WORLD BANK MIDDLE EAST AND NORTH AFRICAECONOMIC STUDIES

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Egypt in the GlobalEconomyStrategic ChoiCes for Savilgs, Inuestments,andLong-Term Growth

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WORLD BANK MIDDLE EAST AND NORTH AFRICA ECONOMICSTUDIES

Egypt in the Global

EconomyStrategic Choicesfor Savings, Investments,and Long-Term Growth

The World BankWashington, D.C.

Copyright © 1998The International Bank for Reconstructionand Development/THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst printing March 1998

Technical Papers are published to communicate the results of the Bank's work to the development community withthe least possible delay. The typescript of this paper therefore has not been prepared in accordance with theprocedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sourcescited in this paper may be informal documents that are not readily available.

The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) andshould not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board ofExecutive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the dataincluded in this publication and accepts no responsibility whatsoever for any consequence of their use. Theboundaries, colors, denominations, and other information shown on any map in this volume do not imply on the partof the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of suchboundaries.

The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sentto the Office of the Publisher at the address shown in the copyright notice above. The World Bank encouragesdissemination of its work and will normally give permission promptly and, when the reproduction is fornoncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through theCopyright Clearance Center, Inc., Suite 910,222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A.

ISSN: 0253-7494

Cover photo by Ray Witlin, 1975, "Cairo. View of the City at Dawn."

Library of Congress Cataloging-in-Publication Data

Egypt in the global economy: strategic choices for savings,investments, and long-term growth.

p. cm. - (Middle East and North Africa economic series)ISBN 0-8213-4066-21. Egypt-Economic policy. 2. Egypt-Economic conditions-1952.

3. Investment, foreign-Egypt. 4. Foreign trade promotion-Egypt.5. Savings and investment-Egypt. I. World Bank. II. Series.HC830.E377 1997338.962-DC21 97-31580

CIP

Contents

Foreword vii

Acknowledgments viii

Abbreviations, acronyms, and definitions ix

Currency and exchange rates xi

Strategic overview xiii

Chapter 1 Employment and growth-an overview 1

Saving, investment and growth-a virtuous cycle 2

Trade openness and investment-friendly policies for a higher growth trajectory 4

Notes 7

Chapter 2 Post-stabilization macroeconomic policy-managing success 9

Recent developments 9Managing success: in capital ilflow problem 12

Why is there a probleim? 12Egypt's capital inflow problem 13Implications for fiscal and exchange rate policy 14

Risk in the immediate future 16Sterilization problems 16Issues in banking 17

Notes 19

Chapter 3 Long-term policy changes 21

Divergent growth scenarios 21The base case scenario 21The high growth scenario 22

Benefits of rapid growth 23

iii

Long-term consistency issues 23What should be done while the investment expansion lasts? 24

What should be done if investment expansion does not accelerate? 25

Notes 26

Chapter 4 Promoting outward orientation through exports 27

The environment 27Achievements 28

The agenda for action 28

The incentive regime-asymmetric prices between import and export 29Import transaction costs 30

Export transaction costs 34

Core areas for action 34

Infrastructure 34

Customs reforms 35

Quality controls 36

Maximixing FDI and its benefits 37

Forging 'buyer-seller linsks 38

Creating an export mentality 39

Notes 39

Chapter 5 Natural resource depletion and savings 41

Nonrenewable resources 41

Projected oil and gas rent 42

The competing use of the oil and gas rent 43Consumption 43

Investment 44

Oil and gas fund 45

Summary and conclusions 46

Notes 46

Annex 47

Chapter 6 Increasing long-term savings to build the basis for growth 51

Increased savings from privatization and public expenditure reform 51The PE saving-investment gap and its roots 52

Potential gains in savings from reforms: a simulation 54

Financial sector reforms to increase private saving 56The social insurance system 56

iv EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

The National Investment Bank 59

Reforming the social insurance system - short- to medium-term measures 61

Reforming the social insurance system - longer-term proposals 62

The insurance industry 64

The capital market and its links with saving 66

Notes 67

Selected bibliography 69

Statistical annex 71

Boxes

2.1 The dynamics of debt and the sustainability of fiscal deficit 166.1 Methodology and assumptions 55

Tables

1.1 Selected cconomic indicators, 1990/91-1995/96 11.2 Growth and employment 21.3 Per capita income growth performance, 1980-93 31.4 Average tariff rates in Egypt and selected East Asian economies51.5 Growth and policies in 86 countries, 1966-93 51.6 Egypt and Indonesia: comparative indicators 51.7 Growth and policies in Egypt and Indonesia,1966-93 61.8 Regression estirnate for Egypt 61.9 Growth counterfactuals 62.1 Recent developments in saving and investment 112.2 Distribution of private investment 112.3 Tariff duty to import ratio and indexes of effective exchange rates 122.4 Indexes of domestic prices of tradables and nontradables 123.1 Outcome of the two scenarios in Egypt 224.1 Tariffs and taxes affecting Egyptian exports 304.2 Effects of expensive Egyptian port services 314.3 Effects of cumbersome Egyptian import clearances 324.4 Effects of restrictive Egyptian quality control system 335.1 Scenario assumptions for nonrenewable resources (oil and gas), 1996-2015 435.2 Estimated implicit subsidies to major petroleum products and gas 445.3 Illustrative rates of return on public subsidies 455A.1 Prices of Egyptian crudes, 1996 475A.2 Price of Suez Blend, 1992-95 475A.3 Long-run marginal cost of gas exploration and production, 1993/ 94 485A.4 Petroleum product end-user prices in Egypt 495A.5 Estimated annual deadweight loss in Egypt (1995) 496.1 Estimated increases in savings from reforming PEs: total 546.2 Estimated increases in savings from reforming PEs, by government and private sector 546.3 Estimated increases in savings from reforming PEs: origin of the change 55

'I

6.4 Sensitivity analysis 566.5 Social insurance system indicators 576.6 Comparative public pension schemes and demographic indicators, using most recent data 576.7 Contribution rates for social insurance 586.8 Public pension spending as shares of most recently published indicators 586.9 NIB funding sources as percentage of total 596.10 Growth of private funds, 1991-95 606.11 Action plan for social insurance system reform 686.12 Action plan for insurance industry reform 68

Figures

2.1 Average growth rate for selected stabilizing economies 92.2 Term structure of deposit interest rates 102.3 Real effective exchange rate 102.4 Current account balance, change in reserves and capital inflows 142.5 Composition of capital inflows 142.6 Inflation, inventory, and exports 152.7 Domestic debt as percentage of total public debt stock 172.8 Domestic vs foreign interest rate 18.3.1 Distribution of sales proceeds from privatization 243.2 Volatility of Egypt's key revenue sources 245.1 Share of oil and gas sector in GDP 415.2 Share of petroleum exports 415.3 Oil and gas production 425.4 Estimated oil and gas rent 425.5 ]Resource rent/GDP 425.6 Egypt's projected oil and gas revenue over 20 years, 1995-2015-- high-case scenario 435.7 Egypt's projected oil and gas revenue over 20 years, 1995-2015 -low-case scenario 445.8 Annual incremental investment over 20 years to compensate for decline

in rent in low-case scenario 455.9 Annual contributions to Egyptian oil revenue stabilization fund, from 1995 (low-case scenario) 465A.1 Price of Dated Brent 475A.2 Heavy fuel oil price 486.1 Saving-investment gap as a percentage of GDP in Egypt and 46 developing countries, 1987-93 526.2 Egyptian saving-investment gap and its sources of finance, 1987/88-93/94 526.3 Saving-investment gap of PEs in Egypt, 1987/88-93/94 536.4 Financial performance of public enterprises in Egypt, 1986/87-93/94 536.5 Proceeds from privatization of Law 203 companies in Egypt, 1994 to September 1996 536.6 Comparative performance of selected pension funds 61

vi EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

Foreword

This report is the third in a series of World Bank economic and socio-political imperative, and requiresMiddle East and North Africa Economic Studies, substantial and sustained job creation over the comingwhich are being published as a contribution to years. Job creation depends critically on acceleratingknowledge about the economies of the Middle East and economic growth, in turn entailing large increases inNorth Africa (MENA) region--a region whose future is domestic investment and savings rates. Meanwhileof substantial strategic and economic importance to the Egypt needs to press forward with the process ofrest of the world. The present study is devoted to opening up to the global economy while ensuring thatEgypt, which has the largest population in the Arab capital inflows support rather than pose risks toworld and plays a central role in regional affairs, both macroeconomic stability.geopolitically and economically. It summarizes Egypt's The strategy described in this report isrecent economic progress, highlights key opportunities designed to help Egypt meet these challenges. On theand challenges currently facing its government and external front, it emphasizes reforming the tradepeople, and outlines a strategy for securing its future regime, boosting exports, and entering into aprosperity on the brink of a new millennium. partnership agreement with the European Union (EU)

Following dynamic economic growth in the of the kind already concluded by other countries in thedecade beginning in 1975, Egypt, along with most region. On the domestic front, it outlines a set ofother countries in the Middle East and North Africa, policies to ensure that macroeconomic stability iswas hard hit by the oil price slump of the mid-1980s. In maintained, and a range of structural reforms torecent years, however, thanks to the strong stabilization promote the higher savings and productive investmentand reform policies implemented by the government on which rapid growth must depend. Effectivelysince 1991, the economy has staged a remarkable pursued, these reforms have the potential for bringingrecovery. Inflation and fiscal imbalances have been about a virtuous spiral of growth, savings anddramatically reduced, but not at the expense of investment that will enable the Egyptian people toeconomic growth, which has improved year on year achieve steadily growing prosperity into the twenty-from a low of under 2 percent in 1991/2 to an estimated first century.5 percent in 1995/6. And Egypt today is attracting I believe that Egypt's prospects today areunprecedented interest from foreign private investors, brighter than they have been for more than a decade,increasingly the source of external resource flows for and that turning these prospects into daily reality willdevelopment worldwide,, not only be good for the Egyptian people but will

But substantial challenges remain. Poverty and contribute substantially to prosperity, stability andunemployment remain serious problems, and the labor peace in the MENA region. We in the World Bankforce is expected to grow by nearly 3 percent a year intend to maintain and deepen our partnership withover the next ten years. Many of today's jobless are in Egypt's government and people, with lending asthe 15-24 age group, as will be a large proportion of requested but also through non-lending servicesthe more than half a million new job seekers expected (including analytical work, of which this report is anto enter the labor market each year. Meeting young example) designed to support their development andEgyptians' aspirations for a decent livelihood is an reform efforts in the years to come.

Kemal Dervi§Vice President, Middle East and North Africa Region

The World Bank

vii

Acknowledgments

T he Bank team wishes to acknowledge the guidance The Bank team consisted of Chang-Po Yang (Teamand support it has received from senior Government Leader); Daniela Gressani (Macro-economics); David

officials in carrying out this study. In particular, we wish Dollar (Savings, Investment and Growth); Sweder vanto thank: H.E. Dr. Zafer El-Bishry (Minister of State for Wijnbergen (Macro-economics); Ahmed Galal, SaharPlanning and International Cooperation); H.E. Dr. Atef Nasr (Privatization and Savings); Albert MartinezEbeid (Minister of Public Enterprises); H.E. Dr. Ahmed (Private Savings and Pension Reforms); Linda vanGoueli (Minister of Trade and Supply); H.E. Dr. Youssef Gelder (Export Development); Robert CrawfordBoutros-Ghali (Minister of Economy); Mr. Ismail Hassan (Investment Promotion); Bjorn Larsen (Natural(Governor, Central Bank of Egypt); Dr. Ibrahim Fawzi Resources and Savings), Anqing Shi (Demographic(Chairman, Investment Authority); Mr. Abdel Hamid Implications for Long-term Saving), and John Wetter,Ibrahim (Chairman, Capital Market Authority); and Alaa El-Shazly (Modelling and Statistics). The editorialGeneral Ehab Elwy (President, CAPMAS). production team included Patricia Zord, Jenepher

We would also like to extend our gratitude to Moseley, Georgette Munir, Rosario Bartolome andnumerous other Government officials, private sector Alexandra Sperling.representatives, and scholars, who have guided and Messrs. John Page (Chief Economist, MENAassisted the Bank team, including Mr. Ismail Badawi Region, World Bank), Khalid Ikram (World Bank(Advisor to the Ministry of Planning and National Country Director in Egypt) and Jayanta Roy (LeadInvestment Bank); Dr. Faika El-Refaie (Sub-Governor, Economist, MENA Region) provided overall direction.Central Bank of Egypt); Mr. Momtaz Said (Director Special thanks to Dr. Heba Handoussa (Director,General for the Budget, Ministry of Finance); Dr. Taher Economic Research Forum) for her helpful commentsHelmy (Partner, Helmy & Hamza, Baker & McKenzie); and suggestions. The analysis on export issues alsoMr. Omar Mohanna (Managing Director, Egypt Arab- benefited from the following USAID-funded studies:African Bank); Mrs. Fatma Ishac (First Undersecretary "Quality Control to Quality Assurance in Egypt: Afor Planning, Social Insurance Organization); and Mrs. Program for Change"; "Egypt's Trade Policy ReformRagaa Mansy (Consultant to the Minister of Social Plan"; "Stanford Research Institute Study on a StrategyInsurance). for Egyptian Exports."

viii

Abbreviations, acronyms, anddefinitions

BMP Black market premiumCA Current: accountCBE Central Bank of EgyptCIF Cost, insurance, and freightCMSA Constant market share analysisCPI Consumer Price IndexDB Defined benefitDC Defined contributionDWL Deadweight lossDWT DeadweightEBA Egyptian Businessmen's AssociationEEPC Egyptian Export Promotion CorporationEGPC Egyptian General Petroleum CorporationEISA Egyptian Insurance Supervisory AuthorityEMA Europe and Mediterranean AgreementEU European UnionFDI Foreign direct investmentFEI Federation of Egyptian IndustriesFOB Free on boardGAFI General Authority for InvestmentGDP Gross domestic productGOEIC Government Organization for Export and Import ControlGNP Gross national productGNY Gross national incomeHS Harmonized Coding and Classification SystemIAS Internalional auditing standardICOR Incremental Capital Output RatioIMF International Monetary FundISO International Standards OrganizationJD Jordanian dollarLE Egyptian poundLIBOR London interbank offered rateLLP Loan loss provisionNEE Nominal effective exchange rateNIB National Investment BankNTCPI Nontradable consumer price indexODA Overseas development assistanceOECD Organization of Economic Cooperation and DevelopmentPE Public enterpriseREER Real effective exchange ratesSGS Societe G6n6rale de SurveillanceSIS Social insurance system

ix

SME Small and microenterprisesTCPI Tradable consumer price indexTOKTEN Transfer of Know-How through Expatriate NationalsUNCTAD United Nations Commission for Trade and DevelopmentUNDP United Nations Development ProgramWEF World Economic ForumWTO World Trade Organization

List of definitions

Bank provisioning: Bank capital set aside against doubtful loans.Defined benefit pension plan: Pensions are determined by an actuarial computation that incorporatessalary and years of service.Defined contribution pension plan: Pensions are solely determined by the accumulated contributions toan individual account and on the investment performance of the fund.Pay-as-you-go pension plan: Benefits received by current retirees are equal, on average to contributions bycurrent active workers.Open door policy: Introduced by Law 43 or 1974 (and its amendment Law 32 of 1977) to encourage foreigninvestment, as a gradual shift towards a private based economy through granting investors privilegesincluding tax exemption, immunity fronm sequestration and unrestricted repatriation of profits. This wasfollowed by trade liberalization through Law 118 or 1975 which allowed the private sector to import goodsexcept those identified as important for hygienic and security purposes (e.g., wheat).Saving: Rate of wealth accumulation.Savings: Stock of financial assets.Sterilization: Sale of government securities by the monetary authority to absorb excess liquidity in theeconomy.

x

Currency and exchange rates

Currency Unit: Egyptian Pound (LE) Fiscal Year

LE per US$ July 1-June 30

Period averages Weights and measures

1988=2.230 Metric system

1989=2.3891990=2.7081991=3.2961992=3.3231993=3.3341994=3.3731995=3.3941996=3.395

xi

Strategic overview

A fter Egyptian growth slowed in 1986 from its These problems combined with an inward-A unprecedented boom during 1975-85, the looking growth strategy have created an incentivegovernment responded by adopting adjustment regime biased against domestic saving and thepolicies to stabilize the economy and restore production of tradable goods, in particular thosegrowth. Growth resumed quickly, averaging 4 that can be exported. The reasons for the bias arepercent during 1993-96 and culminating in a twofold. First, transfers from abroad increasefinancial market boom that started in the second Egypt's domestic income, and therefore its demandhalf of 1996 (see table 1.1). Nevertheless, Egypt's for both tradable and nontradable goods. Prices ofchallenge remains daunting. nontradable goods (such as land and labor) are not

constrained by international market forces, and areEgypt's challenge is to sustain and accelerate relatively free to adjust in the domestic market, butgrowth in order to overcome high prices of tradable goods (such as food andunemployment rate and to pursue integration vegetables) are constrained. Transfers from abroadin the global economy tend to give rise to higher prices for nontradable

goods, encouraging their development at theOfficial estimates of unemployment still stand expense of tradable goods. The concentration of

at about 10 percent of the existing working age investment in nontradable goods and the shift inpopulation, and the size of the group will increase relative prices in their favor undermine the abilityannually, over the next ten years, by more than a of Egyptian industries to produce tradables. Thismillion. It is therefore imperative for Egypt to can lead to higher imports of goods and servicesincrease job and income opportunities to meet the than of exports and lower domestic saving.rising expectations of the young and grow-ing Transfers from abroad also tend to create volatilitypopulation. To this end, the Egyptian government and therefore uncertainty in the level of nationalhas set a target for gross domestic product (GDP) income (see figure 3.2). This tends to reduce thegrowth at an annual rate of 6 percent by the year level of domestic saving because such uncertainty is2000 (see table 1.2). more likely to affect saving before consumption. To

Egypt has a unique opportunity to achieve this achieve long-term self-sustaining growth, Egypttarget. World trade is growing rapidly, the must tackle the structural obstacles to the growth ofEuropean Union (EU) is seeking closer cooperation domestic savings and the growth of exports.with the region, and large amounts of intemationalcapital are seeking productive investment. Egypt, Egypt's most promising route to rapid growthbeing close to the key world markets, could is to achieve a virtuous circle of saving,capitalize on these developments and become a investment, and growth through higher publiccenter of growth and investment for the region. To saving and structural reformsaccomplish this, however, requires that two long-term structural problems be overcome: Egypt has already decided to limit foreign

* Reliance on exogenous resources (remittance borrowing, but this will also limit the resourcesincome, Suez Canal income, exports of oil and gas, available for investment. Given this decision, howand foreign assistance) to finance domestic could Egypt achieve the higher rates of economicexpenditures makes growth too vulnerable' to growth for which saving and investment are soextemal shocks. important? First, we know from the experience of

* Low levels of domestic saving and other countries that though essential for rapidinvestment, cloud Egypt's long-term growth growth, saving and investment may not byprospects through the resultant slow accumulation themselves be sufficient (see table 1.3). This causalof human and physical capital. relationship is influenced by other factors.

STRATEGIC OVERVIEW xiii

Although we do not know exactly what those Attempts to avoid nominal appreciation and tofactors are, we know that policies which promote meet the monetary growth target were reconciledgrowth and investment will also promote saving in a during 1991-94 through a strong sterilization: thatvirtuous circle. We also know that growth, saving, and is, the monetary impact of foreign exchangeinvestment are mutually reinforcing and that there are purchases by the central bank was offset by sales ofways for countries to jump start or accelerate the domestic securities. The result has been to create aprocess. Our analysis shows, for example, how far high Egyptian reserve position (at $18 billion- allEgypt could have boosted its economic dollar amounts are U.S. dollars)-or 17 months ofperformance by emulating policies already adopted imports) offset by a substantial increase in domesticby Indonesia-a country comparable in character debt (see figure 2.7).2 At the same time, realand resources (see table 1.7). Compared with appreciation in the exchange rate, which isIndonesia, being less open to trade is estimated to continuing, poses a threat to the current recovery.have reduced the growth rate of Egypt's real per In order to arrive at an appropriate policycapita GDP by 2 percent per year over the period response to capital inflows, it is important to1966-93. determine which of two possible causes of these

Other features of Egyptian policy, such as the inflows are exerting pressure on the exchange rate.fiscal deficit, government consumption, and the It could be an excessive expansion of aggregatelevel of inflation, are estimated to have reduced demand or a portfolio shift toward LE-based assets.GDP growth by 0.7 percent annually. This suggests The distinction is crucial. Only if an excessiveEgypt has scope to boost its rate of GDP growth per expansion of demand is behind the upwardcapita per year by at least 2.7 percentage points pressure on the exchange rate would contractionaryprimarily through trade opening. Another estimate fiscal and monetary policies be needed. If, however,(Sachs 1996) shows that Egypt could boost its per a renewal of business confidence in governunentcapita growth by as much as 3.7 percent a year if it policies-a portfolio shift towards Egyptianachieves the level of market efficiency of the fast assets-is causing the increase in capital inflowsgrowing East Asian economies and their average noncolitractionary policies would be preferable.level of savings (see table 1.9). Trade liberalization, See chapter 2 for detailed explanatioin.a critical element in structural reforms, would give So what is the answer? Indicators shown inprobably the largest impetus to further growth, figure 2.6 suggest that for now there is little sign ofwhich would in turn stimulate private saving, an overheating economy and point to an assetparticularly through the development of long-term market explanation (shift in portfolio choice) for thesaving instruments and institutions. Higher public upward pressure on the exchange rate. Thissaving is needed to finance the initial growth; appears to justify the government in resistingaccelerated privatization, that results in sales further appreciation and accommodating anyproceeds used to retire public debt and thus allow a downward pressure that might develop. What thenreduction in interest cost, would raise public are the policy measures that could be applied insaving. resisting the upward pressure?

But first Egypt must effectively manage the Resisting upward pressuresuccess of stabilization

Egypt has used two typical policy measures inIn the long term, if growth brought about by response to capital inflows. They have been

stabilization is to be sustained, a buildup in the effective up to a point, but cannot be carried too far.level of domestic saving is critical. In the short run, The first, sterilization, tried in 1993/94, led to ahowever, capital inflows from abroad resulting very rapid accumulation of domestic debt andfrom the success of stabilization are putting could, if pushed further, perversely aggravate theupward pressure on the exchange rate and thereby size and consequence of capital inflows. Thethreaten the current recovery. Egypt has been second, fiscal stringency, should be maintained as aexperiencing the effect of capital inflows in terms of cornerstone in managing capital inflows and toupward pressure on the exchange rate, both keep the fiscal deficit at its already very low level.nominal and real, since 1991. However, substantial further tightening would risk

xiv EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

eroding the economic recovery by unnecessarily deposits are matched with loans in the same foreigncontracting aggregate demand. In any case all the currency, the problem remains: borrowing firmsobvious cuts in expenditure have already been may default on bank loans after a devaluation,made. wiping out the banks' capital. Policy actions to

The measures now proposed would safeguard the soundness of the banking systemcomplement fiscal stringency in managing capital should include the following: strengthenedinflows. They are suggested because the recovery to supervision by the central bank focusing on thedate has been associated with real exchange rate adequacy of loan loss provision, aggressiveappreciation and domestic interest rates enforcement of rules for provisioning against badpersistently higher than rates on major foreign loans; prevention of excessive foreign exchangecurrencies. They include setting equivalent interest exposure by banks. (For details of theserate returns on foreign and domestic currency recommendations see chapter 2.) These actions arereserves with the central bank to eliminate crucial in the post-stabilization period to strengthenincentives for banks to borrow in dollars and lend the banks, or at least to make the extent of theirin domestic currency (see below); requirements for exposure clear to managers and regulators alike.banks to invest surplus foreign exchange depositsabroad; encouragement for pensions to invest in Toward a trajectory of high growthforeign fixed income securities and equities; furtheracceleration of privatization with proceeds applied Solving the immediate problems outlinedto reducing domestic debt. A speedup in import above will reduce Egypt's vulnerability to crises butliberalization could also help alleviate the upward this is not sufficient to get Egypt on a path to rapidpressure on the exchange rate bv increasing import growth supported by higher rates of saving anddemand. investment. Continuing growth will need increases

in public saving until private saving can take up theInternal debt and the exposure of the banking burden in response to stronger growth. The lattersystem also threaten the current recovery will need to be boosted by rapid structural reforms in

particular trade liberalization and privatization.Related to the management of capital inflows is Developing sound long-term savings instruments

the management of internal debt. At 50.6 percent of and institutions would be criticai to ensure efficientGDP it is large, and service costs are high. At 4.7 intermediation between savings and investments.percent of GDP, they are comparable to the size of In the interim, however, three issues need to bethe total civil service wage bill. Reducing the debt to addressed: maintaining a strong fiscal stance overGDP ratio depends on the speed of growth and the level the longer term; adopting supportive policies toof real interest rates. Interest rates in excess of the rate sustain and accelerate the recovery; and adjustingof GDP growth could result in debt financing via macroeconomic policies if the recovery reversesmonetization, with capital flight as its itself into recession.consequence.3 Thus, primary surplus should bemaintained at a minimum of 3 percent of GDP or Fiscal stancehigher to allow a reduction of debt to GDP ratio.

The soundness of the banking system is also a The current fiscal stance appears strong andsource of concern. The interest rate differentials consistent with other policy objectives. However,would make it attractive for banks to borrow in uS the size of internal debt limits the extent to whichdollars and lend in local currency, but this makes the government could apply an expansionary fiscalthem vulnerable to a currency devaluation. Cross- policy in a slowdown, and the sustainability ofcountry experiences show that foreign exchange internal debt could come into question if growthexposure increases substantially when banks are does stagnate. More important, the largeintermediating between local and foreign government borrowing requirement, which hascurrencies. Egyptian banks now have sufficient raised the domestic interest rates and caused theliquidity in foreign exchange assets, but their recent rapid accumulation of internal debt, constrains thesuccess in mobilizing financing from international ability of the government to allocate budgetsmarkets highlights a likely growing trend. Even if toward more productive ends, such as health and

STRATEGIC OVERVIEW xv

education. Against this backdrop, Egypt faces domestic inflation. Increased foreign savings couldcontinued uncertainty in its revenue sources, in sustain the recovery but would also increaseparticular the likely decline in long-term external Egypt's vulnerability to external shocks. Therefore,assistance. Furthermore, as mentioned above, the a critical longer term issue is the recovery ofscope for further expenditure cuts is limited, as domestic saving.obvious expenditure cuts have already been taken. The composition of private investment is also aThus, reducing internal debt should be pursued as cause for concern. The current recovery has beena central policy objective in maintaining the fiscal led for the most part by private investment instance. nontradable goods (see table 2.2). The concentration

Accelerated privatization is one way to help of investment in nontradable goods and the shift instrengthen the fiscal stance. By substantially relative prices in their favor undermine the abilityincreasing central government revenue it would of Egyptian industries to upgrade their exportreduce the govermment's financing requirements (in capability and to compete more successfully inparticular, servicing of internal debt) and so reduce production of tradables (see table 2.4). This posesgovernment claims on domestic resources. This another threat to the current recovery. If there is awould allow interest rates to be lowered and so property market crash, or major realignment ofreduce the incentives for short-term capital inflows. relative prices, the resulting losses would have to

be absorbed, not only by investors using their ownAccelerating the recovery funds, but also by banks using funds from the

depositors. This threat reinforces the need forAlthough growth has resumed, the pace and supporting policies to encourage production of

composition of investment and saving have not tradables, to maintain vigilance against excessivekept in step with each other (see table 2.1). bank exposure to the real estate markets, and toDeclining public sector investment has been adopt aggressive provisioning againstaccompanied by rising public sector saving; and nonperforming assets in banks' portfolios.while private sector investment is rising, private Another cause for concern is the delay of asector saving, having remained at around 11 major export recovery. The rise of capital goodpercent of gross national income since 1994, has not imports in the current recovery needs to beyet shown signs of recovery. balanced by growth of export earnings, thus the

The increased public saving resulted mostly speed of export recovery is critical. The successfulfrom the reduction of budgetary transfers and export experiences demonstrate that a soindsubsidies and from the improved financial relative price incentive regime is necessary, but notperformance of Law 203 companies-enterprises sufficient. Strong and responsive supportingowned by the government but subject to the same policies are also needed to ensure quick and timelyregulatory framework as private enterprises. But the export supply response.increase in public saving has gone about as far as it cango until privatization transfers the bulk of state In case of a slowdownenterprises and economic authorities to privateownership. Data are not available to determine the Should export response turn out to be slow,extent to which the lower private saving is due to private savings remain insufficient, and concen-weakness in corporate saving or in household tration of investment in nontradables continue, thesaving. However, the recovery of private current growth recovery may very well slow down.investment appears to be financed largely by If it slides into a recession, a real exchange rateretained earnings, so it is likely that the behavior of depreciation would be required at some stage.households may be responsible for the stagnant Appreciation can be justified by strong incomeperformance of private saving). growth but without such growth, appreciation can

The timing of the response in private saving is a threaten a recovery that is just beginning. Beforecause for concern. A significant lag would that happens, introducing an element of flexibilitynecessarily be accompanied by a widening of the through the adoption of a crawling band, should becurrent account deficit, and upward pressure on considered seriously.

xvi EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

Solid medium-term saving and investment The high growth scenarioeffort will be needed to support long-termgrowth This scenario is based on the vision that Egypt

should and must grow faster, and that the benefits ofTwo scenarios compare the efforts needed and rapid growth outweigh the potential risks. First, Egypt

the payoffs (see table 3.1). would maintain sound macroeconomic policiesstrengthened by vigorous structural reforms in

The base case scenario (the "base case") trade, capital and labor markets, privatization, andderegulation and would strengthen incentives to

As in the high case, sound macroeconomic raise productivity growth. A rapid and large-scaleconditions are assumed to be present. Fiscal privatization program would provide salesstringency will be maintained, and external debt to proceeds toward reducing domestic debt. ThisGDP ratio will continue to decline, thus increasing would be complemented by rapid growth ofheadroom for managing hiternal debt and adopting private investment. Second, fiscal stringency wouldexpansionary policies if needed in the future. give rise to increased public sector 'saving andGrowth of aggregate expenditures will be slow, therefore rapid increases in domestic saving.with the current account in balance. Growth of Private saving would be boosted subsequently by'oroad money will be kept below growth of nominal the other structural policy reforms-rapid tradeGDP. Inflation will be comparable to that of liberalization ar.d privatizatiorn-and by rapid perOrganization of Economic Cooperation and capita income growth. However, the increasedDevelopment (OECD) countries. By choosing to domestic saving would not be large enough tomaintain its current levels of intermational reserves finance all the investnent requirements; a(at more than 17 months of imports), Egypt would significant gap would still have to be filled withbe able to cope with external shocks with relative portfolio and foreign direct investments and withease. foreign borrowing.

Lhis scenario is distinguished by two main 77Tis scenario indicates that gross national productfeatures. First, such structural reforms as there are (GNP.) in real terms would eai:h a, rowth trajectory ofmove slowly imd the fundamental problems about 6-7 percent by around the year 2000, and nominalimpeding growth of saving and investment remain. export earnings (of nonoil merchandise) would grow atDivestiture of public sector interest is limited, and more than; 15 percent a year during much of 1996-2002.the current recovery of private investment does not While the debt stock would grow with increasedaccclerate. Second, Egypt would choose to limit foreign borrowing, the growth of GNP would beforeign borrowing (on a commitment basis) to the much faster, thereby keeping the growth of debtrange of US$ 1.0-1.5 billion a year during 1996-2002 stock well behind the increases of Egypt's capacitydespite the large interest rate differential between to carry and service debt. As under the firstforeign and domestic borrowing. This means that scenario, the debt problem would be well containedthe debt stock will decline in real terms, and (Egypt would remain "moderately indebted.") Therelative to output as well. The outcome of this decline in foreign exchanige reserves (to no less thanscenario is significant. Growth will continue-but nine months of imports) would be moderate,at a slow pace of 4.5 percent a year. Per capita assuming the enlarged current account deficits areincome growth will be constrained. The rapid financed by using a range of financing instrumentsgrowth of the labor force, along with constrained such as foreign direct investment (FDI), portfoliogrowth of private sector investment, will result in investment, and commercial borrowing. Therising unemployment (as shown in table 3.1) and viability of this scenario, as with the base case,probable increases in the spread of poverty. depends on the level of domestic saving. ShouldFurthermore, slow growth of nonoil merchandise domestic saving not rise far enough or quicklyexports (at 5 percent) limits the scope for Egypt to enough to support the growth of privatereduce its reliance on exogenous resources, despite investment, foreign savings would have to be reliedthe large foreign exchange reserves that it holds upon, and inflationary pressure would emerge,against external shocks. increasing Egypt's vulnerability to external shocks.

STRATEGIC OVERVIEW xvii

The benefits of rapid growth achieve growth of exports at 35 percent a year forfive years to just to regain the 0.27 percent share of

The outcome of this scenario indicates that GNP global export trade that it achieved in 1970.in real terms would reach a growth trajectory of A key issue is to determine what policies andabout 6 to 7 percent, and nominal export earnings institutions can help to expand exports, and enable(of non-oil merchandise) would grow at more than Egypt to catch up with the growing trend in15 percent a year. More specifically, the benefits of globalization. Account must be taken of therapid growth through the high growth scenario changing external environment. The global trendinclude: towards a free trade and investment environment

* Reduction in unemployment to 6.4 percent has changed the 'rules of the game.' Theby 2002 as compared with a rise to 14 percent in the technological and managerial changes that havebase case. occurred in the last decade or so have induced the

* A rise in the level of trade integration (export OECD countries to adopt structural reforms toplus import) to 33.1 percent of GDP by 2002 enhance the competitiveness of firms(compared with 25.2 percent in the base case). headquartered in their territories. An increasing

* Reduced vulnerability to external shocks as a number of these firms have in turn becomeresult of decreases in exogenous resources as a multinationals, sourcing from all over the world.share of GNP, from 12.6 percent to 8.8 percent in Competition for markets, investment, and2002 (compared with 9.4 percent in the base case). technology has intensified.

* Increased per capita income to reach $ 1,650 In this context, the ongoing process ofa year by 2002 (compared with $ 1,465 in the base partnership negotiations with the EU is ofcase). particular importance, and can be argued to have

If rapid growth is to be sustained through reduced the options confronting Egypt. Theincreased exports and domestic savings, the extension of large parts of the EU integrationnecessary sound macroeconomic conditions must mechanisms to partnership countries, such asbe maintained. To put the high case in hand, Egypt Morocco, Jordan, and Israel, implies that a Korean-will need to look at the following questions: how to style policy mix-one that relies on protection ofexpand export production and sales rapidly, how to the domestic nmarket with a broad-based drawbackreplenish income generating assets through sound mechanism to allow exporters to compete on worldpricing and management of nonrenewable natural markets-has become less feasible. The trendresources, how to mobilise domestic saving; what toward adopting deeper regional and multilateralsort of instruments and institutions are needed to trade and investment integration, as well as tradeensure efficient intermediation between savings disciplines, implies that firms located in theand investment. partnership countries must become more

competitive on a global scale. As more market-Export and sales push friendly regulatory mechanisms are introduced and

Egypt s export growth has lagged behind that tariffs are gradually eliminated in regionalof global trade. Had Egypt maintained the same rate of economies and worldwide, Egypt has little choiceexport growth as the rest of the world during 1983-93, but to follow suit. The issue iS to what extent andits exports should have reached $ 6.3 billion, rather than over what time frame.$3.1 billion. Constant market share analysis (CMSA) The forthcoming partnership agreement withwas used to estimate this cumulative $ 3.2 billion the EU would give credibility to Egypt's own tradeloss of export eamings and to attribute it to a liberalization efforts and allow a transition periodcombination of factors. Of these the most important for tariffs to be gradually removed. Removal ofhas been Egypt's inability to adapt to changes in nontariff barriers and reduchon of overheadmarket demand (loss of $ 2.3 billion); of lesser business costs would also become critical if theimportance has been her inability to maintain cost export sector is to compete internationally, because tariff

comsor shares in the expanding export liberalization alone may only encourage more importscmpretitivenssof09billion.. . and production for domestic sales. Removal of nontariffmarkets (loss ofac 9 bllion ). Apte wou aver co barriers and reduction of overhead operating costs are

prerequisites for a strong export push, which is key to

xviii EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

Egypt's success in achieving sustainable growth. Our physical capital (machinery and equipment, etc.)recommendations for encouraging exports focus on and natural resources (oil and gas, and so forth).relaxing practical constraints or creating incentives For this reason, the concept of genuine savingin the following areas: has been developed (World Bank 1997). Genuine

* Trade logistics and transportation; saving, simply defined, is gross national saving,* Customs procedures; less depreciation of capital stock, and less depletion* Quality control and product standards; of natural resources. Within this framework, rates of* Attracting FDI; gross national saving will have to be much higher for* Forging buyer-se:ller links; and economies that depend on extraction of natural resources.* Creating export nientality; The need for higher saving rates is apparent from

See chapter 4 for specific recommendations. estimates of Egypt's genuine savings. Valuing thedepletion of oil and gas indicates that total income

Increasing domestic saving generating assets have not increased much in Egypt

Apart from reaching the general conclusion that in the 1990s. In other words, the genuine savingsEgypt could achieve additional per capita growth rate (as a percentage of GDP) is close to zero. Thus,of 2.7 to 3.7 percentage points per year by adopting for economic growth to be sustainable at a highersound policies, several specific policy and level, gross national savings (and investment)institutional issues at the sector levels need to be would have to increase to a level even higher thanaddressed. The central rmessage is that Egypt must that which might be suggested by internationalsave a lot more to maintain its capital resource base- comparison (see table 1.9).that is, to replace the depletion of income gene- Projections of oil and gas production indicaterating assets resultng from the extraction of oil and that Egypt's income from resource extraction couldnatural gas. Further, Egypt can save a lot more increase over the next several years, due tothrough prizatization and reforms of public enterrises, substantial growth of gas production, but wouldthrough strengthening jfinancial instruments and then gradually fall. Egypt could become a netinstitutions for long-term saving, and through efficient energy importer by the year 2010, in light ofintermediation between savings and investments. increasing domestic energy demand. The extent to

Implications of resource extraction for saving and which economic growth would be affecteu by thecapital fornation. Egypt derives a large share of its future decline in rent income could depend onnational income front the extraction of nonrenew- policies adopted now that will affect how theable natural resources, such as oil and natural gas. current rent income is used.The production of oil and gas averaged about 10 Historically, a substantial share of the rentpercent of Egypt's GDP and 50 percent of its income has been distributed in the form of implicitmerchandise export each year during the 1990s. The subsidies to petroleum product and natural gasoil and gas reserves are national assets that consumers. These are estimated to be 45 percent ofgenerate income (rental) to Egypt.4 Because of the resource income in 1991 and 24 percent in 1995.decline in international prices of oil during the past Since subsidies result in inefficient use of energyfive years, the rent as a share of GDP declined from resources, the rate of return on the energy subsidies14 percent in 1991 to 8 percent in 1995. However, is estimated (based on cross-country data) to bethe change in the international prices of oil negative at -5 to -7 percent. In contrast, returns tonotwithstanding, the income derived from expenditure in education, and to infrastructure thatextracting oil and gas is bound to decline as the facilitates private investment in productive assets,reserves are being gradually depleted. Other forms normally exceed 10 to 15 percent.of capital will have to be created to replace the The policy implication is clear. Egypt couldincome from oil and gas if the growth of national maintain its income generating assets by directingincome is to be maintained. Therefore, the resources toward human and infrastructureframework of national accounts needs to be investment. To do this, Egypt can continue to reduceadjusted to account for the depletion and/or the implicit energy subsidies that result in more rapidaccumulation of income generating assets such as depletion of energy resources and low resource efficiency.

STRATEGIC OVERVIEW xix

How much saving can come from privatization and of saving in the next 15 years by about 24reform of public enterprises? Privatization could percentage points, or roughly 1.6 percent a year.increase savings, in part because the transfer of 7his demographic trend is likely to increase the operatingownership to the private sector is associated with surplus of the social insurance system) making this ahigher productivity. Higher productivity generates good opportunity for Egypt to implement much neededmore resources that can be consumed or saved. pension reforms. The need for these has been brought toAlso, privatization may attract more savings from the fore by the problems of the country's emergingabroad, as happens when specialized multinational financial markets.firms buy such enterprises as telecommunications. The problems, many of them common to theBeyond these effects, privatization could stimulate financial markets of other developing countries,saving indirectly; if the proceeds from sales are include a concentration of investments inused to retire public debt, this could lead to lower government securities, underdeveloped long-termtaxation with favorable effects on public saving. savings instruments, and a lack of competitionAnother positive effect is improved competitive- among contractual savings institutions. Theseness of other industries if privatization lowers the problems have the effect of limiting private savingcost of producing intermediate goods and services. as evidenced in the underdevelopment of principalFinally, privatization can contribute to saving by instruments of pensions funds and life insurance.boosting capital market development, which has By ending government intervention in portfoliobeen shown to contribute positively to growth. allocations, Egypt has already undertaken the first

A sample of Egyptian public enterprises (PEs) of two actions required to bring private savings upanalyzed indicated that assuming enterprise profits to full potential. The second is to encourage theincrease because of investment and productivity development of more flexible and competitivegrowth, privatization and commercialization of the long-term saving instruments and institutions. Thesample would bring additional annual savings to latter is essential fo: encouraging long-term privateEgypt of about 2.4 percent of GDP (see table 6.1). saving and for more efficient intermediationMore significandy perhaps, since the sample of between investments and savings.Egyptian PEs analyzed only represents about a The following will focus on three institutionsthird of the sector, the gains could be as high as 7 that are key to the development of private long-percent of GDP, which is about the amount Egypt term saving: pension schemes; contractual savingsneeds to match the saving/investment ratio to GDP such as life insurance; and the capital market. In theof the fast-growing economies. first instance, evidence from other countries shows

Moreover, the sample analysis indicates that that generous pay-as-you-go state pensions tend tothe results are sensitive to variations in investmnent depress household saving, and that a mandatory(see table 6.4). This not only suggests that the gains saving scheme is most likely to increase householdfrom investment in the course of privatization are saving. Second, sound contractual savingsignificant, but also that care must be taken to institutions, such as the life insurance industry,ensure that investment will be forthcoming. The tend to favor the formation of long-term financialdesign of privatization transactions should commit assets over fixed assets such as real estate, therebythe new owners to an investment program, where enabling households and private corporations toappropriate, to maximize the gains to society. borrow long term; this may indirectly contribute to

increased private savings. Third, development of aWhat policy and institutional changes will capital market both supports and is supported byencourage long-term savings? the development of contractual saving institutions.

It could augment domestic saving by attractingEgypt's level of saving is likely to be boosted by foreign savings.

its demographic trends. It is estimated (usingdemographic data and GDP growth rates during Social insurance1960-94 to explain changes in saving rates in aneconometric model) that the rising share of The social insurance system (SIS) provides oneworking-age population, and the declining share of of the most important sources of long-term savingchild dependency, will both contribute to increases in Egypt (with contributions at 3.5 percent of GDP

xx EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

in 1994/95-a very low level compared with many both employers and employees. The number ofother countries). It effectively works as a pay-as- employees covered more than doubled during theyou-go system. It has been producing an operating period 1990-95, to almost 0.5 million. About 48surplus in the last 10 years due to the high ratio of percent of the assets of the private funds are incontributors to pensioners (see table 6.5). This fixed bank deposits, while another 42 percent areoperating surplus has been invested, via the invested in government bonds. Only about 7National Investment Bank (NIB), in government percent are invested in equities and real estate.projects and, until recent years, in public Lack of professional investment managemententerprises as well. Social insurance funds (new capacity, the dearth of financial instruments, andand reinvested) accounted for 68 percent of the the risk-averse nature of these funds have led to thefund sources of NIB during the past five years (see concentration of investments in bank deposits andtable 6.9). government paper.

NIB used to pay interest on the SIS funds at 5 to Refonning the social insurance system. The6 percent per year, even though inflation was about working age population will continue to grow, andthree times higher. This represents significant SIS is likely to maintain its operating surplus. rhiserosion of the real purchasing power of the reserves provides a favorable environment in which reformsat the SIS and a net subsidy to NIB. Starting July should be implemented without delay.1992, NIB raised the interest rate on incremental SHORT-TERM PROPOSALS: In the short- tosocial security funds (including reinvested reserves) medium-term, the proposed reforms would aim toto 13 percent, providing a positive real rate of improve the efficiency and solvency of the existingreturn over the average inflation during 1992-96 of system. There are three priorities. The first is toabout 10 percent. improve the transparency with which the

The contribution rates under the SIS are high government uses SIS resources; the second is to(on the basic wage) relative to the pension benefits develop a portfolio and investment strategy thatand the insurance it provides. The eligibility criteria supports capital market development without.for retirement in Egypt: (age 60 for both men and compromising safety; and the third is to improvewomen, under the major programs of Law 79/47) is the efficiency and sustamiability of the SIS bylower than that of OECD countries (whose average correcting certain design deficiencies. See chapter 6retirement age is 64.4 years for men and 62.9 years for specific proposals.for women), but comparable with many developing LONG-TERM PROPOSALS: A country's socialcountries. Redistribution has been made by security system typically has three major objectives.providing pensioners from the agricultural sector- The first is to enable the population to shift incomeabout 45 percent of total pensioners in 1995-with from working years to old age (savings). Thethe equivalent of minimum wages (LE 45 per second is to protect those with low incomes bymonth), and by setting a minimum pension for providing a basic income floor during old agethose with a certain number of years' contribution. (redistributive or poverty alleviation). The third is

Pensions on basic wages are fully adjusted, to insure against certain types of risks, such aswhile those on variable wages are not. Over the disability, longevity, and inflation (insurance). Inperiod 1987-96, the adijustments mandated by the order to achieve all three objectives, it is recom-legislature preserved the purchasing power of the mended that a multipillar system be put in placebasic pensions for most of the 10 years; however, consisting of:pensions on variable wages are not automatically indexed - A fully-funded mandatory defined benefitor adjusted by the legislature, in line with inflation. public pillar that insures workers' earnings up to a

Private pension plans provide a strong certain level.complement to the social insurance system. The * A mandatory defined contribution privatenumber of voluntary private pension plans has pillar that insures workers' wages above a certainbeen increasing significantly- as of June 30, 1995, level.there were 504 plans, compared with 330 in 1991. * A purely voluntary scheme that couldThese plans are typically set up by employers on a supplement the first two pillars. In addition, thedefined benefit basis, with contributions made by development of a more competitive and stable

STRATEGIC OVERVIEW xxi

insurance industry should be encouraged to control with price reporting. The deregulation ofprovide many accompanying services, such as life most insurance products shifts the focus ofand disability insurance and annuity products. supervision to solvency monitoring. The

The public pillar would provide a minimum regulations are basically in line with internationalretirement income while the compulsory and (especially EU) practices and definitions. However,voluntary private systems would enable workers to solvency monitoring requires good information andsupplement the pension from the public pillar. The technical capability on the part of the supervisor.consumption tax principle should be applied fully The reform proposals. Following these regulatoryto all contributions and benefits, depending on how reforms and current efforts to strengthenthey are distributed. See chapter 6 for details. supervisory capacity, the next generation of reform

efforts should focus on the issues in competitionContractual savings-insurance and ownership structure. Specific actions that EISA

may consider include:The insurance industry in Egypt is still Allowing the entry of new firms-including

underdeveloped-life insurance premiums to GDP foreign insurance companies -as long as they meetwere an insignificant 0.2 percent in 1995- the licensing criteria, to encourage morecompared with 6 percent for average OECD competition. (This means that the 49 percentcountries. Total assets to GDP of all insurance maximum ownership by foreign firms should becompanies (life and nonlife) in Egypt were about 4 abolished).percent in 1995, while life insurance assets alone-were 38 percent of GDP for average OECD * Providing level treatment for both state-countries. There are 10 insurance companies in owned and private insurance companies.Egypt, of which eight transact all classes of D Focusing on disclosure requirements to theinsurance and business, and two transact only public on prices and commissions to complementnonlife. The industry is highly concentrated and the liberalization of product prices andvirtually under state control. The largest state- commissions.owned company coi itrols 50 percent of both life and See chapter 6 for other specific details.aonlife business, and the largest three state-ownedcompanies account for 93 percent of life and 89 The role of the capital marketpercent of nonlife markets. In the past, directforeign ownership was only allowed in those The principal role of a capital market is to mnakecompanies operating in Egypt's free trade (export savings mnore readily and clieaply avoailable to investorsprocessing) zones. Currently, regulations place a 49 by creating liquidity and reducing transaction costs.percent limit on foreign ownership of direct Capital markets allow investors a wide range ofinsurance companies and no restrictions on foreign instruments to finance investment, and savers haveownership of reinsurance companies. Total more alternatives than bank deposits, preciousinvestment of the insurance industry as of June 30, metals, or real estate.1995 was LE 5.4 billion, representing 2.6 percent of The development of capital markets in EgyptGDP. Lack of financial instruments and both supports and is supported by theconservative investment policies have led to very development of contractual saving institutions. Ashigh concentration of investment in bank deposits discussed in the previous sections, the investmentsand government securities. of private pension funds and insurance companies

A new law on insurance was passed in 1995, have been mainly in government securities andand in June 1996, a new set of regulations was bank term deposits. Capital markets would allowissued by the Egyptian Insurance Supervisory greater diversification and perhaps higher yieldsAuthority (EISA). Among other things, thelaw for these investments, thereby improving therequires distinction and separation of the reserves financial performance of contractual savingfrom life insurance and nonlife insurance institutions; this should result in greater benefits tobusinesses in companies that operate in both savers in the form of lower contribution rates tomarkets. The new regulations also deregulated the pensions schemes and lower premiums forpricing of most insurance products, replacing price insurance. At the same time, pools of funds from

xxii EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

contractual saving institutions could be tapped emerging as major low-cost competition in thethrough capital markets to finance investments. world market. With the technological revolution in

In addition, active capital markets provide an information and communications, and theenabling environment for attracting foreign conclusion of major regional and global tradesavings. The existence of liquid capital markets agreements, the barriers to exchange among nationsgives a foreign investor better exit options, thus are being rapidly reduced. Accelerating growthencouraging more froreign direct investment. through maintaining a stable macroeconomicForeign portfolio investors would focus on actively environment and implementing bold and rapidtraded securities in the stock market. With private structural reforms will prepare Egypt well for thecapital dominating the total capital flows to challenge and opportunities of the twenty-firstdeveloping countries, and an increasing shift century.toward equity financing, the development ofcapital markets becomes essential in attracting Notesprivate foreign savings. But the risks inherent inforeign savings would be kept to a minimum ifforeignsavings augment, rather than replace, domestic saving. 1. The vulnerability is economy wide, as

Finally, the development of capital markets and externally-induced sudden changes in earningsthe process of privatization are mutually from tourism, workers' remittances and exports ofreinforcing. Capital markets provide more options oil and natural gas affect the balance of payments.for divestiture, while privatization increases the However, the largest volatility arises from officialsupply of securities in the market, tlhus providing transfers impacting particularly strongly onthe securities market with more depth. The govermnent financing.deepening of capital markets-as reflected in 2. The debt estimate includes *he net governmenitincreased market capitalization .o GDP, greater borrowing from the National Lnvestaent Bank.liquidity (higher turnover to market capitalization), 3. Under these circumstances, debt dynamics areancd less concentrauion of market activity on a few unstable. Suppose that the government tightensstocks-would enable capital markets to absorb the monetary policy by reducing its rate of printingexpected increase in portfolio investments from money and increasing borrowing. The debtboth domestic and foreign sources and would increases; either deficits will be higher in the futuremitigate against the extreme movements of asset or the government will have to print more moneyprices and the drastic reversal in portfolio flows. in the future to keep the deficit constant. If the

Facing the twenty-first century future deficits are to be held constant, the increasedprinting of money in the future will mean more

Egypt is poised for accelerated growth into the inflation in future. Generally, the expectation oftwenty-first century. H-ler prospects are good, but future inflation increases current inflation.global competition has intensified. Eastern 4. This rent is defined here as the differenceEuropean countries and states of the former Soviet between the economic value of the reserves and theUnion are rapidly integrating in the world cost of production and normal returns on capitaleconomy, and both China and India have been equipment.

STRATEGIC OVERVIEW xxiii

Chapter 1Employment and growth-an overview

After suffering reversal in the latel980s, Egypt has successfully recapturedgrowth through macroeconomic stabilization. To boost employment and integration

with the global economy, she must sustain and accelerate the current expansion. Hermost promising route to rapid growth is to achieve a virtuous circle of growth,

saving, and investment through higher public saving and structural reforms.

E~'gypt achieved unprecedented economic down to below 10 percent in 1995. MacroeconomicE growth during 1975-85 following the stabilization led to a strong recovery. GDP growthadoption of open door policies boosted by sizable rose from the stagnation of the early 1990s, toincreases in foreign assistance, workers' 4.7 percent in 1995, and continued its upwardremittances, and foreign direct investment. This momentum into 1996 (table 1.1).ended in 1986, as a result of Egypt's remaining Notwithstanding these developments, Egypt'sinward-oriented economic policies and a regional long-term challenges remain daunting. At present,economic slowdown brought about by the decline official estimates of unemployment stand at aboutin the price of oil. Egypt experienced a dramatic fall 10 percent. Over the next ten years, there will bein growth and severe macroeconomic imbalances. yearly increases of more than one million in theIn the early 1990s, per capita income grew by a working-age population. The numbers of thosemodest 10 percent from its mid-1980s level. Both entering the labor force (assuming a constantpoverty and unemployment remain high. participation rate) will expand at 2.8 percent a year.

The Egyptian government responded by This will amount to, about 560,000 new job-seekers,adopting adjustment policies to stabilize the more than one-fourth of whom will be of the 15-24economy and restore growth. The first phase of the age group-a most politically vocal and activestabilization policies has been highly successful. segment of society. Thus, it is essential for Egypt toFiscal deficits have been reduced, and the external create jobs and income opportunities to meet thecurrent account deficit has been kept at low levels. rising expectations of the younger generation.At the same time, restrictions on capital movement Economic growth offers an effective response toand interest rate controls have been lifted. With the this challenge. Our estimates show (table 1.2) thateffective fiscal adjustment and management of Egypt could reduce unemployment to 6.4 percentsound monetary policies, inflation was brought with GDP growth of 6.5 percent a year from now

TABLE 1.1Selected economic indicators, 1990191-1995196(percentage of GDP, unless otherwise noted)

Indicator 1990191 1991/92 1992193 1993/94 1994/95 1995/96'

Real GDP growth rate 3.6 1.9 2.9 3.9 4.7 5.0Inflation (change in CPI) 14.7 21.1 11.1 9.0 9.4 7.2Consumption 85.9 83.0 83.3 84.9 83.1 86.0Investment 23.3 18.2 16.2 16.6 16.3 16.7Govemment investment 13.4 8.5 7.0 6.1 5.5 5.5Domestic saving 16.0 17.0 16.7 15.1 16.9 13.9

Overall fiscal balance (exduding grans) -18.1 -5.4 -3.5 -2.1 -1.2 -1.3Current account balance (induding transfers) 5.2 4.1 5.1 0.2 0.6 0.2Official reserves $ billons 6.1 10.6 14.9 17.0 17.9 18.4

Extemal debt/GOP 107.7 89.5 69.2 58.0 55.7 49.2a. Estimates.Source: From data provided by Ministry of Planning, Ministry of Finance and Central Bank of Egypt

until 2002. Otherwise, with GDP growth at the level therefore its demand for both tradable andof 2 percent a year, Egypt will have to contend with nontradable goods. While prices of nontradableunemployment rising to 20 percent of the labor goods (such as land and labor) are not constrainedforce by 2002. by international market forces, and are relatively

free to adjust in the domestic market, prices of

TABLE 1.2 tradable goods (such as food and vegetables) areGrowth and employment constrained by those forces. Thus, transfers from

Rate 1995 1997 2002 abroad would give rise to higher prices of goodsRatmployment (percentage )1995 1997 2002 that cannot be traded internationally than of goodsUnemployment (percentage) 9.6 nl.a. n.a.At 2 percent of GDP growth - 11.0 20.0 that can. Other things being equal, this sort ofAt 4.5 percent of GDP growth - 10.3 14.0 relative price regime would encourage productionAt 6.5 perr;ent of GDP growth -9.0 6.4 of nontradable goods at the expense of tradable-Not available. goods, including goods that can be exported. Thisn.a. not applicableNote: Key assumptions: population growth rate of 2.1 percent p.a.: labor force would lead to a larger resource gap (that is, moregrowth of 2.8 percent pa.; and a participation rate of 47.2 percent. imports of goods and services than exports), andSource: Base year information for 1995 was provided by CAPMAS; iprso od n evcsta xot) nremainder from staff projections. thus lower domestic saving. Furthermore, transfers

from abroad could be sources of income volatility

The Egyptian government has formulated a set or uncertainty and affect the level of domesticof sound economic policies to accelerate economic saving, because societies generally tend to smoothgrowth to above 7 percent by the year 2000, and to their consumption over time. Declines in theirsubstantially reduce poverty and unemployment income, particularly if perceived as transitory, needover the medium term. Egypt has the opportunity not lead to a proportional cut in consumption; inand the potential to achieve the growth target set most cases saving is likely to be compressed first.by the government. World trade is growing at a Thus, achieving long-term self-sustaining growthrapid rate, regional peace seems to be evolving, the requires that Egypt tackle these structuralEU is seeking closer cooperation with the region, problems, and adopt policies to encourageand large amounts of international capital are domestic saving and to accelerate growth ofavailable for financing productive investment. exports.Egypt, as a force for peace in the region, and being Saving, investment, and growth-a virtuousclose to key markets of the world, could capitalize circoton these developments and become a center of circlegrowth and investment for the Middle East and How can Egypt achieve higher rates of growth?

North Africa region. This, however, would require One prerequisite for rapid growth is high levels ofthat two long-standing structural problems be investment (table 1.3) associated with high levels ofeffectively tackled. They are: domestic saving. But this is not sufficient, since a

* Reliance on exogenous resources (remittance country's economic growth can exceed or fall below

income, Suez Canal income, exports of oil and gas, the level predicated by its level of investment. Theand foreign assistance) to finance domestic repancies,expenditures, creating vulnerability to external disc as shown intlen1.3, ectntheshocks. other important factors influencing economic

sh Lowlevelkofsdomestic.saving, and growth and these are indicated in the per capitaLow level of investment; thevresultant income growth equation spelled out in the note.

consequent , . , , , Across countries and over time, higher growthslow accumulation of production factors, both rates are associated with higher investment; higherhuman and physical, clouds Egypt's long-term investment with higher saving; and higher savinggrowth prospects. svinggrowth prospects. ~~~with higher growth rates (World Bank 1993a;

The lack of domestic saving has been associated v wit higher grtherat es (od a 1gheaEdwards 1995). Furthermore, countries with higher

with the relance on exogenous resources, that is, levels of per capita income tend to save and invest aprivate and official transfers from abroad. The larger fraction of their national income. While thesereasons are twofold. First, transfers from abroad e

wouldincrase Eypt' dometic ncome and empirical relationships are well established, there islittle agreement among economists about how to

2 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

interpret them, in particular the exact there is good reason to expect that higher savinginterrelationships among saving, investment and (=investment) leads to higher growth, and thatgrowth, and directions of causality. Policy makers increased saving provides more resources fordo not have to be preoccupied with the exact capital investment, which accelerates growth atmechanisms affecting saving investment and least temporarily, and perhaps permanentlygrowth; what matters is whether the same policies (Harrod 1959).aimed at encouraging investment also encourage While saving causes growth in this proximatesaving. sense, there is no agreement on what causes saving,

or whether there is reverse causality from

TABLE 1.3 investment and growth on the one hand, to savingPer capita income growth performance, 1980-93 on the other. Deaton (1995) explains how this could(percentage) happen:

Per capita Actual relative The international correlation betweengrowth to expected Investment to GDP growth and saving rates comes from the

Country (percentage) growth ratbos (percentage) response of growth to investment, asChina 8.2 (+++)41 predicted by a variety of growth models.Hong Kong 5.4 (++) 27 Saving responds passively to investmentSingapore 5.8 (++) 44 through mechanisms that are at present notThailand 6.5 (+) 40 well understood. A likely candidate is theIndonesia 4.1 (-) 28Malaysia 3.7 () 33 saving behavior of firms or smallChile 3.4 (.) 26 entrepreneurs, who retain profits in order toPakistan 3.2 (+) 21India 3.2 (+) 24 finance investment. In any case, such savingSn Lanka 2.5 (-) 25 is done, not by the mass of households, who

eypat 2.3 () 17 play little part in the process of aggregateEgypt 2.3 H 17 ~~~~~~~accuinulation, but by a few relatively well-

Note: The per capita income growth equation is estimated as follows: gdpeap= a+b GDPCAPUS+c INVGDP+d OPEN+e labpop+f PRENR70+g SCENR70: off people or by firms.where gdpcap is GDP per capita growth rates; GDPCAPUS is per capita GDP This view suggests a virtuous circle. Highin sample countres relative to the United States at the beginning of timeperiods; INVGDP is gross domestic investment to GDP; OPEN is a dummy investment leads to rapid growth, which increasesvariable for openness as defined in Sachs and Warner (1995); labpop is growth the profits of firms and As asin labor force relative to growth in population; PRENR70 is primary enrollment entrepreneurs. longrates in 1970; and SCENR70 is secondary enrollment rates in 1970. The growth is anticipated to continue, these agents savesample is 35 low- and middle-income countnes in Asia, Middle East and NorthAfrica, and Latin America, and is pooled for the two periods 1970-80 and and invest a large fraction of their profits. In thlis1980-93. way, saving, investment, and growth are mutually(+), (.), (-) indicate actual growth was higher, equal, or lower than expectedgrowth. reinforcing. If one accepts the "mutual causality"Source: WDR 1995, and staff estimates. argument, then the policies that promote growth

and investment will also be ones that promoteThe answer appears to be strongly affirmative. saving.

Both theories and empirical evidence support the It is easy to see how a virtuous circle can keepview that there is very little deviation of saving going once it has started, or alternatively, how afrom investment rates (Feldstein and Horioka country can get stuck in a low saving-investment-1980). This holds for both developing and growth trap. It is more difficult to see how adeveloped countries. Hence, the same factors country can accelerate growth once it is entrenched(country characteristics and policies) that determine in a low saving-investment-growth trap. Thissaving also influence investment in the same question has been addressed by examining factorsdirection. In other words, the factors that create a and policies associated with the emergence andgood climate for investment also create a good maintenance of a virtuous circle.climate for saving. Although it is difficult to sort Higher saving, investment and growth seem toout at the macro level the different determinants of depend on certain policies and countrysaving and investment, a good model that explains characteristics. First, macroeconomic instability-investment across countries and over time will also evidenced by high inflation, large budget deficits,be a good model that explains saving across and overvalued exchange rates-was found to becountries and over time. From this point of view,

EMPLOYMENT AND GROWTH-AN OVERVIEW 3

detrimental to both the quantity and the efficiency investment to GDP ratios that were 5 percentageof investment (Fischer 1993). Second, countries with points higher than those of closed countries, andrapid growth of private investment and per capita experienced per capita GDP growth rates thatGDP are ones whose governments invested in averaged 2.5 percentage points higher than those ofinfrastructure financed out of national revenue closed countries after controlling for determinants(that is, government saving). These are also of growth such as education and investment (Sachscountries with less nonproductive government and Warner 1995).consumption and less noninfrastructure public In short, good economic management isinvestment (that is, in state enterprises). After associated with the virtuous circle of higher saving,controlling for these variables, various tax higher investment, and faster growth of GDP.measures had no significant association with Elements of good management include: lowgrowth or investment. This latter finding suggests inflation, low fiscal deficit, public expendituresthat taxation is not an obstacle to investment if the targeted to productive areas, and openness toresulting income is used for infrastructure external trade. The mechanism at work is probablyinvestment or productive expenditures on that these good policies spur investment by makingeducation or protection of property rights (Easterly it more profitable, and also increase the growthand Rebelo 1993). Third, there is a strong impact of any given level of investment by makingassociation between the degree of trade openness it more productive. Over the long term, it may beand rates of per capita growth.' that saving responds passively in the way

Although openness is good for growth, many envisioned by Deaton above. Of course, some of thefear that there will be significant and immediate good policies spur saving directly. The mostnegative consequences in going from closed to open obvious example is government saving, which is aeconomies. The short-run national effects on direct contribution to national saving, according toaggregate output and employment of opening a the experiences of many countries. But othercointry to external trade depend importantly on policies, such as trade liberalization or reform of theinitial conditions. These include the macroeconomic regulatory regime, also have a direct effect onsituation and the relative competitiveness of saving by increasing the returns to saving,existing industries. In the short run, the relative strengthening property rights, or reducingrates of job creation in expanding sectors and job transaction costs.loss in declining sectors are importantconsiderations. The production and investment Trade openness and investment-friendlydecisions of enterprises that determine this are a policies for a higher growth trajectoryfunction of the flexibility of the labor market. Thegreater this flexibility, the more rapid the To what extent could Egypt boost itself onto aadjustment and the lower the net effect on higher trajectory of growth by adopting policiesemployment. Hence the flexibility of labor markets associated with the virtuous circle? The results ofis crucial for reaping the benefits of trade reforms. empirical growth analyses using panel data3 fromEmpirical studies suggest that the output response the World Bank and other sources can be used toto significant trade reform can be rapid, with per analyze the key policies that have affected Egypt'scapita incomes rising in the period immediately growth performance, and to identify areas of policyfollowing trade liberalization. 2 reform that could put Egypt on a higher trajectory

In the longer run, open economies tend to have of long-term growth (Dollar 1992).more rapid capital accumulation, higher export The results of empirical growth analyses fromgrowth rates and more rapid increases in real two different sources (Dollar 1996, and Sachs 1996)wages. Consequently, lower-income countries with show that Egypt could achieve 2.7 to 3.7 percentopen policy regimes tend to attain higher rates of higher per capita GDP growth by emulating theper capita income growth. Openness to external economic policies adopted by same East Asiantrade is associated with both higher output growth countries (table 1.4). Table 1.5 shows the regressionper capita, and higher output growth per worker. results (Dollar 1996) derived from the growthCountries with open policies in 1970-89 had performance of 86 countries over the period 1966-

4 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

93. The results confirm that a large fiscal deficit, 1985-94, compared with 1.3 percent for Egypt.high government consumption, and high inflation Indonesia is also far more involved in internationalall have a negative relationship with growth. A trade, with commodity exports of 23 percent ofblack market premium (BMP) on the exchange rate GDP in 1994, and has an export base more diversi-as a proxy on inflation also has a negative fied from exports of oil. The comparable figure forrelationship with growth. Egypt was only 6.4 percent. Finally, Egypt receives

TABLE 1.4 far more foreign aid: 6.4 percent to GDP in 1994,Average tariff rates in Egypt and selected East Asian compared with 1.0 percent for Indonesia.economies Table 1.7 shows the extent to which Egypt(percentage)Egp

could boost its economic performance by emulatingCountry Average tariff rates the policies already adopted by Indonesia. TheIndonesia 6.0 differences in macroeconomic policies and in tradeRepublic of Korea 4.0 openness account for an estimated 2.7 percentageMalaysia perenagThailand 9.3 points in growth. The actual difference in growthEgypt 30.0 was 5.2 percentage points. The impact of EgyptSource: UNCTAD-Trade Analysis and Information System Data on CD- being less open to trade is estimated to be

2.0 percent lower real per capita GDP growth rateTABLE 1.5 per year over the period of 1966-93. The impact ofGrowth and policies in 86 countries, 1966-93 other policies, the size of government saving,Variable (1) (2) (3) (4) (5) (6) consumption, and macroeconomic stability asPolicy 0.06 .. 0.08 0.08 0.06 0.08 measured by the BMP on the exchange rate, isvariables estimated to be 0.7 percent.

Budget (2.34) (3.41) (3.19) (2.27) (2.99) In an alternative empirical analysis of a samplesurplus of 49 countries, per capita GDP growth over the

Govemment 4.06 -0.09 -0.05 -0.07 -0.02 period of 1992-95 is estimated as a function ofconsumption initial per capita income, the national saving rates,

(2.16) (3.29) (1.82) (2.38) (0.77) and an overall index of market efficiency. The latterInflation -0.01 -0.02 -0.01 35)-0.02 -0.02 is based on the following indexes: openness of the

BM(2.63-6 -3.426 -2.350 9 3 .47 (3.1) economy to trade and financial flows, size of

(0.87) (0.67) (1.31) (2.41) (1.06) government, and degree of labor market flexibility.

Openness 0.02 0.02 0.18 0.02 0.02 TABLE 1.6(7.00) (7.29) (6.69) (7.21) (7.05) Egypt and Indonesia: comparative indicators

R2 0.27 0.26 0.26 0.26 0.27 0.18 Indicator Egypt Indonesia.. Not available. Population (millions) 56.8 190.4Note: The policy variables are dropped one-by-one in order to assess the Per capita GNP (1994 Intl. $)a 3,720 3,600robustness of the results, which appear to be robust. Dependent variable: Gini coefficient 32 32growth rate of real capita GDP n=86 countries, 7 time period (four-year Infant mortality 52 53averages). Included observations = 474. (per 1,000, 1994)Source: Dollar (1996). Primaty school

enrollment 1993In analyzing growth performance, the East Female 89 112

Asian economies are often taken as a reference Male 105 116point to which other countries' policies and growth Secondary school

enrollment 1993performance are compared. In this report, Indone- Female 69 39sia is taken as a relevant comparator for Egypt, Male 81 48

InvestmentlGDP 1994 18 29since the two have similar country characteristics. (percentage)Table 1.6 provides some basic descriptive data. Saving/GDP 1994 6 30Both are large countries with similar per capita (percentage)

FDI/GNP 1994 (percentage) 2.3 4.2gross national product and social indicators, parti- ODA/GNP 1994 (percentage) 6.4 1.0cularly very similar human capital bases. They dif- Exporls/GNP 1994 8.1 22.9fer in that Indonesia has been growing much more (percentage)rapidly, with 6 percent per capita growth during GNP per capita in intemational dollars is converted at purchasing power

Source: Dollar (1996).EMPLOYMENT AND GROWTH-AN OVERVIEW 5

TABLE 1.7 given current income levels (GDP per capita atGrowth and policies in Egypt and Indonesia, 1966-93 purchasing power parity in 1993) and current

market efficiency; and (2) the projected growth rateEstimated for Egypt for current income levels but an

Policy Egypt Indonesia ImpactPoiy gpt Idoeia ipat improved market efficiency index equal to theGrowth of real per capita GDP 0.2 5.4 n.a.Budget surplus (percentage of GNP) -5.4 -1.0 03 average for the East Asian economies. According toGovemment consumption 14.1 9.5 0.3 the regression estimates, improvement in Egypt's(percentage of GNP) market efficiency to East Asian standards would

Inflation (percentage) 16.5 7.7 0.1Black market premium (percentage) 11.6 10.7 0.0 raise annual per capita growth by some 1.9Open no yes 2.0 percentage points per year, to an overall predicted

Total impact of policies na. n.a. 2.7 rate of 4.55 percent per year. If Egypt also had then.a. Not applicable, saving rate of the seven Asian economies, per

capita growth would reach 6.33 percent.Although the coefficients vary somewhat

The overall index of market efficiency ranks the 49 depending on which additional variables arecountries in terms of more openness, smaller included in the analyses, the general point is quitegovernment (as measured by government robust. Egypt could buy itself about 2.7-3.7 perexpenditure as percentage of GDP, and various capita GDP growth per year if it emulated therates of taxation), and more flexible labor markets. policies adopted by the fast growing East AsianAmong the 49 countries, Egypt ranks 22nd on economies, including of course Indonesia. Theopenness (with a rank of 1 being the most open), effects of these policies on saving may be quite31st on size of government, and 40th on flexibility indirect in that, for example, trade reforms and

TABLE 1.8Regression estimates for Egypt TABLE 1.9(dependent variable: real per capita GDP growth 1992-95) Growth counterfactuals

Independent vanables Seven AsianIndependent variablesVariable Egypt Percentage economiesLog inital income -1.17 (-2.58) intali 2.77 3.67Saving rate (1995) 0.098 (2.20) Log inibal income 2.77 3.67Efficiency index 2.75 (3.17) Saving rate 1995 16.84 35.01Constraint 4.59 (2.18) Effidency index 0.142 0.563R2 0.404 Growth 1992-95 -2.26 6.33N 42 Egypts predicted growth rate (1992-95) = 2.61Source: Sachs (1996). Predicted growth if Egypt had efficiency index of

the seven Asian economies: 2.61+1.94 =Predicted growth if Egypt also had the saving rate

of labor markets. The average score of the East of the seven Asian economies: 4.55+1.78= 6.33Asian economies4 would rank 25th on openness, Source: Sachs (1996).

third on size of government; and ninth on flexibility(Sachs 1996'. macroeconomic adjustments directly spur(Sachs 19). investment and growth, and these in turn

The basic regression for Egypt is shown in table enuae angrothe ev d pved above1.8. As expected, initial income enters with a show tat se plc eforms arevan efcve

siniicn neaiecefcet:poe.onre shows that these policy reforms are an effectivesignificant negative coefficient: poorer countries way of spurring saving in the long run (table 1.9).tend to grow more rapidly, all other things being Key elementsaof the policies th at ll prootequal. Also, as expected, more efficient economies got and t fore investmet and srvmogs(that is, those with a higher score on the efficiency include:index) tend to grow more rapidly. According to thisequation, Egypt's growth is held back by its * Macroeconomic policies that ensure a stablerelatively poor ranking on the various components macroeconomic environment, high public trade,of market efficiency. To estimate the growth and national savings.consequences of Egypt's efficiency index, * Trade policies that encourage growthregression estimates were used to calculate two through outward orientation.growth rates: (1) the predicted growth for Egypt

6 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

* Financial policies and infrastructure that Notesestablish strong incentives for long-term privatesavings. 1. Openness is usually measured by the extent of

Egypt's most promising route to rapid growth is the integration in the world economy, as reflected inachievement of the virtuous growth, saving and variables such as trade to GDP ratios, the level ofinvestment circle through higher public saving and trade barriers, and the relative importance ofstructural reforms. Higher public saving is needed to foreign direct investment and intra-industry trade.finance the initial growth; accelerated privatization, 2. Using a large cross-country dataset, Sachs andwith sale proceeds used to retire public debt, would Warner (1995) found that economic growthallow reduction in interest costs, and raise public increased by an average of 1.3 percent following thesaving. Trade liberalization, a critical element in the opening of the economy.structural reforms, would give probably the largest 3. The panel approach will enable us to pick upimpetus to further growth, which would in turn not just cross-country variations, but also variationsstimulate private saving, particularly through the over time for each country, thus giving increaseddevelopment of long-term saving instruments and confidence that the relationships being examinedinstitutions. can be exploited by policymakers.

4. Hong Kong, Rep of Korea, Taiwan (China),Thailand, Philippines, Indonesia, and Malaysia.

EMPLOYMENT AND GROWTH-AN OVERVIEW 7

Chapter 2

Post-stabilization macroeconomicpolicy-managing success

But the success of stabilization brings other problems that threatenthe recovery by boosting exchange rates and discouraging exports. Egypt

shouldfocus in the short term on addressing the adverse effectsof capital inflows and protecting the soundness of the banking system.

If a sound macroeconomic environment is a The program was set up along orthodox lines: anecessary condition for achieving higher long- strong improvement in fiscal performance

run growth, has Egypt obtained this condition? If provided the leeway to sustain a tight monetaryso, how can Egypt sustain it, and protect it from policy. Fiscal stringency was achieved through bothexternal shocks? expenditure restraint and revenue measures, and

was further facilitated by important concessionsRecent developments that the Paris Club made on Egypt's external debt.

The first phase of the stabilization program canMacroeconomic balances. Egypt has gone through now be considered as successfullv concluded.

major changes since the reform process was Investor confidence in the economic policiesinitiated in 1991. Inflation, which hovered between followed by the government seems strong on all20 and 30 percent in the late 1980s, is now around indicators. One such indicator is the stronig7 percent and falling. Growth slowed in the first international interest in Egypt's capital markets.two years of the stabilization program, but it Over the past year, foreign activity has grown toresumed by 1993/94. GDP growth for 1995/96 is almost 30 percent of the turnover on the Cairo stockestimated at around 5 percent. Thus, the exchange. Several Egypt funds have beenstabilization effort brought inflation down to established and a large number of investment fundsmanageable levels without a major slowdown in have shown interest in individual stocks. Well overoutput, and was followed by a relatively fast 100 funds are currently active in the Egyptian stockrecovery. Egypt's growth performance resembles market. Portfolio flows alone in the first half of 1996those of other economies that carried out successful amounted to about $ 500 million.stabilization (figure 2.1). Another indicator can be derived from the term

FIGURE 2.1 structure of interest rates in Egypt (figure 2.2). InAverage growth rate for selected stabilizing economies general, interest rates on the Egyptian pound

remain above U.S. dollar levels, notwithstandingthe firmly fixed exchange rate. But long-term rates

6.21 now lie below short-term rates. Such an invertedyield curve signals expectations of future interest

3.5 2 40 07 rate declines and thus confidence in continued low2 .8 9 g inflation.

Although inflation came down relatively fast, it___________._________ -did not do so instantaneously, and the nominal

Mexico Argentina Egypt Israel exchange rate has been remarkably stable since19S7-92 1990-95 1990-96 1985-90 Egypt switched to effective current account

Source: Based on data from World Bank 1995 (WDR) and staff estimates for convertibility and unified the exchange rate system.Egypt.

9

As a consequence, the real exchange rate has private enterprises.) As the recovery progresses,appreciated significantly over the past five years however, spare capacity will progressively be(figure 2.3). This appreciation came after a eliminated. Thus it can be expected that, without asignificant real depreciation prior to the reform robust recovery of investment, growth cannot beprocess. The exchange rate has not returned to its sustained. In turn, a robust recovery of investmentpeak of the mid-1980s. will require robust savings.

FIGURE 2.2 Table 2.1 reveals that aggregate gross domesticTerm structure of deposit interest rates investment as a share of gross national income

(GNY) has been growing moderately, reflectingcontracting public investment and a significantrecovery of private investment-by almost 3

Percent ____ ____ _______________ percentage points of GNY between 1993 and 1996.115 1s99 r It also shows that the increase in private investment1 31 1- - - - - _ - - - has been accompanied by rising public saving and

14 -~ - 1i9 P a modest current account deficit. Private saving9 - -_ - - - - -'*- ~.(excluding Law 203 enterprises, which since 1994

m_nth 99<1 i have experienced an increase in net operating3- 6-month 1 2-month 5-year profits and thus savings) is not yet showing signs of

recovery, having remained at around 11 percent ofSource: Estimates based on data collected by the World Bank mission in GNY since 1994.Cairo. The increase in public saving is particularly

encouraging and indicative of the strength ofThe process of liberalization has now continued stabilization. This increase has resulted mostly from

to the point where Egypt's exchange rate is fully the reduction of budgetary subsidies and currentconvertible even on the capital accounts. transfers and from a decline in interest costs;International and domestic investors have clearly improved financial performance by Law 203interpreted the opening up as a sign of confidence, enterprises, which recorded aggregate profits inand have responded strongly to the continued 1994-96. has also played a part. If these trends areinterest rate differential in favour of LE securities. sustained and consolidated,. public saving shouldCapital intlows have been strong over the whole continue to grow, though only up to a limit.reform period, putting strong upward pressure on Significant further increase in public saving isthe exchange rate. Attempts to both maintain FIGURE 2.3

monetary restraint and avoid nominal appreciation Real effective exchange ratecould only be reconciled through a strongsterilisation effort. This was done in a straight-forward manner: the monetary impact of foreign ([ndex: 1990- I00)

exchange purchases by the central bank was offsetby sales of domestic securities. In effect, the 140

counterpart of Egypt's high reserve position is a 120

substantial increase in its domestic debt. 10KSaving and investment balances. Although growth 90

has resumed, investmnent (as a share of GDP) hasnot returned to its pre-1990 levels (table 2.1). This 6

points to the existence of large spare capacity at the .D

beginning of the recovery and, perhaps, increased 2.

factor productivity, thanks to reforms in the 0 o~

agriculture sector and the establishment of financialautonomy for Law 203 public enterprises. (Law 203 1985 19S6 19S7 19SS 1989 1991 1991 1992 1993 1994 1995

enterprises are owned by the government butsubjeterpto the samedby re ath gorframewok at Source: From data provided by Central Bank of Egypt.subject to the same regulatory framework as

10 EGYPIT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

unlikely until a comprehensive reform of the civil financed largely by retained earnings.2 It is thusservice is undertaken and privatization transfers likely that the stagnant performance of privatethe bulk of state enterprises and economic saving is to be ascribed to the behavior ofauthorities to private owrnership. households, an issue to be addressed in chapter 6.

The decrease of public investment is also Data are available, however, on the compo-encouraging, as it resulted mostly from a reduction sition of private investment (table 2.2) that shedsof public involvement in the commercial sphere. some light on the determinants of its recovery andThis decrease took place through a contraction of future prospects. Abstracting from developments inbudgetary investment in economic sectors such as the petroleum sector-which are dominated bytourism and the decline in investment by external factors-private investment has beennonfinancial state enterprises (from over 4 percent increasingly concentrated in nontradable sectors.of GDP prior to 1992 to about 1.5 percent during Although the data display significant year-to-yearthe last three years). It is now unlikely that these variation, this trend appears to hold generally fortrends in withdrawal of state involvement will all nontradable sectors.continue, as further significant reduction in public Among possible causes underlying theinvestment cannot take place without jeopardizing increased concentrationi of private investment inthe government's ability to provide basic services nontradable sectors, relative price changes haveand infrastructure. played an important role. As shown in table 2.3 and

Data are not available to determine the extent to table 2.4, relative prices between tradables andwhich the lower private saving is due to weak nontradables - measured by consumer pricehousehold or corporate saving. However, it is likely indexes for tradables (TCPI) and nontradablesthat corporate saving has been increasing, since the (NTCPI) respectively-have shifted in favor ofrecovery of private investment appears to be nontradables since 1991, reflecting the large

TABLE 2.1Recent developments in saving and investment(in percent)

Share 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96a

Shares of GDPGross domestic investment 26.1 35.9 32.6 29.1 21.9 18.2 16.2 16.6 16.3 16.6Gross national saving 19.9 31.8 27.4 24.9 20.7 24.7 23.0 15.4 15.9 15.5Foreign saving 6.2 4.1 5.2 4.3 1.1 -6.5 -6.8 1.2 0.5 1.1

Shares of GNYGrossdomesticinvestment 23.4 31.9 29.3 26.7 20.1 17.0 14.8 15.8 15.5 16.0

Publicb 15.5 20.7 13.6 13.6 12.5 10.0 8.2 7.5 6.6 6.5Private 8.8 11.3 15.7 13.0 7.6 7.1 6.6 8.3 8.9 9.4

Gross national savingb 17.8 28.3 24.6 22.7 19.1 23.1 20.9 14.7 15.1 14.9Public -0.7 -2.9 -0.8 -0.2 -1.3 3.1 2.5 3.3 3.7 3.7Private 18.5 31.1 25.4 22.9 20.3 20.0 18.4 11.4 11.4 11.2

Foreign saving 5.5 3.6 4.7 3.9 1.1 -6.1 -6.2 1.1 0.5 1.1Memo: GDP/GNY 89.6 89.0 90.0 91.5 92.1 93.6 91.2 95.5 95.1 96.1a. Estimates.b. The public sector includes central and local government, and public enterpneses.Source: Estimates based on data provided by the Ministry of Planning, Central Bank, and Public Enterprise Office.

TABLE 2.2Distribution of private investment

Investment 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95

Petroleum and petroleum products 20.0 19.7 20.8 22.6 26.5 25.5 19.1 20.1 14.0Nonoil tradablesa 39.4 46.4 40.9 41.0 36.8 35.6 32.5 31.7 50.7Nontradablesb 40.7 33.9 38.4 36.3 36.7 39.0 48.4 48.2 35.3o/w housing 25.3 21.0 26.5 23.3 23.7 25.3 26.8 27.9 18.5

Total private investment(LE million)c 5,699 7,569 9,508 9,705 10,758 11,666 11,547 12,895 21,051a. Includes agriculture, irrigation and land reclamation; manufacturing and mining; transportation, communications, tourism and Suez Canal.b. Includes electricity and energy; construction; trade, finance and insurance; and social services.c. Total does not exactly match figures from national Income accounts.Source: Estimates based on data provided by the Ministry of Planning, Central Bank, and Public Enterprise Office.

POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS 11

exchange rate appreciation. However, the relative concentration of state-owned enterprises in certainprice shifts are negligible when comparison is made sectors-for example, textiles, food processing, andbetween 1987 and 1995. In any case, caution should construction materials, where state enterprisesbe used in interpreting these price data. It is in fact account for more than 40 percent of total output-likely that the consumer price indexes (CPIs) may discourage private firms from entering, becauseunderestimate the rate of inflation of nontradable they expect collusive behavior on the part of the state-prices, owing to the dominance of administered owned enterprises. Third, high and probablyprices, such as for food, housing and public increasing "sunk costs" of producing for exportutilities, which are not relevant for private markets may make these activities substantially lessinvestment decisions. profitable than nontradable activities. These sunkTABLE 2.3 costs would be attributable not only to quality andTariff duty to import ratio and indexes of effective marketing prerequisites for breaking into foreignexchange rates (1990=100) markets, but also to administrative compliance,

Tanff Trade Bias customs, and shipping. Fourth, investment inYear Dutyl REERa NEER-Xb NEER-Me Index

Imports (NEER-x/ housing and connected services may be respondingNEER-m)*100 to some overall demographic and urban

1985 0.25 74 31 42 74 concentration trends that are not captured by relative1986 0.20 73 38 48 791987 0.14 69 42 50 84 prce shfts. These would iclude among other things,1988 0.13 62 43 51 84 repatriation of savings accumulated abroad by1989 0.12 69 58 64 90 migrant workers since the devaluation of 1991 and1990 0.11 100 100 100 1001991 0.10 121 145 136 107 the Gulf War, and government incentives to develop1992 0.14 113 149 144 103 "new cities."1993 0.14 98 136 137 991994 0.17 95 137 143 961995 0.16 94 142 148 96 Managing success: in capital inflow problema. Real effective exchange rate; decrease is real appreciation.b. Export-weighted nominal effective exchange rate. * a * * c. Import-weighted nominal effective exchange rate, adjusted for import duty. Havig acheved stablization and icreases inSource: From data provided by Central Bank of Egypt; IMF (1996). private investment, Egypt now seems well placed

for a takeoff to sustained growth. However, asTABLE 2.4 other successful reform-cum-stabilization countriesIndexes of domestic prices of tradables and have experienced, success presents its ownnontradables (1987=100) challenges. Post-stabilization macroeconomic

Tradable CPI Nontradable Salter Rabo policy is surprisingly difficult, as Mexico andYear (TCPI) CPI (TCPI/NTCPI)'100 several other Latin American countries recently

1985 69 85 81 leamed. Success breeds investor confidence and the1986 80 91 88 capital inflows noted above that such confidence1987 100 100 100 generates. These inflows are at the root of the1988 121 110 110 difficulties in managing the macroeconomics of1989 145 120 1211990 178 139 128 success; most of this chapter will analyse post-1991 202 164 123 stabilization macroeconomic problems. In addition,1992 240 208 1161993 255 259 99 concentration of private investment in1994 277 285 97 nontradables, and lower levels of private saving1995 308 300 103 may restrain the extent of recovery. Unless privatea. GDP, tradable sectors.b. GDP, nontradable sectors. saving rapidly catches up with the growth ofSource: From data provided by the Ministry of Planning and CAPMAS. investment, and investnent shifts toward tradable

and exportable activities, Egypt's present recoveryFactors other than relative price changes may may go under.

also have played a role in promoting theconcentration of private investment in nontradable Why is there a problem?sectors. First, the current private investmentrecovery may be dominated by the establishment of Capital inflows after a favourable shift innew, small, labor-intensive enterprises. 3 Second, confidence put upward pressure on the exchange

12 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

rate, but the real appreciation that results may Such exposure may be hidden. The banks mayabort the recovery newly underway. If renewed achieve what seems like a balanced position inoptimism, justified or not, pushes the exchange rate foreign exchange by sharing the spread with firms.up, while lingering downward wage and price This can be done through dollar loans passed on atrigidity prevents the fall in wages and prices that a mark-up that may be significant but is still cheapcould offset the appreciation's impact on product compared with local currency loans. The exchangemarkets, a slide back into recession becomes risk persists but in the guise of commercial risk, asinevitable. This in turn may threaten the hard-won the firms, who now carry the risk, are more likelysuccess of stabilization; a recession undermines than not to default if things go wrong and afiscal stringency as tax revenues fall, and slower devaluation occurs.growth magnifies the imapact of any given deficit onthe debt-output ratio, a key indicator of Egypt's capital inflow problemcreditworthiness

A key question is whether upward pressure on Strong appreciation of the real exchange ratethe exchange rate is niecessary to accommodate a and continuing capital inflows pose new policybooming economy, or whether it results simply dilemmas for Egypt of a sort that are common to allfrom anticipation of future wealth, with a successful stabilizers and could be described as ancorresponding impact on capital inflows. Strong embarrassment of riches. Tight monetary policyspending on home goods, by foreigners or domestic and a reliable nominal anchor based on a stableresidents, will make a real appreciation exchange rate send clear signals of a government'sunavoidable. If the nominal exchange rate does not resolve. Once that signal has been convincinglyaccommodate such pressure, high inflation will conveyed, however, a portfolio shift back into thebring it about anyway. If, however, the country brings in such a large inflow of capital thatappreciation is purely the result of a portfolio shift the monetary policy or the exchange rate comeinto the country, downward pressure on inflation under threat, in seemingly inconsistent directions.will result, as the rising real exchange rate makes The choice is between letting the nominal ratehome goods uncompetitive; output will go unsold appreciate or letting money growth exceed itsas exports slow down and domestic expenditure targets. Sterilization-offsetting the monetaryswitches to cheaper imports. impact of foreign exchange purchases by the central

Inflationary pressure and inventory levels thus bank through sales of domestic securities-is anprovide key signals. If inflation continues its attempt to avoid that choice.downward path, and inventories start rising in Egypt's recent experience clearly demonstratesrelation to sales, indications are that asset markets the issue. The fiscal and monetary stringenciesare the driving force an,d that the appreciation thus adopted in 1990/91 have restored current accountneeds to be resisted. 'If inflation is reigning and balances (figure 2.4) and entailed a substantial risecapacity fully used, with inventories falling, tight in capital inflows, particularly private capitalfiscal policy and an accommodation of the inflows (other capital in figure 2.5). In addition,appreciation is needed. removal of restrictions on the capital account and

The Latin American experiences indicate that liberalization of interest rates encouraged a majorthe banking sector is a serious threat to stability in shift in favor of holding LE-based assets, andsuch circumstances. With the exchange rate dollarization declined from 51.8 percent toappreciating and monetary policy still tight in the 29.4 percent in 1995.aftermath of the stabilization, domestic interest Capital inflows may be an embarrassment ofrates will remain high compared with foreign rates riches, but ignoring the issue may well causeplus ex post nominal devaluation. Thus it becomes serious problems later on. Mexico financed hugehighly profitable for banks to borrow in dollars and current account deficits with remarkable easelend in local currency. Of course, if a devaluation through a continuing flood of short-term privatedoes happen, banks talce a capital loss and may in capital inflows after a successful debt reductionfact become insolvent, as happened both in Chile in restored investor confidence. However, short-term1982 and in Mexico in 1994. private capital inflows have a minus side too, as

POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS 13

Mexico found: if the confidence declines, rapid credibility, with inflation set to go into single digitsreversals can take place and lead to severe crises. for 1994. What this suggests is that several years

FIGURE 2.4 into a successful stabilization program, the policyCurrent account balance, change in reserves and challenges change. Early on, the key objective is tocapital inflows convince investors of the consistency and

sustainability of the reform program, and todemonstrate the government's resolve. Hence the

US$ M iion importance of fiscal restraint, tight money, and a8000 rigid adherence to a nominal anchor strategy (for

6000 example, through a fixed exchange rate).5000 Once this program is widely believed, the4000 priorities change. While fiscal stringency remains

2000 important to provide long-term confidence,rooo S00 0 -J |113L_l flexibility and robustness against external shocks

-0 may become more of a challenge. Lower debt-2000 creates more room for expansion if needed later on,

990 1991 992 1994 195 but flexibility to insure the program's ability to

survive unforeseen setbacks takes on additionalECurre.tAccrntDeficit MChangeinNetinternationalReserves ECapital ' importance. This is especially so for Egypt, given its

______ heavy reliance on exogenous resources.Source: From data provided by Central Bank of Egypt. Implications for fiscal and exchange rate

Egypt's current situation is different from policyMexico's in 1994 in several important aspects; inparticular, Mexico's crisis was due to a sustained A need for flexibility does not necessarily implyeffort by its government to mask the impact of a wholesale move away from fixed exchange rates.political uncertainty on investor confidence, and to Mexico went for a flexible rate after the collapse ofoffset reserve outflows through a rapid issue of its exchange rate regime because its loss of reservesdollar-denominated debt in an effort to offset during the crisis and reduced credibilityreserve outflows. When a huge refinancing afterwards, left it no other choice. But Egypt is in arequirement of nearly $30 billion approached, much stronger position; it has avoided many ofanticipation of refinancing difficulties brought the Mexico's errors and can take the necessaryexchange rate down in late 1994. precautions.

Egypt has an external debt comparable toMexico's at that time. But as a result of Paris Club FIGURE 2 5,

negotiations, Egypt has a remarkably smooth debt- p Pservice schedule. Unlike Mexico, Egypt faces norefinancing peak in any year between now and far u 000into the next century, thus Egypt's dollar liabilities 7000

signal no future crisis. Moreover, the fiscal position 500- Lseems more firmly based than Mexico's was. Social 4000

and health expenditure has been largely exempted 3000 t__ _from the retrenchment. 4 Tax reform may bring 2000

further consolidation, and, importantly, the pension ° - - _ _system in Egypt is actually generating surpluses 990 1991 992 1993 1994 199S

(see Chapter 6). ________(see Chapter 6). _-W-~~~~~~~~~~~~~~~Prvate -Investm-ent (net-) E3 Net Foreign Lending --

For all the differences, Mexico's experiencedoes U OtficialCapitalGrantos OtherCapital Flows

contain some lessons. Mexico was in no wayinsolvent in 1994; its public debt was less than halfof what it was prior to the debt crisis. Moreover, its Source: From data provided by Central Bank of Egypt.

stabilization effort had gained considerable

14 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

There are strong arguments against increased account.5 More worrisome is the internal debt; aflexibility in the exchange rate at this time. In the large share is short term and at high real interestpresence of asset market uncertainty or, as in Egypt rates. Currently the debt stands at around 50now, clear shifts in investor confidence, nominal percent of GDP. This makes Egypt's overall totalflexibility will lead to spurious real volatility. This debt around 80 percent of GDP (taking theproblem is made more acute by the privatization concessional nature of some of Egypt's externaldrive, which apparenily is attracting substantial debt into account). For comparison, the Maastrichtforeign interest. SuchL capital inflows may be criteria call for a 60 percent debt ratio. Of course,difficult to manage, given Egypt's relatively such numbers are arbitrary; it is obvious from theunderdeveloped capital markets, with upward strong investor interest in Egypt and inpressure on the nominal exchange rate thus Government of Egypt paper that the government'sbecoming ever harder to resist. Sterilization, with solvency is not in doubt. At current growth andEgypt's domestic currency debt already high, will interest rates, the debt-output ratio will decline: thebe difficult, and in fact increasingly expensive, as nominal interest rate, at around 11 percent, isinterest rate differentials persist. roughly equal to the nominal growth rate of GDP

However, if the exchange rate pressure is real - (in fact, currently slightly lower, since the latter isthat is, driven by a boom in goods markets rather projected at 12 percent for 1996/97).than a portfolio shift into Egyptian assets-the Concerns arise nevertheless, for two reasons.correct response would be to tighten fiscal policy so One, the high debt level restricts the government'sas to create room for export production. But the ability to engage in more sterilization efforts on aboom in goods markets is unlikely to be the large scale. The sterilization effort of 1992-94 led toexplanation. Inflation, although on the high side, an increase in marketed government debt equal tohas shown no sign of increasing, and some 12.7 percentage points of GDP by 1995; repeatingindicators point towards rising inventories. All this that experience would, given the differenceevidence points to an asset market explanation for between the cost of internal debt and the return onthe upward pressure on the exchange rate, foreign assets, start to seriously undermine fiscaljustifying the government's determination to resist stringency.further appreciation and to accommodate any FIGURE 2.6

down-ward pressure that might develop Inflation, inventory, and exports(figure 2.6).

Fiscal policy is severely constrained by the needto maintain confidence in the stabilization prog- Percent

ram's continued success, and by Egypt's high level 30 I

of internal debt. Ultimately, the credibility of 25

restrictive monetary and exchange rate policies is 20 4 Inflation

determined by the fiscal backing they receive. If 15 10 ~ netory/sales

debts spiral out of control (although that is NOT 5happening now) because of interest rates in excess 0 ------ L---- -*

of the nominal growth rate of GDP, monetization -5 L Growth of non- " \

becomes the likely alternative to debt finance, with 10 oil exports

all the consequences for capital flight that were seen -20 Lin Mexico in 1994. Thus, maintaining a fiscal deficit 1990 1991 1992 1993 1994 1995

that will lead to a gradual decline in debt-outputratios is imperative, whatever the exchange rate Source: Estimates based on data collected by World Bank mission in Cairo.

system. Potential liabilities that are not explicitlyImplicit in the above discussion is a second counted as government debt must be taken into

issue-the level of Egypt's debt. Clearly Egypt is consideration. Currently, it is not known how manynot insolvent. Its external debt, at a face value of such liabilities exist. Claims on state enterprises byabout 47 percent of GDP, is actually around 30 such paries may ultim ate enterpie

ino external parties may ultimately become thepercent once its concessional nature is taken into government's liabilities; promises to make up for

POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS 15

high purchase and low selling prices for cotton to denominated securities. In consequence, Egypt's LEtrading companies have not yet been met; liabilities debt shot up (figure 2.7) as reserves accumulated.of public enterprises to the utilities, and the size of Holding such a high level of internal debt, atnonperforming assets in bank portfolios are, for the interest rates substantially in excess of the return ontime being, unknown. Equity and real estate are the equally high foreign reserves, is obviouslyundervalued in bank portfolios, but loan losses undesirable from a fiscal point of view. Amay not be adequately provisioned for. Treatment reasonable estimate of the return on dollar assetsof government guarantees in loan loss provision would be at most 5 percent, the short term U.S. T-calculations are another concern. bill rate. But internal debt now goes at more than 10

A further issue involving debt concerns a state's percent while the exchange rate is stable against thevulnerability to downturn. In Egypt, a slowdown in dollar. If we double the reserves for imports from aeconomic growth is not likely, but not impossible safe level of three months coverage to six months,either. Further turmoil in the Middle East might this would still be only about one third of whatundermine tourism revenues even if, as is likely, Egypt is currently holding, indicating that theEgypt stays out of direct confrontations. If growth Central Bank of Egypt (CBE) has excess reserves ofslows down, the comparison between interest rates around $ 11 billion, or about 16 percent of GDP. Atand nominal growth rates of GDP would turn a 5-percentage point interest differential, thatdistinctly unfavourable. At zero growth, there is a makes for an annual loss of about 1 percent of GDP.5-percentage-point difference opening up at short If the return on assets is lower, the loss ismaturities. At current debt levels, that requires a correspondingly larger, with a maximum loss of 2primary surplus of between 3 and 5 percent of GDP percent of GDP if the foreign assets earn no returnfor stability (box 2.1). If growth slows down, at all. A cautious strategy to reduce reserves wouldproblems could arise from this surplus. thus be called for, rather than further debt-financed

Slow growth will lead to less private saving, reserve accumulation, as will happen if traditionalless tax revenue, and pressure for more sterilization strategies are followed.expenditure. All this will lead to larger external BOX 2.1deficits and larger fiscal deficits, thus making debt The dynamics of debt and the sustainability of fiscal

a more serious problem. For this reason, an active deficitpolicy-while growth is still high-to reduce the The change in the debt ratio (d) is equal to:debt-output ratio to much smaller numbers isdebt-output raio to much smaler numbers isChange in d = (primary defjciVlGNP) - (seignoragelGNP)called for; this would make the government less + (real interest rate - growth rate) x dvulnerable to a crisis from external shocks.

This equation, which is the key to understanding debt dynamics,Risk in the immediate future has a simple intuitive explanation. The noninterest deficit has to

be financed with new debt to the extent that this deficit exceedsthe amount of money creation by the central bank. In addition,

The discussion so far suggests that with nominal interest expenditures have to be refinanced with newstabilization and resumption of growth, policy debt. But since the denominator of the debt ratio is nominalfocus should shift toward raising national saving, GNP, the debt ratio will decline either with inflation or with realGNP growth in the absence of new borrowing.and protecting the success of stabilization. Higher GN .rwhi heasneo e borwn.

The dynamics of debt and the sustainability of deficits arenational saving would provide a solid foundation particularly affected by the difference between the real interestfor Egypt to cope with long-term external shocks. In rate and the growth rate of GNP. Assume first that the realthe immediate future, however, two specific risks interest rate on debt exceeds the growth rate. Then debt

dynamics are unstable, and it becomes impossible to run arequire attention. permanent primary deficit that exceeds the amount of revenue

the government can obtain through seignorage. The conclusionSterilization problems deserves emphasis: if the government is running a primary deficit

larger than the amount of seignorage it can obtain, and if the realinterest rate exceeds the economy's growth rate, the debt to

The large inflows in 1993 and 1994 were GNP ratio will continue rising without limit. At some point it willsterilized in classical fashion. The monetary impact be impossible for the govemment to sell its debt, and the processof the central bank's foreign exchange purchases will have to be brought to an end by cutting the budget deficit.

was offset by sales of domestic currency- Source: Fischer and Easteriy (1 990); Anand and van Wijnbergen (1989).

16 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

A dangerous alternative would be to reduce rate, they have a strong incentive to lend in localreserves by encouraging a larger current account currency. Thus, this asymmetry not only(CA) deficit through, for example, import tariff encourages capital inflows, but also puts the capitalreduction that is not offset by other equivalent of the banks at risk by providing undue incentivesrevenue-raising measures. While running a larger to increase foreign exchange exposure. (This isCA deficit might slow down the reserve discussed below in the section on "Issues inaccumulation, it would significantly increase banking".) A strong policy recommendation isEgypt's vulnerability to a crisis. The resulting either to start paying interest on reserves againstpattern could be very much like Mexico's in the domestic deposits, or to stop paying interest onperiod leading up to its crisis, where high but reserves against foreign deposits.volatile capital inflows were funding a large CA Before the Palestine switch out of Jordaniandeficit. The inflows may easily be, reversed, but the dollars (JDs) triggered Jordan's current reserveCA deficit is much harder to efil..,nate. Over time, problems, Jordanian banks receiving foreignreserve accumulation should be stopped by exchange deposits were required to hold aneliminating undue incentives for capital inflows, equivalent sum in assets abroad. This forced banksand, for example, by widening the pension system's to match capital inflows with oufflows of equalability to invest abroad i(chapter 4). size. A third policy measure (that should be

One key incentive' that unduly encourages considered for other reasons, but that will have ancapital inflows is asymmetric treatment between impact on reducing net capital inflows) is to allowbank loans funded from foreign sources and loans the pension system to invest in high-grade foreignfunded from domestic sources. Domestic deposits assets, such as U.S. government paper or blue chipface a 15 percent reserve requirement over which equity. This will allow the funds to spread risksno interest is paid. Since domestic interest rates are better, and has the added advantage of encouragingover 10 percent, this greatly raises the cost of capital oufflows when inflows are too high from afunding loans from domestic deposits. On the other macroeconomic point of view.hand, while reserve requirements against foreignexchange deposits are also high at 15 percent, they Issues in bankingare remunerated at London interbank offered rate(LIBOR). This makes for a differential cost of almost Banks, whether state-owned or private, are the1 percentage point, or a large fraction of the banks' Achilles heel of many reform programs. A recessionprofits per pound lent.6 in the early phases of a stabilization program will

Through this asymmetry, banks are encouraged lead to a deterioration in the quality of loanto borrow in dollars; because of the persistent portfolios, as firms, in distress because of theinterest differential in the face of a stable exchange recession, stop servicing their debts. In the upturn

FIGURE 2.7 that follows, the real exchange rate typicallyDomestic debt as percentage of total public debt appreciates, and long periods persist when nominalstock rates on domestic currency stay above foreign rates

plus the ex post rate of devaluation.As noted above, such interest differentials, in

Percent turn, make it attractive for banks to borrow in U.S.55

so - ii i jjw dollars and lend in local currency (figure 2.8). As450 long as the exchange rate stays fixed, profitability

will stay high, but, of course, foreign exchange40 _ exposure opens up, and the banks become35 0 X23_l l | l | ' | _ extremely vulnerable to a devaluation. Even if30 dollar deposits are matched with dollar loans, the25 problem remains. Although the banks will then be

1990 1991 1992 1993 1994 1995 matched in foreign exchange, typically theborrowing firms are not, so they will default on

Source: From data provided by Central Bank of Egypt. bank loans after a devaluation, wiping out the

POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS 17

banks' capital. In this case, exchange risk remains, problems were back in less than a year. A purebut is transformed into foreign exchange-related recapitalization merely gives bank managementcommercial risk. This happened during the banking more taxpayer money to squander.crisis in Chile in 1982, during the big Mexican crisis FIGURE 2.8

in 1982, and again in 1994. Domestic vs foreign interest rateThus, careful bank supervision and aggressive

provisioning against bad loans are absolutely Percent

crucial in the post-stabilization period, so as to 25

strengthen the banks, or at least make the extent of 20 \

their distress clear to managers and regulators /Domestic interest ratealike. The central bank needs to be extraordinarily 15 . /

vigilant in preventing excessive foreign exchange / /exposure in banks. Simply matching dollar assets xchange-rite adjusted LIBOR

with dollar liabilities and such is not enough; the 5 -

quality and foreign exchange exposure of theborrowing firms will have to be considered 1990 1991 1992 1993 1994 1995

explicitly. This issue is becoming acute, as pressureby bank clients to give U.S. dollar loans is Source: From data provided by Central Bank of Egypt.

apparently mounting, the risk of devaluationnotwithstanding. If recapitalization is needed, the preceding

The extent to which these two problems exist is audit should be a hard-nosed one done by annot altogether clear in Egypt. The four main state experienced foreign audit company. Egyptian auditbanks (with 70 percent of the loan portfolio) are companies may be competent, but may also beclearly exposed to a substantial number of bad concerned about future business with the bank inloans., since they are the lenders to state enterprises. question or its clients. A foreign auditor without anOn the other hand, they seem to have made office in Egypt faces no such incentive problem.substantial profits during the sterilization period of The audit should assess the adequacy of loan loss1992-94, most of which were used for provisioning. provisions (LLP) and thus report on the accuracy ofTheir true capitalisation cannot really be assessed the current value of capital. This is a crucialon published data alone; a careful audit based on question: almost all major banking crises in theinternational auditing standards (IAS) is very West and the East involved banks that seemedurgent to bring out their true capitalisation. This in adequately capitalised (Continental Illinois, Creditturn will indicate whether cost cutting and Lyonnais, and Banesto all had capital adequacyimproved loan approval and credit quality control ratios in excess of the Basle norm of 8 percent onprocedures are enough, or whether more drastic the day of their collapse). What was wrong was themeasures are required. grossly inadequate provisioning for specific loan

What is to be avoided at all costs is straight losses.recapitalization without more drastic reform in the This may also be a problem in Egypt, althoughincentive structure of the bank and its officers (not modem loan classification schemes andto mention management change). A recapitalization provisioning rules were introduced in 1993, and arewithout further reform signals to the bank that the apparently enforced-at least for the private banks.behaviour that led to the problems is rewarded First of all, it is not clear how stringently these ruleswith subsidies; the behaviour will thus continue, are being enforced for the state banks; second, LLPand all problems will reappear with a vengeance must come out of current profits. This makes itwithin, as experience tells us, one year. Hungary is highly unlikely that banks have been able toa good example. The state banks were recapitalized provision sufficiently against the portions of theirin 1992, 1993 (twice) and 1994, each time for $ 1 portfolios that apparently went bad prior to 1993. Abillion, for a cumulative total equal to 10 percent of final issue concerns the tax treatment of LLP. LLP isHungarian GDP. After each recapitalization, banks not deductible under corporate tax; presumablycontinued their poor loan quality control, and the losses can only be taken when loans are actually

18 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

written down. Allowing at least a partial tax 2. The share to the private sector of total domesticdeduction on LLP would obviously strengthen the credit fluctuated around 55 percent between 1993incentives to provision adequately against specific and 1996.

loan losses. 3. This is consistent with data on businessA second issue concerns the criteria used to registration, which show a large increase in the

classify a loan. If part of the amortisation payments number of new enterprises, and with the data onare not met, the entire loan has to be downgraded, posted job vacancies, which show no significant

not~~~~~~~~~~~ juste the missedes amotistio payent Butlicnnot just the missed amortisation payment. But change; new small businesses are in fact less likelymissed interest payments that are simply rolled to post vacancies to recruit, relying usually onover are apparently no reason for downgrading, family members or business relations.and this is a major issue. This rolling over ofinterest presents auditors with a difficult problem, 4. Total government expenditures as share of GDPone that is currently ignored in Egyptian audits. Is declined from 45.3 percent in 1991 to 28.4 percent inrolling over simply a matter of maintaining credit 1995 while government expenditures on health andrelations with a creditworthy client, or an early educationincreasedfrom3.8percentto4percentofwarning sign of borrower distress? Is the risk of the GDPloan portfolio as a whole adequately assessed? All 5. By convention, the present value of contractualloans to the construction sector are now probably debt service-which takes into account thegood, but if they all withdraw tomorrow, this concessional nature of external debt-has beenoutlook will change. Can subjective criteria (instead calculated using a discount rate of 10 percent inof the objective one of rnissed payments) be used to future service payments. The ratio of present valuedowngrade a loan? Finally, foreign exchange to face value of debt stock was 64 percent for 1995.exposure, both of banks themselves and of their 6. Fifteen percent at zero rate adds 176 basismajor U.S. dollar borrowers, needs to be carefully points to the cost of a loan (10 percent of 15 percentmonitored and kept wit-hin manageable bounds. over 1 minus 15 percent). Foreign funding, as long

Notes as the exchange rate remains stable, costs only88 basis points per pound lent (5 percentage points

1. It should be noted ithat the definition of private interest differential over a 15 percent reserveinvestment used here excludes Law 203 enterprises, requirement, scaled up by (1 minus 15 percent).whose investment has contracted modestly in real The cost difference between foreign and domesticterms during the last three years. sources of funds is thus a full 88 basis points (0.88

percentage points) per unit lent!

POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS 19

Chapter 3

Long-termy policy challenges

Whatever happens to growth, Egypt needs to reduce internal debt tomaintain her freedom of action. She could do this in part by applying revenues

from pnvatization of public enterpnses, thereby also boosing public saving.If the expansion slows, flexibility in the exchange regime should be considered.

Solving the immediate problems outlined above other expenditure categories slow down too muchwould reduce Egypt's vulnerability to crises, to sustain output on a high growth path (the third

but much more needs to be done. The existing challenge), it may be determined that the exchangefavorable circumstances present three long-term rate requires a downward adjustment. If so, howchallenges of which the first two concern, in can that be achieved without triggering a balance ofparticular, the current expansion of private payments crisis?investment. The first of these two is to ensure thatas long as expansion continues the government's Divergent growth scenariosmacro policies remain internally consistent.Assuming expansion continues or if it accelerates, Two medium-terrn scenarios have been devisedthe second challenge is to define policies to support to address the challenges outlined above. They willit, in the absence of a strong recovery in private illustrate the magnitude of the investment andsaving and given the concentration of private saving efforts needed to support either moderateinvestment in nontradable sectors (chapter 2). growth or high growth. 'ihey will also demonstrateConversely, the third challenge is to determine a the scale on which the divergent payoffs ofresponse to a slowdown in investment or any other moderate growth or high growth will affectimportant expenditure category. employment and income growth. Macroeconomic

The achievement of long-term consistency consistencies are assumed to underlie bothcenters around fiscal balance and external scenarios. Only the high-case scenario, however,financing. The other two goals each center around will be assumed to be underpinned by substantialone of two key questions that cannot be ignored. efforts at structural reform (see section below onFor growth to nudge further up as envisaged in a "Long-term consistency issues"). The respectiveproposed scenario for high growth considered outcomes of the two scenarios are summarized inbelow, investment must remain strong or accelerate table 3.1.(the second challenge itemized in the precedingparagraph). If this happens, the real exchange rate The base case scenariomay be sustainable, since strong continuedexpenditure will support its appreciation. The base case scenario (the "base case") isHowever, external balance is likely to deteriorate, predicated on the condition that theand a Mexican situation may develop, with private macroeconomic policies are internally consistent.capital inflows financing a large current account Fiscal stringency will be maintained and thedeficit. While this may be sustainable for a long external debt to GDP ratio will continue to decline,time, the Mexican experience amply demonstrates thus increasing headroom for managing internalthat high growth with a deteriorating external debt and expansionary policies if needed in thebalance is a vulnerable situation, and it probably future. Growth of broad money will be kept belowcannot continue indefinitely. Conversely, if the growth of nominal GDP. Inflation will beinvestment expansion does not accelerate, or if comparable to that in OECD countries. Real GDP

21

growth will be at around 4.5 percent, and extemal will lead to limited growth in job and incomefinancing requirements will be minimal. By opportunities, and therefore to further increases inchoosing to maintain its current levels of unemployment. Moreover, slow growth of nonoilinternational reserves (at more than 12 months of merchandise exports (at 5 percent) will limit theimports), Egypt would be able to cope with external scope for Egypt to reduce its reliance on exogenousshocks with relative ease. resources, despite the large foreign exchange

This scenario is characterized by two features. reserves that it holds against external shocks. TheFirst, while the macroeconomic policies will large fiscal costs arising from holding reserves limitcontinue to be internally consistent, structural the headroom for expansionary policies.reforms will move slowly; thus the fundamentalproblems impeding growth of saving and The high growth scenarioinvestment will remain. Divestiture of public sectorinterest will be limited in scope, and the current The high growth scenario is based on the visionrecovery of private investment will not accelerate. that Egypt should and must grow faster, and thatSecond, Egypt would choose to limit foreign the benefits of rapid growth outweigh the potentialborrowing (on a commitment basis) to the range of risks. This scenario is characterized by the$ 1.0-1.5 billion a year during 1996-2002. This following features. First, Egypt would maintainmeans that the debt stock will decline in real terms, internally consistent macroeconomic policiesand relative to output as well. Egypt would find strengthened by vigorous structural reforms initself denied an opportunity to attract private and trade, capital and labor markets, privatization, andforeign investment through rapid structural deregulation, as well as by strengthened incentivesreforms. The constrained private sector investment to raise productivity growth. In particular, a rapid

TABLE 3.1Outcome of the two scenarios in Egypt(percentage)

Indicator 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/02 2003/05

Base-case scenarioGDP at market price, real grwth rate 4.9 4.4 4.4 4.5 4.5 4.6 4.6Inflation, GDP deflator 7.4 5.3 5.0 4.8 4.7 4.5 4.4GNP, real growth rate 5.0 4.6 4.5 4.5 4.6 4.6 4.7Gross national disposable income, real growth rate 4.5 4.2 4.2 4.6 4.4 4.4 4.5GDP per capita, real growth rate 2.7 2.2 2.2 2.4 2.4 2.5 2.6Unemployment percentageoflaborforce 9.7 10.3 11.1 12.0 12.9 14.0 17.0Consumption/GNP 84.2 84.3 84.5 84.9 85.0 85.2 85.3Gross investmentUGNP 20.7 20.0 19.6 19.5 19.1 18.5 17.6Grossdomesticsaving/GNP 17.0 16.7 16.4 16.0 15.9 15.7 15.4Gross nationalsaving/GNP 20.8 20.2 19.7 19.4 19.1 18.7 18.0Overall budget deficiUGDP -1.3 -0.9 -1.3 -0.3 0.0 0.3 0.6Currentaccountbalance/GDP 0.1 0.1 0.1 -0.1 0.0 0.1 0.4Non-oil merchandise exports, growth rate 5.0 5.0 5.1 5.1 5.1 5.2 5.2M2 growth rate 13.0 10.0 9.7 9.6 9.5 9.3 9.2

High-growth scenarioGDP at market price, real growth rate 4.9 5.7 6.0 6.3 6.5 7.0 7.5Inflation, GDP deflator 7.4 7.0 6.7 6.5 6.4 6.0 5.5GNP, real growth rate 5.0 5.9 6.2 6.3 6.5 7.0 7.5Gross national disposable income, real growth rate 4.5 5.4 5.7 6.4 6.3 6.8 7.3GDP per capita, real growth rate 2.7 3.5 3.8 4.1 4.4 4.8 5.4Unemployment, percentage of labor force 9.7 9.2 8.6 7.9 7.2 6.4 6.0ConsumptionlGNP 84.2 85.5 84.0 83.0 81.5 80.0 75.0Gross investmentlGNP 20.7 21.2 21.6 23.8 24.5 25.6 26.0Grossdomesticsaving/GNP 17.0 15.6 16.9 18.1 19.6 22.0 28.0Gross national saving/GNP 20.8 19.0 20.0 21.2 22.3 24.5 29.0Overall budget deficit/GDP -1.3 -0.9 -0.6 1.4 2.3 3.0 4.0CurrentaccountbalancelGDP 0.1 -2.1 -1.7 -2.6 -2.2 -1.7 2.2Non-oil merchandise exports, growth rate 5.0 15.0 16.0 16.0 16.0 17.0 17.0M2 growth rate 13.0 13.2 13.2 13.3 13.4 13.5 13.5

Source: Word Bank staff estimates.

22 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

and large-scale privatization program would be government spending is prioritized to providecomplemented by rapid growth of private basic social services (including a social safety net)investment. Second, fiscal stringency would give and public infrastructure. Real exports ofrise to increased public sector saving, which would agricultural and manufactured goods would growcontribute to rapid increases in domestic saving. at about 10-15 percent in the high growth scenario,Private saving would be boosted subsequently by compared with 5-7 percent in the base case. Exportrapid per capita income growth and other earnings from sources vulnerable to external shocksstructural policy reforms. However, the increased and depletion of natural resources, such as tourism,domestic saving would not be large enough to the Suez Canal, and petroleum, are expected tofinance all the investment requirements; a grow at similar rates in both scenarios. Moresignificant gap would still have to be filled with specifically, the high-case scenario would offer theportfolio and foreign direct investment and foreign following improved outcomes over the base case:borrowing. * Addition to national income on the

The simulation indicates that, in this scenario, magnitude of $ 37.3 billion over the next six years.GNP in real terms would reach a growth trajectory * Addition of about 5.9 million jobs.of about 7 percent, and nominal export earnings (of * A rise in the level of trade integration (exportnonoil merchandise) would grow at more than 15 plus import) to 33.1 percent of GDP by 2002percent a year. It also shows that while the debt (compared with 25.2 percent in the base case).stock would grow with increased foreign * Reduced vulnerability to external shocks.borrowing, the growth of GNP would be much This would result from decreases in exogenousfaster, therefore keeping the growth of debt stock resources as a share of GNP from 12.6 percent inwell behind the increases in Egypt's capacity to 1996 to 8.7 percent in 2002 (compared with 9.4carry and service debt. As under the first scenario, percent in the base case).the debt problem would be well contained (Egypt * Increased per capita income to $ 1,650 a yearremains "moderately indebted"). The decline in by 2002 (compared wvith $ 1,465 in the base case).foreign exchange reserves (to no less than 9 months Rapid growth, as envisaged in the high caseof imports) would be mnoderate, as the enlarged scenario, requires, of course, maintaining macrocurrent account deficits are expected to be financed policy conisistency, as well as adopting the policiesalso by increases in foreign borrowing. necessary to sustain growth firmly supported byNonetheless, the viability of this scenario depends increased domestic savings. The followingon the level of domestic saving. To the extent that discussion is based on the assumption that Egyptsaving did not rise sufficiently and quickly to should pursue the high growth scenario.support the growth of private investment, foreignsavings would have to be relied upon, and Long-termyi consistency issuesinflationary pressure would emerge, leading to

heightened concern about vulnerability. The current fiscal stance of the government

Benefits of rapid growl:h appears internally consistent. The deficit is small,and interest and growth rates are such that the

Overall, the high growth scenario would imply current primary surplus is high enough to foresee aan investment/GNP ratio of 22-25 percent and an medium-term decline in overall debt-output ratiosincremental capital output ratio (ICOR) of 3.8, in (as implied in both scenarios above). An issue thatcontrast to 18-20 percent and 4.4 respectively in the will come up, however, is the likely decline in long-base case. Gross domestic saving as percentage of term external assistance. The current level of $2GDP would be in the 17-18 percent range in the billion per annum will obviously not continuehigh growth scenario, against 16-17 percent in the indefinitely. If Egypt's reform process continues,base case. The fiscal deficits as shares of GDP are private inflows will doubtless take the place ofestimated to turn to su,rplus by the turn of the diminished external official flows. But an opencentury in both cases. However, better budgetary question is whether such a structural dependenceresults are expected earlier in the high growth case, on volatile private inflows is in fact desirable. Aas the privatization process gathers pace and case can be made that it is not. This reinforces the

LONG-TERM POLICY CHALLENGES 23

case for measures to increase saving, and such further reduction is limited. The government hasmeasures are considered below. now initiated a program to carry out civil service

These measures will also need to include fiscal reforms in the medium term. Although a successfulmeasures if it turns out that internal debt is not reform could reduce the dead weight on thefalling sufficiently as a percentage of GDP. economy, one has to be cautious with regard to theAlthough Egypt is not insolvent, the high level of size of fiscal saving that could be generated in theinternal debt restricts the government's ability to short term. In the meantime, Egypt may have touse expansionary fiscal policy in a slowdown. Its cope with uncertainty in its key revenue sources.sustainability could come into question if, for Figure 3.2 demonstrates high volatility of keywhatever reason, growth does slow down. Thus a revenues derived from foreign aid, the Suez Canal,strict fiscal policy, aimed at significantly reducing and oil exports. This highlights the need for Egyptthe level of internal debt with respect to GDP, is to reduce internal debt so as to increase therecommended. headroom for coping with external shocks.

Applying privatisation revenues to debtreduction should be considered as it will alsostimulate public saving. However, it is unlikely to FIGURE 3.2

be enough. In fact, the last three years saw no Volatility of Egypt's key revenue sourcesproceeds from privatization being applied toreducing government debt but rather to propping ta oup ailing state enterprises through reinvestment 0.18- 0.17

and restructuring (figure 3.1). This practice should 0.16,0.14 -

be avoided. Propping up those enterprises 012 010

postpones their adjustment to new realities and 001

wastes taxpayer money; once the privatisation 0.08 .07 005.35

comes to an end, the hard measures will have to be 0.06 m0.04taken, and the proceeds of privatisation will have 0.02-*

been wasted. A strict policy of applying o i ---tirivatisation revenues to debt reduction, rather OilanldGas Suez Tourism Worker OfficialGrants

Canal Rernittanoesthan to finding state enterprise deficits, is thusstrongly recommended.

Much has been done in the last few years to source Calculated from data providedbyCentral BankoFEgyptreduce public expenditure, and the scope for

What should be done while the investmentFIGURE 3.1 eDistribution of sales proceeds from privatization expansion lasts?

If investment remains strong, or accelerates tolevels necessary to achieve the 6 to 7 percent GDP

Uncollected Financial growth rate required to absorb new entrants to theinstallments restructuring labour force, increasing external deficits can be

34% 23% anticipated on the current account. Once again,Re-investment private capital inflows are most likely to be

13% available to fund such deficits, but such aBank deposits Transaction fees & tax configuration will make Egypt highly vulnerable to

17% 13% reversals of investors' confidence. Thus, measuresto increase saving to levels closer to East Asian onesare strongly recommended.

Most savings come from one of three sources,Note: Sales from all transfers of assets to private ownership estimated at LE and government measures can be classified

accordingly. First, theory notwithstanding, there isSource: Calculated from data provided by Public Enterprise Office. ample practical evidence that raising public saving

24 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

some but not all government saving. Thus, further What should be done ff investment expansionmeasures to increase fiscal surpluses and reduce does not accelerate?deficits will certainly help. This is, however, not the

first~~~~~ araweemau'saerqie,snes Despite this optimistic outlook, there are causesfirst area where measures are required, since so fo ocr.Snetercvr a enldbmuch hs alredy bee done n thisfield for concern. Since the recovery has been led by

mche hsalreandy been donrce in thvisg fied. rp private investment in nontradable activities, thereThe second main source oftaing i ate is a danger that the recovery may be held back by

saoving. th most ountrieoffuds, ore inved mearnig the size of the domestic market.' In addition, to theexprviethre. main source of fundsufor investment extent that the concentration of private investment

in nontradable activities is a result of lack ofencourage companies to retain more earnings. The c ifirst group makes private investent more radable sectors, the productivity ofattractive and therefore funding for it more private investment will suffer, thus limiting further

valuable. Privatisation, improving the regulatory growth.and competitive environment, simplifying the The concentration of investment ingovernment's still complex administrative nontradables, in particular real estate assets, is a

. . . ~~~cause for concern. The enterprises working inprocedures, and using ex licit tax measures >afll all casfocner.Tentpieswkngnpontrocedures,andusingexplicit tax measuresewill.all tradables face the need to upgrade their capabilitiescontribute to this end.

Second, explicit tax measures to promote and to compete more successfully. Yet they areSecoined expicitr at measuresd toi promot attracting far fewer resources than the real estate

retained thearnin, shoru a leas eonsder. d mnexat sector. The shift in relative prices (tables 2.3 andagainstcthem,hou bs fhe onsidere on eamleow 2.4) since 1990 and the concentration of investmentof discriminahton is the practice of allo i nontradables undermine the ability of Egyptian

ery industries to engage in production of tradables.capital, but not for retained earnings. Since'- - t . . , . . D- ~~This may bring about another problem. To the

statutory capital is fixed, this deduction has no extent that investment is intermediated through theuseful incentive effect once the size of statutory Acapital has been decided upon. One alternativewould be to extend the privilege to retained The real estate boom is expected to end as soon asearnings. Another alternative would be to allow the demand is satisfied and market euphoria isinvestment credits that are explicitly limited to over. If there is a crash or a drastic realignment of

in as is relative prices, the resulting losses would have toinvestmdnen fina frome countrietsoained earnings, be absorbed tnot only by investors using their ownalready done in some countries so as to encourage fnsbtas ybnsuigfnsfo

coprt savng funds but also by banks tising funds fromc orporate saving.The third source of national saving is private depositors.

Another cause for concern is the speed of asaving. Much has already been done to encourage Ajor expor recov. e above senariomajor export recovery. The above scenario

saving by those with considerable surpluses: envisages increases in capital good imports, and a

Egypt's capital markets now offer a wider choice rise in private investment in tradables in responseand higher returns than ever before, with improved to the improvement of price regimes andtransparency and investor protection. The recent supporting policies. The rise of capital good

rise of private inivestment also offers further imports needs to be balanced by growth of exportoptimism. If, as argued in chapter 1, an earnings; thus the speed of export recovery isenvironment good for iivestment is also good for critical. The successful export experiencessaving, then the current rebound in private demonstrate that a sound relative price incentiveinvestment will likely bring about a rebound regime is necessary but not sufficient. Strong andprivate saving as well. This prediction is responsive supporting policies are also needed tonot only by the curre-nt sound macroeconomicals by the decnin publicinv men ensure quick and timely export supply response. Instance, but * the case of Egypt, two types of investment could bein commercial activities (see paragraph on "Forging considered: first, investment of a long gestation,buyer-seller links" in chapter 4), and by further characterized by relative high capital and skill

development of the capital market. intensity or, second, investment with short

gestation and quick payoff and with relatively high

LONG-TERM POLICY CHALLENGIES 25

labor and low capital intensity. The supporting continue, the current growth recovery may verypolicies indicated in this report are aimed at slow down. The long-term response to a slowdowngenerating investment with quick export payoff. in investment and to the need to actually sell the

A further cause for concern is the timing of the goods the recently constructed capital helpsresponse of private saving. Even in the high case produce is key to long-term success. Such ascenario outlined above-where the strong slowdown would require a real exchange raterecovery of private investment itself brings about depreciation at some stage. But achieving a realan increase in private saving-a significant lag in depreciation while maintaining the fixed exchangethe response of private saving would necessarily be rate is exceedingly difficult; it requires sustainedaccompanied by a widening of the current account inflation rates below the main trading partners'deficit. Resumed growth and stabilization may inflation. To forestall these possibilities,enable Egypt to attract a large amount of foreign introducing an element of flexibility in thesavings to further finance the recovery, but there is exchange rate, for example through the adoption ofa limit; Egypt's overall exposure to external shocks a crawling band, should be considered seriously,is already very high-owing to the large before the fixed rate is perceived as a matter ofcontribution of oil exports, workers remittances and prestige. A crawling band sets rates of change toforeign grants to the current account-and would both an upper and lower bound within which thebe increased by higher reliance on foreign savings. exchange rate can move freely.

Should export response turn out to be slow, Noteprivate saving remain insufficient, andconcentration of investment in nontradables 1. Egypt's national income of about $ 60 billion, is

equivalent to that of a metropolitan area in Europe.

26 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

Chapter 4

Promoting outward orientationthrough exports

If domestic investment accelerates, current account imbalances may occur. Egypt shouldencourage exports to balance the current account and to hasten her

integration into world markets. The import/export process imposes prohibitive costs,and needs to be made far less cumbersome than at present.

Three issues have emerged as central to getting competitive. In other words, producers must haveon a path of hig]her growth: first, fiscal access to world class inputs at world prices.

stringency is needed to maintain internal In recent decades, Egypt has been essentially anconsistency, and to increase the headroom for import oriented economy, where foreign exchangemanaging short-term risks (through reducing necessary for imports is being earned primarilyinternal debt); second, supporting policies must be through services and other activities. The existenceadopted to substantially increase allocation of of other sources of foreign exchange (Suez Canal,resources to production of tradables and worker remittances, tourismn, oil) has been both anexportables, therefore reducing the current account advantage and a disadvantage. While theseimbalances that are likely to emerge if the current resources created a bigger domestic market, thisinvestment expansion accelerates; and third, long- large domestic market absorbs supply thatterm domestic savings must be mobilized to cope otherwise would be exported-especially since thewith the volatility of external inflows, and to domestic market is protected (profitable) insupport domestic investment. The first issue has potentially exportable sectors.been discussed in chapter 3. The second issue is the Using CMSA, one calculates that if Egypt'stopic of this chapter. Chapter 5 and chapter 6 will exports grew at world rates during the periodtackle the mobilization of savings. Addressing these 1983-93, then exports should have reached $ 6.3three issues is the starting point for establishing the billion rather than $ 3.1 billion. Egypt's "under-basis for long-term growth. performance" amounted to an annual loss of $ 3.2

The environment billion in 1993. The causes of this lag are the failureto change to export markets that were growing

Egypt needs an internationally competitive rapidly (loss of $ 0.7 billion) and not adapting theeconomy that produces world-class goods. Her composition of commodity exports to changes incomparative advantage may lie in the export of world demand (loss of $2.3 billion); the residualhigh value-added, lightweight products such as measures the loss in international competitivenesssoftware, electronics, or highly perishable ($ 0.2 billion). While it is encouraging that Egypthorticulture items. Focus on exports is critical to has not suffered a major loss in competitiveness,achieving competitiveness, as it provides the exporters' inability to adjust to changing productmechanism to modernize the economy and enhance demands and to penetrate new markets points to aproductivity-not only in the export sector but in lack of agility in Egypt's manufacturing sectorthe rest of the economy as well. To be competitive For Egypt's nontraditional exports to reachin world markets, producers must have access to $ 10,000 million by the year 2000 (often cited as araw materials and inputs that allow them to government target), merchandise exports wouldproduce goods of the quality required by need to grow at an estimated annual rate of 35consumers in any given market at a price that is percent. At such a growth rate, it is estimated that

27

Egypt would capture 0.25 percent of world brought about by the large inflows of capitalmerchandise exports within five years (almost discussed in chapter 2. This stance is likely tocatching up to it's share in 1970, which was 0.27 continue in order to prevent the erosion of Egypt'spercent, and approximating the share of Thailand export competitiveness.in 1970). Sustaining that rate for 10 years, Egyptwould be a world player-capturing 1 percent of The agenda for actionworld merchandise exports (the level of Brazil in1972; Korea in 1978; and Thailand today). This A key matter is to determine what policies andclearly requires a quantum leap-making export institutions can help to expand exports, and thusdevelopment high on the government 's agenda. help to achieve the government's objectives of

raising GDP growth and employment. AccountAchievements must be taken of the changing external

environment in designing the trade policyThe trade liberalization effort of the last five component of this growth strategy. The trend in the

years provides a good basis on which to move world at large of moving to a free trade andfurther towards integrating Egypt into the world investment environment for both goods andeconomy. The government has done a great deal to services has changed the rules of the game. Thereduce the magnitude of, import restrictions, technological and managerial changes that haveenhance the transparency of applicable trade occurred in the last decade or so have induced thepolicies, and eliminate export disincentives. The OECD countries to initiate structural reformsforeign exchange system was decontrolled and gradually to enhance the competitiveness of firmsunified, and the foreign exchange quota system for located on their territories. An increasing numberpublic enterprises eliminated. The number of of these enterprises have in turn becomeimports requiring prior government approval was miultinationals, sourcing from all over the world.reduced to zero, as compared to 55 before 1989. All Competition for markets, investment, andsuspensions of letters of credit for imports were technologies has intensified.lifted. Legislative efforts have been undertaken to Egypt's ongoing process of integration witheliminate the discriminatory treatment of foreign Europe is of particular importance (World Banktrading companies, allowing them to operate on an 1996b), and may have reduced her availableequal footing with domestic competitors as far as options. The extension of large parts of theexports are concerned. Controls by the General integration mechanisms to countries such asAuthority for Investment and the General Morocco, Tunisia, Jordan, Turkey, and IsraelOrganization for Industrialization on imports of implies that a Korean-type of policy mix relying onequipment were abolished, as were import protection of the domestic market with arestrictions maintained by the Ministry of Military broadbased drawback mechanism to allowProduction and the jurisdiction of the Industrial exporters to compete on world markets has becomeMonitoring Authority over imports. less feasible. The trend toward adopting more and

The tariff level was reduced, and the tariff wide-reaching bilateral and multilateral tradestructure rationalized. Greater transparency was disciplines implies that firms located in theseachieved through the adoption of the international countries must become more competitive on aHarmonized Commodity Classification and Coding global scale. As more market-friendly regulatorySystem (HS). The government's most recent mechanisms are introduced and tariffs areeconomic program, supported by the International gradually eliminated in the regional economies andMonetary Fund (IMF), shows a continued worldwide, Egypt has little choice but to followcommitment to tariff reduction and to using the suit. The issue is to what extent and over what timeexchange rate as a policy tool. The pace may be frame.slower than the IMF would recommend but the Despite the reform program pursued by thegovernment feels comfortable with as being government, investment and production decisionssustainable. At the same time, efforts have been continue to confront a distorted incentive structure.made to maintain the exchange rate Levels of tariff and nontariff protection remaincompetitiveness against the upward pressure high. For many producers and traders the protected

28 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

domestic market remains much more profitable market for larger profit and less competition. Allthan exporting. Perhaps more importantly, the these features seem rather unusual for a developingregulatory burden that affects the private business country like Egypt which possesses superiorsector in Egypt-wwhether import-competing, natural resources (high-valued agriculturalexport-oriented, or nontradable -is high. Trade and products, sufficient oil and gas reserves); abundanttax policies and their administration, the monopoly cheap labor (Egypt's labor rate at a minimum ofprovision of port services, cumbersome and $ 0.55 per hour is only one-third of that in Cypruscomplex import and export administrative at $ 1.88 or Turkey at $ 1.72 per hour, and one-tenthprocedures, and uncertainty regarding the of that in Israel or Tunisia); and convenientobjectives and planned policies of the government geographical location (Suez Canal andare important disincentives to investment and Mediterranean ports). Egypt does not occupy aexport-oriented production. clear competitive niche on the world market, yet

Reducing the burden of regulatory oversight, similar economies with even less favorableimproving the predictability and transparency of endowments, like Singapore and Indonesia, havecustoms administration, and allowing more already achieved rapid export-led growth. Acompetition in the service sector are key to cursory study of Egypt's economy reveals, notaccelerating export growth. A more efficient service surprisingly, that the twin effects of importsector is a necessary conldition for firms to be able substitution and domestic monopolization haveto compete in international markets. Interviews been the major culprits behind this "high cost"with private sector firms suggest that export character. Import substitution prevents foreigndevelopment has been constrained by the low competition from accessing Egypt's market, whilequality and high cost of support services; the domestic monopolization stifles internalabsence of adequate information on foreign competition. As lack of competition breeds lack ofmarkets; an inability to satisfy foreign technical competitiveness, Egyptian products command highspecifications or standards; and inadequately prices but deliver low quality.;rained or skilled work force and management. This section details many of the existingThese are to a greater or lesser extent all "service transaction costs in the import and export processesissues" in that greater competition in the service that contribute to high domestic prices in Egyptsector could eliminate or help offset such relative to competitive world market prices. Shouldweaknesses. The threat of foreign competition- this asymmetry prevail in its current form, thewhile very powerful-is rarely sufficient to ensure domestic market will remain more profitable,that internal marke!ts will become more entrepreneurs and firms will continue to orientcompetitive. Supporting actions are required. inwardly, and the strategy of export developmentExperience in numerous countries suggests that will fail. Worse still, without reducing transactionsuch actions include privatization, the introduction costs, Egyptian industries may go under in the faceof hard budget constraints for public enterprises, of increased import competition brought about byand demonopolization of services. trade liberalization. Identifying the sources of high

transaction costs is a first step towardThe incentive regime -asymmetric prices understanding their role and importance. Doingbetween import and export this would go a long way toward the design of

optimal policies to remove these obstacles, fulfillingSuccessful competition in both international Egypt's economic growth potentials, stimulating

and domestic markets requires that Egyptian entrepreneurs to face competition, and ultimatelyproducts be of low cost and high quality, which are, building a strong and vigorous economy.unfortunately, both lacking in their current The following two sections cover: importoperation. Egypt has been dubbed a "high cost" transaction costs and export transaction costs. Theeconomy. Domestic prices can be even higher than former contributes to high domestic prices and theworld market prices. As a result, many producers weak incentive to export, the latter to the lack ofand traders are short of incentives to sell in the export competitiveness. These two areas areworld market and prefer to adhere to the domestic interrelated, because when imports are used as

PROMOTING OUTWARD ORIENTATION THROUGH EXPORTS 29

intermediate inputs into the production of exports, Temporary admission allows exporters to importthe added import costs translate into the extra costs commodities free of border taxes, whereas dutyof exports, further elevating prices and drawback and tax rebate reimburse tariffs and taxesdowngrading competitiveness. The section on to exporters should they use imported goods in theimport transaction costs is divided into four parts: production of exports. However, these schemestariffs and taxes, port handling services and freight involve cumbersome procedures and excessiverates, import clearances, and quality control. All paperwork. An exporter has to go through each ofthese costs are only part of many existing forms of the following eight steps to obtain a refund or atransaction costs, such as marketing, information, permit: (1) customs form 22, (2) letter of guaranteemanagement skills, finances, and so forth. There are or insurance letter, (3) release permit, (4) a form toalso immense production costs on top of industrial surveillance authority, (5) productiontransaction costs. However, as transaction costs are reviewing process by industrial control authority,more regulatory and bureaucratic, they are more (6) customs form 13, (7) export form, and (8)tangible and therefore more accessible for determination of refund by a committee (SRIimmediate policy actions. International 1995). These procedures are inevitably

costly in time, money, effort, and attention. Besides,Import transaction costs step-by-step documentation of each transaction for

refund is difficult, nonsale indirect tax cannot beConsiderable effort has been taken by the rebated, and e'ligibility .s subject to local content

Egyptian government to reduce the magnitude of requirement-only if the local content of finalits high levels of import restrictions. It has reduced products reached 20 percent or more shall thetariff rates and reformed the tariff structures, and it imported components be eligible for a tariffhas enhanced the transparency of import policies reduction. In other words, these export-promotingby adopting the HS. schemes have become another form of transaction

Tariffs and taxes. However, the average tariff cost. They only partially alleviate the h-igh importrate still remains at a high level of 16 percent, with duties and remain insurmountable for smallthe import-weighted tariff at 31 percent and the enterprises and emerging exporters.manufacturing-wide effective protection rate at 70 Port handling services nnd freight rates. Thepercent. In addition, tariff differentials between four maritime transport services, Darmietta, Portdifferent product groups and within each group are Said, Dekheila, and Alexandria, and other smallerquite large, creating large distortions in the relative ports are essentially state-owned monopolies. Aprices. The high tariffs are further compounded by multitude of problems at the ports, such as higha number of fees and surcharges that make the service charges, low service quality, delays, andimport tax regime less transparent and deterioration of port installations and equipment,discretionary. has grown to the point where the ports could well

Also, there are stiff tariffs on fertilizers (30 become a major impediment to the growth ofpercent), trucks (70 percent) and agricultural export (table 4.2).machinery (50 percent), in addition to import bans In general, Egypt's seaport service charges foron seeds, poultry, textiles, and clothing. There is a imports triple that of competitors (Hoekman andsales tax of 10 percent applied to all commodities,even to inputs for export goods. All these duties, TABLE 4.1

tariffs, bans, and taxes inevitably increase the cost Tariffs and taxes affecting Egyptian exportsof imports, contributing to the high cost of Barier/impediment Net effectproduction, consumption, and export from Egypt High taiff rate(table 4.1). Overall tariff rate 16 percent

Average imported-weighted tariff 31 percentcumbersome drawback and rebate schemes. To Average manufacturing-wide 70 percent

ensure that exporters can circumvent these trade effectve protection ratebarriers and have access to imported inputs at Bans on imports of seeds, poultry, Infinitely increasing the level of protection

textiles, and clothing for the domestc industres.world market prices, schemes such as temporary High sales tax 10 percent sales tax is applied, even onadmissions, duty drawback, and tax rebate have inputs for exported goods.been developed by the Egyptian government. Souse: World Bank staff estimates.

30 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

Bernard 1996), which raise cost, insurance, and TABLE 4.2

freight (CIF) charges for imports to Egypt by over Effects of expensive Egyptian port services

10 percent-a significant number. Freight plus port Barier/impediment Net effect

costs are as much as 40 percent of the CIF price for Seaport services Overall charges triple that of

some perishable goods requiring refrigerated competitors.containers. Port costs for containerized cargo Container freight rate 15-20 percent higher than other

represent 9-14 percent of the CIF price (Nathan C Mediterranean ports.Container handing cost 2-3 times that of nearby ports

Associates, Inc. 1996). Terminal handling charges Double that of nearby ports.Container freight rates to Alexandria are (stevedorng, transport to rest

generally 15 to 20 percent higher than to other transport)Mediterranean destinations. The freight charge on a Housekeeping and Nonexistent, resulting in poor20-foot dry container from Northern Europe to maintenance physical condition of the port andAlexandria is between $ 280 and $ 500 higher than poor quality of service.to Piraeus, and $ 650 to $ 1,000 higher for a 40-foot Vessel tme lost Nearly 10 percent of total

chargeable time, due to delay incontainer. In Alexandria, container handling costs testing for radiation and in timeare about $ 225 per 20-foot container; in nearby between unloading the cargo andforeign ports, they are only $ 120 to $ 180. Terminal departure of the vessel.

Airport services Air-freight rate is twice as muchhandling charges (stevedoring, transport to the first ($1.0-1.41kg) as other Middle East

point of rest, and delivery to consignee's transport) countries (e.g., Israel $0.45-

for containers on liner terms range from 0.50/kg).approximately $ 183 to $ 225 for a 20-foot dry General remarks: It was estimated that the seaport charges raise CIF cost for

container and $ 367 to $ 441 for a 40-foot unit, imports to Egypt by over 10 percent-a relatively high cost.double the costs in Antwerp at $ 109 and $ 117 and Source: SRI Intemational (1995).

in Zeebrugge at $ 100 (20 or 40). Housekeeping andmaintenance are practically nonexistent. The impediments to trade. rhe administrative processphysical condition of the infrastructure is mostly for complying with customs regulations and thefair to poor, and particularly bad in Alexandria. resulting red tape are still considered a majorVessel time lost in port appears excessive. As an stumbling block. In particular, foreigners still findexample, a 43,500 deadweight (DWT) bulk carrier doing business in Egypt extremely difficult, due towas charged with wheat at Alexandria. Due to a nontransparent procedures and regulations, as welllong delay in testing the ship and cargo for as inefficient bureaucratic practices. Egyptianradiation and waiting time between unloading the customs procedures are particularly complicatedcargo and departure of the vessel, total chargeable and rigid, as shown in table 4.3.time was 196.70 hours, of which nearly 10 percent Clearance of imported foodstuffs is a particularwas dead-time. Assuming $12,000 per day for problem that involves five agencies in authorizingexcess waiting time or demurrage ($ 500 per hour), entry: the atomic energy agency, the food controlthe vessel lost nearly $ 10,000. agency of the Ministry of Health, the agricultural

Air-freight rates are considerably higher than quarantine body, the animal quarantine body andthose of other Middle East countries, largely the Government Organization for Export andbecause EgyptAir flights tend to travel loaded only Import Control (GOEIC). Imports of the sameone way so the charges have to assume the costs of product in consecutive time periods are subject toan empty return flight. The average cost of air repeated sampling. There are multiple steps,freight from/to Egypt on EgyptAir to/from licenses, inspections, and charges. The cumbersomenorthern European cities ranges from $1.00 to import procedures add another 15 percent to the$ 1.40 per kilogram, double that of, say, Israel at an costs of imports. For Egypt as a whole, if importedaverage of only $ 0.45-$ 0.50 per kilogram. intermediate goods account for 60 percent of

Import clearances. These are still cumbersome. production cost, then a 5 percent increase in importEven though the import/export paperwork process costs of intermediate goods would contribute to a 3has been greatly simplified compared with the past, percent increase to the cost of export production,excessive bureaucracy still remains one of the main

PROMOTING OUTWARD ORIENTATION THROUGH EXPORTS 31

and a 15 percent increase would add to a 9 percent included in quality control list while toys and handincrease in the cost of export production. tools, which can be dangerous items too, are notTABLE 4.3 (see table 4.4 for details).Effects of cumbersome Egyptian import clearances The current quality control system has two

main deficiencies. The first deficiency is theBarrer/impediment Net effectMultiple clearance Clearance of imported foodstuffs is particularly a multiplicity of agencies involved in issuing andagencies problem with five agencies involved in authonzing enforcing the regulations. This in turn leads to an

entry-the atomic energy agency, the food control increase in cost due to multiple inspection fees,agency of the Ministry of Health, the agrculturalquarantine body, the animal quarantine body and delays, product loss in the clearing process, andthe GOEIC. higher facilitation and overhead costs. Testing of

Multiple procedures Permit of delivery, Form No. 11 if imports areand licenses financed through a bank, a procedure form, etc. industrial products sometimes takes a long time,Multple inspections Inspections from the Atomic Energy Authority, especially if the required equipment is notand charges control department for determination of available. Importers that regularly buy the same

preliminary custom duties and sales tax, specificcustoms control for inspection, tarff manager for goods from the same foreign suppliers remainprcing, calculation of customs duties, sales tax, subject to inspection on a shipment by shipmentservice charges, customs gate for another basis. Fees charged for inspection activities areinspection.

Delays, extra storage Total delay amounts to three days and there is a based on either the weight of a consignment or thecharges, and the lost storage charge bome by importers. number of units it contains. Fees range from 0.5time and effortsGeneral remarks: These costs amount to a tarff equivalent of 15 percent (a piasters per kilogram to a maximum of LE 10,000conservative figure). If imported intermediate goods represent 60 percent of per consignment. As is the case for tariff rates, feesproducers cost, then a further 5 percent increase in producers cost would for goods that are intended for retail sale arecontribute to a 3 percent increase to the cost of exports. gnr at leat tie as lar as sat areSource: SRi internationali0s99) generally at least twice as large as those that are

applied if the good is not prepared for retail sale.'Quality control. The system for this is restrictive. Final release of imports requires the approval of the

The GOEIC inspects a sample of every consignment GOEIC, as well as of one or more of the otlherof goods enterinig Egypt that is on a list of products bodies mentioned earlier for certain goods.subject to quality control. Some 1,550 tariff lines or Clearance of foodstuffs is particularly time25 percent of the tariff schedule is subject to quality consuming, as all the bodies involved (GOEIC,control, of which about half are foodstuffs. Once health, agriculture, atomic energy agency) sampleapplicable duties have been paid on goods consignments. According to one recent study, forsubjected to inspection requirements, at least 1 some products such as meat it takes at least twopercent of each consignment must be sampled and weeks before releases are issued and another teninspected for compliance with the relevant days to complete the paperwork. In manufacturing,Egyptian standards. The pervasive application Of GOEIC has been responsible, but many timesquality control reflects a fundamental confusion others have to be involved as well; forbetween quality standard and safety standard pharmaceuticals and medical devices, the Ministry

In theory, quality controls are mandatory for a of Health is also involved.number of imported products, primarily for health The second deficiency is the lack ofand safety reasons, and sometimes to protect transparency and due process in the system.Egyptian consumers from low quality produce. In Transparency covers the ability to know clearlypractice, however, quality control has become a what regulations apply to a product. Due process ismeans to protect local industry. Certain imported -the process by which laws, decrees, standards,products removed from the list of banned imports technical specifications or any other official desig-were put on the quality control list, effectively nation are implemented. Adequate information,retaining the import restrictions through long giving all affected parties advance knowledge ofdelays in approval. In fact, it is even questionable proposed changes, for example, can provide inputthat all the mandatory quality control regulations into exporters' decisionmaking. The GOEIC,are based on health, safety, and quality grounds. It however, reportedly ignores internationallyis surprising, for example, that spare parts for cars recommended methods of testing and certification,are subject to quality control, while imported cars and does not recognize internationally known andare not, and that imported playing cards are

32 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

TABLE 4.4Effects of restrictive Egypitian quality control system

Barrierlimpediment Net effect

Standard control set byMinistry of Health:Food and health related goods

Egyptian Organization for Standards Restrictive standards on size, shape, color, and texture and, for food, on fat and sugarcontent. For example, amount of ink in a ballpoint pen and the length of matches are, amongothers, mandatory items.

(part of Ministry of Industry)Industrial products and services.

Enforcement:Various quality control ministriesContent standardShelf-life standard Extensive, but many are inconsistent. For exarnple, granulated sugar has a shelf life of 24

months while powdered sugar has 12 months.Quality control shared by 5 ministriesagriculture, health, economy, industry,and supplyExtensive mandatory inspection items Some 1,550 tariff lines or 25 percent of the tariff schedule or 116 of imports is subject to

quality control, of which about half are foodstuffs. In Europe, only 112069 importedcommodities in 1991, 111 in 1992, 159 in 1993 was under quality control.

Overlapping and duplicative centers of Wth little coordination between these ministries, over half or more of Egypt's regulatoryauthority, multiple test requirements analytical capacity is devoted to quality testing.Lack of transparency and due process Induces transaction uncertainty, reduces imports and investment.High compliance costs Excessive sampling and testing, extended port charges due to delays, unnecessarily rejected

products.Fees Each agency that undertakes inspection charges a fee, based on weight or unit-0.5

pilasters per kilo to a maximum LE 10,000 per consignment.Time and effort consumed Clearance takes 2 to 3 times as long as other Mediterranean ports.Low efficiency Customs clearance rate is valued at $ 600,000 of product per official per year, compared with

_$ 666,000,000 in Singapore.General remarks: It is estimated that the quality control system increases costs to affected producers and traders by 5-90 percent. Thehighest costs are for food proclucts and imported final consumer goods. Export values decrease, as a consequence of increased importcosts, by an estimated 9 percent to 12 percent, GDP loses by more than 1 percent.

Source: SRI Intemational (1995).

accepted quality and certification marks (such as substitute machinery at' high cost, or haltthat of the European IUnion or the International production temporarily. Executives may beStandards Organization (ISO). The lack of required to spend valuable time dealing withtransparency and due process in Egypt increases administrative red tape problems, time that coulduncertainty in decisionmaking and has a negative be much more productively used managing theirimpact on imports and investment. business.

The policies briefly described above directly It is estimated (Nathan Associates 1996b) thataffect imports, and thus exports. They impose large the current system of quality control increaseswelfare losses in the aggregate, and make it more direct and indirect costs to affected producers anddifficult and costly for firms to obtain inputs that traders by from 5 to 90 percent, according toare required for export production. For example, industry. The highest of these added costs are forfarmers producing for export must have ready and food products and imported final consumer goods.reliable access to seeds and plant cuttings so as to Exports decrease by at least an estimated 9 percentbe able to develop and grow varieties that are to 12 percent as a result of these costs, and GDPdemanded by export markets. Manufactured com- loses by more than 1 percent By discouragingponents and intermediate inputs are often key trading activity, the system also reduces access toelements of export-oriented production in the the regionally important Euro-Mediterraneanindustrial sector. Exporters need to have timely market, decreases foreign and domestic investment,access to the imported inputs that are required to reduces product variety and availability, andsatisfy export orders. Delays in clearing customs or wastes government resources on duplicative andpassing inspection can be extremely costly. unnecessary activities.Producers may find themselves having to rent

PROMOTING OUTWARD ORIENTATION THROUGH ExPoRTs 33

Export transaction costs initiatives include the following: (1) the number offorms to be used to register compliance with export

In general, export transaction costs are not as regulations has been reduced to one; (2) exporters haveprohibitive as those of imports, thanks to been exempted from fees for safety-security procedures;government intervention aimed at encouraging (3) many of the port service fees charged to exportersexports. Government measures have included have been reduced; (4) the shipment cost of containersregulating seaport charges with the aim of making carried by the Egyptian Navigation Company werethem internationally competitive for exports; the reduced by 50 percent; (5) transport of containers withingovernment has also eliminated almost all quality the port is now free; piloting fees and dock storagerestrictions on exports. Nevertheless, firms are still charges were lowered by 20 to 75 percent; (6) handlingburdened with cumbersome administrative and security charges for export goods and the electricityprocedures that again involve multiple inspections, cost of refrigerated containers were reduced by 50certificates, and charges. One estimate shows that percent; (7) regulations relating to overtime incurred into complete all the required steps for a typical applying export-related administrative requirementsexport costs LE 1,052 per consignment. Procedures were eliminated for exports; and (8) a 1989 decreeinclude completing forms for agriculture imposing afee on refrigerated goods that were not held inqncluarantine; compu of Custfoms Formcul13 public sector storagefacilities was abolished.

quarantine purchase ofCustomsForAlthough recent government actions have beencompleting certificate of origin, customs certificate, substantial, many of these efforts can be perhapsbank export form and statement of accounts; best characterized as alleviating symptoms. More

inspections from customs, export and import fundamental reforms are necessary for export-ledcontrol authority; fees for inspection, sealing, sotrorag andtlosity tmee fof inspecthreedeaysi(R growth to take place. The costs of doing business in

International 1995). Egypt must be reduced if Egyptian industries are toIneAltional 1995or compete more successfully in world markets . OnlyAlthough seaport services are not signicanyin through competition will Egyptian industries

expensive for exports, the air-freight rate remains become stronger and will service suppliers be givenlofty. As noted above, the same distance costs the incentives to expand the diversity of servicesdouble the price in Egypt ($ 1.0-$ 1.4 per ofe upgrade th quality, ad price serviceskilogram)compared with, say, Israel ($ 0.45-$ 0.50 offered, upgrade their quality, and price serviceskiloramcomare wit, sy, sral (S0.4-S .50 competitively. The rest of the chapter focuses onper kilogram), because of the empty back hauls of ctions eto en re orts by reducin thEgyptAir. As a result, an outrageous air-freight rate transatoncostsgo im ports desreduaboveadds 40) percent to the cost of grape exports, to trnato cot fiprsa dsrbdaoe nnadd 40e percmlen by creating strong buyer-seller links and an exportname one example.

Overall, exporters report that the serious mentality. These are some of the ways to unblock

constraints on increasing sales abroad include: high bottlenecks to the growth of exports.and uneven import tariffs; low-quality domestic Infrastructureinputs; cumbersome duty drawback and temporaryadmission regimes; excessive paperwork, fees, and Outdated infrastructure can pile up bottlenecks.delays for customs and various inspections during Seaports. Charges and quality of port handlingimport and export; workers poorly prepared for the . .. ijobs available; insufficient incentives to export; and services should be iternationally competitive. This

ack f acessto nfomatin o foeignmaretS can be achieved by permitting private national andlack of access to information on foreign markets foreign companies to engage freely in port serviceand product standards. operations, competing on equal terms against each

Core areas for action other and against existing state-owned companies.An important factor raising the costs of

The government is aware of the problems exporting is the quality of the services providedoutlined above and the concerns expressed by the and the level of port service fees for handling andexporting community in Egypt that the high storage of goods. Port services, transportation,transaction costs reduce their competitiveness on handling, and so forth are not natural monopolies.global markets. Many initiatives have been taken Experience in other countries has demonstratedby the government to address these concerns. These that great efficiency gains can be achieved through

34 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

greater competition in this area. Deregulation and must pay air freight costs both ways-that is,privatization of port services had a major impact in exporters must pay for both the fully loadedMexico. Entry into the relevant service activities "headhaul" and for the empty back haul when thewas made free, service market segmentation was aircraft returns.eliminated, and firms were allowed to subcontractfreely and set prices according to market forces. Customs reformsThe results were immediate. In one year the cost of In today's increasingly competitive globalservices in the port of Veracruz declined by some marketplace, the ability to import quickly and at30 percent, while container turnover went up by the lowest costs is crucial for maintaining aalmost 50 percent. Similar elimination of barriers to competitive advantage in exports-particularly incompettion in the provision of port services n countries such as Egypt where dependence onChile led to substantial reductions in operating imported raw material and inputs is relatively high.costs (by about 50 percent over two years). By The ability to deliver competitively-priced productsreducing the costs of shipping by almost 50 percent, fast and on time is considered a prerequisite ofsmall and medium sized firms that would effective linkages with key markets. It is imperativeotherwise be marginal have been able to expand that Egypt improve customs administration totheir export activities (World Bank 1993b). Thus, reduce transaction costs of imports so as tothe Egyptian government may wish to consider the encourage exports and modernize industry.following reform actions. Temporary admission and duty drawback schemes.

* Start legislative p:rocess to terminate the legal Actions can be taken to further improve theand regulatory status of state monopolies in port temporary admission and drawback systems.services. Law 12-1964 and other regulations Procedures for obtaining duty drawback or usingpertaining to such state monopolies should be the temporary admission mechanism cal beabrogated or changed to permit the participation of simplified and made more transparent andprivate national and foreign companies. efficient. Establishing a set of standard input-

. Eliminate interlocking directorships and output coefficients for broad categories of goodsshareholdings between port authorities and could help in expanding the use of theseoperating companies or among port operating mechanisms. Extending access to agriculturalcompanies, since they inhibit competition and producers should also be pursued. Customsimpede effective supervision by the port authority clearance procedures should be greatly simplified,of companies with port policies. become more automated and move towards a

Airports. Since Egypt's comparative advantage paperless environment.may lie in exporting high value-added, lightweight Import inspection and valuation. Under the Worldproducts such as software, electronics, or highly Trade Organization (WTO), all members, includingperishable horticulture items, developing adequate developing countries, must abide by thecapacity in cost-effective air shipping services is requirements of the agreement on customsvital to export developrnent. Currently, the average valuation. This requires that, in principle, the basiscost of air freight from Egypt on EgyptAir to for valuation is the invoice presented by thenorthern European cities is anything from two to importer. In Egypt the introduction of thesethree times higher than its main competitors. The multilateral rules may require a change in currentEgyptian government may wish to consider the procedures. Customs valuation is generallyfollowing actions: considered an uncertain process by importers to

* Relinquishing monopoly control of air Egypt unless Egypt's minimum or reference pricestransport and easing regulations restricting are used rather than invoice values. Often thesecompetition from non-Egyptian airlines and reference prices are imposed by customs, and maycharters. be higher than what was actually paid for the

* Reducing costs by permitting tourist charter goods. However, developing countries that wereflights to accept air freight on the backhaul or not party to the 1979 (Tokyo round) agreement onreturn flight. As noted above, Egypt is one of the valuation-which includes Egypt-may delayfew countries in the region where exporters usually implementation of the agreement for five years

PROMOTING OUTWARD ORIENTATION THROUGH EXPORTS 35

after the date of entry into the WTO. Developing costs would be borne directly by the importers.countries that currently value goods on the basis of Duties would be paid on the basis of value andofficially established minimum values may request classification determined by the preshipmenta reservation to enable them to retain such values inspection body. Customs officers would be obligedon a limited and transitional basis, subject to the to allow sealed containers to pass through customsterms and conditions required by the other WTO without inspection and harassment upon paymentmembers. Although there is a fair amount of slack of duties.built into the agreement, in the medium term Egypt * Developing a comprehensive plan forwill have to alter its customs valuation procedures. customs reform that would minimize face-to-faceThis will require training, as well as upgrading of contacts between importers and customs officials. Itthe information base on product prices available to would reduce required signatures, consolidatecustoms officials. required inspections, and rely on an enforcement

Egyptian enterprises producing for export must mechanism based on spot checks and stiff penaltiesthen be able to source quality imports at world for cheating rather than the current system thatmarket prices, free of taxes and duties, if they are requires inspection of most shipments.not to operate at a cost disadvantage. Although Quality controlstemporary admission and duty drawback systemsexist, as noted above, they are generally seen as Streamlining the quality control process andonly partially alleviating the high import duties focusing it on safety concerns would reduce thethat are applicable to many imports of intermediate cost of doing business and move Egypt towards ainputs. Moreover, the transaction costs associated system that is consistent with its obligations underwith obtaining relief under these schemes are often WTO and Europe and Mediterranean Agreementprohibitive for small enterprises. 2 Furthermore, (EMA) membership. Furthermore, substantialcustoms officials in Egypt appear to be unwilling or efforts to improve quality will also be necessary inunable to take responsibility for such nonroutine order to raise the international reputation ofdecisions, unlike officials in other countries, who Egyptian products. Efforts could be made tocan handle cases, claims, and disputes. Cases stimulate the awareness of quality control and theinvolving drawbacks in Egypt are generally passed importance of satisfying foreign standardson to higher levels of authority, greatly increasing (whether they be mandatory, health an-d safetythe average time involved in obtaining decisions. related, or technically in conformity withThe Egyptian government may wish to consider the specifications required by foreign buyers). Suchfollowing actions: efforts could also help firms in improving quality

o Establishing a "green channel" through control and management systems, and aid them inwhich exporters can import intermediate raw obtaining internationally recognized "quality"materials and capital goods to be assessed for duty certification. The relevant international standardson the basis of invoices submitted by accredited for this are the ISO 9000 series of standards. Oneexporters. There would be no inspection of option that could be explored is to establish amerchandise, but a provision for random ex-port "certification fund" that can provide matchingfactory audit should exist, and any violation would funds for ISO 9000 certification and for the servicesbe subject to penalties. Repeat violators would be of consultants to audit companies.3 The Egyptianremoved from the list of exporters eligible to use government may wish to consider the followingthe green channel. actions.

* Adopting a principle of voluntary * Revamping the inspection process bypreshipment inspection. Importers would be able to establishing a single authority for inspection andobtain documentation classifying and valuing testing.consignments from a small number of accredited * Focusing testing on safety concerns ratherinternational inspection firms selected by the than quality standards. A review process-government. Examples include Societe Generale de including on the panel international experts withSurveillance (SGS) or Bureau Veritas. These firms extensive experience in this area-should bewould inspect and seal containers. The associated initiated to determine whether existing standards

36 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

are necessary, and, if so, whether they are given the size of the internal market, its strategiccompatible with international ones. If not, location, and its vast labor pool. Increasing the levelinternational norms should be adopted where will require marketing as well as continued effortspossible. Such controls should be motivated only to ensure not only the absence of overtby the health and safety of consumers, animals, and discrimination against foreign companies, but alsoplants. the availability of an adequately skilled and

* Recognizing international standards productive work force, an infrastructure that meetscertification for nonfood imports; foreign test minimum standards of quality, the protection ofresults of-and certification by-internationally intellectual property, and the availability ofrecognized bodies should be accepted. efficient service suppliers.

* Reducing inspection levels to minimum spot Egypt needs a honed inward investmentchecks that use compliance history as the basis for promotion agency4 with a highly targeted approachthe frequency of sampling and testing of imported based on current best practice. Options to achieveproducts. this include the following:

* Introducing cost-based fees for inspection i A small group of experienced salesservices rather than the currently used specific fees. professionals could be created (perhaps reinforced

* Supporting standardization of laboratory for a short time by outside specialists to deliverquality through certification by the National training and offer advice). This elite group might beInstitute of Standards. Results from any certified drawn from across different parts of the civillaboratory should be acceptable, thereby service and should be distinguished by a strongeliminating multiple testing and increasing- commitment to making Egypt the premier FDItransparency by assuring quality of laboratory location in the Middle East. The new agency wouldresults. Private testing agencies and laboratories not have a control function, but rather would focusshould be allowed to contest the "inspection exclusively on sales and marketing, aftercare andmarket" once certified on the basis of objective sector development. The body could have acriteria-as laid out by procedures developed supervisory board made up of both foreignunder auspices of international organizations such investors-those already in Egypt, and localas the ISO. companies-and of officials and ministers. The

* Increasing transparency and due process by purpose of this board would be twofold: to assessgiving advance notice of any proposed new rules, the performance of the agency and to advise it onproviding an opportunitv for public comment, key aspects of industrial trends and internationalestablishing known implementation dates, and investment.providing a clear appeal process. * The entire FDI business could be privatized

* Establishing a "certification fund" that can by giving it to a group that works to specific andprovide matching funds for ISO-9000 certification agreed targets by volume of investment flows andand for the services of consultants to audit is also responsible for other areas such as aftercarecompanies. development. If this approach were adopted, it

Maximizing FDI and its benefits would require close monitoring to ensure thatperformance targets were achieved. It might also

Trade and factor flows have become make sense to place within it Egyptians who wouldincreasingly complementary over time as firms become the corps of a new investment body in duespecialize and diversify the production process course. Tasks such as assisting local companiesgeographically. Attracting inward foreign direct with quality and delivery programs would beinvestment-both equity and nonequity-is considered separate and would have to become theparticularly important in fostering exports. In responsibility of another body to allow the privateaddition to creating employment and contributing company to fulfill its targets and to focusdirectly to export growth, FDI also brings with it exclusively on winning investments. Onegreat opportunities to nurture indigenous industry advantage of this model lies in the fact that itby helping the latter to enter export markets. would create a group completely dedicated to kick-Egypt's level of FDI is well below its potential starting the country's FDI promotion efforts.

PROMOTING OUTWARD ORIENTATION THROUGH EXPORTS 37

* A focus on aftercare could be developed by To export, it is necessary to be able to produce aappointing a key official with responsibility for good or service that meets the requirements ofregularly contacting existing businesses investing foreign buyers -that is, it must meet their productin Egypt. In the context of letting them know that specifications and deadlines, and the supply musttheir investments are highly valued, these visits be reliable). It is also necessary to be able to identifywould be an opportunity to find out if companies potential clients and obtain a contract. The latteruse domestic sources and if not why not; if requires knowledge of available technologies thatsomething could be done to facilitate integration can be used to produce specific products; the know-with the local suppliers; and if the businesses could how necessary to bring existing plant to the levelbe encouraged to invest more in the country. This where it can meet foreign market specifications;inquiry should be done with care to avoid the access to labor inputs, raw materials, components,appearance being a high-pressure tactic. and capital equipment; and mechanisms to ensure

* An environment friendly to FDI could be that quality standards are met. Many Egyptiancreated by attending to the details that affect first firms are weak in all these areas. Two deficienciesimpressions: for example, visa requirements, in this respect are mentioned most often as beingairport customs, and orderliness of taxi queues. particularly pressing. They are weaknesses in

* Similarly, the potential of export processing marketing and establishing a presence in overseaszones to attract investments could be enhanced by markets by Egyptian firms, and the lack of attentionproviding "one-stop shopping," ensuring no given to meeting quality standards required bybureaucratic obstacles such as with customs and foreign buyers. Relatively little use is made ofquality control. outside, independent certification bodies like SGS

Forging buyer-seller links or Bureau Veritas. Such firms are established inEgypt. but their services are usually mandated by

As in many of the 'tiger' economies, the foreign buyers and not demanded by localgovernment has created support agencies for producers. Very few intermediaries exist that canexporting firms. In the tiger economies, these supply information services. Weaknesses in thisbodies are compatible with and facilitate the efforts regard reflect historical circumstances: a relativelyof firms and are especially important for those closed economy, with much of its manufacturedsmall- and medium-sized enterprises with limited, exports occurring in the context of trade based onif any, export experience. Of course, they cannot negotiated protocols with former centrally plannedand should not do the work of these companies, but economies. Marketing and associated skills werethe services they do provide can make a critical not required in such an environment. Large foreigndifference to exporters, and there are many retailers and other specialized buyers and tradingoutstanding examples of this happening. houses are generally absent in Egypt as buyers ofUnfortunately Egypt's public export agencies are products.not sufficiently resourced or coordinated to offer * To meet this situation, the Egyptian govern-the kind of support common in many other parts of ment could create a single, one-stop-shop exportthe world. Their functions and activities are promotion center. This would require theconstrained, inter alia, by limited resources, lack of centralization of Trade-Point, the Egyptian Exportstaff training and motivation, low public-sector pay Promotion Corporation (EEPC), and the GOEICscales, insufficient permanent dialogue and into one agency to boost their effectiveness. Such aninteraction with the beneficiary enterprises, and approach would liberate economies of scale therebyabsence of financial and other inputs from the releasing both financial and manpower resources,latter. Were this deficiency compensated for by a enhance coordination, and boost productivity; itbuoyant FDI marketplace -which can attract export should also lead to simplified customer service andactivity by experienced overseas companies that do access. The exact nature of the new structure couldnot require assistance to export-then perhaps the be the subject of a task-force to includesituation would be less grave. But this is not the representatives of the Egyptian Businessmen'scase.

38 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

Association (EBA), the Federation of Egyptian business is done is required.Industries (FEI), possibly someone from a major Second, it could follow up with specific actionsforeign exporter, say a Japanese trading house, and to help stimulate an export mentality and toboth Egyptian small microenterprise (SME) and educate the public. The following are types oflarge company representatives. Possible outcomes action that have been used in some countries:could include: The prime minister could hold a monthly TV press-

* A publicly fundedL agency with a private conference where export statistics are announced.sector-dominated board.. The board would give This can create an excitement and awareness aboutdirection to the management of the agency, and in exports. It also contributes to an environmentso doing would instill confidence in the new body friendly to the private sector by ensuring the timelyamong the private sector as a whole. availability of information.Retention of the existing bodies but with much * Annual national contests could be held thatgreater coordination, for example, by the Ministry reward entrepreneurs who open up new markets orof Trade and Supplies. The disadvantage of this introduce new products. The president couldmodel is that it is unlikely to gain a vote of present awards, and there could be substantialconfidence from the private sector, which is likely press coverage of the winners' activities.to continue to pursue its own interests. It also * A media campaign could be used to explainmisses the opportunity to achieve a radical break the importance of exports.with past practices that have not worked. * Egyptian industrialists overseas could be

* Entire responsibility for exports to be lodged encouraged to return to Egypt for 1 to 3 months towith a private body funded on a "performance work with sister companies. Or UNDPs TOKTENbounty" basis. Quantitative performance could be (Transfer of Know-How through Expatriatemeasured by using nontraditional export growth in Nationals) program could be used to help bringthe designated export sectors and in countries expertise and marketing know-how back to Egypt.selected by the body for targeting. For a qualitative In Egypt this program has so far been used only formeasure, client companies could be asked for an academic and cultural exchanges. But in countriesopinion on the new body's performance. such as Vietnam and China, it has been used

* Enhanced information management systems, successfull, for industrial exchanges.and a data base containing information from Notesreports/studies such as area of reform, recommen-ded action, iniplementation status, and reference

document. ~~~~~~~1. To give one of the more extreme examples ofdocument. fee 'escalation" animal lard, fats, and margarine

Creating an export mentality face a fee of LE 2 per ton if unprepared for retailsale; as opposed to LE 500 per ton if packaged forCurrent producers are content to service a retail sale.

large, protected domestic market. They are 2 For example, the department of Customscomfortable in the current protected environment. 2. . .res onsible for admiisterin the temporarTo create an export mentality, the government g vp ry

admission and drawback systems is located inneeds to set ambihious export goals, create an Cairo, not in the ports.environment in which goals can be met, and engage 3. The rationale is that small and medium sizedin public relations policy campaigns. The firms may be financially constrained and/orgovernment could do this in several ways. unaware of the need for ISO-9000 certification.

First, it could set an ambitious export target and Creating such a fund on the basis of matching withstrive to meet it. For Egypt's nontraditional exports firm's contribution should help accelerate ISO-9000to reach $ 10,000 million by the year 2000 (an often- certification, an important step toward integrationcited government targel), exports would need to with international standards.grow at an estimated amnual rate of 35 percent. 4 As currently constituted, the General AuthoritySetting such ambitious targets has the advantage of for Investient (GAFI) is basically a control agencymaking clear that tinkering on the margin will not and does not act to market Egypt, support investorsbe successful and that fulLl scale change in the way already in the country, and target new investors.

PROMOTING OUTWARD ORIENTATION THROUGH EXPORTS 39

Chapter 5

Natural resource depletion and savings

Wel before oil and gas resources run out in twenty years time, Egypt mustdevelop other income producing assets to maintain the required rate of savings

and growth. She may consider applying oil and gas revenues, now usedto subsidize inefficient consumption, to developing human capital and infrastructure.

So far we have addressed the general conclusion now as opposed to being saved for consumption inthat Egypt could achieve additional GDP per the future? And in what should the resource rent be

capita growth of 2.7 to 3.7 percentage points per year invested to support sustainable growth?by adopting sound policies that lead to a virtuouscircle of higher growth and higher rates of saving Nonrenewable resourcesand investment. In addition several specific policyand institutional issues at sector levels need to be Nonrenewable natural resources have played anaddressed, and we will do so in this and the important role in Egypt's economic development.following chapters. The central question is how These consist of oil and natural gas, whichmuch more does Egypt need to save in order to contributed about 10 percent of Egypt's GDP duringmaintain its capital resource base - that is, to replace the 1990s (figure 5.1). The crude oil and petroleumthe depletion of income generating assets resulting product exports have been close to $ 2 billion duringfrom extraction of oil and natural gas. the 1990s, and accounted for roughly 50 percent of

Countries that derive a significant share of their total merchandise export (figure 5.2).'national income from the extraction of nonrenewable Oil production increased almost four-fold duringnatural resources are faced with several issues 1975-84, from slightly more than 10 million tons torelated to the sustainability of economic growth. more than 40 million tons, and has been relativelyHow important are noinrenewable resources in the stable at about 44-46 million tons since 1988 (figuremacroeconomy? What are the effects on output 5.3). Marketable natural gas production also grewgrowth of the future rate of resource extraction? during 1975-84, and continued its increase from lessHow much of the resource rent should be consumed than 4 million tons of oil equivalent in 1985 to more

FIGURE 5.1Share of oil and gas sector in GDP FIGURE 5.2(at constant prces; in percent) Share of petroleum exports

PercentagePercentage

1 8~~~~~~.0. ........... . ..... ... .. ............ ...... ........ .. . .... _.. -----l --- --

16.0 00

14.0 ~~~~~~~~~~~~~~~8012.0$ -__ 60 -

8.0 -_ _ _ _ i 2 0 l _ _ _ ____ _ _ _ _ _ _ _ _'_ _

8.0~~~~~~~~~~~~~~~~6

20 __ n_

° °-- 1991 1992 1993 1994 1995

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95

Source: Egypt Ministry of Planning. Source: From data provided by the Central Bank of Egypt.

41

FIGURE 5.3Oil and gas production being depleted, other forms of capital will have to be(million tons) created to replace the income generated from oil and

gas.tonnage Based on estimates of the cost, normal return on

capital, and economic value of oil and gas resources,5000 ^~~t Oil the resource rent (see annex to this chapter) has been

in the order of $ 4-4.5 billion a year during 1991-3000- t wz ~ 95.2. The oil rent fluctuated between $ 3 and $ 42000- ~ l Gas billion but was generally decreasing; the gas rent

increased from $ 0.5 to $ 1 billion (figure 5.4). Thefluctuations in the oil and gas rent are due to

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 fluctuations in intemational crude and fuel oil

prices. Overall the rental income from oil and gas asSource: From data p;ovided by the Central Bank of Egypt a share of GDP (based on current prices) declined

from 14 percent in 1991 to 8 percent in 1995tham 10 million in 1994. While a substantial share of (figure 5.5).oil is exported, natural gas is mostly consumed athome. FIGURE 5.5home. ~~~~~~~~~~~Resource rentIGDP

The oil resources are primarily extracted under (current prices; in percent)production sharing agreements by international oilcompanies whose output share corresponds to theircost of production and return on capital. Natural gas Percentage

is produced under similar arrangements and the 2018 -- - - - - - - -- - - - - . .price of gas received by the international companies 16-_ .

is tied to the international fuel oil price. The resource 12 '------=--= - = -

rent-the difference between the economic value of 10 : . i .

oil and gas, and cost of production and return on 6-. . __1

capitalaccrues to Egypt. 2 . .. = _. .

The issue of the resource rent has a significant 0macroeconomic dimension. Oil and gas reserves, are 1991 1992 1993 1994 1995

income generating assets, like productive capital in Source: Bank staff estimates based on official statistics.

the manufacturing, service, and agricultural sectors.As oil and gas reserves are finite, the reserves will Projected oil and gas rentonly generate income over a confined time period. Projection of future oil and gas rent depends onThus, as the nonrenewable reserves of oil and gas are the magnitude of new oil and gas discoveries, world

FIGURE 5.4 prices of crude oil, production costs, and rate of oilEstimated oil and gas rent and gas extraction. Two scenarios are developed for

the 20 years from 1995 for which assumptions areUS $ millon, current presented in table 5.1. The difference between the6000- two scenarios is a slower decline in oil production5000 - - ----.--- ------ and higher real oil prices in the "high" scenario.4000 Oil -- ~ - _______ Current gas reserves are at least 23 trillion cubic3000 _ _ _ _ 7t __ _ __ _ _ ' feet, or close to 60 years of current production levels.2000- _ __/_ __. _ __ Reserves are sufficient to allow an average annual

-- _- Gas increase of 8 percent over the next 15 years and a

o0 ___ stabilization of production thereafter beyond the75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 scenario time horizon. Thus, no distinction in gas

productionrate is made between the two scenarios.

Source., Wodd Bank staff estimates. Proven oil reserves stand at about 3.4 billionbarrels, or 10 to 11 years of current productionlevels.

42 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

Thus, the magnitude of additional discoveries has a TABLE 5.1

bearing on production levels over the next 20 years Scenario assumptions for nonrenewable resources (oilas can be seen in table 5.1. Projections of future oil and gas), 1996-2015prices entail substantial uncertainty. Reserve High case Low case

In the high case, real oil prices increase at an Proven oil reserves (billion bbis) 3.4 3.4annual rate of 1.5 percent, while they are constant in Additional oil discoveries (billion bbis) 1.7 0.6

Gas production increase (percentage/yea,)the low scenario. The oil rent is 70 percent of crude Year 1-15 8.0 8.0oil prices in both scenarios (the same as in the 1990s). Year 16-20 0.0 0.0

The gas rent is fuel oil price minus long-run Oilproducion increase (percentageyear) 0 0Year 1-6 0 0.marginal cost of production (see annex to this Year 7-20 -5.0 -7.5chapter). llncrease in real crude and fuel oil prices 1.5 0.0

The projected oil and gas rent for the 20 years (percentage/year)r rs .s . . . s . ~~~~~~~~~~~~Source: World Bank staff estimates.from 1995 in the high case scenario is presented m

figure 5.6. It shows an increase in rent for the first 7 Corporation (EGPC). EGPC exports and sellsyears, peaking at $ 800 million higher than the level domestically Egypt's oil production share, whetherof rent in 1995. The projected oil and gas rent does crude or refined products. EGPC also manages oilnot fall below 1995 levels until after year 18. The product imports and sale of natural gas.projected rent in the low case scenario is presented m Most of central government revenues from thefigure 5.7. In this case, the oil and gas rent peaks at oil and gas sector are from taxation of and profitabout $ 400 million higher than the 1995 level after 6 transfer from EGPC. Given production sharingyears. The rent falls below the 1995 level after 8 years con*acts with interational partners and a policy byand by $ 2,600 million in year 20. EGPC of retaining after-tax profit, the maiin factors

The low scenario may be the reality of the future, that affect the level of goverment revenues areurdess substantial new oil reserves are discovered 'n magnitude of oil and gas production, internationalthe next few years. The decline in oil and gas rent oil prices, and domestic petroleum product prices.coiild have negative inmpacts on future income tn r ' could The n vpact s on future income in Thus, keeping domestic petroleum product pricesEgypt. The impact on future iode d l below economic value implies a loss of goverunment

on the use of the oil and gas rent today. revenues and is a way of distributing the resourcerent among the general population.The competing use of the oil and gas rentConsumption

The rent from the Egyptian oil and gas rent hasThree obvifrous uses: Egypirs uli cndgasumnti Historically, a substantial share of the rent has

thre obiou uss: irs, pbhcconumpion been distributed to the population, althoughexpenditure that does not increase the productivecapacity of the economy; second, public investment FIGURE 5.6that does increase the productive capacity, either Egypt's projected oil and gas revenue over 20 years,through investment in physical income generating 1995-2015-high-case scenariocapital or investment in ]human resources; and third,investment in income generating financial assets-that is, an oil and gas fund. It can be argued thatEgypt's policy has been and is a combination of thethree. Some aspects of the possible use of the oil and am_gas rent are discussed below. -- -

The public sector has the dominant role in ° -

allocating the oil and gas rent. Most of the rent is 4 .0made available to the central government budget;the rest is used to cross-subsidize operations of .° =-=- -=------

public sector companies or invested by these sscompanies in gas transmission and distributioninfrastructure. The main domestic player in the oiland gas sector is the Egyptian General Petroleum Note: Rent is relative to 1995 level.

Source: World Bank staff estimates.

NATURAL RESOURCE DEPLETION AND SAVINGS 43

FIGURE 5.7 gasoline price in Egypt remains substantially belowEgypt's projected oil and gas revenue over 20 years, the price prevailing in, for instance, Tunisia,1995-2015-low-case scenario Morocco, and most Eastern European countries (and

all Western European countries).caistt US Implicit subsidies, in total dollar terms, to diesel

150-. __ .____ __ and kerosene declined substantially from 1991 to-000 1995, while subsidies to fuel oil only declined by 13

percent. In terms of combined subsidies to the fouro____ ___ E_____E s ] N : _ products in 1991 and 1995, about 65 percent of the

-1200D- reduction can be attributed to nominal retail or-1500- - delivery price increases in Egypt, 27 percent to a-2 _ decline in international spot prices, 11 percent to-25D - -234507891011121314151 =7181~ Plower domestic consumption and -3 percent to the

1 2 3 4 5 6 7 8 910111213141S1617181920 slight nominal depreciation in the foreign exchangeYeas rate. Increased gas consumption, which occurred

Note: Rent is relative to 1995 level. despite an increase in bulk gas prices of more than 60Source: World Bank staff estimates. percent, had the effect of significantly increasing the

ueecconsumption implicit subsidies to gas between 1991 to 1995.unevenly, in the form of indirect consumption Although the estimated subsidies are indirect orsubsidies (prices lower than opportunity cost). Not implicit in the sense that they are not budgetary butonly did this benefit larger consumers more, that is, prevail as a consequence of price regulation,the relatively wealthier, but it has also resulted m nevertheless, the subsidies repTesent a large bud-excessive consumption, waste, and inefficient getary revenue loss. The subsidies are estimated ateconomic allocation of investment resources. 45 percent and 24 percent of the estimated oil rent inMoreover, these subsidies can be considered a tax on 1991 and 1995, respectively.the future generation as the oil and gas reserves thatwould be available are being diminished. Invesfment

Petroleum product retail/deliveryprices and gasprices have been adjusted upwards substantially The use of the oil and gas rent on publicsince 1990, although they have in real terms expenditures for current consumption does notdeteriorated significandy since 1993. Estimated provide a basis for sustainable economic growth if itsubsidies for major petroleum products and gas are is accompanied by underinvestment in thepresented in table 5.2, and amounted to $2,000 economy's productive capacity in other sectors. Suchmillion in 1991 and $ 1,050 million in 1995. For underinvestment could be drawing resources frompetroleum products, the estimates are based on areas such as health and education (to increasepetroleum product prices and consumption in human capital) or basic infrastructure (to supportEgypt, and international spot prices plus allowances and increase efficiency of economic activities) wherefor distribution cost (see annex to this chapter). public sector contributionis needed.Distribution cost from refinery to retail outlet or

delivery used in the estimate is one-half the costs in Estimated implicit subsidies to major petroleumthe United Kingdom and Germany. For gas, the products and gasestimate is based on bulk prices and consumption of (millions of $)

gas, and internationalfuel oil prices (FOB) as a proxy Fuel 1991 1995

for the economic value of gas. Gasoline -50 -295The only major product with an implicit tax (in Gas oil/diesel 725 235

negatives) is gasoline, and the implicit tax has Kerosene 430 110increased substantially as a result of domestic price Heavy fuel oil 520 450

increases. However, if the gasoline retail price were atual 2,000 1,050

to reflect the cost of road infrastructure and social Total 2e000 tl( a4

cost of traffic accidents and pollution, it should be Soutre:lWored Bankstaff estimates.

significantly higher than the current level. The

44 EGYPT IN THE GLOBAL EcoNoMy: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

To illustrate the possible scope of such losses, a TABLE 5.3

range of rates of return for alternative uses of Illustrative rates of return on public subsidiesgovernment revenues-resource rent is presented in (percentage)table 5.3. Returns to energy subsidies are estimates Subsidy Rate of return

for Egypt in 1995. They are based on estimated Energy -5.5 to -7.1subsidies and their efficiency costs in leading to Education

Primary 1 o2higher energy consumption. Returns to education Secondary 11 to 18

are cross-country estimates; returns to infrastructure Higher 10 to 12

are averages for World Bank projects during 1974- infrastructureTransport 18 to 21

92. These rates of return can only serve as indicative Irnigation and drainage 13 to 17

for Egypt. Return to education clearly depends on Source: Energy: estimate for Egypt in 1995. Education: Psacharopoulos 1994

more than education expenditure, and can be greatly (the range reflects estimated averages for and differences across regions ofdeveloping countres); Infrastructure: World Bank projects (1974-82 and

affected by variables in quality of education and by 1983-92) presented in World Development Report 1994 (retums to transport

labor market policies. Similarly, return to projects are averages for airports, highways, ports, and railroads).

infrastructure would depend on factors such as thelevel and quality of current infrastructure. cushion a decline in future oil and gas rent. Still to be

An eventual decline i,n oil and gas rents could be resolved, however, are two questions: how largecompensated for by higher private sector would such a fund have to be if it is to generate aninvestment, as envisage(d in the low case scenario income equivalent to the rent lost through thepresented in figure 5.8. Incremental annual reduction of oil and gas production revenues, andinvestment would start in year 6 to meet rent decline how much should be placed in the fund each year?from year 9. The estimated annual incremental The latter depends largely on three parameters, thatinvestrnent to yield an income (incremental GDP) is, the annual oil and gas production to the year ofequivalent to the amnual rent decline is based on an depletion, the future price of oil and value of gas,incremental capital-output ratio of four and a and the rate ot return on the financial assets. Astraight line depreciationrate of 10 percent. substantial degree of uncertainty is associated with

the first two parameters.Oil and gas fund The low case scenario is used to estimate the

annual contribution to the fund. This assumes newAn alternative, or supplementary, use of the oil oil discoveries of 20 percent above known reserves to

and gas rent, already adopted by Egypt, is to invest be added to current reserves, and constant real pricesthe rent, or part of it, in financial assets to of crude oil and fuel oil. The real rate of return on thecompensate for the depletion of income generating financial assets of the fund is assumed to be 4oil and gas. Many oil and gas producing countries percent. Annual contributions to the fund arehave established such funds. In doing so, Egypt hastaken a step in the right direction, but still has further FIGURE 5.8

to go. Annual incremental investment over 20 years toEgypt's fund from oil and gas revenues stood at compensate for decline in rent in low-case scenario

about LE 5.1 billion ($ 1.5 billion) in fiscal year1995/96. The fund increased from LE 0.8 billion in Constant US$m

1989/90 to LE 3.8 billion in 1990/91 and has 2500increased modestly in each succeeding year. The 2000 - - -

fund is raised through the issuance of bonds, 1500 __ __ ____

primarily held by EGPC. The fund serves as an oil 'moo _ _ _ - ----

revenue stabilization furtd in the event of declining 500 ____ __intemational oil prices. The purpose of the fund is 0 *- l l- a* i |also investmnent and development of altemative 1 2 3 4 s 6 7 8 9 1011 121314151617181920

energies to reduce domestic dependence on Yearsconsumption of fossil fuels.

Indirectly, the fund also serves as a transfer of oilrent from the present to the future. As such it could source: World Bank staff estimates.

NATURAL RESOURcE DEPLETION AND SAVINGS 45

presented in figure 5.9, and amount to two-thirds of production of 7.5 percent a year from year 2002. Inthe projected annual oil and gas rent in the period this case, the combined oil and gas rent would fallbefore depletion begins. A contribution at that level below the 1995 level in year 2004 and thereafterwould obviously have significant negative impact on decline rapidly to only 40 percent of the current levelcurrent income. Fostering private sector investment in year 2015.and investing in priority infrastructure, quality Although declines in oil and gas rent may beeducation, and health improvements seem like avoided during the next 6 years, alternative uses forviable alternatives to the anticipated future decline of oil and gas revenues during this period deserveoil and gas rent. serious consideration. Petroleum product and

FIGURE 5.9 natural gas prices have been raised significantlyAnnURE5. contributions to Egyptian oilrevenuesince 1990, but have declined in real terms sinceAnnual contributions to Egyptian oil revenuestabilization fund, from 1995 (low-case scenario) 1993. Estimated implicit subsidies to petroleum

products and gas stood at more than $ 1 billion in1995, or 24 percent of the resource rent.

Constant US $ m Estimates of the efficiency cost of energy4000 subsidies in Egypt in 1995 suggest that energy3500 subsidies have a rate of return to the economy of -5.53000 -- -_ percent to -7.1 percent. In contrast, well spent2000 - investments in education and priority basic1000 - _ __ infrastructure could yield a return on the order of500 ___ 15-20 percent. Fostering private investment already

0- >-- ----- - ----!-- i 1- X- -4---1 forms part of Egypt's growth strategy. Incremental1 2 3 4 S 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 private sector investments, rising to $2 billion a year

Years (above current levels) by the year 2014, wouldcompensate for the anticipated decline in resourcerent from oil and gas.

Source: Bank staff estimates based on official statistics. The policy implication is clear. Egypt couldmaintain its income generating assets by directing

Summary and conclusion resources toward human and infrastructureinvestment. This can be achieved by reducing the

Nonrenewable resources account for importantt implicit energy product subsidies that result in moreparts of the economy with oil and gas production at rapid depletion of nonrenewable resources and low10 percent of GDP, and oil and petroleum product resource efficiency.exports at about 50 percent of total merchandiseexports. The resource rent-that is, value of oil and Notesgas less production cost and normal return oninvestment-is estimated at about $4.4 billion, or 8 1. Petroleum exports (crude and products) andpercent of GDP. merchandise export figures do not include exports

The level of future oil and gas production and by international oil production partners.consumption could have significant bearings on 2. The economic value of oil is the price of Egypt'sfuture output growth. Two scenarios of projected oil crude oil, while the value of gas is approximated byand gas rent have been envisaged. The "low" the price of heavy fuel oil (FOB), heavy fuel and gasscenario could become the reality-a decline in oil being close substitutes.

46 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

TABLE 5A.1A nnex " Prices of Egyptian crudes, 1996

(average differentials relative to Dated Brent: $/bbl)

Crude First quarter Second quarter July-August

Egyptian crude oil prices Suez Blend -1.33 -1.63 -2.45Ras al-Bihar -0.95 -1.03 -1.60Zeit Bay -1.00 -1.08 -1.65

The Egyptian crude oil prices have traditionally Belayim -2.03 -2.36 -3.13been set on the basis of a formula with weighted Ras Budran -2.18 -2.54 -3.33average differentials to selected internationally Ras Ghab -3.03 -3.44.18

Source: Calculations based on monthly differentials published in Arab Oil andtraded crudes; of these Dated Brent was the most Gas (various 1996 issues).important (see figure 5A.1 for historic annualaverage price of Dated Brent). The formula was Economic value of natural gassimplified in January 1996 with export crude pricesset relative to the Dated Brent. The average Natural gas produced in Egypt is consumeddifferentials of major Egyptian crudes to the Dated domestically and there are so far no pipelnes forBrent are presented in table 5A.1. The differentials export. An export parity price is therefore notare reviewed monthly. available. Natural gas consumed domestically is

FIGURE 5A.1 largely replacing the use of petroleum products inPrice of Dated Brent power plants and industry. The petroleum product

MOWb, replaced is predominantly heavy fuel oil. The priceof heavy fuel can therefore serve as a reasonable

-35 __ _ ,_ = proxy for the economic value of natural gas. In fact,30 - _ _ production agreements with international oil25_- _ _ J companies in Egypt set the price of natural gas2__ _ _ I received by the oil companies relative to the

10 __ __ international market price of heavy fuel oil. The

o annual average international spot price of highsulphur heavy fuel oil is presented in figure 5A.2.75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95

Years

Calculation of oil and gas rent

Source: Energy Prices and Taxes; OECD. The annual realized oil and gas rent is theeconomic value of annual oil and gas production,

In the pricing formula prior to 1996, the Suez less costs of production and normal return on capital.Blend served as a reference crude, and the price was The economic value of the oil is the Egyptian crudetied through price diffe:rentials to the Dated Brent oil prices multiplied by the quantity of the respectiveand the Iranian Heavy crude by a weighting crude production volumes. The economic value offormula. The other Egyptian crudes were tied to the the natural gas is the international high sulphurSuez Blend. The Suez Blend pricing formula with heavy fuel oil price multiplied by the number of tonsdifferentials during 1992-95 are presented in table of oil equivalent of gas5A.2. The price differentials of the other Egyptiancrudes relative to the Suez Blend during 1992-95 TABLE 5A.2

were in the range of -3.85 (in $ per barrel, i.e. cheaper Price of Suez Blend, 1992-95by $ 3.85) to + 0.65 (more expensive). (differentials relative to crudes in weighting formula: $/bbl)

Production of Suez Blend crude was about Weiht32 percent of total production in 1993 (against about Crude (percent) 1992 1993 1994 199532 percent in 1992), Ras Gharib about 20 percent Dated Brent 60 -2.4 to -3.2 -2.8 to -3.2 -1.2 to -1.7 -0.6 to -1.9(22.5 percent), Ras Budran about 19 percent Iranian Heavy 20 -0.5 -0.5 -0.5 0.0 to -0.5(12 percent), Ras al-Bihar about 14 percent Suez Blend 20 parnty panty parnty parity(11.5 percent), and Belayim about 13.5 percent Source: Arab Oil and Gas (various issues 1992-95).

(19 percent).

47

Figures for the cost and normal return on capital FIGURE 5A.2

in use for oil production are not readily available. Heavy fuel oil priceHowever, since most of Egyptian oil production isunder production sharing contracts with VW

international oil companies, the oil companies' 30

production shares serve as a good proxy for the cost 25 _ _ - _ _

and return on capital. The aggregate annual 20 ---------------------

production share has been in the neighborhood of 15- -_--- �- A -30-33 percent in the five-year period between 1990 10and 94. Thus, the oil rent is estimated at 67-70 s -- - -percent of the economic value of crude production. 0

The most recent years are more relevant for assessing 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95

both the role of the rent in the Egyptian economy Year

today and future policy associated with the rent; lessemphasis has therefore been placed on an accuratecalculation of the rent in the earlier period of the Soure Energ Prices and Taxes; OECD

1970s and 1980s. Thus, the rent calculation has beenbased on 70 percent of the crude oil value, although since the mid-lo 80si while Petrobel's output has beenthis may understate the rent in periods of high oil inceteid-i ThescowhileePetaober'seoutputnhassbeenincreasing. The companies have recently intensifiedprices and overstate the rent in the 1970s. efforts to increase recovery rates from existing fields

To obtain figures for natural gas, British Gas . .calculated long-run marginal costs for EGPC m 1994.The costs are summarized in table 5A.3. The long, lft and water injection) and by developing new

The coss are smmarize in tabe A.3 Th long extensions to their fields. These measures contributerun marginal cost of existing fields have been .signi to sustain es toal annualapplied to calculate the gas rent of current and productle However, p tio fom newhistoric gas production. For historic years, the costs field discoveries tends to be relatively low. Fourhave been deflated.

fields started production in 1994 with a total

Oil and gas reservesandproduction production capacity of 35,000 barrels per day, orabout 3.9 percent of total annual production from all

Proven oil reserves in Egypt stood at about 3.4 productionfields.billion barrels as of January 1, 1995, equivalent to Natural gas reserves were estimated at about 21about 10 to 11 years worth of production at current trillion cubic feet in 1995, or almost 600 billion cubicannual production levels of about 45 million tons. meters. In contrast, annual production in 1995 was aProven reserves have been relatively constant for little more than 10 million tons. Gas production hasseveral years, implying that recent discoveries have increased at an annual rate of 8 to 9 percent in thereplaced annual production. However, output from 1990s, and Egypt's policy is to continue gasexisting fields is projected to decline over the coming production at or about this rate of increase. If annualyears. Thus, substantial discoveries will have to be production is increased at an annual rate of 8 percentmade to sustain annual production at about 44 to 46 until it reaches about 30 billion cubic meters, andmillion tons. then levels off at around 33 billion cubic meters, the

reserves of almost 600 billion cubic meters will lastOf 23 principal oil fields in Egypt, SIX werediscovered in the 1980s. Seven fields account for TABLE 53

about 80 percent of total oil production. Gupco, Long-run marginal cost of gas exploration andPetrobel, and Suco are the three largest operators in production, 1993/94Egypt, accounting for slightly more than 80 percent ($ per 1000 cubic meters)of total oil production. In 1993, Gupco's annual oil Gas fields Base case Most likely caseproduction stood at somewhat more than 20 million Existing fields 11.1 11.1

tons, Petrobel's production at a little over 12 million Existng discoveries 38.3 37.7

tons, and Suco's production at almost 4.5 millon Unproven reserves 40.5 40.3tons. Source: Calculations by EGPC/Brtish Gas.

48 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

for at least 20 more years, and it is unlikely that no The annual deadweight loss (DWL) can bemore discoveries are madle. estimated in two steps:

Petroleum product and gas subsidies

Retail (end-user) prices in Egypt for majorpetroleum products and gas bulk prices are where Qe is energy consumption (tons) in thepresented in table 5A.4. All prices were substantially absence of subsidy, Qs is energy consumption (tons)increased from 1990 to 1993, but have not been in the presence of subsidy, ps is the subsidizedadjusted since 1993. Although budgetary subsidies to energy price (LE/ton), pe is the price at economicpetroleum products are almost nil, price regulations value of energy (LE/ton), and e (<0) is the pricehave kept retail prices below economic value or elasticity of energy demand.opportunity cost for all major products exceptgasoline, implying that implicit subsidies prevail.

(2) DWL= (pp)(Qs - Qe)/2

Efficiency cost of energy subsidieswith a linear approximation of the energy demand

Historic energy subsidies in developing fucto inter.vnpiernecountries have been substantial for many reasons. Based on the consumption of major petroleumPolicy makers' arguments have included protection ducts one kosene, of diesel, ueof the poor and of infant industries. However, oil) and natural gas, domestic prices, and estimatedsubsidized energy prices (direct budgetary transfers economc value of the products and gas, estimates ofand price regulations) provide reduced incentive to edeadwe os in 1995 are prestinatable

use nerg effcietly,resutin in xcesive the deadweight loss in 1995 are presented in tableuse eergyeffiienty, reultig inexcesive 5A.5 for vanious assumption of the price elasticity of

consumption compared with the level that would d femand.prevail if prices reflected the opportunity cost ofenergy.

A methodology often used to assess the annual TABLE 5A.5

efficiency cost of subsidies is the estimation of Estimated annual deadweight loss in Egypt (1995)deadweight loss. The deadweight loss can be seen to Elasticity Deadweight loss Deadweight lossrepresent the resource waste in the economy. When a of demand (US$ million) (percent of estmated subsidy)subsidy is removed, users of energy will tend to -0.3 58 5.5reduce energy consumption as long as energy -0.4 75 7.1

efficiency improvements and conservation cost less 0.5 92 8.7than the increase in thLe energy price. Thus, the Source: World Bank staff estimates.

difference between the economic value (opportunitycost) of energy saved, and the cost of saving energy, The DWL as a percentage of estimated subsidiesis the deadweight loss (or resource waste) in the can be seen as the (negative) economic rate of returnpresence of a subsidy. to providing energy subsidies.TABLE 5A.4Petroleum product end-user prices in Egypt

1990 1990 1991 1992 1992 1992 1993Product Unit May September May January June December July

Premium gasoline LE/Atr 0.55 0.60 0.80 0.80 1.00 1.00 1.00Regular gasoline LE/Atr 0.50 0.55 0.70 0.70 0.90 0.90 0.90Kerosene LE/ltr 0.10 0.10 0.20 0.30 0.30 0.30 0.40Gas oil LE/ltr 0.10 0.10 0.20 0.30 0.30 0.30 0.40Gas oil (for power) LE/ltr 0.15 0.15 0.25 0.25 0.35 0.35 0.45Diesel oil LE/ltr 0.09 0.09 0.18 0.27 0.27 0.27 0.36Fuel oil LE/ton 50 50 80 80 100 130 130Gas (bulk) LE/th n9 46.7 46.7 75 75 94 122.5 122.5Source: As published in various ministerial decrees.

NATURAL RESOURCE DEPLETION AND SAVINGS 49

II

Chapter 6

Increasing long-term savings to build thebasis for growth

Egypt has a golden opportunity to catch up with fast growing economies by shifting publicenterprises to pnivate hands, thereby triggering public and corporate saving.

As financial sector reforms increase household saving, privatization in life insurance andpension reform together could promote private saving through development of the capital market.

The scope for further expenditure reductions is effects, privatization could stimulate savinglimited, and fiscal revenues remain volatile indirectly. For example, if the proceeds from sales

(chapter 3). How, and by how much, could Egypt are used to retire public debt, this could lead to aincrease public sector savings? Furthermore, given reduction in the size of government through lowerthe favorable demographic trend in Egypt-that is, taxation, with favorable effects on public savinga stable elderly population, and rapid growth of the (Sachs 1996).1 Another example relates to theworking-age population (Shi and Yang 1996)-how favorable effect of privatization on thecould private savings be encouraged? competitiveness of industries if it were to lower the

cost of producing intermediate goods and servicesIncreased savings lfrom privatization and (for example, power, telecommunications, services).public enterprise reform Finally, privatization could contribute to saving

indirectly by boosting capital market development,It is often thought that countries like Egypt are which has been shown to contribute positively to

unable to compete in a more globalized world growth (ILevine and Renelt 1993).because they are saddled with large, inefficient PE The positive link between privatization andsectors. The irony is that the same countries can be saving has important implications for countriessaid to have an opportunity to gain rapid keen to grow fast but unable to wait for savings toproductivity growth by shifting the assets of PEs to accumulate from economic growth. To suchmore efficient use. The fact that the gains from countries, privatization, along with other reformsreforms, especially in terms of savings, can be (for example, of pension funds), can help jump-startsubstantial suggests that some countries have a real the growth process, thereby creating a virtuousopportunity to break the vicious circle, and begin a circle of saving, investment, and growth. Anprocess of catching up with the fast-growing important question in this context is: how is iteconomies. Egypt is one of those countries. possible to raise saving from reform of PEs, and

Privatization could increase savings, in part what is the magnitude of the potential increase inbecause the transfer of ownership to the private savings from privatization? The methodology usedsector is associated with higher productivity (Galal in addressing these questions is based onand others 1994; World Bank 1995). Higher comparing the saving from the PE sector underproductivity, in turn, generates more resources, continued public ownership and its saving underwhich can either be consumed or saved. In the counterfactual scenario of privatization andaddition, privatization could attract savings from commercialization.2 Because the potential gains inabroad, which may not occur without privatization. saving depend on the initial conditions of the PEThis typically happens when specialized sector (including its level of efficiency and size), wemultinational firms buy such enterprises as power start by measuring the past performance of the PEand telecommunications. Beyond these first-round sector, and exploring the roots of the problem.

51

The PE saving-investnent gap and its roots Of course, whatever gap Egypt's PEsaccumulated in the past had to come from

Availability of consolidated accounts for the elsewhere in the economy: the government budget,entire PE sector in Egypt limited the analysis below domestic saving, foreign borrowing, or a mix of allto 356 enterprises. 3 These enterprises operate in three. As can be seen from figure 6.2, thealmost all branches of the industrial sector, but the government clearly carried the bulk of the burden,few missing PEs, known as the "economic although the budget's contribution fell dramaticallyauthorities" in Egypt, are relatively important ones, in recent years. The banks were the second majorand include such large entities as the Suez Canal, contributor to PEs, and this contribution increasedtelecommunications, power, and the railway. The in recent years to partially offset the reduction inbias in the sample favors PEs, given that previous budgetary transfers dictated by tighter fiscalanalysis has shown that the economic authorities policies. The shift of financing from the governmenttend to perform less well than other PEs on average budget to the banking sector could pose problems,(World Bank 1987). given that banks are also publicly owned; this

The PE saving-investment (S-I) gap is defined means that commercial criteria may not have beenas the difference between the PEs' current surplus, followed in allocating these funds.before transfers to or from the government, andtheir fixed capital formation. Current surplus is FIGURE 6.2

defined as operating revenues minus operating Egyptian saving-investment gap and its sources ofexpenditures, plus net nonoperating income before finance, 1987188-93194

MVi.. of LE

taxes and dividends. For the sample analyzed, the -000 ___ _gap for the PE sector in Egypt averaged -2 percent . "of GDP over the period 1987/88 to 1993/94.4 This -1 _

gap is notably higher than the average of 0.4 2000 1 > -

percent for 46 developing countries (figure 6.1), but -- ;the Egyptian PEs did better over time. The S-I gapreversed from -7.3 percent of GDP in 1987/88 to asurplus during 1991/92-1993/94. Since then, the i _PEs in Egypt have 'oeen self-sufficient, generating 000

most of tie resources they needed for operation - - -

and expansion. -0-ou -_ _ _ _ _.Source: Calculated from CAPMAS data (varous issues).

FIGURE 6.1 While a smaller PE S-I gap is desirable becauseSaving-investment gap as a percentage of GDP in Egypt i frees sourcer tE mor producive priateand 46 developing countries, 1987-93 it frees resources for the more productive private

Perce-t of GDP sector, the way this gap is reduced matters.2 1 Unfortunately, the improvement in the S-I gap of

1- 46 devloping , the PE sector in Egypt came primarily from aCowits ,, ' reduction in capital expenditures, rather than from

° -- -- --R-----3g -i-- -- - a; 1 an increase in saving (figure 6.3). Capital.1 - - , expenditures were cut sharply twice (in 1988/89

* * ,' and 1991/92), and never recovered since. At the

.31. 8 Egypt " 8 ' same time, saving as a percentage of GDP has-3 , v ̂ #deteriorated between the beginning and the end of

the period.The reasons for the deterioration in saving are

.5 ,' low rates of return on capital and low productivity._____________ j__-~ ~ Egyptian PEs were not net losers on average, but

they made only modest rates of return on capital(figure 6.4).5 Between 1986/87 and 1993/94, their

Source: Developing countries: World Bank (1995); Egypt: computed from ope surplu ree to apd wasCAPMAS data (various issues). operating surplus relahve to capia employed was

52 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

FIGURE 6.3 average performer. Moreover, the performance ofSaving-investment gap of PEs in Egypt, 1987188-93194 the sector lags significantly behind those of such

P.,.nt GOP _ _ successful reformers as Korea, Chile, and Mexico.r0 - The roots of the modest performance data of

8 lPEs in general are relatively well known:e o N _ _ The government has overextended itself in4 !: _ commercial areas not suited for public ownership.

* Managers of PEs face little incentive to- ~ -> behave efficiently or to respond to consumer tastes

° r----- --- - ------ ,-St -- ~and market conditions.*2 -° ja.5.;,p rD E To be sure, the government has attempted to

-47 ," "',' , address the two causes of the problem of PEs in__ ! Egypt. With respect to privatization, a process was

initiated a few years ago, and picked up more

Source: Calculated from CAPMAS data (various issues). steam in 1996. Not only did the proceeds from salesincrease in the first nine months of 1996, but the

11.9 percent, which is relatively low given that the nature of privatization changed in favor of the salesurplus represents the returns to owners as well as of majority stake, in some cases to anchor investors.lenders. Profit-, net of taxes and subsidies to net So far, the government has sold stakes in 39worth reflect an average return below the deposit companies (figure 6.5); the private sector acquired arate over the last few years. Finally, the rates of majority of the shares in 18 of these (4 acquired byreturn on revalued capital only averaged close to anchor investors and the remaining 14 sold on the5.5 percent during the period. stock market). In addition, the government sold a

Productivity is difficult to measure for the majority of the shares in 11 comparnles toentire PE sector, in part because no meaningful employees, along with the partial sale of 21composite price indices exist for outputs and enterprises on the stock market. The total proceedsinputs. However, a comparison between real per from sales to date are ,ust below$ 1 billion.unit variable cost and operating surplus to sales of As for commercialization. the government hasthe PE sector in Egypt and a sample of eight also made substantial progress. It incorporated PEscountries indicates that thie PE sector in Egypt is an under Law 203 and provided a framework in wvhich

a legal distinction has been rnade betweenFIGURE 6.4Financial performance of public enterprises in Egypt, FIGURE 6.51986187-93194 Proceeds from privatization of Law 203 companies in

Percat Egypt, 1994 to September 199614_xd _ _, LE

Not weiafing l~~~amo

11 SpliS ~ 40+0 E 0 o

6j ~ ~ e ( -0 -- 8 _._ _ _ I

Cl 1200 O t 0 - 0 £

Source: Calculated from CAPMAS data (various issues) Source: From data provided by Public Enterprise Oflice.

INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 53

TABLE 6.1 Potential gains in savings from reforms: aEstimated increases in savings from simulationreforming PEs: total

NPV of profits Total increase Annual increase in Assuming that the government undertakes thebefore taxes in savings savings necessary reforms to improve the performance of

Type of reform (millions of 1995 LE) (percent of 1995 GDP) the PE sector, how much additional savings will50 percent such reforms bring about?priatization 89,879 In answering this question, the emphasis is50 percent epaicommercialization 132,095 42,216 2.1 centered on the addition to savings as a result of50 percent privatization, rather than on the budgetary impact

50ppercent of privatization. This means that what matters iscommercialization 140,032 50,153 2.4 whether or not privatization and commercializationSource: Calculated from CAPMAS data (various issues). generate additional resources that could be

consumed or saved by the public or the private

ownership and management responsibilities. In this sector.6 As argued at the outset, these additionalcontext, budget transfers to PEs have been reduced, savings could come from behavioral changes at theand the banking sector is being encouraged to lend firm level, such as improved productivity andto PEs on commercial grounds. Competition has increased investment. The next section elaboratesbeen enhanced by opening up the economy and the methodology followed to estimate the additionallowing the private sector to participate in many to savings.sectors previously reserved for PEs. Finally, 17 Simulation results. Based on the assumptionsholding companies were formed with a view to (box 6.1), privatization and commercialization ofgiving managers more autonomy in the sample of PEs analyzed are expected to bringdecisionmaking. about additional savings to Egypt to a magnitude

Notwithstanding the progress on privatization of 2.4 percent of GDP (table 6.1). For reasonsand commercialization, success in reducing the explained above, the gains from privatization (2.1

relative size of the sector to restore a healthy percent of GDP) are much more substantial thanbalance between the public and private sectors in from commercialization (0.4 per-cent of GDP).the economy remains to be seen. On the More significanty perhaps, given that the FEcommercialization front, some PEs still receive sample analyzed only represents about a third ofsubsidies.Theihardbudget constraintwas imposed the PE sector in Egypt, the addition to savingsby cutting investment, with limited progress on could be much more. Indeed, unless returns on themeasures to improve saving. Banks have not been gains in savings diminish unexpectedly, they couldprudent in lending to PEs. The holding companies be as high as 7 percent of GDP. This is about theare proving to be less than keen on privatization, as size of the gap Egypt needs to bridge if itsit diminishes their power. In short, despite the saving/investment ratio to GDP is to increaseimprovement in the PE S-I gap in recent years, the sufficiently to match the fast-growing economies.sharp cut in investment and the relatively low rates The gains in savings from privatization andof return on capital suggest that there is some room commercialization would be made by both thefor squeezing more savings from reforming the PE government and the private sector. Table 6.2 showssector. the distribution of these gains between the two of

TABLE 6.2Estimated increases in savings from reforming PEs, by govemment and private sector

Total increase in savings Annual increase in savings(millions of 1995 LE) (percent of 1995 GDP)

Type of reform Govemment Private sector Total Govemment Private sector Total

50 percent prvatzafion -17,751 59,967 45,216 -0.9 2.9 2.150 per cent commercializabon 7,937 0 7,937 0.4 0.0 0.450 percent pnvatzation and -9,814 59,967 50,153 -0.5 2.9 2.450 percent commercializationSource: Calculated from CAPMAS data (various issues).

54 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

them, witlout taking into account the price to bepaid by the private sector to the government for the BOX 6.1

purchase of 50 percent of PEs in the sample. The Methodology and assumptionseffect on saving is positive (2.4 percent of GDP). The potential gains in savings from privatization andcommercialization of the PE sector are obtained by subtracting

Finally, table 6.3 shows the gains in savimgs the net present value (NPV) of profits before taxes underfrom privatization and commercialization by continued public ownership (or the factual scenario) from theorigin. The gains are split almost evenly between NPV of profits before taxes under privatization andorigin, ~~~~~~~~~~~~~~~commercialization (or the counterfactual scenario). To this end,investment and productivity. More interestingly, three scenarios are first constructed.however, the gains to the country are greater when The No-Reform scenario, in which the current performance ofboth behavioral differernces are present because of the sector is projected into the future by extrapolating the

sector's revenues, costs and investment according to theirsynergies, or the interaction between productivity historical trends. The projections are made for all items in theand investment. When both are present, a larger income statement and balance sheet. Profits before taxes arestock of resources is used more efficiently, and then discounted at 10 percent to obtain the NPV under the No-

there is a compounded effect on performance, and Reform scenario.The Privatization scenario, in which the performance of the

thus on savings. sector is also projected into the future, but under theSensihivity analysis. Given that the results assumption that productivity will improve annually by 1.5

depend on the assumptions made, it is useful not percent, and investment will increase annually by 20 percentrelative to fixed operating assets. The same procedure withonly to separate the effect of each assumption from respect to discounting is then applied as in the No-Reformthe effect of the other, but also to explore the scenario. The result is another NPV of the sector, representing

sensitivity of the results to these assumptions. The one extreme counterfactual scenario (100 percentseparation of the impact of each assumption has The Commercialization scenario, in which the performance ofalready been done, and can be used by the reader to the sector is projected into the . future, assuming thataccept or reject anv of the assumptions and still commercialization will lead to an improvement in productivity of

1 percent per annum, accompanied by no change inobtain useful results. The remaining issue is to investment behavior. The result is an NPV of the sector,explore the sensitivitv of the results to the key representing another extreme counterfactual .;cenario (100

assumptions. This is done here, and presented in commercializaticn).table 6.4. The table shows the results under two From these three NPVs the additin to saving estimate bymaking the realistic assumption that the government will sellextreme scenarios: full privatization of the sample only half the sector and commercialize the operation of theof PEs analyzed, and full commercialization. For rest. In all instances, the NPVs are calculated by discountingeach of these scenarios, the results are shown for the streani of benefits antdhe osum ofer the reus tofthembuyersvarious discount rates (8, 10, and 12 percent), and sellers. The costs are the resources used to generate thevarious productivity diffierentials (1.0, 1.5, and 2.0 benefits, including the costs of labor, capital, and intermediate

percent for privatization) and various investment ippossibilities (15, 20 and 25 percent of net fixed Source: Galal (1996).

assets). moderately sensitive to variations in productivity,Two broad conclusions can be drawn from and most sensitive to variations in investment. This

table 6.4. First, reforms of the sample of PEs not only suggests that the gains from investment ininvestigated here can produce gains in savings of the course of privatization are significant, but also1.2 percent of GDP at a minimum, and as high as that care must be taken to ensure that investment4.3 percent of GDP. Second, the results are least will be forthcoming. The design of privatizationsensitive to variations in the discount rate. They are transactions should commit the new owners to an

TABLE 6.3Estimated increases in savings from reforming PEs: origin of the change

Total increase in savings Annual increase in savings(millions of 1995 LE) (percentage of 1995 GDP)

Productivity Additional Productvity AdditionalType of reform improvement investment Synergies Total improvement investment Synergies Total50percentprivabzabon 11,966 23,300 6,950 42,216 0.6 1.1 0.3 2.150 percent commercializaton 7,937 0 0 7,937 0.4 0.0 0.0 0.450percentprivatzabonand 19,903 23,300 6,950 50,153 1.0 1.1 0.3 2.450 percent commerdalization

Source: Calculated from CAPMAS data (various issues).

INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 55

investment program, where appropriate, to conditions, attract private foreign savings. Finally,maximize the gains to society. tax policies that are biased in favor of investment

Financial sector reforms to increase private and against consumption could encourage savingsaving by both households and the corporate sector,

though the empirical evidence still appearsSaving is affected in various ways by different unsettled.

financial policies and institutions. Three policy The social insurance systemareas that could increase the rate and improve thecomposition of private saving will be addressed in The Egyptian social insurance system (SIS) hasthis section: reforming the pension system, re- an important impact on several macroeconomicstructuring the insurance industry, and developing and welfare issues, such as saving, redistribution,capital markets. capital market development, social protection and

There is increasing evidence that generous pay- public finance. In 1994/95, contributions bvas-you-go state pensions tend to depress household employers and employees to the pension fundsaving. Econometric work for this report shows a amounted to 3.5 percent of GDP, equivalent tonegative correlation between private saving and about 21 percent of gross domestic saving. Benefitgovernment spending on social security as shares of payments and fiscal transfers (wage taxes andGDP. It also shows that a mandatory saving scheme investment income) to the pension fund were 2.5is most likely to increase household saving. percent and 1.5 percent, respectively (table 6.5). SISFurthermore, the contractual saving institutions, inflows (including investment income) lesssuch as the life insurance industry, have a clear outflows was 5.3 percent of GDP in 1994/95, andimpact on the composition of savings, by favoring accumulated reserves were 33 percent of GDP inlong-term financial assets (invested by financial mid-1995. By way of comparison, combined marketinstitutions), over fixed assets such as real estate, capitalization in both stock exchanges was about 13precious metals, and land (invested by individuals), percent of GDP at end-1995.even though it is not clear whether soundcontractual saving institutions lead to higher The surplus from the SIS is invested via theaggregate saving. With well-developed contractual National Investment Bank (NIB) -a government-saving institutions, households and private owned instituticn that finances primarilyscorporations are able to borrow long term (Poterba government projects. Thus, the SIS effectively1994). The insurance industry also supports works as a pay-as-you-go system. The nationalpension reform by providing specialized products reserves of the SIS at the NIB represent public debtand services such as annuities and life-disability due in the future when the SIS starts incurring ainsurance. To the extent that pension reform and deficit. Access to cheap funds appears tc increaseprivatization programs increase household and the propensity of governments to spend, andcorporate saving respectively, capital market crowds out the private sector-during the perioddevelopment has an impact on the level of private 1970-94, the public investment share of totalsaving. In addition. capital markets, under certain investment in Egypt averaged about 68 percent.

TABLE 6.4Sensitivity analysis(annual increase in savings as percentage of GDP)a

Investmentb Productvivtf Discount rate

Typeof refomm 15 20 25 1 1.5 2 8 10 12

100 percent privatization 1.7 4.1 7.7 3.5 4.1 4.7 4.4 4.1 3.9100 percent commercialization 0.8 0.8 0.8 0.4 0.8 1.2 0.8 0.8 0.850 percent pnivatzabon and 1.2 2.4 4.3 1.9 2.4 3.0 2.6 2.4 2.350 percent commercializabona. Increases in savings include the interaction of changes in productivity and changes in investment.b. Percentage of net fixed assets.c. Annual growth rates of productivty under privatization. The corresponding rates under commercialization are 0.5 percent, 1 percent and 1.5 percent,respectively.Source: Calculated from CAPMAS data (various issues).

56 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

TABLE 6.5Social insurance system indicators(percentage of GDP)

Transfers from Annual surplus Accumulated surplusYear Contributrion Benefits Treasury

1985/86 5.1 2.5 1.2 5.8 38.21986/87 4.4 2.3 1.0 5.1 36.61987/88 4.3 2.3 0.9 5.6 36.21988/89 4.0 2.2 1.0 4.8 33.91989/90 3.6 2.0 0.9 4.6 31.71990/91 3.5 2.1 1.0 4.5 31.91991/92 3.1 2.1 1.1 3.6 29.01992/93 3.3 2.2 1.3 4.5 30.21993/94 3.5 2.5 1.5 5.4 32.51994/95 3.5 2.5 1.5 5.3 33.1Sofurce: Staff calculations based on data frorm Ministry of Social Insurance.

The saving effect of a mandatory scheme is comparative public pension scheme andtherefore offset by increased government spending. demographic indicators.On the other hand, a truly fully-funded system that Contributions. The SIS reaches very highinvests in financial instruments at market rates has contribution rates on (basic) taxable wages relativethe potential of developing financial markets -even to benefits. -Social security contributions must beif the system invests in government securities, paid on workers' basic and variable wages, with agovernment borrowing becomes a transparent maximum taxable amount for each category ofprocess. Funded systems that strengthen the link wages (LE 450 per month for basic and LE 500 perbetween benefits and contributions (such as defined month for variable). The average total taxable wagecontribution plans) eliminate many of the in 1994/95 was LE 267 per month for civil serviceclistortions of a pay-as-you-go system. employees and LE 149 per month for noncivil

SIS provides penision benefits and insurance service employees, far below the maximum taxableagainst disability, death, and loss of earnings due to amounts. In 1994/95, basic wage was 42 percent ofunemployment or illness. The SIS covers a high total taxable wage for civil service employees andproportion of the work force,7 about 83 percent in 46 percent for noncivil service employees.1994.8 There are more pensioners than persons For those covered under the main programover the age of 60- a ratio of 146 percent - which is (Law 79/47), total contribution rates 9 on basicout of line compared with other regions, including wages are 41 percent for private sector employees,the OECD; this indicates a system that is quite 39 percent for public enterprise employees, and 36generous or lax in its eligibility requirements. The percent for government workers. Workersratio of pensioners to contributors (the system contribute 14 percent, the Treasury 1 percent, anddependency ratio) is high relative to other the employer pays the remainder. The contributiondeveloping countries, and to the ratio of population rates on variable wages are lower, since noover 60 to that aged 20-59 years (demographic contribution is assessed on job exit indemnity.dependency ratio). Table 6.6 gives some Nonetheless, the contribution rates are too high in

TABLE 6.6Comparative public pension schemes and demographic indicators, using most recent data(population ratios in percentage)

Contributors to Pensioners to contributors Pensioners to Population over 60 toRegion work force population over 60 population 20-59OECD 93.9 39.2 84.1 34.0Latin America 38.3 21.0 30.8 18.0MiddleEastandNorthAfrca 41.3 27.5 57.5 13.5Asia 23.5 11.4 22.3 13.5Afrca 6.4 8.5 24.0 12.5Egypt (1995) 83.1 37.7 146.3 14.4Source: Staff calculations based on data provided by Ministry of Social Affairs; OECD (1994); World Bank staff estimates.

INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 57

relation to the benefits. Table 6.7 provides the pension for those with a certain number of years'contribution rates for both basic and variable wages contribution.for different types of workers covered under Law Benefits. Pensions on basic wages are fully79/47 adjusted, while those on variable wages are not.

Eligibility criteria. The eligibility criteria for The ratio of average monthly pensions to averageretirement constitute a major variable in covered monthly wages (replacement rate)determining the financial viability of any defined indicates that social insurance provides monthlybenefit plan. The normal retirement age for Egypt benefits that represent a high percentage of average(age 60 for both men and women, under the major taxable wages, 102 percent for civil serviceprograms of Law 79/47) is lower than that of employees and 147 percent for noncivil serviceOECD countries (whose average retirement age is employees in 1995. In 1986, the replacement rates64.4 years for men and 62.9 years for women), but is were 89 percent and 103 percent respectively.in line with many developing countries. Given Inflation adjustments on pensions have beenincreasingly productive life spans, many countries greater than the growth of average wages ofare improving the financial viability of their contributors, with the differential greater forpension systems by raising the retirement age. noncivil service workers.

Redistribution occurs in two main areas. First, The determination of the pension amount atpensioners from the agricultural sector-about 45 retirement depends critically on the treatment ofpercent of total pensioners in 1995-are provided wage and price inflation. For variable wages, thethe equivalent of minimum wages (LE 45 per method of computing for the pensionable amountmonth). Given the very low flat contributions by is particularly sensitive to the inflation rate, sinceagricultural workers and farmers (currently LE 1 the basis used is the average wage during theper month), the benefits are higher than would be covered period adjusted by an annual inflationafforded by the contributions. Second, within Law factor of 2 percent. At a 10 percent annual inflation79/47, which covers civil service employees and the rate, the pensionable variable wage for a 30-yearformal sector, the pension formula sets a minimum contribution period would only be 55 percent of

real wages.

TABLE 6.7Contribution rates for social insurance(percentage)

Basic wage Variab,e wage(up to LE 450/month) (up to LE 500/month)

Program Worker Employer Govemment Total Worker Employer Govemment Total

Prvate sector enterprises 14 26 1 41 11 24 1 36Public sector enterprses 14 24 1 39 1 1 22 1 34Governmentoffices 14 21 1 36 11 19 f 31Source: From data provided by Ministry of Social Affairs.

TABLE 6.8Public pension spending as shares of most recently published indicators(percentage)

Share of receipts fromPublic pension Public pension

Region spending to GDP receipts to GDP Wage taxes Investment income General revenuesOECD 9.2 9.1 57.4 11.0 35.1Latin America 2.0 2.4 63.8 23.0 13.0ECA 8.0 7.9 68.6 0.2 16.3Middle East and North Africa 2.8 4.4 63.1 17.5 19.4Africa 0.5 0.7 77.8 20.3 1.5Asia 1,9 5.2 61.3 24.2 14.1Egypt 1995 2.5 7.7 45.3 35.6 19.1Note: Regional numbers are simple averages of sample country data.Source: OECD 1994 and estimates by Word Bank staff.

58 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

In addition, there is rno automatic indexation of retum, they would have increased to a figure 60benefit payments during retirement to protect the percent higher than the sum they reached in 1995.value of benefits from inflation. Prior to 1987, the In effect the reduction in value of reserves over thepurchasing power of pensions declined 10-year period between 1980 and 1990 is equivalentsignificantly, because the government did not raise to more than seven years of (1995) benefitbasic pensions regularly. However, over the past 10 payments. This represents a significant erosion inyears, annual basic pension adjustments were made the real purchasing power of the reserves and a netto prevent the decline of basic pension benefits in subsidy to NIB.real terms. Over the period 1987-96, the legislature- In July 1992, NIB raised the interest rate onmandated adjustments preserved the purchasing incremental social security funds (includingpower of the basic pensions for all but three of the reinvested reserves) to 13 percent, which is thepast 10 years. However, pensions on variable wages are current rate. This rate is higher than current banknot automatically indiexed or adjusted by the legislature. term deposit rates (12 percent) but lower thanThus, in addition to the adverse impact of inflation interest on NIB investment certificates (17 percent).on the computation of the pensionable variable Average inflation during the period 1992-96 waswage on which the initial pension benefits are about 10 percent, providing a positive real returnbased, the resulting variable wage pensions are not on incremental and reinvested funds.protected from inflation during retirement.

Financial conditions. During the period 1985-95,the SIS has been producing operating surplus NIB is responsible for evaluating and financing(contributions less outlays) due to the high ratio of the government investment program. Funds arecontributors to pensioners. Because the inflation disbursed to various public sector entities,adjustments on basic pensions approved by including central and local governments, serviceParliament are financed from general revenues, agencies such as hospitals and universities, andtotal receipts by the SIS come from three sources: economic agencies such as the public utilities. In thewage taxes, investment income (fiscal transfers), past, NIB also financed the PEs, but since theand general revenues. Table 6.8 shows the shares of adoption of Law 203, NIB's exposure to the PEs hasthe different sources of financing for the SIS. gone down to almost zero. NIB is the effect of usingAmong other things, Egypt also has the biggest pension funds to provides long-term financing todifferential between public pension spending to public investment* projects approved by theGDP and public pension receipts to GDP. parliament, and charges interest to recover

As noted above, operating surpluses of the operating costs. In the 1980s, interest rates chargedinsurance funds are invested by the SIS in the to government projects and PEs were negative inNational Investment Bank. During the period 1980- real terms, because funds available through the SIS90, NIB paid interest to SIS on the funds at 5 to 6 were cheap. However, with the increase in interestpercent per year. This amounted to a negative real rates on social insurance funds to positive real ratesrate of return since the C:PI was increasing by about since 1992, the NIB has also increased interest rates18 percent per year during the same period. Had on its lending, thus raising the hurdle rates forthe insurance reserves been earning even a zero real investment projects. Currently, interest rates paid

TABLE 6.9

NIB funding sources as percentage of total(LE million, in percent)

1990/91 1991/92 1992/93 1993/94 1994195 Total

Social insurance fund 67 64 67 53 45 56Postal savings fund 2 2 2 3 3 3Investment certificates 11 3 23 33 29 23Bank's surplus 14 19 1 7 17 12Credit 4 10 7 4 4 5Others 2 2 1 1 2 1

Total 6,477.4 8,203.3 9,555.4 14,365.3 20,548.2 59,149.6Source: From data provided by National Investment Bank.

INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 59

by NIB for social insurance funds and postal governed by Act No. 54 (1975) and Executivesavings funds are 13 percent and 13.25 percent, Regulations Decree 78 (1977), and are under therespectively. supervision of the Egyptian Insurance Supervision

The SIS is the main source of funds for NIB. As Authority (EISA). Efforts are under way to updateof June 1995, SIS reserves in NIB were LE 67 billion, the law and introduce appropriate regulatory andabout 33 percent of GDP. Social insurance funds supervisory arrangements.(new and reinvested) accounted for 68 percent of The number of private pension plans has beenthe fund sources of NIB during the past five years. increasing significantly-as of June 30, 1995, thereInvestment certificates (10 years with 6-month were 504 plans, compared with 330 in 1991. Thecoupons) issued to the public made up another 29 reserves held by these funds (LE 3.3 billion as ofpercent of funding sources, while deposits of postal June 30, 1995), while representing only 1.6 percentsavings funds contributed 3 percent (table 6.9). of GDP, have been growing by about 30 percent perOver the past 10 years, SIS funds available for year over a five-year period. The number oflending averaged 4.1 percent of GDP a year, employees covered more than doubled during themaking SIS a major financier of public investment. period 1990-95, to almost 0.5 million. ContributionsWith a policy objective increasing the share of to the funds in 1994/95 were LE 600 million, lessprivate sector in total investment, the role of the than 1 percent of GDP, but with an annual growthNIB and the utilization of SIS funds need to be rate of more than 30 percent over a five-yearreviewed. period. Table 6.10 provides data on the growth of

What is the effect of using pension funds to private funds.finance government investment? The privileged A majority of these funds were established byaccess to public pension funds is a less transparent public sector organizations, although a recentway of financing government projects and lacks the decree forbids contributions by governmentdisciplining effect of capital markets. The negative organizations to these funds. Less than 10 percentreal interest rates paid to the SIS during the 1980s were set up by private sector companies. Nearly allimposed a hidden tax on contributing workers and of the private pension plans operate on a definedprobably encouraged more public investments than benefit principle, where the majority of the plansmarket-based rates would have induced. In many provide salary-related benefits in return for salary-countries, publicly managed funds required to related contributions.invest a major portion of their portfolios in About 48 percent of the assets of the privategovernment securities (including lending to PEs) funds are in fixed bank deposits, while another 42tend to charge below-market rates. Privately- percent are invested in government bonds. Onlymanaged funds, however, tend to achieve higher about 7 percent are invested in equities and realreal rates of return. Figure 6.6 shows comparative estate. Lack of professional investmentreturns for selected pension funds during the 1986. management capacity, the dearth of financial

Private pension plans. To complement the social instruments, and the risk-averse nature of theseinsurance system, voluntary pension plans have funds have been cited as the main reasons for theemerged in Egypt. These plans are typically set up concentration of investments in bank deposits andby employers on a defined benefit basis, with government paper.contributions made by both employers and Private funds are covered by Law 54 (1975) andemployees. Private pension plans in Egypt are regulated by Decree No 78 (1977). Private pension

TABLE 6.10

Growth of private funds, 1991-95

1990/91 1991/92 1992/93 1993/94 1994/95

Number 330 376 408 471 504Contributions (LE 000) 256,662 369,511 380,310 585,333 602,063Reserve fund (LE 000) 1,379,768 1,717,928 2,129,265 2,727,855 3,300,921Coverage 203,201 216,885 292,403 408,421 496,386

Souse: Egyptian Insurance Supervision Authority annual reports.

60 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

funds must be registered with the EISA, which auditors, and actuaries. Prudential guidelines onrequires that each fund submit annually a financial investment should be developed, consistent withstatement audited by an extemal auditor, and every the development of capital markets and financialfive years a financial statement prepared by an infrastructure. The regulations should deal withactuary registered with the EISA, which may pricing (fee structure), portability, and marketingrequest an external actuary to review the issues. Also, a decision on guarantee arrangementssubmissions. Investment regulations prescribe would be necessary.minimum and maximum investments in different Reforming the social insurance system-types of investment vehicles. short- to medium-term measures

To deal with the rapid growth of privatepension funds, and their likely changes in There are several reform initiatives that couldinvestment strategies in response to developments be undertaken in the short- to medium-terms toin the capital market, the legal and regulatory improve the efficiency and solvency of the currentframework would have to be revised, and the system. These reforms focus on: (1) improving thesupervisory capacity of EISA developed. In transparency of govermunent uti(ization of SISparticular, thenewlawnd regulations should deal resources to ensure a neutral impact onwith the emergence of defined contribution plans, government spending decisions; (2) developing aindividualized accounts, professional fund portfolio and investment strategy that supportsmanagers, fund administrators, custodians, capital market development, without

FIGURE 6.6

Comparative performance of selected pension funds

EDw '-__19ett ,~~~~~~~~~~~(9"

pmum

TK(alcey - 2. 6 1344

-~~~~~ 41tt4 136018)

Egm)t

da~

Ni&m1aid(-Qonq~Wu) Prvatdynuiaged

LLK (ocampdIaid)

Chle.(DIs)

40.0 J.I0 -30. -O -210 -14.0 10.0 40 0.0 60 10i.0 160

PvdtageraL edrai Ow lrVtlMn

Soure: World Bank staff estimates.

INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 61

compromising safety objectives; and (3) correcting wages during the worker's entire career, adjusted atcertain design deficiencies to improve efficiency 2 percent per year for inflation, results in aand financial sustainability of the SIS. This section defective pensionable wage. On the other hand,focuses on these initiatives, while a following using the average of the last two years' basic wagesection gives the longer-term reform does not take inflation into account, and alsorecommendations for the pension system. These introduces an incentive for manipulation (forshort- to medium-term reforms would serve as a example, raising wages sharply right beforefoundation for the longer-term reforms described retirement). One solution to consider is a formulabelow (Table 6.11). that uses the average career earnings adjusted for

The most critical reform initiative in the short- wage inflation, although this requires a betterto medium-term should be to improve the information system. Pension benefits should bemanagement of social security funds, to achieve adjusted for inflation automatically, using aboth rate of return and security objectives. This formula that takes into account wage inflation,would entail the elimination of the special access of rather than awaiting legislative action. The amountthe NIB to SIS funds, and the establishment within of wages that would be subject to the contributionSIS of an investment management capability. The rates should also be automatically adjusted.SIS already has plans to develop portfolio Finally, the contribution rates should bemanagement capability, and has requested reviewed. Improved returns on reserves and lesstechnical assistance from the World Bank. In generous retirement (eligibility) provisions shouldaddition to the hiring and training of personnel, result in lower contribution rates, although thesome of the tasks necessary to ensure proper impact of revising the pensionable wagemanagement of the reserves include development computation to better account for inflation wouldof investment objectives, designing an investment result in higher costs. the net impact of alI thestrategy by targeting a certain portfolio mix, above reforms on the contribution rates should beidentifying investment vehicles and participating determined. The amount of governmentfinancial intermediaries, and putting in place a contributions to fund redistributioin programscontrol system. NIB would have to strengthen its should also be reviewed.competition for the SIS funds by paying marketrates (that is, rates paid by the NIB certificates of Reforming the social insurance system-deposit). A transition plan would have to be put in longer-term proposalsplace to reduce NIB's existing holdings of socialsecurity funds. A spillover benefit of this reform A country's social security system typically haswould be the increased supply of long-term savings three major objectives: first, to enable theto be intermediated by the capital market and population to shift some income from workingothers to the private sector. The SIS should pursue years to old age (saving or wage replacement);technical assistance in this area. second, to protect those with low incomes by

Another area of reform is retirement provisions. providing a basic income floor during old ageFirst, the normal retirement age of 60 should be (redistributive or poverty alleviation); and third, toincreased over time to 65. Given the present trend insure against certain types of risks, such asof improved mortality rates, the current retirement disability, longevity, and inflation (insurance). Inage implies an increasing dependency ratio, thus order to achieve all three objectives, a combinationincreasing costs to the system. Second, the early of systems (the multipillar system) isretirement provisions should be revised by raising recommended, since one system cannot efficientlythe early retirement age to 60. Workers who elect to achieve all objectives.receive pensions between the ages of 60 and 64 7he multipillar approach. The reform of theshould receive benefits that are actuarially fair, pension system in Egypt should move to establishrelative to the full benefit available at normal three pillars to assure adequate retirement incomes:retirement age. first, a fully-funded mandatory defined benefit

A third area of reform is the treatment of (DB) public pillar that insures workers' earnings upinflation. The current method of using variable to a certain level; second, a mandatory defined

62 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

contribution (DC) private pillar that insures Redistribution is achieved by introducing aworkers' wages above a certain level; and third, a minimum basic pension to those with low incomes.purely voluntary scheme that could supplement the The current minimum is 50 percent of referencefirst two pillars. In addition, the development of a wage, assuming a minimum number of 20 years'competitive and stable insurance industry would contribution; the minimum pension would beprovide many accompanying services, such as life correspondingly lower if the number of years ofand disability insurance and annuity products. contribution is lower. It may be prudent to review

The public pillar would provide a minimum whether this formula achieves the safety netretirement income, while the compulsory and objective.voluntary private systems would enable workers to Mandatory private schemes. The second pillarsupplement their public pensions. The three would be a privately-managed defined contribu-schemes should be portable across employers, and tion scheme, involving compulsory contributionsvesting should be immediate for the DC private from earnings in excess of the public pensionablepensions, while the ]DB public scheme would wage but below some maximum. The mandatoryrequire a minimum number of years of private pillar effectively replaces the variablecontribution. The public pillar would achieve the pension scheme of the social insurance system. Theobjective of dealing with old-age poverty, which contribution rate should allow the attainment of ahas elements of income redistribution. The private certain replacement target, say, 70 percent ofpillars have the advantage of closely linking pensionable wages. Under a DC scheme, thebenefits to contributions, thus minimizing the determination of such a contribution rate wouldproblems of evasion and manipulation. At the same largely depend on the real returns on thetime, as experienced in other countries, the private contributions. Disability and survivors' benefitsschemes should improve capital accumulation and could be purchased from insurance companies, andfinancial market development. would have to be financed from alt additional

The public pillar. The public pillar is contribution, (about 3 percent in many countries).recommended to be a filly-funded DB scheme with The contribution rate in relation to the targeta required contribution from employees and replacement rate should be much lower than isemployers. In order to make a smooth transition to currently the case for variable pensions. Athe new system, the current basic pension scheme contribution rate of 10 percent (plus 3 percent forcould be modified to form the public pillar. Under disability and death insurance, and 1 to 2 percentthis plan, the variable pension scheme would be for management) to a fund that earns 5 percent inreplaced by the mandatory private pillar discussed real terms (that is, 4 percent over the real wagebelow. Thus, the public pillar would be built on the growth rate), would achieve a replacement rate ofcurrent basic wage pension scheme, which would 70 percent of wages over the retirement period ofbe modified by reviewing contribution rates, 16 years (indexed to wage inflation), assuming thatmaximum taxable amounts, redistribution the pensioner contributed for 32 years.objectives, automatic adjustment for inflation, and The contribution of the employers to thethe minimization of fiscal transfers. The SIS should variable pension scheme could be merged as part ofseek technical assistance to review the current the compensation of the employees, and, to thesystem and develop a short- and medium-term extent that the required contributions by thereform plan in the context of the longer-term employees are less in the new system, workersdesign. The contribution rate for the public scheme would effectively get a pay increase. Pastwould depend on the average replacement ratio contributions to the variable pension scheme of the(average pension payments to average covered SIS could be converted into a bond carrying awages), the dependency ratio (the ratio of market interest rate, which would mature when thepensioners to active workers), mortality rates, worker retires. Transition issues would have to bedisability rates, the level of desired funding, and reviewed carefully.the rate of return on accumulated reserves. An Under a private system, participating privateactuarial review would be necessary. pension funds and fund management companies

would have to be licensed and regulated. Workers

INCREASING LONG-TERM SAVIINGS TO BUILD THE BASIS FOR GROWTH 63

could choose among the licensed funds managed would be tax exempt, while pensions would beby professional management companies, and taxed like any other source of income; ormandatory contributions would be automatically contributions would not be deductible, but bothwithheld from wages by employers and placed in investment returns and pension benefits would beindividual accounts. Workers could change tax exempt. The latter approach provides cash flowemployers without any impact on past advantages for the budget, since no tax income iscontributions, thus improving labor mobility. lost up front, but provides weaker incentives toWorkers should also be able to move their accounts workers to participate in voluntary pension funds.from one fund to another with minimal cost, thus A third alternative, currently used in the Czechensuring competition among the funds. Because the Republic and Australia, would be to offer asystem is susceptible to fraud and mismanagement, government contribution (credit transfer) toappropriate regulatory and supervisory systems pension members, instead of a tax credit orshould be in place, including good information exemption. This alternative would be moreflow to participants. redistributive than the other approaches, since it

As recommended above, given that that there is would also benefit nontaxpayers. In addition, ita growing number of private pension finds, EISA would offer a strong incentive to low- and middle-should recommend the replacement of the 1975 income workers, irrespective of whether they payLaw on Private Insurance Funds, and adopt income tax, to save for their retirement. The creditappropriate prudential regulations to cover the transfer could be limited to active workers, anddevelopment of individual accounts under DC could be paid only to those workers who save aschemes managed by licensed fund professionals. specified percentage of their income and do notThis would provide the foundation for the withdraw their balances until they retire. As thedevelopment of a mandatory private pension credit transfer would be added to the individualscheme managed by the private sector. Since the retirement saving account of each worker, thistransition to a mandatory private system would approach would generate a higher level of loig-probably take some time, the development and term financial resources than a tax treatmrent basedexperience of current regulatory efforts and private on deductibility.fund management constitute a pilot from which Currently, the Egyptian tax treatment provideslessons could be learned, allowing adjustments to for tax deductibility of contributions and taxbe made before the mandatory private system is exemption of pension-fund investment income andput in place. Furthermore, capital market pension benefits. A review of the issues of taxdevelopment would have to advance, creating a treatment should be made.more liquid and deeper financial market.

Voluntary Private Funds. Under the third pillar, n tyworkers would be able to make voluntary The insurance sector can play a very importantcontributions with a cap, in addition to the part in the development of the private sector, themandatory contributions. Upon retirement, emergence of a private pension system, and theworkers would be able to combine their modernization of the securities markets. Byaccumulated funds with their pension accounts, covering certain economic and financial risks, itincreasing the size of their pensions. This would enables enterprises to better manage their financialallow firms to offer pension plans in excess of the affairs, and protects households from financialmandatory ones, as they already do. These funds losses arising from accidents or injuries. Inwould be subject to the same regulatory framework addition, the industry, especially the life insuranceas those in the mandatory schemes, and may in fact sector, mobilizes long-term savings that canbe one and the same fund. facilitate the financing of both enterprises and

Tax treatment. The consumption tax principle households with resources that have a much longershould be fully applied to this as to all types of maturity than traditional loans from the bankingcontractual savings. This would imply one of two sector. In most developed countries, the insurancethings. Either contributions to contractual savings industry is a significant component of the economy;would be fully deductible and investment returns life insurance companies' reserves to GDP range

64 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

from 13 percent to 34 percent, and premiums to Another 18 percent was invested in corporateGDP range from 3.0 percent to 10.1 percent. paper. The rest was used to purchase real estate

Egypt's insurance industry. The insurance and provide loans to policy holders. Conservativeindustry in Egypt is underdeveloped-life investment policies and lack of financialinsurance premiums to GDP were an insignificant instruments have led to the concentration of0.2 percent in 1995, compared with 6 percent for a investment in bank deposits and governmentsample of developed economies. Total assets to paper.GDP of all insurance companies (life and nonlife) in Legal and regulatory framework. In 1995, a newEgypt were about 4 percent in 1995, while life law on insurance was passed, and in June 1996, ainsurance assets alone were 38 percent of GDP for new set of regulations was issued by the EISA. Inthe developed economies sample. There are 10 addition to solvency requirements, the regulationsinsurance companies in Egypt, of which eight impose certain guidelines on investment bytransact all classes of insurance and business, and insurance companies, making a distinction betweentwo transact only nonlife. All are publicly quoted reserves from the life insurance business andjoint stock companies. Two have been set up as reserves front the nonlife segment. The law requiresjoint ventures with foreign investors to operate as separation of the reserves between the twobusinesses exclusively in Egypt's export processing businesses in companies that operate in bothfree zones and are not allowed to offer their markets. The new regulations also deregulated theservices to the rest of the market. pricing of most insurance products, replacing price

The industry is highly concentrated. The largest control with price reporting. The only exceptionscompany controls 50 percent of both life and are in the fire and motor vehicle insurance lines,nonlife business, and tIhree companies account for which will be deregulated in 1999. The93 percent of life and 89 percent of nonlife markets. deregulation of most inLsurance products shifts theThe three largest insurance companies and the sole focus of supervision to solveincy monitoring. There-insurance company are state owned, thus regulations are basically in line with internationalmaking the sector virtuallyv under state control. The (especially EU) practices and defirntions. However,state owned insurance companies also own shares solvency monitoring requires good information andin five of the private insurance companies. In the technical capability on the part of the supervisor.past, direct foreign ownership was only allowed in Reform proposals. With the changes in the legalthose companies operating in the free zones and regulatory framework and the ongoing(Egypt's free trade, or export processing, zones). institutional development of supervisory capacity,The exception was granted under the Investment the next generation of reform efforts should focusLaw, which allowed for the creation of companies on the issues of competition and ownership. Asas joint ventures, to encourage companies to mentioned earlier, there is a high concentrationoperate in the free zones. Currently, regulations level in the industry, which is indicative ofplace a 49 percent limit on foreign ownership of problems of competition. To encouragedirect insurance companies and no restrictions on competition, EISA should allow the entry of newforeign ownership of reinsurance companies. firms-including foreign insurance companies-as

Investment. Total investment of the insurance long as they meet the licensing criteria. This meansindustry as of June 30, 1995 was LE 5.4 billion, that the 49-percent maximum ownership by foreignrepresenting 2.6 percent of GDP. Over the period firms should be abolished. EISA should also ensure1990/91 to 1994/95, investment grew by 18 percent a level treatment of both state owned and privateper year. The state owned insurance companies insurance companies. Finally, the state ownedaccounted for 91 percent of investment. The insurance companies should be included in thereserves of nonlife business accounted for 60 current privatization program (Table 6.12).percent of total reserves in 1995, compared with 68 On the regulatory aspects, to complementpercent in 1991. liberalization of pricing of products and

The insurance companies invested the bulk of commissions, EISA should focus on disclosuretheir funds in fixed-term bank deposits (39 percent requirements to the public of prices andof total) and governrment bonds (38 percent). commissions. The obligatory ceding requirements

INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 65

and price controls on reinsurance should be when they do, liquid capital markets allow them toeliminated. Tight regulations on employment of divest quickly and inexpensively.foreigners should also be relaxed to enable In several countries, securities markets haveinsurance companies to acquire needed expertise developed in parallel with-and have supported-quickly. Finally, to improve the transparency of the two initiatives that have an important impact onsector, financial statements of insurance companies private saving: one is pension reform (such as theshould be available to the public, and these transformation of pay-as-you-go to fully-fundedstatements should be audited by qualified and systems), and the other is privatization of stateindependent auditors. Accounting standards and owned enterprises. To the extent that pensionauditing guidelines for insurance companies should reform and privatization programs increasebe provided by EISA. household and business saving, respectively,

securities market development has an impact onThe capital market and its link with saving the level of private saving.

In the case of Egypt, the development of capitalCapital markets affect economic activity markets both supports and is supported by the

through the creation of liquidity and the reduction development of contractual saving institutions. Asof transaction costs. From the point of view of the discussed in the previous sections, investment byinvestor, liquid securities markets allow the private pension funds and insurance companies hasacquisition of assets that can be sold quickly in case been mainly in government securities and bankof a need to access savings or alter a portfolio. As term deposits. Capital markets would allow greaterfor the corporation issuing long-term securities, it diversification, and perhaps higher yields, for thesehas access to a larger pool of funds and has better investments, therebv improving the financialinformation about the relative cost of different. performance of contractual saving institutions; thisways of financing an investment. Thus, corpora- should result in greater benefits to savers in thetions have a wider range of instruments to finance form of lower contribution rates to pensionsinvestment, and savers have more alternatives than schemes and lower premiums for insurance. At thebank deposits; precious metals, or real estate. same time, the existence of pools of funds from

Many studies conclude that the impact of stock contractual saving institutions could be tappedmarkets on the level or rate of domestic saving is through capital markets to finance investments.ambiguous - savers may merely shift funds from In addition, active capital markets provide anone saving instrument (such as bank deposits) to enabling environment for attracting foreignsecurities. However, some studies have shown that savings. The existence of liquid capital marketsthere is a positive relationship between private gives a foreign investor better exit options, thussaving as percent of GDP and financial sector encouraging more foreign direct investmentdevelopment, which includes capital market Foreign portfolio investors would focus on activelydevelopment, although the channels through which traded securities in the stock market. With privatethis relationship is defined are numerous. For capital dominating the total capital flows toexample, stock markets are seen to increase developing countries, and an increasing shiftinvestment, thereby increasing national income, toward equity financing, the development ofand thus increasing the level of domestic saving. capital markets becomes essential in attracting

But what is unambiguous is that the private foreign capital. But the risks of foreigncomposition of saving is improved by the savings would be kept to a minimum if theyintroduction of liquid capital markets. Savers augment, rather than replace, domestic savings.purchase long-term securities, which offer higher The experiences of two regions that attracted theexpected returns and enable risk diversification. In greatest shares of private capital flows had twothe process, more financing opportunities become different outcomes-foreign savings replacedavailable to corporations to implement projects domestic savings in Latin America and thewith long-term pay-offs. Long-term investors need Caribbean, but augmented domestic savings in Eastnot relinquish their saving for long periods, but Asia. The positive experience of Asia is attributable

66 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH

to macroeconomic policies and institutions that Statistics (CAPMAS) attributes to liquidation andencouraged domestic saving and investment. privatization.

Finally, the development of capital markets and 4. Excluding 1992/93 because the reported datathe process of privatization are mutually show a sharp drop in gross fixed assets.reinforcing. Capital markets provide more options 5. Returns to capital are measured using threefor divestiture, while privatization increases the indicators: (1) the ratio of operating surplus tosupply of securities in the market, thus providing capital employed, which measures the retums to allthe securities market with more depth. The contributors (the government as equity holder,deepening of capital markets-as reflected in recipient of taxes, and creditors), (2) the ratio ofincreased market capitalization to GDP, greater profit before taxes and other transfers to or fromliquidity (higher turnover to market capitalization), government to net worth, which reflects the retumsand less concentration of market activity on a few to the government, as if it were a private owner,stocks-would enable capital markets to absorb the and (3) the ratio of current surplus before taxes toexpected increase in portfolio investments from revalued capital employed, where capital isboth domestic and foreign sources, and mitigate revalued using the perpetual inventoryagainst the extreme movements of asset prices. methodology.

6. WVhere the budgetary impact of privatization isNotes the main concern, it is important that all flows to

and from the treasury are taken into account. In1. From a welfare perspective, it has been argued particular, two flows of funds have to be compared:that $1 in the hands of government is worth less (1) the flow of funds from the private sector to thethan $1 in the hands of the private sector, because government (in the form of sale price and taxesraising $1 by government through taxation is from privatized firms, minus the cost ofdistortionary. For further discussions of this point. privatizing), and (2) the flow of funids thesee lones, Tandon, and Viogelsang (1990). government gives up by privatizing (including the2. Privatization refers to the transfer of ownership taxes and dividends from PEs minus the subsidiesand/or control to the private sector. and other transfers made to PEs).Commercialization refers to a package of reforms: 7. Work force includes Egyptians working abroad,increased competition, hard budget constraints, which in 1995 numbered 2 7 million out of a totalregulation of monopolies, financial market reforms, work force of 19.1 million.and incentives to managers to perform efficiently. 8. Contributors to the social insurance svstemDetails on methodology and key assumptions are during 1994/95 to labor force in 1995.provided in Galal (1996). 9. Different contribution rates are assessed for3. The number of PEs in the sample declined from different types of benefits, such as old age pensions,364 in 1991/92 to 356 in 1992/93, which Egypt's disability, death, unemployment, and end ofCentral Authority for Public Mobilization and service indemnity.

INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 67

TABLE 6.11Action plan for social insurance system reform

Area of reform Short- to medium-term actions Medium- to long-term actions

Improve retums on surplus * Develop portfolio management capability * manage all SIS funds* Develop plan to place funds currently with NIB underthe management of SIS* Develop an investment strategy, focusing on theidentficaton of investment obiectives

Adjust benefits for inflation * Review formula for treatrnent of inflaton in determininginital benefits for both basic and variable pensions* Index benefits automaUcally to wage inflabon* Review how to adjust maximum taxable wageautomatbcally

Reduce contribution rates * Review actuarial assumptions and determine whetherthere is scope for reducing contribution rates for both basicand variable pensions

Introduce mandatory private pillar * Develop infrastructure for mandatory private pillar by * convert varable pension scheme tostrengthening legal, regulatory, and supervisory framework mandatory defined contribution plan managed byfor voluntary private pension schemes, strengthening the the private sectorinsurance industry, and developing capital markets

Develop new legal framework * Introduce new law that allows for defined benefitindividual accounts and sets a flexible framework for theregulation

Strengthen regulatory framework * develop and issue new regulations to include coverage * 3djust regulabons as necessaryof fund managers, administrators, custodians, auditors,and actuaries

Strengthen supervision capacity * implement institutional development of EISA

TABLE 6.12Action plan for insurance industry reform

Area of reform Short- to medium-term actions Medium -to long-term actions

Improve structure and competitive conditions * privatze one or two insurance companies * privatize the other state-owned insurancecompanies

* allow more entry, including foreign firms

Deregulate prices * allow competitive pricing of fire and motorvehide TPL insurance

Improve supervisory capacity * implement recommendatons from intemationalconsultants (Coopers and Lybrand)

Ensure neutrality of tax treatment on saving * Eliminate stamp duty for life insurance and reduce * Review income tax rates of insurancestamp duty for nonlife insurance companies in the context of an overall tax review

Increase supply of listed securities * Contnue privatizabon process

Improve financial infrastructure * Develop custodial depository and improve paymentsand settiement services under private sector initiative

Improve Information quality and access * Ensure proper accountng and auditing of financialaccounts* Automate informabon on listed companies

Develop prudential regulation and * Coordinate regulabon and supervision of investmentstrengthen supervisory capacity managers with EISA

68

Selected bibliography

Anand, Ritu, and Sweder van Wijinbergen. 1989. Galal, Ahmed. 1996. "Savings and Privatization.""Inflation and the Financing of Government Working Paper No. 8. The Egyptian Center forExpenditure: An Introductory Analysis with an Economic Studies, Cairo, Egypt.Application to Turkey." World Bank Economic Harrod, R. F. 1959. "Domar and DynamicReview 3 (anuary): 17-38. Economics." Economic Journal 69 (275): 451-64.

CAPMAS (Central Authority for Public Hoekman, Bernard. 1996. "Trade and InvestmentMobilization and Statistics). Various issues. Liberalization: Issues and Options for Egypt."Financial and Economic Statistics of Public Working paper. World Bank, Washington, D.C.Companies. Cairo, Egypt. Unpublished.

Deaton, Angus. 1995. "Growth and Saving: What IMF (International Monetary Fund). 1996. DirectionDo We Need to Know, and What Might We of Trade Statistics Yearbook. Washington, D.C.Learn." Policy Research Department. World Levine, Ross and David Renelt. 1993. "A SensitivityBank, Washington, D.C. Unpublished. Analysis of Cross Country Growth

Dollar, David. 1992. "Outward-Oriented Regressions." American Economic Review.Developing Economies Really Do Grow More September.Rapidly: Evidence from 95 LDCs, 1976-85" Nathan Associates Inc. 1996a. "Egypt: Options forEconomic Development and Cultural Change 40 (3): Increasing Market Competition in Maritime523-44. Port Services." Consultant study funded by

_ 1996. "Growth and Savings in Egypt: USAID. Cairo, Egypt.Lessons from the Empirical Growth Literature." 1996b. "The Quality Control System inWorking Paper. World Bank, Washington, D.C. Egypt." Consultant study funded by USAID.Unpublished. Cairo, Egypt.

Easterly, William R., and Sergio T. Rebelo. 1993. OECD (Organization for Economic Cooperation"Fiscal Policy and Economic Growth: An and Development). 1994. Taxation and HouseholdEmpirical Investigation." Journal of Monetary Saving. Paris.Economics 32 (3): 417-58. . 1996. Energy Prices and Taxes. Paris.

Edwards, Sebastian. 1995. "Why Are Saving Rates Psacharopoulos, George. 1994. "Returns toSo Different Across Countries? An International Investment in Education: A Global Update."Comparative Analysis." NBER Working Paper World Development 22 (September): 1325-43.5097. National Bureau of Economic Research, Poterba, James M. (ed.). 1994. Public Policies andCambridge, Mass. Household Saving. NBER Project Report.

Feldstein, Martin, and Charles Horioka. 1980. Chicago: University of Chicago Press."Domestic Saving and International Capital Sachs, Jeffrey D., and Andrew Warner. 1995.Flows." Economic Journal 90 (358): 314-29. "Economic Reform and the Process of Global

Fischer, Stanley. 1993. "The Role of Macroeconomic Integration." Brookings Papers on EconomicFactors in Growth." Journal of Monetary Activity No. 1:1-118.Economics 32 (3): 485-512. Sachs, Jeffrey D. 1996. "Achieving Rapid Growth:

Fischer, Stanley, and Easterly, William. 1990. "The The Road Ahead for Egypt" The EgyptianEconomics of the Government Budget Center for Economic Studies, DistinguishedConstraint." The World Bank Research Observer 2: Lecture Series III.127-42. Shi, Anching, and Chang-Po Yang. 1996. "Egypt:

Galal, Ahmed, Leroy Jones, Pankaj Tandon, and Long-Term Demographic Trend, and itsIngo Vogelsang. 1994. Welfare Consequences of Implications for Savings and EducationSelling Public Enterprises: An Empirical Analysis. Expenditure." Working Paper. World Bank,New York: Oxford University Press. Washington, D.C.. Unpublished.

69

SRI International. 1995. "Achieving Egyptian . 1995. World Development Report: Workers in anExport Growth." Consultant study funded by Integrating World. New York: Oxford UniversityUSAID. Cairo, Egypt. Press.

UNCTAD. 1987. "Trade Analysis and Information . 1995. Bureaucrats in Business: The EconomicsSystem Data." CD ROM. Geneva, Switzerland. and Politics of Government Ownership. New York:

World Bank. 1987. "Egypt: Review of the Finances Oxford University Press.of the Decentralized Public Sector." Report No. . 1996a. World Development Report: Economy in6421. Middle East North Africa Region. Transition. New York: Oxford University Press.Washington, D.C. . 1996b. "Maximizing the Benefits of Free

. 1993a. The East Asian Miracle: Economic Trade with the European Union-ChallengesGrowth and Public Policy. New York: Oxford and Options for Egypt." Working paper.University Press. Washington, D.C. Unpublished.

___.1993b. Latin America and the Caribbean: A . 1997. "Expanding the Measure of Wealth:Decade After the Debt Crisis. Washington, D.C. Indicators of Environmentally Sustainable

____ .1994. World Development Report: Infrastructure Development." Environmentally Sustainablefor Development. New York: Oxford University Development Studies and Monographs No. 17.Press. Washington, D.C.

70

Statistical Appendix

TABLE 1National accounts(LE million)

Second five-year plan period: actual Third plan period: actual | Estimate1988 1989 1990 1991 1992 1993 1994 1995 1996

A. In current prices (mil LE)

GDP at market prices 61,600.0 76,800.0 96,100.0 111,200.0 139,100.0 157,300.0 175,000.0 205,000.0 230,958.3Net indirect taxes 2,970.0 3,630.0 4,525.0 2,460.0 8,043.0 11,140.0 10,608.0 11,873.0 12,970.1

GDP atfactor cost 58,630.0 73,170.0 91,575.0 108,740.0 131,057.0 146,160.0 164,392.0 193,127.0 217,988.2

Agriculture 11,116.0 14,395.0 17,735.0 19,110.0 21,680.0 24,427.0 27,500.0 32,050.0 35,419.9Industry 16,909.0 20,474.0 26,255.0 36,150.0 43,693.0 48,340.0 53,360.0 61,700.0 69,579.1

of which manufacturng 14,320.0 18,091.0 22,349.0 25,151.0 30,685.0 34,441.0 39,981.0 46,580.0 53,228.5Services 30,605.0 38,301.0 47,585.0 53,480.0 65,684.0 73,393.0 83,512.0 99,377.0 112,989.2

Resource balance (6,913.5) (7,269.8) (10,171.7) (7,680.5) (6,873.6) (5,742.9) (9,798.8) (9,423.4) (8,328.5)

Exports (GNFS) 15,067.5 18,317.9 27,239.4 37,386.2 40,414.0 42,762.7 41,079.0 44,578.2 51,400.8Imports (GNFS) 21,981.0 25,587.6 37,411.2 45,066.7 47,287.6 48,505.6 50,877.8 54,001.5 59,729.3

Total expenditures 68,513.5 84,069.8 106,271.7 118,880.5 145,973.6 163,042.9 184,798.8 214,423.4 239,286.8Consumpton expenditures 48,063.5 60,069.8 77,971.7 92,230.5 118,473.6 137,542.9 147,853.3 172,075.5 192,132.5Govemment 8,437.6 9,690.2 11,178.0 12,769.0 14,645.0 17,719.0 19,826.0 21,915.0 24,213.0Private 39,625.9 50,379.6 66,793.7 79,461.5 103,828.6 119,623.9 128,027.3 150,160.5 167,919.5

Gross domestic investment 20,450.0 24,000.0 28,300.0 26,650.0 27,500.0 25,500.0 36,945.5 42,347.9 47,154.4Govemment 11,022.0 11,480.0 14,251.0 10,178.0 12,346.0 10,987.0 10,659.0 11,299.0 12,581.0Private 9,128.0 11,620.0 12,249.0 17,672.0 16,354.0 14,513.0 26,286.5 31,048.9 34,573.4Total fixed investment 20,150.0 23,100.0 26,500.0 27.850.0 28,700.0 25,500.0 36,945.5 42,347.9 47,154.4Total investment in stocks 300.0 900.0 1,800.0 (1,200.0) (1,200.0) 0.0 0.0 0.0 0.0

Domestic saving 13,536.5 16,730.2 18,128.3 18,969.5 20,626.4 19,757.1 27,146.7 32,924.5 38,825.9+ Net factor income (NFY) (1,052.7) (1,536.5) (3,501.1) (3,309.0) (2,408.5) (9,968.1) (3,202.8) (2,683.4) (2,783.4)+ Net current transfers (NCT) 5,955.7 6,852.5 9,749.5 11,285.6 18,203.1 16,526.7 10,902.9 11,128.9 11,309.2

= National saving 18,439.6 22,046.2 24,376.6 26.946.1 36,420.9 26,315.7 34,846.8 41,370.1 47,351.7

Gross national product 60,547.3 75,263.5 92,598.9 107,891.0 136,691.5 147,331.9 171,797.2 202,316.6 228,174.9Gross national disposable income 66,503.0 82,116.0 102,348.4 119,176.6 154,894.6 163,858.6 182,700.1 213,445.5 239,484.2

B. In constant 1992 prices

GDP at market prices 119,626.9 125,727.9 131,762.9 136,506.4 139,100.0 143,307.7 148,760.0 155,540.0 163,161.5

Resourcebalance (13,232.9) (10,879.1) (13,823.2) (9,934.9) (6,922.1) (4,550.1) (7,462.0) (7.496.0) (6,174.3)Exports (GNFS) 32,677.5 35,658.5 36,272.2 40,996.9 40,414.0 43,253.5 41,207.4 41,763.7 45,918.5Imports (GNFS) 45,910.4 46,537.6 50,095.5 50,931.8 47,336.1 47,803.7 48,669.4 49,259.7 52,092.8

Total expenditures 122,027.0 126,536.8 135,945.5 141,255.1 147,173.6 140,969.4 156,222.0 163,036.0 169,335.7

Consumption expenditures 89,813.5 96,182.9 104,602.4 110,272.1 118,473.6 112,969.4 124,022.0 129,336.0 134,108.0Govemment 15,766.9 15,515.8 14,995.8 15,266.8 14,645.0 14,553.3 16,630.4 16,471.8 16,900.6Private 74,046.6 80,667.1 89,606.6 95,005.3 103,828.6 98,416.1 107,391.6 112,864.2 117,207.4

Gross domestic investment 32,693.1 31,536.5 33,472.1 29,648.1 27,500.0 28,000.0 32,200.0 33,700.0 35,227.7Govemment 17,620.7 15,084.9 16,855.5 11,323.0 12,346.0 12,064.2 9,289.9 8,991.6 9,398.9Private 14,592.8 15,268.9 14,487.6 19,660.1 16,354.0 15,935.8 22,910.1 24,708.4 25,828.8Total fixed investment 32,213.5 30,353.9 31,343.1 30,983.1 28,700.0 28,000.0 32,200.0 33,700.0 35,227.7

Total investment in stocks 479.6 1,182.6 2,129.0 (1,335.0) (1,200.0) 0.0 0.0 0.0 0.0

Terms of trade (TT) effect (1,206.8) (2,342.8) 202.7 1,254.9 41.5 (1,109.7) (1,911.4) (1,099.9) (1,089.4)

Gross domestic income 117,553.1 122,322.3 131,975.9 134,449.7 139,141.5 142,198.0 146,848.6 154,440.1 162,072.0

Domestic saving (TT adjusted) 27,739.6 26,139.4 27,373.5 24,177.6 20,667.8 29,228.7 22,826.6 25,104.1 27,964.0

Source: Govemment of Egypt.

72

TABLE 2National accounts(LE million)

Second five-year plan period: actual Third plan period: actual Estimate

1988 1989 1990 1991 1992 1993 1994 1995 1996

GDP at factor cost(at constant 1992 prices) 113,141.3 118,351.8 123,607.0 127,891.3 131,054.2 134,335.0 139,622.0 146,131.0 153,369.0

Commodity sectors 57,122.3 59,681.5 61,795.0 64,252.6 65,372.2 66,886.0 70,173.0 73,203.0 76,361.0

Agriculture and irrigation 19,623.4 20,196.6 20,756.6 21,264.2 21,680.0 22,220.0 23,072.0 23,741.0 24,470.0

Manufacturng & mining 17,720.8 18,939.8 20,225.7 21,406.3 21,728.3 22,360.0 23,295.0 25,087.0 26,970.0

Petroleum & products 12,293.8 12,597.1 12,442.0 12,772.3 13,008.2 13,210.0 14,345.0 14,365.0 14,365.0

Electricity & energy 1,781.1 1,891.6 2,005.3 2,122.2 2,220.1 2,296.0 2,382.0 2,525.0 2,658.0

Construction 5,703.3 6,056.4 6,365.3 6,687.7 6,735.7 6,800.0 7,079.0 7,485.0 7,898.0

Productive services sectors 37,629.8 39,595.6 41,902.4 42,848.9 43,605.7 44,494.0 45,592.0 47,860.0 50,674.0

Transportabon & communicabon 7,726.0 8,107.2 8,655.9 8,541.1 8,708.7 9,060.0 9,334.0 9,875.0 10,495.0

Suez Canal 5,299.7 5,572.7 5,851.9 6,124.9 6,124.9 5,800.0 5,778.0 5,516.0 5,621.0

Trade 18,852.6 19,652.0 20,474.0 21,341.2 21,731.6 22,350.0 21,345.0 24,632.0 25,936.0

Finance 4,056.7 4,146.5 4,266.7 4,469.6 4,544.9 4,680.0 1,520.0 5,435.0 5,909.0

Insurance 64.1 71.3 71.3 73.6 76.0 79.0 85.0 92.0 104.0

Tourism 1,630.6 2,046.1 2,582.7 2,298.6 2,419.6 2,525.0 2,055.0 2,310.0 2,609.0

Social services sectors 18,389.1 19,074.7 19,909.5 20,789.8 22,076.3 22,955.0 23,857.0 25,068.0 26,334.0

Housing 1,279.6 1,375.8 1,462.8 1,555.9 2,349.0 2,452.0 2,568.0 2,712.0 2,819.0

Public utilities 336.3 353.4 374.3 397.1 400.9 426.0 459.0 495.0 532.0

Social & personal services 8,683.7 9,006.8 9,388.6 9,780.2 9,893.8 10,245.0 10,613.0 11,194.0 11,039.0

Social security 72.8 78.1 81.7 85.2 87.0 92.0 97.0 102.0 111.0

Governmental services 8,016.7 8,260.5 8,602.2 8,971.3 9,345.6 9,740.0 10,120.0 10,565.0 11,833.0

Source: Government of Egypt.

73

TABLE 3Merchandise trade(US$ million)

Second five-year plan period: actual Third plan period: actual EsUmab

1988 1989 1990 1991 1992 1993 1994 1995 1996

A. Value in current prices (USS mil.)

Total merchandise exports 4,572.5 3,875.5 4,374.2 5,709.7 4,790.8 6,301.9 4,573.5 4,854.0 5,438.0

Primary products 3,359.7 2,657.9 2,865.2 4,019.6 3.065.9 4,886.9 3,340.3 2,652.0 2,696.1

of which petroleum' 2,861.5 2,244.8 2,458.0 3,793.6 2,808.4 4,687.5 3,065.2 2,036.5 1,998.9

of which cotton 354.2 298.6 220.0 83.2 35.4 36.8 84.0 306.4 327.5

of which otheragriculture 144.0 114.5 187.2 142.8 222.1 162.6 191.1 309.1 389.7

Manufactured goods 1,212.8 1,217.6 1,509.0 1,690.1 1,724.9 1,415.0 1,233.2 2,202.0 2,741.9

of which textiles 504.4 446.1 635.1 528.9 575.4 450.9 569.3 1,077.3 1,335.1

of which othermanufactured 708.4 771.5 873.9 1,161.2 1,149.5 964.1 663.9 1,124.7 1,406.8

Total non-factor service receipts 3,988.6 5,566.7 6,082.4 6,715.1 7,371.1 6,532.0 7,605.3 8,280.4 9,679.5

of which tourism 885.9 900.6 1,071.8 930.7 1,727.2 1,571.0 1,779.3 2,298.9 3,202.0

of which Suez Canal 1,268.7 1,306.7 1,471.8 1,661.9 1,950.2 1,941.1 1,990.3 2,058.4 2,160.0

Total merchandise imports 9,891.7 10,360.6 11,441.1 11,424.5 10,039.5 10,728.2 8,4884 11,279.9 12,454.0

Food 1,826.9 2,601.5 2,516.4 2,074.7 2,206.2 2,354.0 1,982.0 2,759.8 3,044.6

Other consumer goods 1,322.8 1,340.2 868.9 850.6 547.2 584.3 371.1 478.7 516.5

POL and other energy 209.4 266.8 406.1 594.9 584.6 623.8 393.7 721.4 800.9

Intermediate goods 4,319.2 4,102.5 4,743.1 4,868.9 4,085.0 4,358.7 3,392.2 4,212.4 4,687.8

Capital goods 2,213.4 2,049.6 2,906.6 3,035.4 2,631.1 2,807.4 2,349.4 3,107.6 3,404.3

Total non-factor service paymentsa 2,597.5 2,828.9 2,920.2 3,552.8 4,190.9 3,829.3 6,595.4 4,631.0 5,113.0

B. Value in constant 1992 prices (USS mil.)

Total merchandise exports 5,309.7 4,610.0 4,388.8 5,401.7 4,790.8 6,610.2 5,064.7 4,892.9 5,182.8

Petroleum* 3,423.6 2,882.2 2,408.4 3,447.0 2,808.4 5,018.3 3,628.5 2,385.8 2,212.7

Cotton 378.1 287.9 186.6 70.4 35.4 42.6 81.8 233.1 244.8

Other agriculture 132.4 101.0 174.5 138.8 222.1 161.6 164.9 232.9 279.1

Textiles 572.1 490.5 681.5 546.3 575.4 442.2 549.1 998.6 1,191.1

Othermanufactures 803.5 848.3 937.7 1,199.3 1,149.5 945.5 640.4 1,042.5 1,255.1

Total non-factor service receipts 4,524.0 6,120.8 6,526.7 6,935.6 7,371.1 6,406.2 7,335.9 7,675.2 8.635.6

of which tourism 1,004.8 990.3 1,150.1 961.3 1,727.2 1,540.8 1,716.3 2,130.9 2,856.7

of which Suez Canal 1,439.0 1,436.8 1,579.3 1,716.5 1,950.2 1,903.7 1,919.8 1,908.0 1,927.0

Totalmerchandiseimports 10,869.8 10,894.2 11,941.8 11,657.6 10,054.1 10,630.1 8,284.4 10,531.4 11,114.9

Food 1,709.3 2,313.5 2,403.0 2,074.7 2,206.2 2,361.1 1,922.2 2,457.5 2,548.2

Other consumer goods 1,500.4 1,473.6 932.4 878.5 547.2 573.1 358.0 443.7 460.8

POL and other energy 250.5 342.6 397.9 540.5 584.6 667.8 466.1 845.1 888.5

Intermediate goods n.e.i. 4,899.0 4,510.9 5,089.6 5,028.8 4,085.0 4,274.8 3,272.0 3,904.5 4,182.2

Capital goods 2,510.5 2,253.6 3,118.9 3,135.1 2,631.1 2,753.3 2,266.2 2,880.5 3,037.2

Total non-factor service payments- 2,940.2 3,110.5 3,133.5 3,669.5 4,190.9 3,755.6 6,361.8 4,292.5 4,561.6

Memorandum items

Export volume growth rate 35.6% -13.2% -4.8% 23.1% -11.3% 38.0% -23.4% -3.4% 5.9%

Import volume growth rate 20.5% 0.2% 9.6% -2.4% -13.8% 5.7% -22.1% 27.1% 5.5%

74

TABLE 3 (contd)Merchandise trade(US$ million)

Second five-year plan period: actual Third plan period: actual Estimate1988 1989 1990 1991 1992 1993 1994 199 | 1996

C. Price indices (1992 = 100)

Merchandise exports 86.1 84.1 99.7 105.7 100.0 95.3 90.3 99.2 104.9

Merchandiseimports 91.0 95.1 95.8 98.0 99.9 100.9 102.5 107.1 112.0

Merchandise terms of trade 94.6 88.4 104.0 107.9 100.1 94.5 88.1 92.6 93.6

D. Non-factor service indices (1992 = 100)

Exports of NFS - volume index 61.4 83.0 88.5 94.1 100.0 86.9 99.5 104.1 117.2

Exports of NFS - price index 88.2 90.9 93.2 96.8 100.0 102.0 103.7 107.9 112.1

ImportsofNFS-volumeindex 70.3 74.2 74.8 87.8 100.0 89.6 151.8 102.4 108.8

Imports of NFS-price index 88.2 90.9 93.2 96.8 100.0 102.0 103.7 107.9 112.1

' Includes foreign partners share.

'' Includes payments in return for foreign partner's investment

Source: Govemment of Egypt.

75

TABLE 4Balance of payments(US$ million)

Second five-year plan period: actual Third plan period: actual Estimate1988 1989 1990 1991 1992 1993 1994 1995 1996

TotalexportsofGNFS 8,561.1 9,442.2 10,456.6 12,424.8 12,161.9 12,833.9 12,178.8 13,134A4 15,117.5

Merchandise 4,572.5 3,875.5 4,374.2 5,709.7 4,790.8 6,301.9 4,573.5 4,854.0 5,438.0

Non-factor services 3,988.6 5,566.7 6,082.4 6,715.1 7,371.1 6,532.0 7,605.3 8,280.4 9,679.5

Total imports of GNFS 12,489.2 13,189.5 14,361.3 14,977.3 14,230.4 14,557.5 15,083.8 15,910.9 17,567.0

Merchandise 9,891.7 10,360.6 11,441.1 11,424.5 10,039.5 10,728.2 8,488.4 11,279.9 12,454.0

Non-factor services 2,597.5 2,828.9 2,920.2 3,552.8 4,190.9 3,829.3 6,595.4 4,631.0 5,113.0

Resource balance (3,928.1) (3,747.3) (3,904.7) (2,552.5) (2,068.5) (1,723.6) (2,905.1) (2,776.5) (2,449.5)

Netfactorincome (598.1) (792.0) (1,344.0) (1,099.7) (724.8) (2,991.6) (949.5) (790.6) (818.6)

Factor receipts 624.1 734.0 776.9 1,049.4 1,080.2 1,258.0 853.5 1,625.5 1,755.5

Factor payments 1,222.2 1,526.0 2,120.9 2,149.1 1,805.0 4,249.6 1,803.0 2,416.1 2,574.2

Interest 741.4 1,054.0 1,805.8 1,238.5 940.1 1,236.6 1,211.8 1,327.7 1,452.1

Otherfactorpayments 480.8 472.0 315.1 910.6 864.9 3,013.0 591.2 1,088.4 1,122.0

Net private current transfers 3,383.9 3,532.2 3,742.6 3,750.6 5,477.9 4,960.0 3,232.4 3,279.0 3,326.2

of which workers remittances 3,383.9 3,532.2 3,742.6 3,750.6 5,477.9 4,960.0 3,232.4 3,279.0 3,326.2

Net official current transfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Currentaccountbalance (1,142.3) (1,179.9) (1,727.7) (113.7) 2,697.9 208.5 (622.2) (288.1) 58.0

Official capital grants 697.6 711.2 1,093.7 1,486.9 1,039.3 1,357.0 813.6 918.6 964.5

Private investment (net) 124.0 124.0 136.4 140.5 358.7 453.0 1,287.4 680.6 535.0

Direct foreign investments 124.0 124.0 136.4 140.5 358.7 453.0 1,284.9 676.5 500.0

Portfolio investments 2.5 4.1 35.0

Net foreign lending 1,452.3 1,366.9 1,189.7 (143.3) 75.1 220.9 75.0 295.1 560.4

Disbursements 2,347.9 2,621.0 3,186.9 1,999.0 1,730.3 1,405.4 1,018.5 1,133.9 1,668.9

Repayments 895.5 1,254.1 1,997.2 2,142.4 1,655.2 1,184.5 943.5 838.8 1,108.5

Other capital flows, n.e.i. 597.2 (404.8) (55.6) 5,618.9 971.0 1,433.9 992.8 (51.7) 189.8

Change, net intemational reserves 1,728.8 617.4 636.5 6,989.3 5,142.0 3,673.3 2,544.1 1,550.4 2,530.4

[plus indicates increase in assets]

Memorandum items:

Net international reserves (NIR) 6,975.7 7,593.1 8,229.6 15,218.9 20,360.9 24,034.2 26,578.2 28,128.6 30,659.1

NIR, in months of imports 6.3 6.3 6.6 12.8 16.8 19.1 20.0 19.2 19.9

Exchange rates

Annual average (LE/US$) 1.8 1.9 2.6 3.0 3.3 3.3 3.4 3.4 3.4

At end-year (LE/US$) 2.3 2.6 2.7 3.3 3.3 3.3 3.4 3.4 3.4

Index real avg. X-rate (1990 = 100) 92.3 89.3 102.4 106.0 99.9 92.4 88.9 83.2 81.0

(decrease is real appreciation)

Current account balance as % GDP -1.9% -1.5% -1.8% -0.1% 1.9% 0.1% -1.2% -0.5% 0.1%

Source: Government of Egypt.

76

TABLE 5External debt, stocks and flows(US$ million)

Second five-year plan period: actual Third plan period: actual Estimate

_______________________ 1988 1989 1990 1991 1992 1993 1994 1995 1996

A. Gross disbursements

Publicand publicly guaranteed 1,945.7 2,441.0 3,044.9 1,825.7 1,590.4 1,385.4 958.5 1,133.9 1,068.9

Official multilateral 412.5 233.7 416.3 238.6 266.0 743.7 481.9 637.9 503.8

of which IDA 22.9 18.0 11.1 4.1 3.3 17.4 28.8 51.8 70.8

of which IBRD 140.6 98.8 94.8 101.2 137.6 214.5 154.7 88.3 31.8

Official bilateral 671.7 1,028.8 1,333.5 911.7 745.4 435.3 321.6 375.7 378.0

Private creditors (guaranteed) 861.5 1,178.6 1,295.1 675.4 579.0 206.4 155.0 120.3 187.1

of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private creditors non-guaranteed 245.0 180.0 142.0 90.0 20.0 20.0 60.0 0.0 200.0

Total LT loan disbursements 2,190.7 2,621.0 3,186.9 1,915.7 1,610.4 1,405.4 1,018.5 1,133.9 1,268.9

Drawings from IMF 157.2 0.0 0.0 83.3 119.9 0.0 0.0 0.0 0.0

Total disbursements 2,347.9 2,621.0 3,186.9 1,999.0 1,730.3 1,405.4 1,018.5 1,133.9 1,668.9

B. Amortization

Public and publicly guaranteed 679.0 1,049.8 1,775.0 1,738.5 1,305.4 1,064.5 758.5 769.4 1,062.5

Official multilateral 153.6 176.6 238.0 370.6 385.6 294.0 292.9 334.3 382.5

of which IDA 3.8 4.2 6.1 8.4 10.9 11.0 12.1 13.1 14.0

of which IBRD 120.5 138.8 169.3 194.8 189.8 187.6 187.3 201.8 203.0

Official bilateral 152.2 322.2 692.2 590.4 257.7 123.0 95.4 154.2 348.6

Private creditors (guaranteed) 373.1 550.9 844.8 777.5 662.2 647.5 370.2 281.0 331.3

of which bonds 0.8 0.8 50.8 0.8 0.0 0.0 0.0 0.0 0.0

Private creditors non-guaranteed 150.0 147.0 192.0 321.0 270.0 120.0 185.0 0.0 0.0

Total LT loan net disbursements 829.0 1,196.8 1,967.0 2,059.5 1,575.4 1,184.5 943.5 769.4 1,062.5

Net credit from IMF 66.5 57.3 30.3 82.8 79.8 0.0 0.0 69.3 46.0

Total repayments 895.5 1,254.1 1,997.2 2,142.4 1,655.2 1,184.5 943.5 838.8 1,108.5

C. Net disbursements

Public and publically guaranteed 1,266.7 1,391.2 1,269.9 87.2 285.0 320.9 200.0 364.5 6.5

Official multilateral 258.9 57.0 178.3 -132.0 -119.6 449.6 189.0 303.6 121.3

of which IDA 19.1 13.9 4.9 -4.3 -7.6 6.4 16.7 38.7 56.8

of which IBRD 20.2 -40.0 -74.5 -93.5 -52.2 26.9 -32.6 -113.5 -171.2

Official bilateral 519.4 706.6 641.3 321.3 487.7 312.3 226.2 221.5 29.3

Private creditors (guaranteed) 488.3 627.6 450.3 -102.1 -83.2 -441.1 -215.2 -160.7 -144.2

of which bonds -0.8 -0.8 -50.8 -0.8 0.0 0.0 0.0 0.0 0.0

Private creditors non-guaranteed 95.0 33.0 -50.0 -231.0 -250.0 -100.0 -125.0 0.0 200.0

Total LT loan net disbursements 1,361.7 1,424.2 1,219.9 -143.8 35.0 220.9 75.0 364.5 206.5

Net credit from IMF 90.7 -57.3 -30.3 0.5 40.2 0.0 0.0 -69.3 -46.0

Total net disbursements 1,452.3 1,366.9 1,189.7 -143.3 75.1 220.9 75.0 295.1 560.4

77

TABLE 5 (cont'd)External debt, stocks and flows(US$ million)

Second five-year plan period: actual Third plan period: actual Estimate

1988 1989 1990 1991 1992 1993 1994 1995 1996

D. Interest and charges

Publicand publically guaranteed 358.4 644.7 1,232.8 850.1 713.3 1,021.0 1,018.7 1,236.8 1,398.8

Official multilateral 175.7 159.8 190.7 212.9 189.2 192.0 214.3 232.6 258.0

of which IDA 7.0 7.4 6.2 7.1 7.3 6.8 6.8 7.1 8.0

of which IBRD 141.4 124.7 131.7 144.0 116.2 117.2 113.7 116.9 119.0

Official bilateral 83.8 340.8 781.9 418.4 363.4 684.6 696.7 898.4 1,036.7

Private creditors (guaranteed) 99.0 144.1 260.2 218.7 160.7 144.4 107.8 105.8 104.0

of which bonds 3.9 4.3 4.8 0.1 0.0 0.0 0.0 0.0 0.0

Private creditors non-guaranteed 90.0 104.3 107.4 123.8 54.9 41.4 38.5 17.5 8.5

Total interest on LT loans 448.4 749.0 1,340.2 973.9 768.1 1,062.4 1,057.2 1,254.3 1,430.4

Interest on short-term credit 293.0 305.0 465.5 264.6 172.0 174.2 154.6 73.3 10.1

Interest on IMF drawings 6.6 10.1 20.4 12.4 12.7 13.2 10.9 11.4 1.6

Total interest (LT+ST+IMF) 741.4 1,054.0 1,805.8 1,238.5 940.1 1,236.6 1,211.8 1,327.7 1,452.1

E. External debt (DOD)

Public and publicaliy guaranteed 29,927.8 28,844.2 29,024.6 21,688.5 29,241.3 28,748.1 29,964.0 32,858.5 32,949.2

Official multlateral 3,176.3 2,952.3 3,401.8 3,220.7 3,333.8 3,717.8 4,040.6 4,635.1 4,750.7

of which IDA 887.3 892.7 908.1 902.4 910.6 912.8 938.2 998.6 1,055.4

of which IBRD 1,519.2 1,371.1 1,416.0 1,298.5 1,369.7 1,394.0 1,443.2 1,493.9 1,322.6

Official bilateral 22,344.0 21,371.0 21,271.3 14,578.9 22,164.4 22,338.3 23,675.4 26,250.0 26,525.3

Private creditors (guaranteed) 4,407.6 4,520.9 4,351.5 3,888.9 3,743.0 2,692.0 2,248.0 1,973.4 1,673.2

of which bonds 52.3 51.5 0.8 0.0 0.0 0.0 0.0 0.0 0.0

Prvate creditors non-guaranteed 1,098.0 1,131.0 1,081.0 850.0 600.0 500.0 375.0 375.0 200.0

Total LT DOD 31,025.8 29,975.2 30,105.6 22,538.5 29,841.3 29,248.1 30,339.0 33,233.5 33,149.2

Short-term debt 6,360.0 6,871.0 7,133.0 4,565.5 2,335.4 2,052.4 2,042.5 1,932.9 2,332.9

Use of IMF credit 242.3 175.8 155.7 155.1 210.7 206.6 213.2 109.0 63.0

Total DOD (ST+LT+IMF) of which: 35,737.1 34,551.0 34,024.3 25,705.6 32,386.0 31,505.8 32,593.2 35,272.5 35,542.2

F. Debt & debt burden indicators

Total debt service (mil US$) 1,637.0 2,308.1 3,803.0 3,380.9 2,595.3 2,421.1 2,155.3 2,166.5 2,560.6

Interest (LT+ST+IMF) 741.4 1,054.0 1,805.8 1,238.5 940.1 1,236.6 1,211.8 1,327.7 1,452.1

Principal (LT+IMF) 895.5 1,254.1 1,997.2 2,142.4 1,655.2 1,184.5 943.5 838.8 1,108.5

Total debt (DOD), total debt service (TDS):

DOD/exports(GNFS+WR)rato 284.3% 252.0% 227.2% 149.2% 173.0% 165.4% 200.4% 195.5% 176.0%

DOD I GDP ratio 102.1% 87.3% 92.2% 69.6% 77.4% 66.7% 62.8% 58.4% 52.3%

MLT DOD (public+pub. guar.) / GDP ratio 85.5% 72.9% 78.7% 58.7% 69.9% 60.9% 57.8% 54.4% 48.5%

TDS Iexports (GNFS+WR) rabo 13.0% 16.8% 25.4% 19.6% 13.9% 12.7% 13.3% 12.0% 12.7%

Source: Central Bank of Egypt and World Bank.

78

TABLE 6Fiscal accounts(LE million)

Second five-year plan period: actual Third plan period: actual EstImate1988 1989 1990 1991 1992 1993 1994 1995 1996

Govemment budiget (mit LCUs)

Total current revenues 12,4117 14,791.9 17,047.0 25,608.0 37.834.0 43,503.0 49,418.0 52,925.0 57,708.0

Direct taxes 2,805.5 3,414.6 4,247.0 6,408.0 10,001.0 11,120.0 12,015.0 12,156.0 13,731.0

Indirecttaxes 5,337.4 6,461.8 7,496.0 9,095.0 14,285.0 16,182.0 19,358.0 22,123.0 24,518.0On domestic goods and services 2,959.7 3,613.9 4,579.0 5,828.0 9,697.0 11,166.0 13,238.0 15,1060 16,607.0

On intematonal trade 2,377.7 2,847.9 2,917.0 3,267.0 4,588.0 5,016.0 6,120.0 7,017.0 7,911.0Non-tax receipts 4,268.8 4,915.5 5,304.0 10,105.0 13,548 0 16,201.0 18.0450 18,6460 19,459.0

Total currentexpenditures 15,819.9 18,588.7 22,446.0 29,679.0 36,1980 40,886.0 46,097.0 47,633.0 51,967.0

Interest on extemal debt 377.9 539.1 687.0 2,870.0 3,151.0 3,994.0 4,682.0 3,613.0 3,796.0

Interestondomestcdebt 1,926.4 2,471.9 2,969.0 4.1760 6,359.0 9,295.0 11,816.0 11,178.0 12,231.0

Transfers to pnvate sector 674.3 1,002.3 1,985.0 -1,735.0 -650.0 1,591.0 1,176.0 498.0 -76.9

Transfers to other NFPS 2,036.3 2,053.4 2,656.0 4,964.0 6,451.0 3,245.0 -153.0 179.0 256.0

Subsidies 2,367.4 2,831.8 2,971.0 6,635.0 6,242.0 5,042.0 8,750.0 10,250.0 11,547 9

Consumption 8,437.6 9,690.2 11,178.0 12,769.0 14,645.0 17,719.0 19,826.0 21,915.0 24,213 0

Wages and salares 4,5701 5,224.9 6,064.0 7,118.0 8,029.0 9,771.0 11,096.0 12,519.0 14,045.0

Otherconsumption 3,867.5 4,465.3 5,114.0 5,651.0 6,616.0 7,948.0 8,730.0 9,396.0 10,168.0

Budgetary savings -3,408.2 -3,796.8 -5,399.0 -4,071.0 1,636.0 2,617.0 3,3210 5,292.0 5,741.0

Capital revenues 3,571.4 3,515.4 4,829 0 2,951.0 3,572.0 2,998.0 3,149.0 2,794.0 3,185.0

Total capital expenditures 11,012.5 11,565.8 13,947.0 15,831.0 11,365.0 10,927.0 10,167.0 10,624.0 11,922.0

Capital transfers -9.5 85.8 -304.0 5,653.0 -981.0 -80.0 492.0 -675.0 -659.0

Budgetaryfixed investment 11,022.0 11,480.0 14,251.0 10,178.0 12,346.0 10,987.0 10,659.0 11,299.0 12,581.0

Overall balance (minus = defict) -10,849.3 -11,847.2 -14,517 0 -16,951.0 -6.157.0 -5,312.0 -3,697.0 -2,538.0 -2,996.0

Sources of 6nancing 10,849.3 11,847.2 14,517.0 16,951.0 6,157.0 5,312.0 3,697.0 2.538.0 2,996.0

Foreign finaning 2,499.0 2,963.0 3,248.0 13,512.0 1,783.0 64.0 464.6 42.2 -385.5

Monetary system credit 3,713.0 4,984.0 7,696.0 1,635.0 -3,456.0 -3,202.0 -211.4 -1,053.2 4,336.0

Other domestc financing 3,687.0 3,771.0 3,527.0 3,956.0 7,678.0 8,450.0 3,443.8 3,548 9 3,653.0

Residual sources and discrepancies 950.3 129.2 46.0 -2,152.0 152.0 0.0 0.0 0.0 0.0

Shares of GDP at current prices

Currentrevenues 20.1% 19.3% 17.7% 23.0% 27.2% 27.7% 28.2% 25.8% 25.0%

Current expenditures 25.7% 24.2% 23.4% 26.7% 26.0% 26.0% 26.3% 23.2% 22.5%

Budgetary savings -5.5% 4.9% -5.6% -3.7% 1.2% 1.7% 1.9% 2.6% 2.5%

Capital revenues 5.8% 4.6% 5.0% 2.7% 2.6% 1.9% 1.8% 1.4% 1.4%

Capital expenditures 17.9% 15.1% 14.5% 14.2% 8.2% 6.9% 5.8% 5.2% 5.2%

Overall balance (minus = deficit) -17.6% -15.4% -15.1% -15.2% 4.4% -3.4% -2.1% -1.2% -1.3%

Foreign financing 4.1% 3.9% 3.4% 12.2% 1.3% 0.0% 0.3% 0.0% -0.2%

Monetary system credit 6.0% 6.5% 8.0% 1.5% -2.5% -2.0% -0.1% -0.5% 1.9%

OtherdomesUcfinancing 6.0% 4.9% 3.7% 3.6% 5.5% 5.4% 2.0% 1.7% 1.6%

Govemment debt (DOD, end of year)

Extemal debt (LE mil) 49,333.3 52,394.8 55,004.9 47,228.7 79,694.0 79,665.8 84,783.4 92,664.3 92,730.1

Extemal debt (USS mil) 21,449.3 20,229.7 20,297.0 14,454.1 23,992.7 23,805.7 24,987.7 27,294.3 27,461.8

Debt to monetary system (LE mil) 26,640.0 31,925.0 43,072.0 53,723.0 52,308.0 47,765.0 47,553.6 46,500.4 46,228.8

Other domestc debt (LE nil) 11,818.2 15,589.2 19,116.2 23,072.2 30,750.2 39,200.2 42,644.0 46,192.9 49,846.0

Total govemment debt (LE mil) 87,791.5 99,909.0 117,193.1 124,023.9 162,752.2 166,631.0 174,981.0 185,357.6 188,804.9

Total govemmentdebtas percentGDP 142.5% 130.1% 121.9% 111.5% 117.0% 105.9% 100.0% 90.4% 81.7%

Tax burden indicators (%)

Dirct taxesIGOP 4.6% 4.4% 4.4% 5.8% 7.2% 7.1% 6.9% 5.9% 5.9%

Indir. taxes on domestic G&S l GDP 4.8% 4.7% 4.8% 5.2% 7.0% 7.1% 7.6% 7.4% 7.2%

Indir. taxes dom G&S I pdv. consum. 7.5% 7.2% 6.9% 7.3% 9.3% 9.3% 10.3% 10.1% 9.9%

Taxes intl trade/merch. imports 13.7% 14.2% 9.8% 9.5% 13.8% 14.0% 21.4% 18.3% 18.7%

Source: Govemment of Egypt

79

TABLE 7Monetary survey(LE million)

Second five-year plan period: actual Third plan period: actual Estimate1988 1989 1990 1991 1992 1993 1994 1995 | 1996

A. Annual flows during the year

Netforeign assets 1,040.0 -1,003.0 -4,487.0 11,265.0 14,475.0 17,153.0 8,276.0 -846.9 13,886.5

Domesic credit 8,785.0 10,280.0 17,662.0 18,328.0 1,488.0 5,008.0 12,054.6 15,707.8 18,611.8

Netclaimsongovemment 3,537.0 5,285.0 11,147.0 10,651.0 -1,415.0 -4,543.0 -211.4 -1,053.2 4,336.0

Claims on private sector 3,358.0 3,504.0 3,675.0 4,605.0 1,618.0 7,194.0 6,738.0 16,045.0 18,076.7

Claims on PE sector 1,890.0 1,491.0 2,540.0 3,072.0 1,285.0 2,357.0 5,528.0 716.0 806.7

Total assets = liabilities 9,825.0 9,277.0 13,175.0 29,593.0 15,963.0 22,161.0 20,330.6 14,860.9 32,498.3

Moneyandquasimoney 11,649.0 8,905.0 11,841.0 19,740.0 13,065.0 17,174.0 15,102.0 15,163.0 19,793.4

Other liabilities (net) -1,824.0 372.0 1,334.0 9,853.0 2,898.0 4,987.0 5,228.6 -302.1 12,704.9

B. End-of-year stock

Net foreign assets 1,461.0 458.0 -4,029.0 7,236.0 21,711.0 38,864.0 47,140.0 46,293.1 60,179.6

Domesticcredit 54,170.0 64,450.0 82,112.0 100,440.0 101,928.0 106,936.0 118,990.6 134,698.4 153,310.2Net claims on govemment 26,640.0 31.925.0 43,072.0 53,723.0 52,308.0 47,765.0 47,553.6 46,500.4 46,228.8

Credit to private sector 20,017.0 23,521.0 27,196.0 31,801.0 33419.0 40,613.0 47,351.0 63,396.0 81,472.7Credit to PE sector 7,513.0 9,004.0 11,844.0 14,916.0 16,201.0 18,558.0 24,086.0 24,802.0 25,608.7

Total assets = liabilities 55,631.0 64,908.0 78,083.0 107,676.0 123,639.0 145,800.0 166,130.6 180,991.5 213,489.8

Money and quasimoney 51,067.0 59,972.0 71,813.0 91,553.0 104,618.0 121,792.0 136,894.0 152,057.0 171,850.4

Other liabilities (net) 4,564.0 4,936.0 6,270.0 16,123.0 19,021.0 24,008.0 29,236.6 28,934.5 41.639.4

C. Factors accounting formonetary expansion (as % MOM)

Net foreign assets 2.9% 0.8% -5.6% 7.9% 20.8% 31.9% 34.4% 30.4% 35.0%Net credit to govemment 52.2% 53.2% 60.0% 58.7% 50.0% 39.2% 34.7% 30.6% 26.9%

Credit to private sector 39.2% 39.2% 37.9% 34.7% 31.9% 33.3% 34.6% 41.7% 47.4%Credit to PE sector 14.7% 15.0% 16.5% 16.3% 15.5% 15.2% 17.6% 16.3% 14.9%Other liabilities (net)(-) 8.9% 8.2% 8.7% 17.6% 18.2% 19.7% 21.4% 19.0% 24.2%Total money and quasi-money 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

D. Memorandum items

Net intl. reserves (US$ mil.)Monetary system, flow 1,728.8 617.4 636.5 6,989.3 5,142.0 3,673.3 2,544.1 1,550.4 2,530.4Monetary system, stock 6,975.7 7,593.1 8,229.6 15,218.9 20,360.9 24,034.2 26,578.2 28,128.6 30,659.1in months of imports 6.3 6.3 6.6 12.8 16.8 19.1 20.0 19.2 19.9

E. Money, credit and prices

M2 / GOP 82.9% 78.1% 74.7% 82.3% 75.2% 77.4% 78.2% 74.2% 74.4%Annual growth rate M2 29.6% 17A% 19.7% 27.5% 14.3% 16.4% 12.4% 11.1% 13.0%

Annual growth private credit 20.2% 17.5% 15.6% 16.9% 5.1% 21.5% 16.6% 33.9% 28.5%GDP deflator, growth rate 13.4% 18.8% 18.4% 14.5% 19.8% 9.8% 7.2% 12.0% 7.4%

Govemment of Egypt.

80

TABLE 8National accounts(LE million)

Actual Estimate Projection: base case scenario1996 1996 1997 1998 1999 2000 2001 2002

A. In current prices (mil LE)

GDP at marketl rpces 205,000.0 230,958.3 253,9040 278,331.6 304,818.2 333,505.3 364,540.6 398,078.4

Net indirect taxes 11,873.0 12,970.1 13,779.8 14,033.8 15,607.6 16,399.2 17,193.0 17,972.0

GDP atfactorcost 193,127.0 217,988.2 240,124.2 264,297.8 289,210.6 317,106.1 347,3476 380,106.3

Agriculture 32,050.0 35,419.9 38,370.3 41,477.2 44,718.5 48,163.4 51,833.9 55,691.5

Industry 61,700.0 69,579.1 76,913.0 84,837.5 93,334.0 102,575.6 112,645.8 123,499.0

of which mariufacturng 46,580.0 53,228.5 60,787.4 68,896.1 75,411.7 83,334.3 92,087.0 101,651.7

Services 99,377.0 112,989.2 124,841.0 137,983.2 151,158.2 166,367.0 182,867.9 200,915.8

Resource balance (9,423.4) (8,328.5) (8,363.6) (8,766.9) (10,647.3) (10.795.6) (10,852.1) (10,738.2)

Exports (GNFS) 44,578.2 51,400.8 53,762.4 57,745.0 68,037.4 74,472.4 81,430.2 88,879.7

Imports (GNFSI 54,001.5 59,729.3 62,126.0 66,511.8 78,684.7 85,268.0 92,282.3 99,617.9

Total expenditures 214,423.4 239,286.8 262,267.6 287,098.5 315,465.5 344,300.8 375,392.7 408,816.5

Consumption expenditures 172,075.5 192,132.5 211,884.4 233,069.2 256,432.7 281,028.9 307,639.9 336,391.6

Govemment 21,915.0 24,213.0 25.736.7 27,358.2 29,083.8 30,920.4 32,875.2 34,955.9

Private 150,160.5 167,919.5 186,147.8 205,711.1 227,346.9 250,108.6 274,764.8 301,435.7

Gross domestc investment 42,347.9 47,154.4 50.383.2 54,029.3 59.032.8 63,271.9 67,752.8 72,424.9

Govemment 11,299.0 12,581.0 14,021.0 15,447.4 16,8564 18,509.5 20.487.2 22,610.9

Pnvate 31,048.9 34,573.4 36,362.2 38,581.9 42,176.4 44,762.4 47.265.6 49.814.1

Total fixed investment 42,347.9 47,154.4 50,383.2 54,029.3 59,032.8 63,271.9 67,752.8 72,424.9

Total investment in stocks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Domestic saving 32,924.5 38,825.9 42,019.6 45,262.4 48,385.6 52,476.4 56,900.7 61,686.8

+ Netfactorincome(NFY) (2,683.4) (2,783.4) (2,606.0) (2,495.7) (2,761.7) (2,880.1) (3,027.0) (3,158.5)

+ Net current transfers (NCT) 11.128.9 11,309.2 11,320.9 11,650.8 13,037.4 13,512.4 13,994.9 14,473.6

= National saving 41,370.1 47,351.7 50,734.5 54,417.4 58,661.2 63.108.7 67,868.6 73,001.8

Gross nabonal product 202,316.6 228,174.9 251,298.0 275,835.9 302,056.5 330,625.2 361,513.6 394,919.8

Gross natonal disposable income 213,445.5 239,484.2 262,619.0 287,486.7 315,093.8 344,137.6 375,508.6 409,393.4

B. Shares of GCP (current pnces)

Gross domestc product 100.0° 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Net indirect taxes 5.8% 5.6% 5.4% 5.0% 5.1% 4.9% 4.7% 4.5%

Agriculture value added 15.6% 15.3% 15.1% 14.9% 14.7% 14.4% 14.2% 14.0%

Industry value zidded 30.1% 30.1% 30.3% 30.5% 30.6% 30.8% 30.9% 31.0%

of which manufacturng 22.7% 23.0% 23.9% 24.8% 24.7% 25.0% 25.3% 25.5%

Services value added 48.5% 48.9% 49.2% 49.6% 49.6% 49.9% 50.2% 50.5%

Resource balance (X-M) -4.6% -3.6% -3.3% -3.1% -3.5% -3.2% -3.0% -2.7%

Exports (GNFSI 21.7% 22.3% 21.2% 20.7% 22.3% 22.3% 22.3% 22.3%

Imports (GNFS) 26.3% 25.9% 24.5% 23.9% 25.8% 25.6% 25.3% 25.0%

Total expenditures 104.6% 103.6% 103.3% 103.1% 103.5% 103.2% 103.0% 102.7%

Govemmentconsumpbon 10.7% 10.5% 10.1% 9.8% 9.5% 9.3% 9.0% 8.8%

Private consumpton 73.2% 72.7% 73.3% 73.9% 74.6% 75.0% 75.4% 75.7%

Govemment investment 5.5% 5.4% 5.5% 5.6% 5.5% 5.6% 5.6% 5.7%

Private investment 15.1% 15.0% 14.3% 13.9% 13.8% 13.4% 13.0% 12.5%

Gross domestc saving 16.1% 16.8% 16.5% 16.3% 15.9% 15.7% 15.6% 15.5%

Gross national saving 20.2% 20.5% 20.0% 19.6% 19.2% 18.9% 18.6% 18.3%

Memorandum items:

GDP deflator (% change) 12.0% 7.4% 5.3% 5.1% 4.8% 4.7% 4.6% 4.4%

Consumer prce index (% change) 12.0% 7.4% 5.3% 5.1% 4.8% 4.7% 4.6% 4.4%

Total GDP (million current USS) 60,400.7 67,927.2 75,717.6 81,862.2 81,319.2 87,132.2 93,335.9 100,030.6

Conversion factor used (LEAIS$) 3.4 3.4 3.4 3.4 3.7 3.8 3.9 4.0

Per capita gross nabonal product 940.0 1,050.0 1,170.0 1,270.0 1,320.0 1,350.0 1,390.0 1,470.0

[AUas method: in Constant USS]

81

TABLE 8 (cont' d)National accounts(LE million)

Actual Estimate Projection: base case scenario1995 1996 1997 1998 1999 2000 2001 2002

C. In constant 1992 prices

GOP at market prices 155.540.0 163,161.5 170,381.3 177,793.5 185,836.8 194,257.8 203,020.7 212,326.2

Resource balance (7.496.0) (6,174.3) (6.077.0) (6,461.9) (7,187.4) (7,003.2) (6,727.4) (6,325.9)

Exports (GNFS) 41,763.7 45,916.5 47,846.4 49,883.3 52,036.3 54,313.2 56,722.0 59,271.5

Imports (GNFS) 49,259.7 52,092.8 53,923.4 56,345.2 59,223.7 61,316.4 63,449.4 65,597.5

Total expenditures 163,036.0 169,335.7 176,458,3 184,255.5 193,024.2 201,261.0 209.748.1 218,652.2

Consumpton expenditures 129,336.0 134,108.0 140,349,9 147,244.4 155,087.8 162,376.2 169,891.2 177,798.8

Govemment 16,471.8 16,900.6 17,047.7 17,283.9 17,589.6 17,865.5 18,155.0 18,475.8

Private 112,864.2 117,207.4 123,302.2 129,960.5 137,498.2 144,510.6 151,736.2 159,323.0

Gross domestc investment 33,700.0 35,227.7 36,108.4 37,011.1 37,936.4 38,884.8 39,856.9 40,853.3

Govemment 8,991.6 9,398.9 10,048.5 10,581.8 10,832.5 11,375.3 12,052.0 12,754.3

Private 24,708.4 25,828.8 26,059.9 26,429.3 27,103.9 27,509.4 27,804.9 28,099.0

Total tixed investment 33,700.0 35,227.7 36,108.4 37,011.1 37,936.4 38,884.8 39,856.9 40,853.3

Total investment in stocks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Terms of trade (TT) effect (1,099.9) (1,089.4) (1,182.3) (964.9) (826.5) (759.9) (734.0) (745.0)

Gross domestc income 154,440.1 162,072.0 169,199.0 176,828.7 185,010.3 193,497.8 202,286.6 211,581.2

Domestic saving (TT adjusted) 25,104.1 27,964.0 28,849.1 29,534.3 29,922.5 31,121.7 32,395.5 33,782.3

D. Annual growth rates (1992 prices)

GDP at market prices 4.6% 4.9% 4.4% 4.4% 4.5% 4.5% 4.5% 4.6%

Exports (GNFS) 1.3% 9.9% 4.2% 4.3% 4.3% 4.4% 4.4% 4.5%

Imports (GNFS) 1.2% 5.8% 3.5% 4.5% 5.1% 3.5% 3.5% 3.4%

Total expenditures 4.4% 3.9% 4.2% 4.4% 4.8% 4.3% 4.2% 4.2%

Consumption 4.3% 3.7% 4.7% 4.9% 5.3% 4.7% 4.6% 4.7%

Investment 4.7% 4.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Gross domestc income 5.2% 4.9% 4.4% 4.5% 4.6% 4.6% 4.5% 4.6%

Gross domestc savings 10.0% 11.4% 3.2% 2.5% 1.1% 4.0% 4.1% 4.3%

Per capita growth rates:

Per capita GDP (mp) 2.2% 2.7% 2.2% 2.2% 2.4% 2.4% 2.4% 2.5%

Per capita total consumption 2.0% 1.5% 2.5% 2.7% 3.2% 2.6% 2.5% 2.6%

Per capita private consumpton 2.8% 1.7% 3.0% 3.2% 3.6% 3.0% 2.9% 2.9%

Source: WVord Bank.

82

TABLE 9Merchandise trade(USS million)

Actual Estimate Projection: base case scenario1995 1996 1997 1998 1999 2000 2001 2002

A. Value in current pnces (US$ mil.)

Total merchandise exports 4,854.0 5,438.0 5,627 5 5,830.6 6,177.7 6,597.0 7,035.5 7,493.8Prmary products 2,652.0 2,696.1 2,666 3 2,643.9 2,745.8 2,902.0 3,059.6 3,218.3of which petroleum' 2,036.5 1,998.9 1,998.9 1,948.9 1,987.4 2,089.6 2,188.0 2,282.0of which cotton 306.4 327.5 305.8 319.4 343.8 3625 382.3 403.3of which other agriculture 309.1 369.7 361.6 375.6 414.5 449.9 489.3 533.1

Manufacturedgoodts 2,202.0 2,741.9 2,9613 3,186.7 3,431.9 3,695.0 3,975.8 4,275.4ofwhichTextiles 1,0773 1,3351 1,441.9 1,551.6 1,671.0 1,7991 1,935.9 2,081.8of which other manufactured 1,124 7 1,406.8 1,519.4 1,635.0 1,760.9 1,895.9 2,040.0 2,193.7

Total non-factor service receipts 8,280.4 9,679.5 10,405.1 11,153.3 11,973.3 12,859.8 13,813.7 14,840.2of which oursm 2,298.9 3,202.0 3,557.0 3,937.1 4,361.2 4,829.7 5,345.3 5,912.3of which Suez Canal 2,058.4 2,160.0 2,243.9 2,322.7 2,406.2 2,492.0 2,579.2 2,667.9

Total merchandise imports 11,279.9 12,454.0 13,134.5 13,868.6 14,8817 15,793.3 16,750.7 17,746.5Food 2,759.8 3,044.6 3,109.5 3,175.2 3,241 5 3,308.5 3,378.1 3,444.4Other consumer goods 478.7 516.5 558.9 603.7 655.1 706.0 759.7 816.9POLandotherenergy 721.4 800.9 819.9 817.8 854.6 920.8 987.9 1,056.5Intermediate goods 4,212.4 4,687.8 5,008.8 5,371.2 5,868.6 6,290,1 6,735.5 7,200.0Capital goods 3,107.6 3,404.3 3,637.4 3,900.7 4,261.9 4,567.9 4,891.4 5,228.7

Total non-factor service payments- 4,631.0 5,113.0 5,392 4 5,693.8 6,109.7 6,484.0 6,877.0 7,285.8

B. Value in constant 1992 pnces (US5 mll.)

Total merchandise exports 4,892.9 5,182.8 5,373.5 5,572.4 5,779.9 5,996.4 6,222.4 6,458.3Petroleum' 2,385 8 2,212.7 2,257.0 2,302.1 2,348.2 2,395.1 2,443.0 2,491.9Cotton 233,1 244.8 252.1 259.7 267.5 275.5 283.8 292.3Otheragnculture 232.9 279.1 295.9 313.6 332.4 352.4 373.5 395.9Textiles 998.6 1,191.1 1,250.6 1,313.2 1,378.8 1,447.8 1,520.1 1,596.2Othermanufactures 1,042.5 1,255.1 1,317.9 1,383.8 1,452.9 1.525.6 1,601.9 1,682.0

Total non-factor service receipts 7,675.2 8,635.6 9,025.1 9,439.1 9,879.6 10,348.2 10,847.1 11,378.5of which tourism 2,130.9 2,856.7 3,085.2 3,332.0 3,598.6 3,886.5 4,197.4 4,533.2of which Suez Canal 1,908.0 1,927.0 1,946.3 1,965.8 1,985.4 2,005.3 2,025.3 2,045.6

Totalmerchandiseimports 10,531.4 11,114.9 11,550.2 12,137.4 12,781.0 13.234.5 13,693.9 14,154.1Food 2,457.5 2,848.2 2,640.3 2,813.6 2,871.7 2,873.5 2,864.2 2,844.6Otherconsumergoods 443.7 460.8 484.7 510.9 #40.6 568.1 596.5 626.4POL and other enerqy 845.1 886.5 925.8 966.0 1.009.7 1,055.5 1,103.1 1,153.7Intermediate goods r.e.i. 3,904.5 4,182.2 4,344.4 4,545.7 4,842.4 5,061.6 5,289.0 5,520.5Capital goods 2,880.5 3,037.2 3,155.0 3,301.2 3,516.6 3,675.8 3,841.0 4,009.0

Total non-factor service payments- 4,292.5 4,561.6 4,677.1 4,818.7 5,041.3 5,217.6 5,400.1 5,586.3

Memorandum tems

Export volume growth rate -3.4% 5.9% 3.7% 3.7% 3.7% 3.7% 3.8% 3.8%Import volume growth rate 27.1% 5.5% 3.9% 5.1% 5.3% 3.5% 3.5% 3.4%

C. Prce Indices (1992 = 100)

Merchandise exports 99.2 104.9 104.7 104.6 106.9 110.0 113.1 116.0Merchandise imports 107.1 112.0 113.7 114.3 116.4 119.3 122.3 125.4Merchandise terms of trade 92.6 93.6 92.1 91.6 91.8 92.2 92.4 92.5

D. Non-factor service indices (1992 =100)

ExportsofNFS-volurneindex 104.1 117.2 122.4 128.1 134.0 140.4 147.2 154.4ExportsofNFS-pnpceindex 107.9 112.1 115.3 118.2 121.2 124.3 127.3 130.4

ImportsofNFS-volumeindex 102.4 108.8 111.6 115.0 120.3 124.5 128.9 133,3ImportsofNFS-priceindex 107.9 112.1 115.3 118.2 121.2 124.3 127.3 130.4

Includes foreign partner's share.

- Includes payments in retum forforeign partner's invest ent

Source: Woodd Bank.

83

TABLE 1 0Balance of payments(US$ million)

Actual Estimate Projection: base case scenario

1995 1996 1997 1998 1999 2000 2001 2002

TotalexportsofGNFS 13,134.4 15,117.5 16,032.7 16,983.8 18,151.0 19,456.8 20,849.1 22,334.0

Merchandise 4,854.0 5,438.0 5,627.5 5,830.6 6,177.7 6,597.0 7,035.5 7,493.8

Non-factor services 8,280.4 9,679.5 10,405.1 11,153.3 11,973.3 12,859.8 13,813.7 14,840.2

Tota! imports ofGNFS 15,910.9 17,567.0 18,526.8 19,562.3 20,991.5 22,277.3 23,627.7 25,032.3

Merchandise 11,279.9 12,454.0 13,134.5 13,868.6 14,881.7 15,793.3 16,750.7 17,746.5

Non-factor services 4,631.0 5,113.0 5,392.4 5,693.8 6,109.7 6,484.0 6,877.0 7,285.8

Resource balance (2,776.5) (2,449.5) (2,494.1) (2,578.5) (2,840.5) (2,820.5) (2,778.5) (2,698.3)

Net factor income (790.6) (818.6) (777.1) (734.0) (736.8) (752.5) (775.0) (793.7)

Factor receipts 1,625.5 1,755.5 1,896.0 2,047.7 2,211.5 2,388.4 2,579.5 2,785.8

Factorpayments 2,416.1 2,574.2 2,673.1 2,781.7 2.948.3 3,140.8 3,354.5 3,579.5

Interest 1,327.7 1,452.1 1,502.1 1,5483 1,608.5 1,649.0 1,698.2 1,752.2

Other factor payments 1,088.4 1,122.0 1,171.0 1,233.4 1,339.8 1,491.8 1,656.3 1,827.3

Net prvate cunrent transfers 3,279.0 3,326.2 3,376.1 3,426.7 3,478.1 3,530.3 3,583.2 3,637.0

of which workers remittances 3,279.0 3,326.2 3,376.1 3,426.7 3,478.1 3,530.3 3,583.2 3.637.0

Net official current transfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Current account balance (288.1) 58.0 104.8 114.2 (99.1) (42.7) 29.7 145.0

Ofricial capital grants 918.6 964.5 945.2 926.3 907.8 889.7 871.9 854.4

Pnvate investment (net) 680.6 762.3 1,697.0 2.067.9 2,275.1 2,514.2 2,774.6 3,057.0

Directforeign investments 676.5 757.7 1,497.0 1,847.9 2,033.1 2,248.0 2,481.8 2,734.9

Portfolio investments 4.1 4.6 200.0 220.0 242.0 266.2 292.8 322.1

Net foreign lending 295.1 660.4 719.3 876.9 936.5 1,027.3 1.212.5 1,287.2

Disbursements 1,133.9 1,668.9 1.807.8 1,890.2 2,095.0 2,308.7 2,527.6 2,737.3

Repayments 838.8 1,108.5 1,088.5 1,013.3 1,158.5 1,281.4 1,315.1 1,450.1

Other capital flows. n.e.i. (51.7) 189.8 221.0 (680.4) (856.3) (479.3) (521.9) (565.7)

Change, net intemational reserves 1,550.4 2,530.4 3,487.3 3,084.9 2.922.0 3,643.0 4,073.9 4,455.8

[plus indicates increase in assets]

Memorandum items:

Net intematonal reserves (NIR) 28,128.6 30,659.1 34,146.4 37,231.3 40,153.2 43,796.2 47,870.1 52,325.9

NIR, in months of imports 19.2 19.9 20.9 21.3 21.6 22.2 22.9 23.7

Exchange rates

Annual average (LEIUSS) 3.4 3.4 3.4 3.4 3.7 3.8 3.9 4.0

At end-year (LEAJSS) 3.4 3.4 3.4 3.6 3.8 3.9 3.9 4.0

Index real avg. X-rate (1990 = 100) 83.2 81.0 77.3 75.4 81.0 81.0 81.0 81.0

(decrease is real appreciabon)

Currentaccountbalanceas%GDP -0.5% 0.1% 0.1% 0.1% -0.1% 0.0% 0.0% 0.1%

Source: World Bank.

84

TABLE 1 1External debt, stocks and flows(US$ million)

Actual Estimate Projection: base case scenario

1995 1996 1997 1998 1999 2000 2001 2002

A. Gross disbursements

Public and publicly guaranteed 1,133.9 1,068.9 1,167.8 1,182.2 1,311.7 1,442.1 1,568.7 1.676.2

Official multlateral 637.9 503.8 491.4 456.1 489.2 546.2 607.2 635.3

of which IDA 51.8 70.8 102.9 97.8 89.8 73.9 54.4 36.0

ofwhich IBRD 88.3 31.8 45.0 79.2 127.8 185.4 245.1 281.8

Official bilateral 375.7 378.0 340.4 378.6 444.7 474.2 489.5 512.3

Private creditors (guaranteed) 120.3 187.1 336.0 347.5 377.8 421.8 472.1 528.7

of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private creditors non-guuiranteed 0.0 200.0 200.0 224.0 250.9 281.0 314.7 352.5

Total LT loan disbursements 1,133.9 1,268.9 1,367.8 1,406.2 1,562.6 1,723.1 1,883.4 2,028.7

Short-term credit (net) 0.0 400.0 440.0 484.0 532.4 585.6 644.2 708.6

Drawings from IMF 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total disbursements 1,133.9 1,668.9 1,807.8 1,890.2 2,095.0 2,308.7 2,527.6 2,737.3

8. Amortizabon

Public and publicly guaranteed 769.4 1,062.5 1,034.0 1,013.3 1,110.0 1,201.4 1,190.3 1,275.2

Offidal mulilateral 334.3 382.5 421.2 391.0 381.3 370.7 340.8 341.8

of which IDA 13.1 14.0 15.0 16.1 17.8 19.9 23.1 32.0

of which IBRD 201.8 203.0 215.8 198.8 173.5 146.4 123.6 116.3

Offiaat bilateral 154.2 348.6 348.1 395.0 497.9 624.8 730.1 789.1

Pnvate creditors (guararneed) 281.0 331.3 264.8 227.3 230.8 205.9 119.4 144.2

of which bonds 0.0 0 0 0.0 0.0 0.0 0.0 0.0 0.0

Prvate creditors non-guaranteed 0.0 0.0 0.0 0.0 40.0 80.0 124.8 175.0

Total LT loan net disbursements 769.4 1,062.5 1,034.0 1,013.3 1,150.0 1,281.4 1,315.1 1,450.1

Net credit from IMF 69.3 46.0 54.5 0.0 8.5 0.0 0.0 0.0

Total repayments 838.8 1,108.5 1,088.5 1,013.3 1,158.5 1,281.4 1,315.1 1,450.1

C. Net disbursements

Public and publicallyguaranteed 364.5 6.5 133.8 168.9 201.7 240.7 378.4 401.1

Official multilateral 303.6 121.3 703 65.1 107.9 175.5 266.3 293.4

of which IDA 38.7 56.8 88.0 81.6 72.0 54 0 31.3 4.0

of which IBRO (113.5) (171.2) (170.7) (119.6) (45.7) 38.9 121.6 165.5

Official bilateral 221.5 29.3 (7.7) (16.4) (53.2) (150.6) (240.6) (276.8)

Private creditors (guaranteed) (160.7) (144.2) 71.2 120.2 147.0 215.8 352.7 384.5

of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Prvate creditors non-guaranteed 0.0 200.0 200.0 224.0 210.9 201.0 189.9 177.5

Total LT loan net disbursements 364.5 206.5 333.8 392.9 412.6 441.7 568.3 578.6

Short-term credit (net) 0.0 400.0 40.0 44.0 48.4 53.2 58.6 64.4

Net credit from IMF (69.3) (46.0) (54.5) 0.0 (8.5) 0.0 0.0 0.0

Total net disbursements 295.1 560.4 719.3 875.9 936.5 1,027.3 1,212.5 1,287 2

85

TABLE 11 (cont'd)Extemal debt, stocks and flows(US$ million)

Actual Estimate Projection: base case scenario

1995 1996 1997 1998 1999 2000 2001 2002

D. Interest and charges

Public and publically guaranteed 1,236.8 1,398.8 1,412.4 1,436.2 1,472.8 1,490.5 1,518.0 1,551.8

Oficial mulblateral 232.6 258.0 269.8 286.5 305.5 323.7 345.4 371.7

of which IDA 7.1 8.0 8.9 9.7 10.5 10.8 10.8 10.7

ofwhich IBRD 116.9 119.0 116.3 120.5 128.0 138.5 153.8 172.4

Official bilateral 898.4 1,036.7 1,047.0 1,055.9 1,072.5 1,069.5 1,064.6 1,055.7

Private creditors (guaranteed) 105.8 104.0 95.6 93.8 94.9 97.3 108.0 124.4

of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Pnvate creditors non-guaranteed 17.5 8.5 25.5 43.5 62.0 79.5 96.1 111.7

Total intereston long-term loans 1,254.3 1,430.4 1,478.2 1,523.9 1.581.5 1,619.5 1,665.6 1,716.4

Interest on short-term credit 73.3 10.1 21.2 23.3 25.7 28.2 31.1 34.2

InterestonlMFdrawings 11.4 1.6 1.7 0.0 0.1 0.0 0.0 0.0

Total interest(LT+ST+IMF) 1,327.7 1,452.1 1,502.1 1,548.3 1,608.5 1,649.0 1,698.2 1,752.2

E. External debt (DOD)

Public and publically guaranteed 32,858.5 32,949.2 32,961.1 33,188.2 33,421.3 33,665.8 34,060.6 34,459.1

Official mulblateral 4,635.1 4,750.7 4,820.9 4,886.0 4,993.9 5,169.4 5,435.8 5,729.2

of which IDA 998.6 1,055.4 1,143.4 1,225.0 1,297.0 1,351.0 1,382.3 1,386.3

of which IBRD 1,493.9 1,322.6 1,151.9 1,032.3 986.7 1,025.6 1,147.1 1,312.6

Offirial bilateral 26,250.0 26,525.3 26,517.7 26,625.2 26,616.8 26,583.2 26,360.4 26,082.1

Pnvate creditors (guaranteed) 1,973.4 1,673.2 1,622.5 1,676.9 1,810.5 1,913.2 2,264.5 2,647.7

of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private creditors non-guaranteed 375.0 200.0 400.0 624.0 834.9 1,035.9 1,225.8 1,403.3

Total LTDOD 33,233.5 33,149.2 33,361.1 33,812.2 34,256.2 34,701.7 35,286.4 35,862.3

Short-term debt 1,932.9 2,332.9 2,372.9 2,416.9 2,465.3 2,518.5 2,577.1 2,641.5

UseoftMFcredit 109.0 63.0 8.5 8.5 0.0 0.0 0.0 0.0

Total DOD (ST+LT+IMF) of which: 35,272.5 35,542.2 35,339.6 35,794.7 36,234.6 36,684.9 37,275.0 37,856.7

F. Debt & debt burden indicators

Total debt service (mil USS) 2,1665 2,560.6 2,590.6 2,561.6 2,767.0 2,930.5 3,013.2 3,202.3

Interest(LT+ST+IMF) 1,327.7 1,452.1 1,502.1 1,548.3 1,608.5 1,649.0 1,698.2 1,752.2

Principal(LT+IMF) 838.8 1,108.5 1,086.5 1,013.3 1,158.5 1,281.4 1,315.1 1,450.1

Total debt (DOD), total debt service (TDS):

DOD/exports (GNFS+WR) rabo 195.5% 176.0% 165.9% 159.4% 152.0% 144.6% 138.0% 131.6%

DOD /GDP rato 58.4% 52.3% 46.7% 43.7% 44.6% 42.1% 39.9% 37.8%

MLT DOD (public-pub. guar.)IGDP rato 54.4% 48.5% 43.5% 40.5% 41.1% 38.6% 36.5% 34.4%

TDS/exports(GNFS+WR)rato 12.0% 12.7% 12.2% 11.4% 11.6% 11.5% 11.2% 11.1%

Source: World Bank.

86

TABLE 12Fiscal accounts(LE million)

Actual Estimate Projection: base case scenario1995 1996 1997 1998 1999 2000 2001 2002

Government budget (mit LCUs)

Total currentrevenues 52,925.0 57,708.0 61,689.0 65,477.7 72,612.3 78,485.7 84,715.3 91,283.7

Directtaxes 12,156.0 13,731.0 14,760.0 15,800.0 17,655.1 19,267.1 20,990.4 22,822.6

Indirect taxes 22,123.0 24,518.0 26,475.0 27,950.4 30,848.5 33,074.5 35,420.0 37,875.9

On domestc goods and services 15,106.0 16,607.0 17,845.0 19,604.3 21,532.8 23,583.8 25,802.9 28,200.5

On internabonal trade 7,017.0 7,911.0 8,630.0 8,346.1 9,315.7 9,490.7 9,617.2 9,675.4

Non-tax receipts 18,646.0 19,459.0 20,454.0 21,727.3 24,108.7 26,144.1 28,304.9 30,585.1

Total current expenditures 47,633.0 51,967.0 54,181.7 58,128.7 61,721.7 65,253.8 69,123.3 73,568.6

Interest on external debt 3,613.0 3,796.0 3,963.0 4,045.1 4,522.3 4,619.1 4,719.5 4,819.1

Interest on domestc debt 11,178.0 12,231.0 12,354.0 13,715.4 14,297.9 14,893.8 15,501.4 16,473.9

Transfers to pnvrate sector 498.0 (76.9) (567.2) (906.5) (1,423.2) (1,854.6) (2,199.9) (2,584.2)

Transfers to other NFPS 179.0 256.0 0.0 0.0 0.0 0.0 0.0 0.0

Subsidies 10,250.0 11,547.9 12,695.2 13,916.6 15,240.9 16,675.3 18,227.0 19,903,9

Consumpbon 21,915.0 24,213.0 25,736.7 27,358.2 29,083.8 30,920.4 32,875.2 34,955.9

Wages and salaries 12,519.0 14,045.0 15,028.2 16,080.1 17,205.7 18,410.1 19,698.8 21,077.8

Other consumption 9,396.0 10,168.0 10,708.5 11,278.0 11,878.0 12,510.2 13,176.3 13,878.1

Budgetary savings 5,292.0 5,741.0 7,507.3 7,349.0 10,890.6 13,231.9 15,592.0 17,715.1

Capital revenues 2,794.0 3,185.0 3,634.0 3,952.3 4,292.6 4,659.9 5,129.0 5,602.4

Total capital expenditures 10,624.0 11,922.0 13,417.0 14,835.1 16,246.8 17,875.9 19,831.0 21,973.9

Capital transfers (675.0) (659.0) (604.0) (612.3) (609.6) (633.7) (656.2) (636.9)

Budgetary fixed inivestment 11,299.0 12,581.0 14,021.0 15,447.4 16,856.4 18,509.5 20,487.2 22,610.9

Overall balance (minus = deficit) (2,538.0) (2.996.0) (2,275.7) (3,533.8) (1,063.6) 15.9 890.0 1,343.5

Sources of finanding 2,538.0 2,996.0 2,275.7 3,533.8 1,063.6 (15.9) (890.0) (1.343.5)

Foreign financing 42.2 (385.5) (530.0) (387.8) (280.3) (590.2) (432.3) (502.5)

Monetary system credit (1,053.2) 4,336.0 4,257.0 1,063.5 (1,501.5) (2,238.1) (3,229.9) (3,564.7)

Otherdomestccfinancing 3,548.9 3,653.0 3,753.9 3,849.2 3,936.6 4,013.8 4,094.9 4,180.0

Residual sources and discrepancies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Shares of GDP at c urrent prces

Current revenues 25.8% 25.0% 24.3% 23.5% 23.8% 23.5% 23.2% 22.9%

Currentexpenditurets 23.2% 22.5% 21.3% 20.9% 20.2% 19.6% 19.0% 18.5%

Budgetary savings 2.6% 2.5% 3.0% 2.6% 3.6% 4.0% 4.3% 4.5%

Capital revenues 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4%

Capital expenditures 5.2% 5.2% 5.3% 5.3% 5.3% 5.4% 5.4% 5.5%

Overall balance (minus = deficit) -1.2% -1.3% -0.9% -1.3% -0.3% 0.0% 0.2% 0.3%

Foreign financing 0.0% -0.2% -0.2% -0.1% -0.1% -0.2% -0.1% -0.1%

Monetary system credit -0.5% 1.9% 1.7% 0.4% -0.5% -0.7% -0.9% -0.9%

Otherdomesticfinancing 1.7% 1.6% 1.5% 1.4% 1.3% 1.2% 1.1% 1.1%

Government debt (000, end of year)

Extemal debt (LE mil) 92,664.3 92,730.1 92,046.2 97,334.0 103,057.8 104,702.6 106,404.2 107,904.8

Extemal debt (USS mil) 27,294.3 27,461.8 27,259.6 27,232.3 27,206.4 27,078.5 26,988.1 26.861.7

Debt to monetary system (LE mil) 46,500.4 46,228.8 45.280e7 45,353.1 42,760.3 39,320.8 34,768.2 29,747.1

Other domestc debt (LE mil) 46,192.9 49,846.0 53,599.9 57,449.1 61,385.7 65,399.6 69,494.5 73,674.5Total govemment debt (LE mil) 185,357.6 188,804.9 190,926.7 200,136.1 207,203.9 209,423.0 210,666.8 211,326.5

Total government debt as percent GDP 90.4% 81.7% 75.2% 71.9% 68.0% 62.8% 57.8% 53.1%

Tax burden indicators (%)

Direct taxes /GDP 5.9% 5.9% 5.8% 5.7% 5.8% 5.8% 5.8% 5.7%lndir.taxesondomestecG&S/GDP 7.4% 7.2% 7.0% 7.0% 7.1% 7.1% 7.1% 7.1%

Indir. taxes dom G&S / priv. consum. 10.1% 9.9% 9.6% 9.5% 9.5% 9.4% 9.4% 9.4%

Taxes intitradel merch. imports 18.3% 18.7% 19.6% 17.7% 16.7% 15.7% 14.7% 13.7%

Source: World Bank.

87

TABLE 13Monetary Survey(LE million)

Actual Estimate Projection: base case scenario

1995 1996 1997 1998 1999 2000 2001 2002

A. Annual flows dunng the year

Nettoreign assets (846.9) 13,886.5 10,302.1 16,041.4 17.126.3 15,329.4 17,415.6 19,431.2

Domestccredit 15,707.8 18,611.8 19.811.3 22,829.1 22,329.5 23,828.2 25,252.6 27,526.2

Net claims on govemment (1,053.2) 4,336.0 4,257.0 1,063.5 (1.501.5) (2,238.1) (3,229.9) (3,564.7)

Claims on pnvate sector 16,045.0 18,076.7 19,872.6 21,784.5 23,857.6 26,102.9 28,532.0 31,156.9

Claims on PE sector 716.0 806.7 886.8 972.1 1,064.6 1,164.8 1,273.2 1,390.4

Total assets = liabilites 14,860.9 32,498.3 30.113.4 38,870.5 39,455.8 39,157.6 42,668.2 46,957.4

Money and quasimoney 15,163.0 19,793.4 17.241.9 18,382.7 19,938.5 21,591.5 23,355.1 25,234.1

Other liabilities (net) (302.1) 12,704.9 12,871.5 20,487.8 19,517.4 17,586.1 19,313.0 21,723.4

B. End-ot-year stock

Net foreign assets 46,293.1 60,179.6 70,481.7 86,523.1 103,649.4 118,978.8 136,394.4 155,825.6

Domesticcredit 134,698.4 153,310.2 173,121.5 195,950.6 218,280.1 242,108.3 267.360.9 294,887.1

Net cdaims on govemment 46,500.4 46,228.8 45,280.7 45,353.1 42,760.3 39,320.8 34,768.2 29,747.1

Credit to private sector 63,396.0 81,472.7 101,345.3 123,129.9 146,987.5 173,090.4 201,622.4 232,779.3

Credit to PE sector 24,802.0 25,608.7 26,495.5 27,467.6 28,532.2 29,697.1 30,970.3 32,360.6

Total assets= liabilities 180,991.5 213,489.8 243,603.2 282,473.6 321,929.5 361,087.1 403,755.2 450,712.6

Money and quasimoney 152,057.0 171,850.4 189,092.2 207,474.9 227,413.4 249,004.9 272.360.0 297,594.0

Otherliabilites (net) 28,934.5 41,639.4 54,510.9 74,998.7 94,516.1 112,082.2 131,395.3 153,118.6

C. Factors accounting for

monetary expansion (as % MQM)

Net foreign assets 30.4% 35.0% 37.3% 41.7% 45.6% 47.8% 50.1% 52.4%

Net credit to govemment 30.6% 26.9% 23.9% 21.9% 18.8% 15.8% 12.8% 10.0%

Credit to pnvate sector 41.7% 47.4% 53.6% 59.3% 64.6% 69.5% 74.0% 78.2%

CredtitoPEsector 16.3% 14.9% 14.0% 13.2% 12.5% 11.9% 11.4% 10.9%

Other liabilibies (net)(-) 19.0% 24.2% 28.8% 36.1% 41.6% 45.0% 48.2% 51.5%

Total money and quasi-money 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

D. Memorandum items

Net intl. reserves (USS mil.)

Monetary system, flow 1,550.4 2,530.4 3,487.3 3,084.9 2,922.0 3.643.0 4,073.9 4,455.8

Monetary system, stock 28,128.8 30,659.1 34,146.4 37,231.3 40,153.2 43.796.2 47,870.1 52,325.9

in months of imports 19.2 19.9 20.9 21.3 21.6 22.2 22.9 23.7

E. Money, credit and pnrces

M2 I GOP 74.2% 74.4% 74.5% 74.5% 74.6% 74.7% 74.7% 74.8%

Annual growth rate M2 11.1% 13.0% 10.0% 9.7% 9.6% 9.5% 9.4% 9.3%

Annual growth pnivate credit 33.9% 28.5% 24.4% 21.5% 19.4% 17.8% 16.5% 15.5%

GDP Deflator, growth rate 12.0% 7.4% 5.3% 5.1% 4.8% 4.7% 4.6% 4.4%

Source: Vorld Bank.

88

TABLE 14National accounts(LE million)

Actual Estimate Projection: high case scenario

1995 1996 11997 1998 1999 2000 2001 2002

A. In current pnces (mil LE)

GOP at market prices 205,000.0 230,958.3 261,211.6 295,433.4 334,457.8 378,994.2 429,458.8

Net indirecttaxes 11,873.0 12,970.1 13,414.4 15,157.0 18,113.7 19,630.1 21,162.0 22,704.7

GOP atfactor cost 193,127.0 217,988.2 247,797.1 280,276.4 316,344.1 359,3641 408,296.8 464,3875

Agrculture 32,050.0 35,4199 38,996.3 42,7970 46,899.2 51,329.7 56,058.2 61,116.8

Industry 61,700.0 69,579.1 78,167.9 87,5371 97,885.4 109,318.9 121,825.9 135,529 9

of which minufactunng 46,580.0 53,228.5 61,797.4 71,595.7 79,192.1 88,942.7 99,747.7 111,734.5

Senrices 993770 1129892 130633.0 149942.3 1715596 198715.5 2304128 267740.8

Resourcebalarice -9423.4 (8,328.5) (14,298.3) (13,711.1) (18.767.1) (18,602.3) (17,708.2) (15,8767)

Exports (GNFS) 44,578.2 51,400.8 58,105.1 65,548.0 85,997.7 102,144.9 121,196.0 143,729.5

Imports (GNFS) 54,001.5 59,729.3 72,403.4 79,259.1 104,764.8 120,747.2 138,904.2 159,606.3

Total expenditures 214423.4 239286.8 275509.8 309144.5 353224.9 397596.5 447167.0 502968.9

Consumption expenditures 172,0755 192,132.5 220,834.1 245,842.5 274,5955 305,662.1 339,912.0 378,058.6

Govemment 21,915.0 24,213.0 25,907.9 27,203.3 28,5635 29,991.6 31,491.2 33,0658

Prvate 150,160.5 167.919.5 194,926.2 218,639.2 246,032.0 275,670.4 308,420.7 344,992.8

Gross domestic investment 42,347.9 47,154.4 54,675.7 63,302.0 78,629.4 91,934.5 107,255.0 124,910.3

Govemment 11,299.0 12,581.0 14,021.0 16,396.6 18,495.5 21,034.2 24,1356 27,666.8

Pnvate 31,048.9 34,573.4 40,654.7 46,905 4 60,133.9 70,900.3 83,119.5 97,243.4

Total fixed investment 42,347.9 47,154.4 54,675.7 63,302.0 78,629.4 91,9345 107,255.0 124,910.3

Total investment in stocks 0.0 0.0 0.0 0.0 0.0 0.0 0 0 0.0

Domestc saving 32,924.5 38,825.9 40,377.4 49,590.9 59,862.3 73,332.1 89,546.8 109,033.5

. Net factor income (NFY) -2683.4 -2783.4 -2805.3 -2817.6 (3,447 4) (3,907.6) (4,450.0) (5,036 4)

+ Netcurrenttransfers(NCT) 11,128.9 11,309.2 11,492.8 11,650.8 13,598.2 14,309.4 15,029.2 15,764.1

=National saving 41,370.1 47,351.7 49,065.0 58,424.1 70,013.1 83,733.9 100,126.0 119,761.3

Gross nabonal product 202,316.6 228,174.9 258,406.3 292,615.8 331,010.4 375,086 6 425,008.8 482,055.7

Gross natonal disposable income 213,445.5 239,484.2 269,899.1 304,266.6 344,608.6 389,396.0 440,038 0 497,819.9

B. Shares of GDP (current prces)

Gross domestic product 100.0% 100.0% 100.0% 100.0% 100 0% 100.0% 100 0% 100.0%

Netindirecttaxes 5.8% 5.6% 5.1% 5.1% 5.4% 5.2% 4.9% 4.7%

Agriculture value added 15.6% 15.3% 14.9% 14.5% 14.0% 13.5% 13.1% 12.5%

Industry value added 0.3 30.1% 29.9% 29.6% 29.3% 28.8% 28.4% 27.8%

ofwhichmanufactunng 22.7% 23.0% 23.7% 24.2% 237% 23.5% 23.2% 22.9%

Services value added 48.5% 48.9% 50.0% 50.8% 51.3% 52.4% 53.7% 55.0%

Resource balance (X-M) 4.6% -3.6% -5.5% -4.6% -5.6% -4.9% 4.1% -3.3%

Exports (GNFS) 21.7% 22.3% 22.2% 22.2% 25.7% 27.0% 28.2% 29.5%

Imports (GNFS) 26.3% 25.9% 27.7% 26.8% 31 3% 31.9% 32.3% 32.8%

Total expenditures 104.6% 103.6% 105.5% 104.6% 105.6% 104.9% 104.1% 103.3%

Govemment consumpton 10.7% 10.5% 9.9% 9.2% 8.5% 7.9% 7.3% 68%

Private consumpbon 73.2% 72.7% 74.6% 74.0% 73.6% 72,7% 71.8% 7.1%

Govemment investment 5.5% 5.4% 5.4% 5.6% 5.5% 56% 5.6% 5.7%

Privateinvestment 15.1% 15.0% 15.6% 159% 18.0% 18.7% 19.4% 200%

Grossdomestcsaving 16.1% 16.8% 15.5% 16.8% 17.9% 19.3% 20.9% 22.4%

Gross national saving 20.2% 20.5% 18.8% 19.8% 20.9% 22.1% 23.3% 24.6%

Memorandum items:

GDP deflator (% change) 12.0% 7.4% 7.0% 6.7% 6.5% 6.4% 6.1% 6.0%

Consumer prce index (%change) 12.0% 7.4% 7.0% 6.7% 6.5% 6.4% 6.1% 6.0%

Total GOP (million current US$) 60,400.7 67,927.2 76,731.7 86,892.2 85,546.3 93,501.8 102,390.2 112,378.0

Conversion factor used (LEIUS$) 34 3.4 3.4 3.4 3.9 4.1 4.2 4.3

Percapita gross nabonal product 940.0 1,050.0 1,180.0 1,320.0 1,400.0 1,460.0 1,520.0 1,640.0

[Atias method: in constant US$]

89

TABLE 14 (con't)National accounts(LE million)

Actual Estimate Projection: high case scenario

1995 1996 1997 1998 1999 2000 2001 2002

C. In constant 1992 prces

GDPatmarketpnces 155,540.0 163,161.5 172,471.0 182,897.9 194,425.8 207,136.8 221,152.2 236,741.6

Resource balance (7,496.0) (6,174.3) (10,923.6) (10,363.7) (12,256.3) (11,318.9) (9,963.1) (8,128.3)

Exports(GNFS) 41,763.7 45,918.5 50,911.4 56,551.5 62,930.8 70,154.7 78,344.9 87,641.5

Imports (GNFS) 49,259.7 52,092.8 61,835.0 66,915.2 75,187.1 81,473.6 88,306.0 95,769.7

Total expenditures 163,036.0 169,335.7 183,394.6 193,261.6 206,682.1 218,455.6 231,115.2 244,869.8

Consumption expenditures 129,336.0 134,108.0 143,939.6 149,861.1 157,639.5 164,508.8 171,773.7 179,594.1

Govemment 16,471.8 16,900.6 16,886.8 16,582.6 16,397.7 16,141.6 15,914.0 15,707.7

Pnvate 112,864.2 117,207.4 127,052.8 133,278.4 141,241.8 148,367.1 155,859.7 163,886.5

Gross domestic investment 33,700.0 35,227.7 39,455.0 43,400.5 49,042.6 53,946.9 59,341.5 65,275.7

Govemment 8,991.6 9,398.9 10,117.8 11,241.7 11,536.0 12,342.8 13,353.6 14,458.2

Private 24,708.4 25,828.8 29,337.2 32,158.9 37,506.6 41,604.1 45,987.9 50,817.5

Total fixed investment 33,700.0 35,227.7 39,455.0 43,400.5 49,042.6 53,946.9 59,341.5 65,275.7

Total investment in stocks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Termsoftrade(TT)effect (1,099.9) (1,089.4) (1,287.6) (1,212.0) (1,212.4) (1,233.0) (1,294.9) (1,398.4)

GrossdomesUcincome 154,440.1 162,072.0 171,183.4 181,685.9 193,213.4 205,903.8 219,857.3 235.343.2

Domestic saving (TT adjusted) 25,104.1 27,964.0 27,243,8 31,824.8 35,573.9 41,395.0 48,083.6 55,749.1

D. Annual growth rates (1992 prices)

GOP at market prices 4.6% 4.9% 5.7% 6.0% 6.3% 6.5% 6.8% 7.0%

Exports(GNFS) 1.3% 9.9% 10.9% 11.1% 11.3% 11.5% 11.7% 11.9%

Imports (GNFS) 1.2% 5.8% 18.7% 8.2% 12.4% 8.4% 8.4% 8.4%

Total expenditures 4.4% 3.9% 8.3% 5.4% 6.9% 5.7% 5.8% 6.0%

Consumpton 4.3% 3.7% 7.3% 4.1% 5.2% 4.4% 4.4% 4.6%

Investment 4.7% 4.5% 12.0% 10.0% 0.1 0.1 0.1 10.0%

Gross domesfc income 5.2% 4.9% 5.6% 6.1% 0.1 6.6% 6.8% 7.0%

Gross domestic savings 10.0% 11.4% -2.6% 16.8% 11.8% 16.4% 16.2% 15.9%

Per capita growth rates:

PercapitaGDP(mp) 2.2% 2.7% 3.5% 3.9% 4.1% 4.4% 46% 4.9%

Per capita total consumption 2.0% 1.5% 5.1% 2.0% 3.0% 2.2% 2.3% 2.5%

Percapitapnvateconsumption 2.8% 1.7% 6.1% 2.7% 3.8% 2.9% 2.9% 3.1%

Source: Worid Bank.

90

TABLE 15Merchandise Trade(US$ million)

Actual Estimate Projection: high case scenario

1995 1996 1997 1998 1999 2000 2001 2002

A. Value in current prices (USS mil.)

Total merchandise exports 4,854.0 5,4380 6,128.8 6,9432 8,058.8 9,4388 11,0626 12,9755

Pnmary products 2,652.0 2,6961 2,800.9 2,918 7 3,187.9 3,545 2 3,935.8 4,362.8

of which petroleum* 2,036.5 1,998.9 2,096.9 2,1447 2,294.3 2,5304 2,779.5 3,0410

of which cotton 306.4 327.5 3118 3319 364.2 391.5 420.9 452.6

of which other agnculture 3091 369.7 3923 442.1 529.4 6232 735.4 8692

Manufactured goods 2,202 0 2,741.9 3,327.9 4,024.6 4,870.9 5,893.7 7,126.8 8,612.6

of which textiles 1,077.3 1,335.1 1,620.4 1,959.6 2,371.7 2,869.7 3,470.1 4,193.6

of which other manufactured 1,124.7 1,406.8 1,707.5 2,065.0 2,499.2 3,024.0 3,656.7 4,419.0

Total non-factor service receipts 8,2804 9,679.5 10,9398 12,335.6 13,937.4 15,761.4 17,8326 20,184.6

of which tounsm 2,298.9 3,202.0 3,688 7 4,234 1 4,863.9 5,586.0 6,411.3 7,354 0

of whichSuezCanal 2,058.4 2,160.0 2,277.3 2,392.2 2,515.0 2,643.3 2,776.5 2,914.7

Totalmerchandiseimports 11,279.9 12,454.0 15,078.3 16,526.5 18,997.1 21.119.1 23,478.1 26,105.4

Food 2,759.8 3,044.6 3,109.5 3,175.2 3,241.5 3,308.5 3,376.1 3,444.4

Other consumer goods 478.7 516.5 566.9 603.8 648.9 692.3 738.1 787.0

POLandothereenergy 721.4 800.9 830.0 841.3 8941 981.9 1,076.2 1,178.0

Intermediate goods 4,212.4 4,687.8 5,285.9 5,9531 7,106.3 8,068.2 9,143.9 10,348.0

Capital goods 3,107 6 3,404.3 5,285.9 5,953.1 7,106.3 8,068.2 9,143.9 10,348.0

Total non-factor service payments- 4,631.0 5,113.0 6,190.4 6,785.0 7.799 3 8,670.5 9,639 0 10,717.6

B. Value in constant 1992 prces (US$ mul.)

Total merchandise exports 4,892 9 5,182 8 5,832.2 6,578.5 7,437.7 8,428 8 9,573.6 10,898.0Petroleum' 2,385.8 2,212.7 2,367.6 2,533.4 2,710.7 2,900 5 3,103.5 3,320.7

Cotton 233.1 244.8 257.0 269.9 283.4 297.6 312.4 328.1

Otheragnculture 232.9 279.1 321.0 369.1 424.5 4882 561.4 645.6

Textles 998.6 1,191.1 1,405.5 1,558.5 1,957.0 2,309.2 2,724.9 3,215.4

Othermanufactures 1,042.5 1,255.1 1,481.0 1,747.6 2,062.2 2,433.4 2,871.4 3,388.2

Total non-factor service receipts 7,675.2 8,635.6 9,488.8 10,439.8 11,500.2 12,683.1 14,003.0 15,476.2

of which tounsm 2,130.9 2,856.7 3,199.5 3,583.4 4,013.4 4,495.0 5,034.4 5,638 5

of whichSuezCanal 1,908.0 1,927.0 1,975.2 2,024.6 2,0752 2,127.1 2,180.3 2,234.8

Total merchandise imports 10,531.4 11,114.9 13,238.8 14394.8 16,190.8 17,541.0 19,005.8 20,602.7

Food 2,457.5 2,548.2 2,640.3 2,813.6 2,871.7 2,873.5 2,864.2 2,844.6

Other consumer goods 443.7 460.8 491.8 511.0 535.5 557.1 579.6 603.4

POL and other energy 845.1 886.5 937.1 993.8 1,056.4 1,125.5 1,201.6 1,286.3

Intemnediate goods n.e i. 3,904.5 4,182.2 4,584.8 5,038.2 5,863.6 6,492.5 7,180.2 7,934.2

Capital goocis 2,880.5 3,037.2 4,584.8 5,038.2 5,863.6 6,492.5 7,180.2 7.934.2

Total non-factor service payments" 4,292.5 4,561.6 5,369.3 5,742.2 6,435.4 6,977.1 7,569.0 8,217.5

Memorandurrl items

Export volumne grwth rate -3.4% 5.9% 12.5% 12.8% 13.1% 133% 13.6% 13.8%

Import volume growth rate 27.1% 5.5% 19.1% 8.7% 12.5% 8.3% 8.4% 84%

C Price indices (1992 = 100)

Merchandise exports 99.2 104.9 105.1 105.5 108.3 112.0 115.6 119.1

Merchandise imports 107 1 112.0 113.9 114.8 117.3 120.4 123.5 126.7

Merchandise terms of trade 92.6 93.6 92.3 91 9 92.3 93.0 93.5 94.0

D Non-factor service indices (1992 = 100

Exports ofNFS - volume index 104.1 117.2 128.7 141.6 1580 172.1 190.0 2100

Exports of NFS-priceindex 107.9 1121 115.3 118.2 1212 124.3 127.3 130.4

Imports of NFS - volume index 102.4 108.8 1281 137.0 153.6 156.5 180.6 196.1

ImportsofNFS-pnceindex 107.9 112.1 115.3 118.2 121.2 124.3 127.3 130.4

Includes foreign partners share.I' ncludes payments in return for foreign partners investment

Source: World Bank.

91

TABLE 16Balance of payments(US$ million)

Actual Estimate Projection: high case scenario

1995 1996 1997 1998 1999 2000 2001 2002

TotalexportsofGNFS 13,134.4 15,117.5 17,068.5 19,278.8 21,996.2 25,200.2 28,895.2 33,180.1

Merchandise 4,854.0 5,438.0 6,128.8 6,943.2 8,058.8 9,438.8 11t062.6 12,975.5

Non-factor services 8,280.4 9,679.5 10,939.8 12,335.6 13,937.4 15,761.4 17,832.6 20,184.6

Total imports of GNFS 15,910.9 17,567.0 21,268.7 23,311.5 26,796.3 29,789.6 33,117.1 36,823.0

Merchandise 11,279.9 12,454.0 15,078.3 16,526.5 18,997.1 21,119.1 23,478.1 26,105.4

Non-factorservices 4,631.0 5,113.0 6,190.4 6,785.0 7,799.3 8,670.5 9,639.0 10,717.6

Resource balance (2,776.5) (2,449.5) (4,200.2) (4,032.7) (4,800.2) (4,589.4) (4.221.9) (3,662.9)

Net factor income (790.6) (818.6) (824.1) (828.7) (881.8) (964.0) (1,061.0) (1,162.0)

Factor receipts 1,625.5 1,755.5 1,696.0 2,047.7 2,211.5 2,388.4 2,579.5 2,785.8

Factor payments 2,416.1 2,574.2 2,720.0 2,876.4 3,093.2 3,352.4 3,640.4 3,947.8

Interest 1,327.7 1,452.1 1,502.1 1,548.3 1,608.5 1,649.0 1,698.2 1,752.2

Otherfactorpayments 1,088.4 1,122.0 1,217.9 1,328.1 1,484.7 1,703.4 1,942.3 2,195.6

Net prvate current transfers 3,279.0 3,326.2 3,376.1 3,426.7 3,478.1 3,530.3 3,583.2 3,637.0

of which workers remittances 3,279.0 3,326.2 3,376.1 3,426.7 3,478.1 3,530.3 3,583.2 3,637.0

Net official current transfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Current account balance (288.1) 58.0 (1,648.2) (1,434.7) (2,203.8) (2,023.2) (1,699.7) (1.187.9)

Official capital grants 918.6 964.5 945.2 926.3 907.8 889.7 871.9 854.4

Pnvate investment (net) 680.6 762.3 1,697.0 2,067.9 2,275.1 2,514.2 2,774.6 3,057.0

Direct foreign investments 676.5 757.7 1,497.0 1,847.9 2,033.1 2,248.0 2,481.8 2,734.9

Portfolio investments 4.1 4.6 200.0 220.0 242.0 266.2 292.8 322.1

Netforeign lending 295.1 560.4 719.3 876.9 936.5 1,027.3 1,212.5 1,287.2

Disbursements 1,133.9 1,668.9 1,807.8 1,890.2 2,095.0 2,308.7 2,527.6 2,737.3

Repayments 838.8 1,108.5 1,088.5 1,013.3 1,158.5 1,281.4 1,315.1 1,450.1

Othercapital flows, n.e.i. (51.7) 99.2 218.3 (854.8) (1.161.8) (648.4) (688.7) (728.6)

Change, netintemational reserves 1,550.4 2,439.8 1,731.6 1,361.6 511.7 1,493.4 2,179.8 2,960.0

[plus indicates increase in assets]

Memorandum items:

Net intemational reserves (NIR) 28,128.6 30,588.5 32,300.1 33,681.7 34,173.5 35,668.9 37,846.7 40,806.6

NIR, in months of imports 19.2 17.2 16.6 15.1 13.8 12.9 12.3 12.2

Exchange rates

Annual average (LEIUSS) 3.4 3.4 3.4 3.4 3.9 4.1 4.2 4.3

At end-year (LE/US$) 3.4 3.4 3.4 3.7 4.0 4.1 4.3 4.4

Indexrealavg.X-rate(1990=100) 83.2 81.0 77.3 73.3 81.0 81.0 81.0 81.0

(decrease is real appreciation)

Current account balance as % GDP -0.5% 0.1% -2.1% -1.7% -2.6% -2.2% -1.7% -1.1%

Source: Worid Bank.

92

TABLE 17Extemal debt, stocks and flows(US$ million)

Actual Estimate Projection: high case scenario1995 1996 1997 1998 1999 2000 2001 2002

A. Gross disbursements

Publicanclpublirlyguaranteed 1.133.9 1,068.9 1,167.8 1,182.2 1,311.7 1,442.1 1,568.7 1,6762

Official multilateral 637.9 503.8 491.4 456.1 489.2 546.2 607.2 635 3

of which IDA 51.8 70.8 102.9 97.8 89.8 73.9 54.4 36.0

of which IBRD 88.3 31.8 45.0 79.2 127.8 185.4 245.1 281.8

Offioal bilateral 375.7 378.0 340.4 378.6 444.7 474.2 489.5 512.3

Pivate creditors (guaranteed) 120.3 187.1 336.0 347.5 377.8 421.8 472.1 528.7

of which bonds 0.0 0.0 0.0 0 0 0.0 0.0 0.0 0.0

Pnvate creditors non-guaranteed 0.0 200.0 200.0 224.0 250.9 281.0 314.7 352.5

Total LT loan disbursements 1,133.9 1,268.9 1,367.8 1,406.2 1,562.6 1,723.1 1,883.4 2,028.7

DrawingsiromIMF 0.0 0.0 0.0 0.0 0.0 0.0 0.0 00

Total disbursements 1,133.9 1,668.9 1,807.8 1,890.2 2,095.0 2,308.7 2,527.6 2,737.3

B. Amorlizabon

Publicand publidy guaranteed 769.4 1,062.5 1,034.0 1,013.3 1,110.0 1,201.4 1,190.3 1,275.2

Official mulblateral 334.3 382.5 421.2 391.0 381.3 370.7 340.8 341.8

of which IDA 13.1 14.0 15.0 16.1 17.8 19.9 23.1 32.0

of which IBRD 201.8 2030 215.8 198.8 173.5 146.4 123.6 116.3Official bilateral 154.2 348.6 348.1 395.0 497.9 624.8 730.1 789.1

Pnvate creditors (guaranteed) 281.0 331.3 264.8 227.3 230.8 205.9 119.4 144.2

of which bonds 0.0 0.0 0 0 0.0 0.0 0.0 0.0 0.0

Prvate creditors non-guaranteed 0.0 0.0 0.0 0.0 40.0 80.0 124.8 175.0

Total LT loan net disbursements 769.4 1,062.5 1.034.0 1,013.3 1,1500 1,281.4 1,315.1 1,4501

Net credit orm IMF 69.3 46.0 54.5 0.0 8.5 0.0 0.0 0.0

Total repayments 838.8 1,108.5 1,088.5 1,013.3 1,158.5 1,281.4 1,315.1 1,4501

C. Net disbursements

Public and publically guaranteed 364.5 6.5 133.8 168.9 201.7 2407 378.4 401.1Offlialmulblateral 303.6 121.3 70.3 65.1 107.9 175.5 2663 2934

of which IDA 38.7 56.8 88.0 81.6 72.0 54.0 31.3 4.0

of which IBRD (113.5) (171.2) (170.7) (119.6) (45.7) 38.9 121.6 165.5Official bilateral 221.5 29.3 (7.7) (16.4) (53.2) (150.6) (240.6) (276.8)Prvate creditors (guaranteed) (160.7) (144.2) 71.2 120.2 147.0 215.8 352.7 384.5of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private creditors non-guaranteed 0.0 200.0 200.0 224.0 210.9 201.0 189.9 177.5

Total LT loan net disbursements 364.5 206.5 333.8 392.9 412.6 441.7 568.3 578.6

Net credit from IMF (69.3) (46.0) (54.5) 0.0 (8.5) 0.0 0.0 0.0Total net disbursements 295.1 560.4 719.3 876.9 936.5 1,027.3 1,212.5 1,287.2

D. Interest and charges

Publicand publically guaranteed 1.236.8 1,398.8 1,412.4 1,436.2 1,472.8 1,490.5 1,518.0 1,551.8

Official multilateral 232.6 258.0 269.8 286.5 305.5 323.7 345.4 371.7

of which IDA 71 8.0 8.9 9.7 10.5 10.8 10.8 10.7of which IBRD 116.9 119.0 116.3 120.5 128.0 138.5 153.8 172.4

Official bilateral 898.4 1,036.7 1,047.0 1,055.9 1,072.5 1,069.5 1,064.6 1,055.7Prvate creditors (guaranteed) 105.8 104.0 95.6 93.8 94.9 97.3 108.0 124.4

of which bonds 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Prvate creditors non-guaranteed 17.5 8.5 25.5 43.5 62.0 79.5 96.1 111.7Total intereston LTloans 1,254.3 1,430.4 1,478.2 1,523.9 1,581.5 1,619.5 1,665.6 1,716.4

Interest on short-term credit 73.3 10.1 21.2 23.3 25.7 28.2 31.1 34.2

Interest on IMF drawings 11.4 1.6 1.7 00 0.1 0.0 0.0 0.0Total interest (LT+STvIMF) 1,327.7 1,452.1 1,502.1 1.548.3 1,608.5 1,649.0 1,698.2 1,752.2

93

TABLE 17 (cont'd)External Debt, Stocks and Flows(US$ million)

Actual Estimate| Projection: high case scenario

_ 1995 1996 1 1997 1998 1999 2000 2001 2002

E. Extemal debt (DOD)

Public and publically guaranteed 32,858.5 32,949.2 32,961.1 33,188.2 33,421.3 33,665.8 34,060.6 34,459.1

Official multilateral 4,6351 4,750.7 4,820.9 4,886.0 4,993.9 5,169.4 5,435.8 5,729.2

of which IDA 998.6 1,055.4 1,143.4 1,225.0 1,297.0 1,351.0 1,382.3 1,386.3

of which IBRD 1,493.9 1,322.6 1,151.9 1,032.3 986.7 1,025.6 1,147.1 1,312.6

Official bilateral 26,250.0 26,525.3 26,517.7 26,625.2 26,616.8 26,583.2 26,360.4 26,082.1

Prvate creditors (guaranteed) 1,973.4 1,673.2 1,622.5 1,676.9 1,810.5 1,913.2 2.264.5 2,647.7

of wthich bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private creditors non-guaranteed 375.0 200.0 400.0 624.0 834.9 1,035.9 1,225.8 1,403.3

Total LT DOD 33,233.5 33,149.2 33,361.1 33,812.2 34256.2 34,701.7 35,286.4 35,862.3

Short-term debt 1,932.9 2,332.9 2,372.9 2,416.9 2.465.3 2,518.5 2,577.1 2,641.5

Use of IMF credit 109.0 63.0 8.5 8.5 0.0 0.0 0.0 0.0

Total DOD (ST-LT+IMF) of which: 35,272.5 35,542.2 35,339.6 35,794.7 36,234.6 36,684.9 37,275.0 37,856.7

F. Debt & debt burden indicators

Total debt service (mil USS) 2,166.5 2,560.6 2,590.6 2,561.6 2,767.0 2,930.5 3,013.2 3,202.3

Interest (LTvST-IMF) 1,327.7 1,452.1 1,502.1 1,548.3 1,608.5 1,649.0 1,698.2 1,752.2

Pnncipal (LT-IMF) 838.8 1,108.5 1,088.5 1,0133 1,158.5 1,281.4 1,315.1 1,450.1

Total debt (DOD), total debt service (TDS):

DOD/exports(GNFS-VVR)ratio 195.5% 176.0% 158.2% 144.6% 130.9% 117.9% 106.3% 95.6%

DOD/GDPratio 58.4% 52.3% 46.1% 41.2% 42.4% 39.2% 36.4% 33.7%

MLT DOD (publicvpub. guar.) / GDP ratio 54.4% 48.5% 43.0% 38.2% 39.1% 36.0% 33.3% 30.7%

TDS/exports(GNFSvWR)ratio 12.0% 12.7% 11.6% 10.3% 10.0% 9.4% 8.6% 8.1%

Source: World Bank.

94

TABLE 18Fiscal accounts(LE million)

Actual Estimate Projection: high case scenario

1995 1996 1997 1998 1999 2000 2001 2002

Govemment budget (mil LCUs)

Totalcurrentrevenues 52,9250 57,708.0 61,689.0 68,614.9 80,451.4 90,5255 101,726.0 114,2567

Directtaxes 12,156.0 13,7310 14,760.0 16,323.5 19,364.9 22.173.0 25,3547 28,979.0

Indirecttaxes 22,123.0 24,5180 26,475.0 29,928.7 34,836.5 38,579.8 42,634.9 47,0590

On domesticgoods and services 15,106.0 16,607.0 17,845.0 19,983.0 22,433.1 25,140.2 28,159.1 31,557.5

On intemational trade 7,017.0 7,911.0 8,630.0 9,9457 12,403.5 13,4397 14,475.8 15,5018

Non-tax receipts 18,646.0 19,459.0 20,4540 22,362.8 26,250.0 29,772 7 33,736 3 38,2184

Total current expenditures 47,633.0 51,967.0 54,352.9 58,731.5 62,673.4 66,526 3 70,821.2 75,828 9

Interestonextemaldebt 3613.0 3,796.0 3,963.0 4,045.1 4,7168 4,891.5 5,068.3 5,248.8

Interest on domestic debt 11,178.0 12,231.0 12,354.0 13,715.4 14,297.9 14,893.8 15,501.4 16,473.9

Transfers to prvate sector 498.0 (76.9) (9326) (1,0040) (1,627.8) (2,200.4) (2,712.7) (3,314 2)

TransferstootherNFPS 179.0 256.0 0.0 0.0 0.0 0.0 00 0.0

Subsidies 10250.0 11547.9 13060.6 14771.7 16722.9 18949.7 21472.9 243546

Consumpbon 21,915.0 24,213.0 25,907.9 27,203 3 28,563.5 29,991.6 31,4912 33,065.8

Wages and salanes 12,519.0 14,045.0 15,028.2 15,779.6 16,568 5 17,397.0 18,266.8 19,180.2

Other consumption 9,396.0 10,168.0 10,879.8 11,423.7 11,994.9 12,594.7 13,224.4 13,885.6

Budgetary savings 5,292.0 5,741.0 7,336.1 9,883.4 17,778.1 23,999.2 30,904.7 38,427 8

Capital revenues 2,794.0 3,185 0 3,634.0 4,150.7 4,636.4 5,187.6 5,896 1 6.661.6

Totalcapitalexperuditures 10,624.0 11,922.0 13,417.0 15,7466 17,826.6 20,314.1 23,362.6 26,887.5

Capital transfers (675.0) (659.0) (604.0) (650 0) (668.9) (720.1) (773.0) (779.3)

Budgetary fixed lirvestment 11,299.0 12,5810 14,021.0 16,396.6 18,495 5 21,034 2 24,1356 27,666.8

Overall balance (mrrinus = deficit) (2,538 0) (2,996.0) (2,446 9) (1,712 5) 4,587.9 8,872.7 13,437 2 18,201.9

Sources of financirig 2538.0 2996.0 2446.9 1712.5 (4,587.9) (8,8727) (13,4372) (18,201.9)

Foreign financing 42.2 (385.5) (5381) (387.8) (292.3) (6251) (464.3) (547.3)

Monetary system credit (1,053.2) 4,336 0 4,257.0 (775.9) (7,160.9) (11,082.0) (15,769.3) (20,404.9)

Other domestc financing 3,548.9 3,653.0 3,753.9 3849.2 3,936.6 4,0138 4,094.9 4,180.0

Residual sources and discrepancies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Shares of GDP at current prices

Current revenues 25.8% 25.0% 23.6% 232% 241% 23.9% 23 7% 23.5%

Currentexpenditures 23.2% 22.5% 208% 19.9% 187% 17.6% 16.5% 15.6%

Budgetary savings 2.6% 2.5% 2.8% 3.3% 5.3% 6.3% 7.2% 7.9%

Capital revenues 1.4% 1.4% 1.4% 1.4% 14% 1.4% 1.4% 1.4%

Capital expenditurns 5.2% 5.2% 5.1% 5.3% 53% 5.4% 54% 5.5%

Overall balance (minus = deficit) -1.2% -1.3% -0.9% -0 6% 1.4% 2.3% 3.1% 3.7%

Foreign financing 0.0% -0.2% -0.2% -0 1% -0.1% -0.2% -01% -0.1%

Monetary system credit -0.5% 1.9% 1.6% -0 3% -2.1% -2.9% -3.7% -4.2%

Otherdomesticfinancing 1.7% 1.6% 1.4% 13% 1.2% 1.1% 10% -0.9%

Govemment debt (DOD, end of year)

Extemal debt (LE rnil) 92,664.3 93,429.2 92,740.2 99,529.6 108,322.5 111,667.3 115,087.5 118,322.1

Extemal debt (US$ mil) 27,294.3 27,481.8 27,259.6 27,232.3 27,206 4 27,078.5 28,988.1 26,861.7

Debttomonetarysystem(LEmil) 46,500.4 46,228.8 45,459.9 43,711.0 35,4789 23,217.4 6,1495 (15,685.1)

Other domestic debt (LE mil) 46,192.9 49,846.0 53,599.9 57,449 1 61,385.7 65,399.6 69,494.5 73,674.5

Total govemmentdebt(LE mil) 185,357.6 189,504.0 191,800.0 200,689.8 205,187.0 200,294.2 190,731.6 176,311.5

Total govemment debt as percent GDP 90.4% 82.1% 73.4% 67.9% 61.3% 52.8% 44.4% 36.2%

Tax burden indicators (%)

Direct taxes I GDP 5.9% 5.9% 5 7% 5 5% 5.8% 5.9% 5.9% 5.9%

Indir. taxes on domestic G&S I GDP 7.4% 7 2% 6.8% 6.8% 6.7% 6.6% 6.6% 6.5%

Indir. taxes dom G&S I prv. consum. 10.1% 9.9% 9.2% 9.1% 9.1% 9.1% 9.1% 9.1%

Taxesint'ltradelnmerch.imports 18.3% 18.7% 168% 17.7% 16.7% 15.7% 14.7% 13.7%

Source: World Bank.

95

TABLE 19Monetary Survey(LE million)

Actual Estimate Projection: high Case Scenario1995 1996 1997 1998 1999 2000 2001 2002

A. Annual flows during the year

Netforeign assets (846,9) 14,340.2 4,416.1 11,358.0 11,010.9 9,012.1 12,219.3 16,192.1

Domesficcredit 15,707.8 18,611.8 20.588.0 22,406.0 19,113.4 18,725.4 18,045.1 17,990.5

Net claims on govemment (1,053.2) 4,336.0 4,257.0 (775.9) (7,160.9) (11.082.0) (15,769.3) (20,404.9)

Claims on prvate sector 16,045.0 18,076.7 20,444.6 23,123.1 26,177.4 29,663.2 33,613.0 36,123.9

Claims on PE sector 716.0 806.7 912.3 1,031.9 1,168.2 1,323.7 1,500.0 1,701.3

Total assets = liabilities 14,860.9 32,952.0 25,004.1 33,764.0 30,124.4 27,737.6 30,264.5 34,182.6

Money and quasimoney 15,163.0 19,793.4 22,684.1 25,688.5 29,303.4 33,441.9 37,894.2 43,276.2

Otherliabilibies (net) (302.1) 13,158.7 2,320.0 8,075.5 821.0 (5.704.3) (7,629.7) (9,093.6)

B. End-of-year stock

Net foreign assets 46,293.1 60,633.3 65,049.4 76,407.4 87,418.3 96,430.5 108,649.8 124,841.9

Domestic credit 134,698.4 153,310.2 173,898.2 196,304.2 215,417.7 234.143.1 252,186.2 270,178.7

Netclaims on govemment 46,500.4 46,228.8 45,459.9 43,711.0 35.478.9 23,217.4 6,149.5 (15,685.1)

Credittoprivatesector 63,396.0 81,472.7 101,917.3 125,040.4 151,217.8 180,881.0 214,494.0 252,617.9

Credit to PE sector 24802.0 25608.7 26521.0 27552.8 28,721.0 30,044.7 31,544.7 33,245.9

Totel assets = liabilibes 180.991,5 213,943.5 238,947.6 272,711.6 302,836.0 330,573.6 360,838.1 395,020.7

Money and quasimoney 152,057.0 171,850.4 194,534.4 220,223.0 249,526.3 282,968.2 320,862.4 364,138.6

Otherliabilibes (net) 28,934.5 42,093.1 44,413.2 52,488.7 53,309.7 47,605.4 39,975.7 30,882.0

C. Factors accounting formonetary expansion (as % MQM)

Net foreign assets 30.4% 35.3% 33.4% 34.7% 35.0% 34.1% 33.9% 34.3%

Net credit to govemment 30.6% 26.9% 23.4% 19.8% 14.2% 8.2% 1.9% -4.3%

Credit to private sector 41.7% 47.4% 52.4% 56.8% 60.6% 63.9% 66.8% 69.4%

CredittoPEsector 16.3% 14.9% 13.6% 12.5% 11.5% 10.6% 9.8% 9.1%

Other liabilities (net)(-) 19.0% 24.5% 22.8% 23.8% 21.4% 16.8% 12.5% 8.5%

Total money and quasi-money 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

D. Memorandum items

Net ing. reserves (USS mil.)

Monetary system, flow 1,550.4 2,439.8 1,731.6 1,361.6 511.7 1.493.4 2,179.8 2,960.0

Monetary system, stock 28,126.6 30,568.5 32,300.1 33,661.7 34,173.5 35,666.9 37.843.7 40,806.6

inmonthsofimports 19.2 17.2 16.6 15.1 13.8 12.9 12.3 12.2

E. Money, credit and pnces

M2 I GOP 74.2% 74.4% 74.5% 74.5% 74.6% 74.7% 74.7% 74.8%

Annual growth rate M2 11.1% 13.0% 13.2% 13.2% 13.3% 13.4% 13.4% 13.5%

Annual growth prvate credit 33.9% 28.5% 25.1% 22.7% 20.9% 19.6% 18.6% 17.8%

GDP deflator, growth rate 12.0°h 7.4% 7.0% 6.7% 6.5% 6.4% 6.1% 6.0%

Source: Word Bank.

96

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