banks start to re-price loansfrom Caibor and probably a year before Caibor becomes firmly entrenched.

Caibor is set for a Julylaunch

24 Egypt


The stockmarket has continued its downward trend, with the EFG Hermesindex falling almost 30% to 4,633 on April 24th, from a high of 6,546 in mid-January. Following the late-1999 surge as investors reacted positively to thenew government, the market has slumped in response to high interbankinterest rates, continuing US dollar shortages and tight domestic liquidity.More particularly, there is disappointment that the government has not movedfaster on economic liberalisation and reforms, especially privatisation (seeEconomic policy). The recent volatility in world stockmarkets, particularly thesharp falls in the value of technology stocks, has not helped.

A record 4.8m tourists visited Egypt in 1999, spending an estimated US$3.9bn,up from 3.5m tourist arrivals in 1998 and 4m in 1997. Egypt’s tourismindustry has surprised market analysts by recovering much more quickly thanhad been expected from the massacre at Luxor in November 1997, in which58 tourists died, plunging the industry into sharp decline. This rapid recoveryis attributed to a stronger focus on marketing, the marketing of resorts on theRed Sea as separate entities from Egypt, the diversion of tourists from nearbymarkets such as Turkey and Greece in the wake of major earthquakes, andcheap prices. The government is now attempting to work with the industry toattract higher spending tourists, moving it away from being a cheap, mass-market destination.

Oil and gas

Egypt and Israel agreed on April 12th actively to encourage companies on bothsides to resume negotiations immediately on the supply of Egyptian naturalgas to Israel and for the two governments to work together to solve anyoutstanding issues. The Israeli national infrastructure minister, Eli Suissa, statedin Cairo, after meeting Egypt’s petroleum minister, Sameh Fahmy, that politicaldifferences, which had delayed negotiations in the past, are no longer a factor.Egypt froze gas talks with Israel in 1996 owing to the perceived Israeliobstruction of the peace process. However, faced with a massive gas surplus,despite growing domestic demand—reserves stand at an estimated120 trn cu ft, of which 42.5 trn cu ft are proven—Egypt has now made theexport of natural gas a priority. Israel, in turn, announced on March 1st 2000that it was suspending negotiations for several months to allow time to assessthe potential of recent gas discoveries off the Ashkelon coast, which areprojected to meet Israel's gas needs for 10-15 years. While Mr Suissa has toldthe Egyptian minister that priority will now be given to Israeli companies andthat Egypt can only be a secondary supplier, he has also stressed Israeliintentions to diversify its sources of natural gas. Moreover, he has added thatthe increased competition should reduce prices, while Egypt will be able tosupply gas sooner. Mr Fahmy, in turn, has guaranteed gas supplies to Israelwithin 17 months of signing a long-term supply agreement. Israel is alsobelieved to want Egyptian gas for political reasons, in order to develop the stillunfriendly ties between the peace partners. However, given the existence ofsubstantial Israeli gas supplies, the longstanding basis of the deal—that Egyptwould sell Israel 2.2trn cu ft of gas a year for 20 years from 2002—may no

Gas export talks are toresume with Israel

Tourism posts recordresults in 1999

The stock market declinecontinues

Egypt 25


longer be viable, according to the Israeli minister. Nevertheless, as a gaspipeline now runs to the north Sinai capital of El Arish, less than 150 km fromAshkelon, smaller export quantities may still prove economic. Italy’s ENIinaugurated its Sinai gas pipeline, connecting the Al-Jamil gas processing plant,west of Port Said, to El Arish, on March 2nd. This so-called "peace pipeline"could then extend across the border into Gaza, to supply the Palestinianterritories, and up Israel’s coastline to feed power-plants and large industrialusers. Eventually, the pipeline could continue up the coast to Lebanon, Syriaand Turkey, although Mr Fahmy has noted that the task of gaining theagreement of all five parties to such a project will prove highly challenging.

On April 3rd BG International announced that it had signed, together withItaly’s Edison, an agreement in principle with the Egyptian General PetroleumCorporation (EGPC) to develop a liquefied natural gas (LNG) export project.The agreement envisages the sale of gas from BG’s offshore West Delta DeepMarine field to a proposed LNG plant operated by the partners near Idku, eastof Alexandria. The first LNG train is due to come on stream in 2004. Furthertrains are dependent on market demand and the signature of LNG salescontracts. Industry publications note that the result is that gas exports havenow become more viable. LNG offers greater market flexibility compared withfixed pipelines, and BG is concentrating on Turkey and southern Europe,which possess large and liberalising gas markets. BG International is currentlybidding for the contract to supply Turkey’s western industrial port of Izmirwith LNG. However, the international gas market place is fiercely competitive,with a plethora of alternative gas schemes. By signing with EGPC, BG isintending to keep down capital costs by planning ahead and installing a singleoffshore pipeline system in its concession area to handle both local and exportsupply. This cost-cutting is then expected to make Egyptian gas, mainly foundin deep-water, more competitive in the international markets. Moreover, thegovernment has recently indicated that it is prepared to adjust its gasconcession agreements, currently structured for the domestic marketplace, sothat a commercial framework can be put in place to allow exports to moveforward. Mr Fahmy said on April 20th that one-third of Egyptian gas will beallocated for local consumption, another third for export and the remainderwill be stored as a strategic reserve.

Infrastructure

The New & Renewable Energy Authority and the Egyptian Electricity Authority(EEA) have invited offers for a hybrid solar-fossil fuel combined-cycle power-plant at Al-Kuraimat, south Cairo, on a build-own-operate-transfer (BOOT)basis. This will be Egypt’s first power station using solar power, which willaccount for 10% of Al-Kuraimat’s output. Natural gas will be the mainfeedstock. The developer will sell the electricity from the 100mw-150mw plantto the EEA, and the World Bank’s global environment facility will provide agrant of US$50m to cover the additional costs. The plant, targeted to come onstream in 2003, is part of a seven-year plan drawn up in 1998 by the Ministryof Electricity and Energy, which envisages 15 power stations with a total

A solar BOOT power plantis offered

BG agrees on LNG exports

26 Egypt


capacity of 9,350 mw to be established on the BOOT model. An EEA officialannounced on March 18th that the BOOT projects must now be financed fromforeign currency transferred from abroad and that local contractors should beinvolved in the construction of the power station. On March 13thPresident Hosni Mubarak confirmed his full support for Egypt’s BOOT power-station construction programme during a strategic briefing with the energy andelectricity minister Ali al-Saidi.

The Civil Aviation Authority (CAA) has awarded a build-operate-transfer (BOT)contract for the development of one of Egypt’s first private-sector airports, atRas Sudr on the south Sinai coast, to a group led by Malicorp of the UK. Theairport concession is for 40 years, while the group will also develop84m sq metres of adjoining land. The award follows the rejection by a Cairocourt on March 26th of an appeal by the local Delta Gulf investment groupagainst the CAA for cancelling its contract for the development. Delta wasaccused of failing to abide by the stipulated terms of the agreement. Contractshave already been awarded for BOT airports at Mersa Alum on the Red Seacoast and El Alamein on the Mediterranean.

The National Authority for Tunnels (NAT) has indicated that it has had anenthusiastic response to its March 1st offer to prequalify for work on a 3-kmextension to the 18-km second line of the Cairo metro. The E£300m (US$88m)extension, for which the 22 international and local applicants were asked toinclude financing options, runs from Giza Station to Moneib on the west bankof the Nile. Previous metro construction has been financed entirely from thestate's own resources. The government is also expected to move ahead with athird 29-km line, stretching from the densely populated Imbaba in Giza toCairo International Airport via Attaba, al-Azhar and Heliopolis. A 21-km metroline for Alexandria, running the length of the city, is under review. Thegovernment is expected to seek external finance for all of these projects.

As part of the government's push to improve Egypt's information technology(IT) infrastructure, the state TelecomEgypt announced on April 5th that it hadpurchased broadband capacity (45 megabits/second) from Fiberoptic LinkAround the Globe (FLAG) Telecom on its underwater cable system. This is tomeet the projected rapid growth in Internet demand. At present, Egypt hasaround 250,000 Internet users, of which only 50,000 are subscribers. Egypt'sFLAG capacity, which is expected to be upgraded to 155 megabits/second byend-2000, will run from Alexandria via the UK to the US.

Financial and other services

The government concluded a number of agreements with major informationtechnology firms during President Hosni Mubarak's end-March visit to the US,aimed at developing Egypt's technological base—an initiative strongly backedby the president. The US software giant IBM has agreed to invest US$44m overfive years to train 3,000 Egyptian graduates each year in cutting-edge IT skillsand to train and certify 250 software instructors a year. The Egyptian

Egypt recruits IT majors toboost its technological base

Telecom Egypt buys FLAGaccess

Ras Sudr BOT airportchanges developer

Metro extensions moveahead

Egypt 27


government will contribute equal finance to the programme. Oracle has agreedto make its programmes available to Egyptian students at a discount, followinga similar accord with Microsoft in January 1999 for the provision of software to100,000 students. According to the minister of state for telecommunicationsand information technology, Ahmed Nazif, Cisco is to open a training centrein Egypt. Network Solutions, the world’s leading registrar of web addresses,announced on March 29th that TelecomEgypt would join its internationalpremier domain registration service programme, a move which is expected toadd credibility to the .eg domain name. The company will also assist Egypt indeveloping Arabic-character domain names. Finally, the Internet super-carrier,PSINet, has announced plans to expand its operations into Egypt. Thecompany has said it will establish a technology service and e-commerce centrein Egypt to serve the region and establish, or purchase, a domestic Internetservice provider (ISP). Moreover, the government stated on April 8th that inorder to achieve a technological revolution over the coming few years, a newtelecoms law, currently under draft, will be passed. This will establish anauthority for the development of the IT industry, as well as a series of “smartvillages” in partnership with the private sector. The first of these will be on a325 feddan (1 feddan=0.42 ha) compound outside of Giza—Egypt will also signinternational agreements for the liberalisation of the IT sector.

A leading local telecoms company, Orascom Telecom, acquired an 80% stake inTelecel International, the largest global system for mobile communications(GSM) mobile operator in sub-Saharan Africa, for US$413m on February 14th.The largest acquisition ever by an Egyptian company, either inside or outsideof Egypt, the deal makes Orascom the premier cellular operator in the MiddleEast and Africa, “moving towards our goal of becoming the third worldoperator,” according to the chairman of Orascom Telecom, Naguib Sawaris.With Telecel International's 11 licences added to Orascom Telecom's GSMlicences in Congo-Brazzaville, Jordan, Syria and Egypt—the latter through its27% stake in MobiNil—Orascom Telecom is potentially serving a totalpopulation of some 300m. The company announced on March 22nd plans tobuy a 26% stake in the Pakistani mobile network Mobilink. In mid-AprilOrascom Telecom increased its 40% stake in Egypt's largest ISP, InTouchCommunications, to 99%.

Increased competition in the financial sector has led to a number of mergersbetween leading players. In the most recent, the UK investment house RobertFleming, the local private Commercial International Bank (CIB) and theFleming joint venture with Commercial International Investment Company,Fleming CIIC, merged their asset management activities, on March 29th. Thenew Fleming CI Asset Management, capitalised at E£5m, is owned 60% byFleming CIIC, 30% by CIB and 10% by Fleming.

Orascom expands itstelecoms empire

Fleming CIIC and CIBjoin forces

28 Egypt


Foreign trade and payments

Improved balance-of-payments figures released by the Central Bank of Egypt(CBE) on March 21 indicate a narrowing current-account and higher capitalinflows from portfolio and direct investment. However, foreign-exchangereserves have continued to decline as the Central Bank has drawn down onthem to inject liquidity into a tight money market.

Balance of payments(US$ m)

1998/99a 1999/2000a 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr1

Export proceeds 1,083 1,028 1,015 1,319 1,305 1,597

Import payments –4,150 –4,138 –4,221 –4,461 –4,302 –4,345

Trade balance –3,067 –3,110 –3,206 –3,142 –2,996 –2,748

Receipts 2,926 2,638 2,661 2,789 2,865 2,966 Transportation 630 657 635 714 635 674 of which: Suez Canal dues 432 456 455 428 431 454 Travel 825 726 765 920 1,182 1,037 Investment income 523 508 440 451 440 456 Government services 86 70 86 66 13 53 Other 862 677 735 638 596 745

Payments –1,371b –1,338 –1,276 –1,085 –1,460 –1,359 Transportation –95 –101 –84 –97 –115 –102 Travel –257 –252 –333 –262 –221 –261 Investment income –356 –144 –279 –150 –332 –131 of which: interest –263 –129 –269 –128 –266 –124 Government expenditure –169 –162 –82 –99 –134 –178 Other –94 –679 –498 –477 –659 –687

Services (net) 1,555 1,300 1,385 1,704 1,405 1,607

Balance of goods & services –1,512 –1,810 –1,821 –1,438 –1,591 –1,141

Official transfers (net) 474 245 148 230 270 222

Private transfers (net) 772 1,113 1,071 817 942 809

Total transfers 1,246 1,358 1,219 1,047 1,212 1,030

Current-account balance –266 –452 –602 –391 –379 –111

Direct investment (net) 146 224 105 103 106 634

Portfolio investment (net) –73 –235 109 24 132 352

Other investments (net) 365 576 –583 84 –487 –1,625

International reserves 18,961 18,665 18,072 17,237 16,383 14,959

a Fiscal year ending June 30th. b Does not sum in source..

Sources: Central Bank of Egypt; IMF, International Financial Statistics.

The current-account deficit fell to US$110.8m in the second quarter of1999/2000 (fiscal year ending June 30th), as a result of higher export revenue, aslowdown in import growth and a strong recovery in tourism. On the basis ofthe published data, the current-account deficit for the calendar year 1999 isestimated at US$1.49bn, or 1.7% of GDP. Export revenue posted a 22% rise on

The current-account deficitnarrows

Egypt 29


the previous quarter, and a 55% rise on the same quarter in 1998, and, assistedby higher global oil prices, stood at a total of US$1.6bn. Imports grew by amere 1% over the previous quarter, and 5% from the same period of 1998/99,reaching US$4.3bn. This suggests that the restrictive trade rules imposed inearly 1999 to curb imports have been successful in this narrow goal. However,local analysts note that, at the same time, this has closed up the economy,which has implications for growth. Overall, the trade deficit fell to US$2.7bn inthe second quarter of 1999/2000, the lowest level in over two years.Meanwhile, services receipts rose to US$1.6bn, as tourism posted a massive43% year-on-year increase to just over US$1bn. However, net private transfersfell slightly to US$809m, as worker remittances fell below average. The capitalaccount also improved, owing to a hefty rise in foreign investment. Net foreigndirect investment (FDI) reached a quarterly record of US$639m, compared withUS$114.9m in the previous quarter, as a result of a number of large cementprivatisations. Net portfolio investments jumped to US$351.5m, fromUS$132.1m in the preceding quarter, as the stockmarket rallied, driven byimproved investor confidence in the wake of the October cabinet reshuffle.The overall balance-of-payments deficit widened to US$1.42bn, compared withUS$1.02bn the previous quarter. This was mainly thanks to the US$1.63bndeficit in “other investments”, as banks replenished their foreign assets,depleted over the past two years in response to the liquidity shortage.

Owing to our need to provide internationally comparable data where possible,the EIU uses calendar-year balance-of-payments data published by the IMF inits International Financial Statistics for historical data. It is from this base thatour forecasts are made. However, there is a large discrepancy in translatingavailable quarterly Central Bank fiscal-year import data into calendar-year data.Using quarterly fiscal-year data, the Central Bank figures show imports ofUS$16.7bn in calendar year 1998, up from US$14.9bn in 1997. However,published IFS data put imports at US$14.6bn in calendar year 1998, up fromUS$14.2bn in 1997. Given this discrepancy we have not used theUS$17.3bn 1999 calendar-year data for imports, which are derived from therecent quarterly Central Bank data. Instead, we have applied the impliedannual percentage gain to the IFS’s existing 1998 calendar-year data to give a1999 estimate of US$15.2bn. We have, however, kept the overall calendar-year1999 current-account deficit figure of US$1.49bn implied by the Central Bank’sdata, as well as those for exports, income debits, credits and net transfers. Wewill revise this if necessary when the IMF publishes its calendar-year 1999current-account figures for Egypt.

Egypt's external debt stood at US$28.2bn as of March 24th, the prime minister,Atef Obeid, told parliament a day later. This debt is to be repaid over 26 years,at an average annual interest rate of 3.5%, and is to be redeemed at the rate ofUS$1.2bn annually. This expenditure represents only 9% of Egypt's foreign-currency reserves. According to Ahmed al-Darsh, the minister of planning andinternational co-operation, Egypt could borrow up to US$1.2bn each year fromabroad without any risk, given the steady decline in the ratio of external debtto GDP. This has dropped to around 30% at present from 38% in 1996/97 and60% in 1993/94. Youssef Boutros-Ghali, the minister of economy and foreign

External debt stands atUS$28.2bn

Data issues

30 Egypt


trade, maintains that as Egypt’s external debt consists mostly of low-interestloans, its real value on the financial market is only US$18bn. Nevertheless, theminister stated in mid-March that the government has decided to borrow nomore than US$1bn annually in soft loans from regional and Arab funds fromnow on. Over 80% of external debt is owed to official multilateral and bilateralcreditors, while the Institute of International Finance (IIF) notes that althoughofficial figures indicate that short-term debt is only about 6% of total externaldebt, the joint BIS-IMF-OECD-World Bank database gives a somewhat higherfigure of 12%.

This higher short-term debt figure is reflected in the World Bank’s estimate ofEgypt’s total external debt, which it puts at US$31.96bn in 1998, comprisingUS$27.67bn in public medium- and long-term debt, US$34m in privatemedium- and long-term debt and US$4.26bn in short-term debt. Our historicaldata and forecasts are based on the World Bank figures which have recentlybeen updated to include 1998.

External debt stock(US$ m)

1995 1996 1997 1998

Total 33,266 31,299 29,850 31,964 Public medium- & long-term 3,479 28,810 26,804 27,669 Private medium- & long-term 313 127 54 34 IMF 103 16 0 0 Short-term 2,371 2,347 2,991 4,260 of which: interest arrears 3 2 3 1 official creditors 2 1 2 0 private creditors 1 1 1 1

Medium- & long-term debtTotal 30,792 28,937 26,858 27,704 Official creditors 28,794 27,517 25,728 26,751 Bilateral 24,821 23,584 21,836 22,555 Multilateral 3,974 3,933 3,892 4,195 Private creditors 1,998 1,420 1,130 953

Memorandum itemsExport credits 8,933 9,561 10,278 10,612Principal arrears 133 139 149 142 Official creditors 128 133 142 134 Private creditors 5 6 7 8

Source: World Bank, Global Development Finance.

Faced with generally favourable external debt indicators, Egypt is once moreconsidering a sovereign debt issue. This was postponed in 1998 in the light ofthe volatile financial markets. Abdel Fatah al-Gebaly, adviser to the financeminister, said on April 19th that Egypt plans to issue its first sovereign bondthis year, of US$300m-400m. Both the date and the pricing of the issue has yetto be set, but he noted that Egypt has received attractive pricing offers frominternational investment banks, at rates 1.5 percentage points above theLondon Interbank Offered Rate (Libor). The main purpose of a sovereign bond

Egypt plans a sovereignbond issue

Egypt 31


issue is to establish a benchmark for corporate borrowing and thereforeimprove the financing options for the private sector in the internationalmarkets. According to the investment bank Merrill Lynch, a sovereign issuecould permit some US$2bn of external borrowing by the private sector.However, the sovereign bond would also have the useful effect of allowing thegovernment to lengthen the maturity of its domestic debt, which currentlystands at E£147.1bn or 40.2% of GDP, as the prime minister told parliament. Itwould also provide funds for the government’s proposed repayments ofoutstanding debts to the public sector.

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