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Egypt in the Global Economy
Strategic ChoiCes Savilgs, Inuestments, for
andLong-Term Growth

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WORLD BANK MIDDLE STUDIES

EAST AND NORTH AFRICA

ECONOMIC

Egypt in the Global Economy
StrategicChoicesforSavings,Investments, and Long-TermGrowth

The WorldBank Washington, D.C.

Copyright © 1998 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing March 1998 Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited 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) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright 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 0-8213-4066-2 1. Egypt-Economic policy. 2. Egypt-Economic conditions-1952. 4. Foreign trade promotion-Egypt. 3. Investment, foreign-Egypt. 5. Savings and investment-Egypt. I. World Bank. II. Series. HC830.E377 1997 97-31580 338.962-DC21 CIP

and definitions Currencyand exchangerates Strategicoverview xiii 1 xi ix Chapter 1 Employment and growth-an overview Saving.acronyms.Contents Foreword vii Acknowledgments viii Abbreviations. investment and growth-a virtuous cycle 2 Trade openness and investment-friendly policies for a higher growth trajectory Notes 7 4 policy-managing success macroeconomic Chapter2 Post-stabilization Recent developments 9 12 9 Managing success: in capital ilflow problem Why is there a probleim? 12 Egypt's capital inflow problem 13 Implications for fiscal and exchange rate policy Risk in the immediate future 16 Sterilizationproblems 16 Issues in banking 17 Notes 19 14 Chapter3 Long-termpolicy changes Divergent growth scenarios 21 The base case scenario 21 The high growth scenario 22 Benefits of rapid growth 23 21 iii .

Long-termconsistencyissues 23 25 What should be done while the investment expansion lasts? 24 What should be done if investment expansion does not accelerate? Notes 26 Chapter4 Promotingoutward orientationthroughexports The environment 27 28 30 34 27 Achievements 28 The agenda for action Import transaction costs Export transaction costs The incentive regime-asymmetric pricesbetween importand export 29 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 Chapter5 Naturalresourcedepletionand savings Nonrenewable resources 41 41 Projectedoil and gas rent 42 The competing use of the oil and gas rent 43 Consumption 43 Investment 44 Oil and gas fund 45 Summaryand conclusions Notes 46 Annex 47 46 Chapter6 Increasinglong-termsavingsto buildthe basis for growth Increased savings from privatization and public expenditure reform The PE saving-investment gap and its roots 52 Potential gains in savings from reforms: a simulation 54 51 51 Financialsectorreformsto increaseprivatesaving 56 The social insurance system iv 56 EGYPT IN THE GLOBALECONOMY: STRATEGIC CHOICESFOR SAVINGS.ANDLONG-TERMGROWTH . INVESTMENTS.

1966-93 5 Egypt and Indonesia: comparative indicators 5 Growth and policies in Egypt and Indonesia.4 5A. 1993/ 94 48 Petroleum product end-user prices in Egypt 49 Estimated annual deadweight loss in Egypt (1995) 49 Estimated increases in savings from reforming PEs: total 54 Estimated increases in savings from reforming PEs. 1980-93 3 Average tariff rates in Egypt and selected East Asian economies5 Growth and policies in 86 countries.4 5.2 1.1 4.3 5A.to medium-term measures 62 61 Reforming the social insurance system .1 4.1 2.3 2.3 4. 1996-2015 43 Estimated implicit subsidies to major petroleum products and gas 44 Illustrative rates of return on public subsidies 45 Prices of Egyptian crudes.4 1.1 The dynamics of debt and the sustainability of fiscal deficit Methodology and assumptions 55 16 71 Tables 1.1966-93 6 Regression estirnate for Egypt 6 Growth counterfactuals 6 Recent developments in saving and investment 11 Distribution of private investment 11 12 Tariff duty to import ratio and indexes of effective exchange rates Indexes of domestic prices of tradables and nontradables 12 Outcome of the two scenarios in Egypt 22 30 Tariffs and taxes affecting Egyptian exports Effects of expensive Egyptian port services 31 Effects of cumbersome Egyptian import clearances 32 Effects of restrictive Egyptian quality control system 33 Scenario assumptions for nonrenewable resources (oil and gas).9 2.1 6.2 5A.8 1.longer-term proposals The insurance industry 64 The capital market and its links with saving 66 Notes 67 Selected bibliography 69 Statistical annex Boxes 2.3 5A.5 6.3 Selected cconomic indicators.5 1.2 2. 1990/91-1995/96 1 Growth and employment 2 Per capita income growth performance.2 5. 1996 47 Price of Suez Blend.6 1.3 1. 1992-95 47 Long-run marginal cost of gas exploration and production.1 5.2 6.1 5A.1 6.1 1.7 1.2 4.4 3.The National Investment Bank 59 Reforming the social insurance system - short. by government and private sector 55 Estimated increases in savings from reforming PEs: origin of the change 54 'I .

9 5A. 1995-2015 -low-case scenario Annual incremental investment over 20 years to compensate for decline in rent in low-case scenario 45 Annual contributions to Egyptian oil revenue stabilization fund.12 Sensitivity analysis 56 Social insurance system indicators 57 Comparative public pension schemes and demographic indicators. 1987/88-93/94 Saving-investment gap of PEs in Egypt.1 6.6 6.1 5. and exports Domestic debt as percentage of total public debt stock 17 18 Domestic vs foreign interest rate Distribution of sales proceeds from privatization 24 24 Volatility of Egypt's key revenue sources Share of oil and gas sector in GDP 41 Share of petroleum exports 41 Oil and gas production 42 Estimated oil and gas rent 42 42 ]Resource rent/GDP 43 Egypt's projected oil and gas revenue over 20 years.1 3. inventory. 1987-93 52 Egyptian saving-investment gap and its sources of finance.4 6.3. 1995-2015-. INVESTMENTS.8 6. using most recent data Contribution rates for social insurance 58 Public pension spending as shares of most recently published indicators 58 NIB funding sources as percentage of total 59 Growth of private funds.7 6. 1987/88-93/94 53 53 Financial performance of public enterprises in Egypt.5 2.9 6.ANDLONG-TERM GROWTH EGYPTIN THE GLOBALECONOMY: STRATEGIC .1 5A.4 2.high-case scenario 44 Egypt's projected oil and gas revenue over 20 years.2 5.1 2.3 5. 1994 to September 1996 53 61 Comparative performance of selected pension funds 46 52 vi CHOICESFOR SAVINGS.8 5.10 6.6 2.2 6.4 5. change in reserves and capital inflows 14 Composition of capital inflows 15 Inflation. 1986/87-93/94 Proceeds from privatization of Law 203 companies in Egypt.2 5.3 2. from 1995 (low-case scenario) Price of Dated Brent 47 Heavy fuel oil price 48 Saving-investment gap as a percentage of GDP in Egypt and 46 developing countries.6.6 Average growth rate for selected stabilizing economies 9 10 Term structure of deposit interest rates Real effective exchange rate 10 14 Current account balance.5 5.3 6.5 6.7 5.7 2.6 5.2 2.5 6.4 6.2 6.11 6. 1991-95 60 Action plan for social insurance system reform 68 Action plan for insurance industry reform 68 57 Figures 2.8 .

thanks to the strong stabilization and reform policies implemented by the government since 1991. and that turning these prospects into daily reality will not only be good for the Egyptian people but will contribute substantially to prosperity. Egypt. but not at the expense of economic growth.Foreword This report is the third in a series of World Bank Middle East and North Africa Economic Studies. was hard hit by the oil price slump of the mid-1980s. Middle East and North Africa Region The World Bank vii . and a range of structural reforms to promote the higher savings and productive investment on which rapid growth must depend. increasingly the source of external resource flows for developmentworldwide. it outlines a set of policies to ensure that macroeconomic stability is maintained. Poverty and unemployment remain serious problems. stability and peace in the MENA region. But substantialchallenges remain. and requires substantial and sustained job creation over the coming years. the economy has staged a remarkable recovery. We in the World Bank intend to maintain and deepen our partnership with Egypt's government and people. and the labor force is expected to grow by nearly 3 percent a year over the next ten years. and outlines a strategy for securing its future prosperity on the brink of a new millennium. as will be a large proportion of the more than half a million new job seekers expected to enter the labor market each year. however. The strategy described in this report is designed to help Egypt meet these challenges. Effectively pursued. On the domestic front. Meeting young Egyptians' aspirations for a decent livelihood is an economic and socio-political imperative. Inflation and fiscal imbalances have been dramatically reduced. which has improved year on year from a low of under 2 percent in 1991/2 to an estimated 5 percent in 1995/6. these reforms have the potential for bringing about a virtuous spiral of growth. Kemal Dervi§ Vice President. Job creation depends critically on accelerating economic growth. On the external front. and entering into a partnership agreement with the European Union (EU) of the kind already concluded by other countries in the region.. it emphasizes reforming the trade regime. highlights key opportunities and challenges currently facing its government and people. which are being published as a contribution to knowledge about the economiesof the Middle East and North Africa (MENA) region--a region whose future is of substantialstrategic and economic importance to the rest of the world. The present study is devoted to Egypt. Meanwhile Egypt needs to press forward with the process of opening up to the global economy while ensuring that capital inflows support rather than pose risks to macroeconomic stability. in turn entailing large increases in domestic investment and savings rates. of which this report is an example) designed to support their development and reform efforts in the years to come. with lending as requested but also through non-lending services (including analytical work. Many of today's jobless are in the 15-24 age group. boosting exports.It summarizes Egypt's recent economic progress. savings and investment that will enable the Egyptian people to achieve steadily growing prosperity into the twentyfirst century. Following dynamic economic growth in the decade beginning in 1975. which has the largest population in the Arab world and plays a central role in regional affairs. I believe that Egypt's prospects today are brighter than they have been for more than a decade. In recent years. along with most other countries in the Middle East and North Africa. And Egypt today is attracting unprecedented interest from foreign private investors. both geopolitically and economically.

Dr. private sector representatives. MENA Region) provided overall direction. Taher Helmy (Partner. Abdel Hamid Ibrahim (Chairman. Atef Ebeid (Minister of Public Enterprises). Zafer El-Bishry (Minister of State for Planning and International Cooperation). H. Central Bank of Egypt). Rosario Bartolome and Alexandra Sperling. Dr. Bjorn Larsen (Natural Resources and Savings).E. Mr. Dr. Baker & McKenzie)." viii . including Mr. Ahmed Galal.E. who have guided and assisted the Bank team.Acknowledgments he Bank team wishes to acknowledge the guidance and support it has received from senior Government officials in carrying out this study. Mr.E. Capital Market Authority). Mrs. Dr. Ismail Hassan (Governor. "Stanford Research Institute Study on a Strategy for Egyptian Exports. Dr. Ministry of Finance). and John Wetter. Ismail Badawi (Advisor to the Ministry of Planning and National Investment Bank). Messrs. CAPMAS). Jenepher Moseley. "Egypt's Trade Policy Reform Plan". and Mrs. Georgette Munir. Mr. Ahmed Goueli (Minister of Trade and Supply). Economic Research Forum) for her helpful comments and suggestions.E. The editorial production team included Patricia Zord. T The Bank team consisted of Chang-Po Yang (Team Leader). Dr. Social Insurance Organization). and scholars. Dr. Ragaa Mansy (Consultant to the Minister of Social Insurance). World Bank). Robert Crawford (Investment Promotion). Helmy & Hamza. MENA Region. In particular. Alaa El-Shazly (Modelling and Statistics). Khalid Ikram (World Bank Country Director in Egypt) and Jayanta Roy (Lead Economist. Heba Handoussa (Director. We would also like to extend our gratitude to numerous other Government officials. Sweder van Wijnbergen (Macro-economics). The analysis on export issues also benefited from the following USAID-funded studies: "Quality Control to Quality Assurance in Egypt: A Program for Change". Sahar Nasr (Privatization and Savings). Faika El-Refaie (Sub-Governor. John Page (Chief Economist. Linda van Gelder (Export Development). Momtaz Said (Director General for the Budget. Albert Martinez (Private Savings and Pension Reforms). Central Bank of Egypt). H. Mr. Investment Authority). and General Ehab Elwy (President. Investment and Growth). Youssef Boutros-Ghali(Minister of Economy). Omar Mohanna (Managing Director. Daniela Gressani (Macro-economics). Egypt ArabAfrican Bank). David Dollar (Savings. Special thanks to Dr. we wish to thank: H. Fatma Ishac (First Undersecretary for Planning. Ibrahim Fawzi (Chairman. H. Anqing Shi (Demographic Implications for Long-term Saving).

insurance. and definitions BMP CA CBE CIF CMSA CPI DB DC DWL DWT EBA EEPC EGPC EISA EMA EU FDI FEI FOB GAFI GDP GOEIC GNP GNY HS IAS ICOR IMF ISO JD LE LIBOR LLP NEE NIB NTCPI ODA OECD PE REER SGS SIS Black market premium Current: account Central Bank of Egypt Cost.Abbreviations. and freight Constant market share analysis Consumer Price Index Defined benefit Defined contribution Deadweight loss Deadweight Egyptian Businessmen's Association Egyptian Export Promotion Corporation Egyptian General Petroleum Corporation Egyptian Insurance Supervisory Authority Europe and Mediterranean Agreement European Union Foreign direct investment Federation of Egyptian Industries Free on board General Authority for Investment Gross domestic product Government Organization for Export and Import Control Gross national product Gross national income Harmonized Coding and Classification System Internalional auditing standard Incremental Capital Output Ratio International Monetary Fund International Standards Organization Jordanian dollar Egyptian pound London interbank offered rate Loan loss provision Nominal effective exchange rate National Investment Bank Nontradable consumer price index Overseas development assistance Organization of Economic Cooperation and Development Public enterprise Real effective exchange rates Societe G6n6rale de Surveillance Social insurance system ix . acronyms.

Defined contribution pension plan: Pensions are solely determined by the accumulated contributions to an individual account and on the investment performance of the fund. Sterilization: Sale of government securities by the monetary authority to absorb excess liquidity in the economy. wheat). Savings: Stock of financial assets. Saving: Rate of wealth accumulation. Open door policy: Introduced by Law 43 or 1974 (and its amendment Law 32 of 1977) to encourage foreign investment. Pay-as-you-go pension plan: Benefits received by current retirees are equal. on average to contributions by current active workers.. This was followed by trade liberalization through Law 118 or 1975 which allowed the private sector to import goods except those identified as important for hygienic and security purposes (e. x . immunity fronm sequestration and unrestricted repatriation of profits. Defined benefit pension plan: Pensions are determined by an actuarial computation that incorporates salary and years of service.SME TCPI TOKTEN UNCTAD UNDP WEF WTO Small and microenterprises Tradable consumer price index Transfer of Know-How through Expatriate Nationals United Nations Commission for Trade and Development United Nations Development Program World Economic Forum World Trade Organization List of definitions Bank provisioning: Bank capital set aside against doubtful loans. as a gradual shift towards a private based economy through granting investors privileges including tax exemption.g.

395 xi .230 1989=2.373 1995=3.389 1990=2.323 1993=3.334 1994=3.Currency and exchange rates Currency Unit: Egyptian Pound (LE) LE per US$ Period averages 1988=2.394 1996=3.708 Fiscal Year July 1-June 30 Weights and measures Metric system 1991=3.296 1992=3.

.

Strategic overview
fter Egyptian growth slowed in 1986 from its A unprecedented boom during 1975-85, the government responded by adopting adjustment policies to stabilize the economy and restore growth. Growth resumed quickly, averaging 4 percent during 1993-96 and culminating in a financial market boom that started in the second half of 1996 (see table 1.1). Nevertheless, Egypt's challenge remains daunting.

A

These problems combined with an inwardlooking growth strategy have created an incentive regime biased against domestic saving and the production of tradable goods, in particular those that can be exported. The reasons for the bias are twofold. First, transfers from abroad increase Egypt's domestic income, and therefore its demand for both tradable and nontradable goods. Prices of nontradable goods (such as land and labor) are not constrained by international market forces, and are

Egypt's challenge is to sustainand accelerate relatively free to adjust in the domestic market, but growth in order to overcome high prices of tradable goods (such as food and unemploymentrate and to pursue integration vegetables) are constrained. Transfers from abroad
in the global economy Official estimates of unemployment still stand at about 10 percent of the existing working age population, and the size of the group will increase annually, over the next ten years, by more than a million. It is therefore imperative for Egypt to increase job and income opportunities to meet the rising expectations of the young and grow-ing population. To this end, the Egyptian government has set a target for gross domestic product (GDP) growth at an annual rate of 6 percent by the year 2000 (see table 1.2). Egypt has a unique opportunity to achieve this target. World trade is growing rapidly, the European Union (EU) is seeking closer cooperation with the region, and large amounts of intemational tend to give rise to higher prices for nontradable goods, encouraging their development at the expense of tradable goods. The concentration of investment in nontradable goods and the shift in relative prices in their favor undermine the ability of Egyptian industries to produce tradables. This can lead to higher imports of goods and services than of exports and lower domestic saving. Transfers from abroad also tend to create volatility and therefore uncertainty in the level of national income (see figure 3.2). This tends to reduce the level of domestic saving because such uncertainty is more likely to affect saving before consumption. To achieve long-term self-sustaining growth, Egypt must tackle the structural obstacles to the growth of domestic savings and the growth of exports.

capital are seeking productive investment. Egypt, being close to the key world markets, could capitalize on these developments and become a center of growth and investment for the region. To
accomplish this, however, requires that two longterm structural problems be overcome: * Reliance on exogenous resources (remittance income, Suez Canal income, exports of oil and gas, and foreign assistance) to finance domestic expenditures makes growth too vulnerable' to extemal shocks. * Low levels of domestic saving and investment, cloud Egypt's long-term growth prospects through the resultant slow accumulation of human and physical capital.
STRATEGIC OVERVIEW

Egypt's most promisingroute to rapid growth is to achieve a virtuous circle of saving, investment,and growththrough higherpublic savingand structuralreforms
Egypt has already decided to limit foreign borrowing, but this will also limit the resources available for investment. Given this decision, how could Egypt achieve the higher rates of economic growth for which saving and investment are so important? First, we know from the experience of other countries that though essential for rapid growth, saving and investment may not by themselves be sufficient (see table 1.3). This causal relationship is influenced by other factors.
xiii

Although we do not know exactly what those factors are, we know that policies which promote growth and investment will also promote saving in a virtuous circle.We also know that growth, saving, and investment are mutually reinforcing and that there are ways for countries to jump start or accelerate the process. Our analysis shows, for example, how far Egypt could have boosted its economic performance by emulating policies already adopted by Indonesia-a country comparable in character and resources (see table 1.7). Compared with Indonesia, being less open to trade is estimated to have reduced the growth rate of Egypt's real per capita GDP by 2 percent per year over the period 1966-93. Other features of Egyptian policy, such as the fiscal deficit, government consumption, and the level of inflation, are estimated to have reduced GDP growth by 0.7 percent annually. This suggests Egypt has scope to boost its rate of GDP growth per capita per year by at least 2.7 percentage points primarily through trade opening. Another estimate (Sachs 1996) shows that Egypt could boost its per capita growth by as much as 3.7 percent a year if it achieves the level of market efficiency of the fast growing East Asian economies and their average level of savings (see table 1.9). Trade liberalization, a critical element in structural reforms, would give probably the largest impetus to further growth, which would in turn stimulate private saving, particularly through the development of long-term saving instruments and institutions. Higher public saving is needed to finance the initial growth; accelerated privatization, that results in sales proceeds used to retire public debt and thus allow a reduction in interest cost, would raise public saving.

Attempts to avoid nominal appreciation and to meet the monetary growth target were reconciled during 1991-94 through a strong sterilization: that is, the monetary impact of foreign exchange purchases by the central bank was offset by sales of domestic securities. The result has been to create a high Egyptian reserve position (at $18 billion- all dollar amounts are U.S. dollars)-or 17 months of imports) offset by a substantial increase in domestic debt (see figure 2.7).2 At the same time, real appreciation in the exchange rate, which is continuing, poses a threat to the current recovery. In order to arrive at an appropriate policy response to capital inflows, it is important to determine which of two possible causes of these inflows are exerting pressure on the exchange rate. It could be an excessive expansion of aggregate demand or a portfolio shift toward LE-based assets. The distinction is crucial. Only if an excessive expansion of demand is behind the upward pressure on the exchange rate would contractionary fiscal and monetary policies be needed. If, however, a renewal of business confidence in governunent policies-a portfolio shift towards Egyptian assets-is causing the increase in capital inflows noncolitractionary policies would be preferable. See chapter 2 for detailed explanatioin. So what is the answer? Indicators shown in figure 2.6 suggest that for now there is little sign of an overheating economy and point to an asset market explanation (shift in portfolio choice) for the upward pressure on the exchange rate. This appears to justify the government in resisting further appreciation and accommodating any downward pressure that might develop. What then are the policy measures that could be applied in resisting the upward pressure?

But first Egypt must effectively manage the successof stabilization
In the long term, if growth brought about by stabilization is to be sustained, a buildup in the level of domestic saving is critical. In the short run, however, capital inflows from abroad resulting from the success of stabilization are putting upward pressure on the exchange rate and thereby threaten the current recovery. Egypt has been experiencing the effect of capital inflows in terms of upward pressure on the exchange rate, both nominal and real, since 1991.
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Resistingupwardpressure
Egypt has used two typical policy measures in response to capital inflows. They have been effective up to a point, but cannot be carried too far. The first, sterilization, tried in 1993/94, led to a very rapid accumulation of domestic debt and could, if pushed further, perversely aggravate the size and consequence of capital inflows. The second, fiscal stringency, should be maintained as a cornerstone in managing capital inflows and to keep the fiscal deficit at its already very low level. However, substantial further tightening would risk

EGYPTIN THE GLOBALECONOMY:STRATEGIC CHOICES SAVINGS, FOR INVESTMENTS, LONG-TERM AND GROWTH

eroding the economic recovery by unnecessarily contracting aggregate demand. In any case all the obvious cuts in expenditure have already been made. The measures now proposed would complement fiscal stringency in managing capital inflows. They are suggested because the recovery to date has been associated with real exchange rate appreciation and domestic interest rates persistently higher than rates on major foreign currencies. They include setting equivalent interest rate returns on foreign and domestic currency reserves with the central bank to eliminate incentives for banks to borrow in dollars and lend in domestic currency (see below); requirements for banks to invest surplus foreign exchange deposits abroad; encouragement for pensions to invest in foreign fixed income securities and equities; further acceleration of privatization with proceeds applied to reducing domestic debt. A speedup in import liberalization could also help alleviate the upward pressure on the exchange rate bv increasing import demand. Internal debt and the exposure of the banking system also threaten the current recovery Related to the management of capital inflows is the management of internal debt. At 50.6 percent of GDP it is large, and service costs are high. At 4.7 percent of GDP, they are comparable to the size of the total civil service wage bill. Reducing the debt to GDP ratio depends on the speed of growth and the level of realinterest rates.Interest rates in excess of the rate of GDP growth could result in debt financing via flight as its monetization, with capital 3 Thus, primary surplus should be consequence. maintained at a minimum of 3 percent of GDP or higher to allow a reduction of debt to GDP ratio. The soundness of the banking system is also a source of concern. The interest rate differentials would make it attractive for banks to borrow in uS dollars and lend in local currency, but this makes them vulnerable to a currency devaluation. Crosscountry experiences show that foreign exchange exposure increases substantially when banks are intermediating between local and foreign currencies. Egyptian banks now have sufficient liquidity in foreign exchange assets, but their recent success in mobilizing financing from international markets highlights a likely growing trend. Even if STRATEGIC OVERVIEW

deposits are matched with loans in the same foreign currency, the problem remains: borrowing firms may default on bank loans after a devaluation, wiping out the banks' capital. Policy actions to safeguard the soundness of the banking system should include the following: strengthened supervision by the central bank focusing on the adequacy of loan loss provision, aggressive enforcement of rules for provisioning against bad loans; prevention of excessive foreign exchange exposure by banks. (For details of these recommendations see chapter 2.) These actions are crucial in the post-stabilization period to strengthen the banks, or at least to make the extent of their exposure clear to managers and regulators alike. Toward a trajectory of high growth Solving the immediate problems outlined above will reduce Egypt's vulnerability to crises but this is not sufficient to get Egypt on a path to rapid growth supported by higher rates of saving and investment. Continuing growth will need increases in public saving until private saving can take up the burden in response to stronger growth. The latter will need to be boosted by rapid structural reforms in particular trade liberalization and privatization. Developing sound long-term savings instruments and institutions would be criticai to ensure efficient intermediation between savings and investments. In the interim, however, three issues need to be addressed: maintaining a strong fiscal stance over the longer term; adopting supportive policies to sustain and accelerate the recovery; and adjusting macroeconomic policies if the recovery reverses itself into recession. Fiscal stance The current fiscal stance appears strong and consistent with other policy objectives. However, the size of internal debt limits the extent to which the government could apply an expansionary fiscal policy in a slowdown, and the sustainability of internal debt could come into question if growth does stagnate. More important, the large government borrowing requirement, which has raised the domestic interest rates and caused the rapid accumulation of internal debt, constrains the ability of the government to allocate budgets toward more productive ends, such as health and xv

If there is a property market crash. and upward pressure on xvi funds. domestic inflation. If it slides into a recession. This threat reinforces the need for supporting policies to encourage production of tradables. The concentration of investment in nontradable goods and the shift in relative prices in their favor undermine the ability of Egyptian industries to upgrade their export capability and to compete more successfully in production of tradables (see table 2. Another cause for concern is the delay of a major export recovery. The timing of the response in private saving is a cause for concern. The increased public saving resulted mostly from the reduction of budgetary transfers and subsidies and from the improved financial performance of Law 203 companies-enterprises owned by the government but subject to the same regulatory framework as private enterprises. a critical longer term issue is the recovery of domestic saving. Accelerated privatization is one way to help strengthen the fiscal stance. the recovery of private investment appears to be financed largely by retained earnings. The composition of private investment is also a cause for concern. Appreciation can be justified by strong income growth but without such growth. thus the speed of export recovery is critical. The current recovery has been led for the most part by private investment in nontradable goods (see table 2. introducing an element of flexibility through the adoption of a crawling band. but also by banks using funds from the depositors.2). Thus. LONG-TERM AND GROWTH . the current growth recovery may very well slow down. Therefore. However. the resulting losses would have to be absorbed. private sector saving. but not sufficient. Against this backdrop.4). Furthermore. Data are not available to determine the extent to which the lower private saving is due to weakness in corporate saving or in household saving. In case of a slowdown Should export response turn out to be slow. having remained at around 11 percent of gross national income since 1994. not only by investors using their own Accelerating recovery the Although growth has resumed. Egypt faces continued uncertainty in its revenue sources. the pace and composition of investment and saving have not kept in step with each other (see table 2. This poses another threat to the current recovery. The successful export experiences demonstrate that a soind relative price incentive regime is necessary. FOR INVESTMENTS. private savings remain insufficient. so it is likely that the behavior of households may be responsible for the stagnant performance of private saving). Declining public sector investment has been accompanied by rising public sector saving. Increased foreign savings could sustain the recovery but would also increase Egypt's vulnerability to external shocks. But the increasein public saving has gone about asfar as it can go until privatization transfers the bulk of state enterprises and economic authorities to private ownership. reducing internal debt should be pursued as a central policy objective in maintaining the fiscal stance. to maintain vigilance against excessive bank exposure to the real estate markets. and concentration of investment in nontradables continue. By substantially increasing central government revenue it would reduce the govermment's financing requirements (in particular. servicing of internal debt) and so reduce government claims on domestic resources. Before that happens. appreciation can threaten a recovery that is just beginning.1). in particular the likely decline in long-term external assistance. or major realignment of relative prices. and while private sector investment is rising. This would allow interest rates to be lowered and so reduce the incentives for short-term capital inflows. the scope for further expenditure cuts is limited. should be considered seriously. EGYPT THEGLOBALECONOMY: IN STRATEGIC CHOICES SAVINGS. a real exchange rate depreciation would be required at some stage. and to adopt aggressive provisioning against nonperforming assets in banks' portfolios. as obvious expenditure cuts have already been taken.education. The rise of capital good imports in the current recovery needs to be balanced by growth of export earnings. Strong and responsive supporting policies are also needed to ensure quick and timely export supply response. A significant lag would necessarily be accompanied by a widening of the current account deficit. has not yet shown signs of recovery. as mentioned above.

Second.First. By choosing to domestic saving would not be large enough to maintain its current levels of intermationalreserves finance all the investnent requirements. the debt problem would be well contained the debt stock will decline in real terms. give rise to increased public sector 'saving and Growth of aggregate expenditures will be slow. STRATEGIC OVERVIEW xvii . The rapid financed by using a range of financing instruments growth of the labor force.1). as with the base case. and external debt to proceeds toward reducing domestic debt. This means that scenario. slow growth of nonoil merchandise domestic saving not rise far enough or quickly exports (at 5 percent) limits the scope for Egypt to enough to support the growth of private reduce its reliance on exogenous resources. portfolio growth of private sector investment. against external shocks. such structural reforms as there are (GNP. As under the first foreign and domestic borrowing. foreign savings would have to be relied the large foreign exchange reserves that it holds upon. probable increases in the spread of poverty. Fiscal privatization program would provide sales stringency will be maintained. sound macroeconomic raise productivity growth. Should Furthermore. depends on the level of domestic saving. Egypt would choose to limit foreign borrowing. Inflation will be comparable to that of liberalization ar. foreign borrowing. A rapid and large-scale conditions are assumed to be present. However. Growth will continue-but nine months of imports) would be moderate. Lhis scenario is distinguished by two main 77Tis scenarioindicates gross nationalproduct that features. despite investment. will result in investment. Egypt would significant gap would still have to be filled with be able to cope with external shocks with relative portfolio and foreign direct investments and with ease. a (at more than 17 months of imports).5billion a year during 1996-2002 stock well behind the increases of Egypt's capacity despite the large interest rate differential between to carry and service debt. exportearnings(of nonoilmerchandise) would grow at Divestiture of public sector interest is limited. and commercial borrowing. with the current account in balance. privatization. therefore rapid increases in domestic saving. Egypt the payoffs (see table 3. and (Egypt would remain "moderately indebted.andnominal impeding growth of saving and investment remain. fiscal stringency would expansionary policies if needed in the future.0-1. of move slowly imd the fundamental problems about6-7 percentby aroundtheyear2000. This GDP ratio will continue to decline.Solid medium-term saving and investment The high growthscenario effort will be needed to support long-term growth This scenario is based on the vision that Egypt should and must growfaster. and that the benefits of Two scenarios compare the efforts needed and rapidgrowth outweighthe potentialrisks. along with constrained such as foreign direct investment (FDI). and inflationary pressure would emerge. capital and labor markets. increasing Egypt's vulnerability to external shocks.") The relative to output as well. First. at a slow pace of 4. the increased Development (OECD) countries.1) and viability of this scenario. Growth of Private saving would be boosted subsequently by 'oroad money will be kept below growth of nominal the other structural policy reforms-rapid trade GDP. Second. thereby keeping the growth of debt range of US$1.5 percent a year.)in realtermswould eai:h rowth trajectory a. the current recovery of private investment does not While the debt stock would grow with increased accclerate.15 percenta yearduring much of 1996-2002. and morethan.d privatizatiorn-and by rapid per Organization of Economic Cooperation and capita income growth. the growth of GNP would be foreign borrowing (on a commitment basis) to the much faster. and deregulation and would strengthen incentives to As in the high case. The rising unemployment (as shown in table 3. Per capita assuming the enlarged current account deficits are income growth will be constrained. would maintain sound macroeconomic policies strengthened by vigorous structural reforms in The base casescenario(the "basecase") trade. thus increasing would be complemented by rapid growth of headroom for managing hiternal debt and adopting private investment. The outcome of this decline in foreign exchanige reserves (to no less than scenario is significant.

and nominal export earnings (of non-oil merchandise) would grow at more than 15 percent a year. how to mobilise domestic saving.650 a year by 2002 (compared with $ 1. Apte xviii friendly regulatory mechanisms are introduced and tariffs are gradually eliminated in regional economies and worldwide.4 percent by 2002 as compared with a rise to 14 percent in the base case. A key issue is to determine what policies and institutions can help to expand exports. the necessary sound macroeconomic conditions must be maintained. Egypt will need to look at the following questions: how to expand export production and sales rapidly. The trend toward adopting deeper regional and multilateral trade and investment integration.8 percent in 2002 (compared with 9. achieve growth of exports at 35 percent a year for five years to just to regain the 0. The forthcoming partnership agreement with the EU would give credibility to Egypt's own trade liberalization efforts and allow a transition period for tariffs to be gradually removed. its exports should have reached$ 6. LONG-TERM AND GROWTH EGYPTINTHEGLOBALECONOMY:STRATEGIC . becausetariff liberalization alone may only encourage more imports and production for domestic sales.27 percent share of global export trade that it achieved in 1970. An increasing number of these firms have in turn become multinationals.2 percent in the base case). Had Egypt maintained the same rate of export growth as the rest of the world during 1983-93. what sort of instruments and institutions are needed to ensure efficient intermediation between savings and investment. Jordan. Account must be taken of the changing external environment. cmpretitivenssof09billion. * Reduced vulnerability to external shocks as a result of decreases in exogenous resources as a share of GNP. and enable Egypt to catch up with the growing trend in globalization.2 billion loss of export eamings and to attribute it to a combination of factors. such as Morocco.6 percent to 8. The global trend towards a free trade and investment environment has changed the 'rules of the game. To put the high case in hand. * A rise in the level of trade integration (export plus import) to 33.4 percent in the base case). from 12. for markets. how to replenish income generating assets through sound pricing and management of nonrenewable natural resources. sourcing from all over the world. co aver wou markets (loss ofac 9 bllion ).465 in the base case). rather than $3. the benefits of rapid growth through the high growth scenario include: * Reduction in unemployment to 6. * Increased per capita income to reach $ 1. Removal of nontariff barriers and reduction of overhead operating costs are prerequisitesfor a strong export push. Constant market share analysis (CMSA) was used to estimate this cumulative $ 3. as well as trade disciplines.1 percent of GDP by 2002 (compared with 25. the ongoing process of partnership negotiations with the EU is of particular importance. Egypt has little choice but to follow suit. and Competition technology has intensified.' The technological and managerial changes that have occurred in the last decade or so have induced the OECD countries to adopt structural reforms to of firms the competitiveness enhance headquartered in their territories. The issue iS to what extent and over what time frame. and Israel. implies that firms located in the must become more partnership countries competitive on a global scale.1 billion. which is key to CHOICES SAVINGS. of lesser importance has been her inability to maintain cost comsor in the expanding export shares .3 billion. As more market- Export and sales push Egypt s export growth has lagged behind that of global trade. In this context. More specifically. Removal of nontariff barriers and reduchon of overhead business costs would also become critical if the export sector is to compete internationally. If rapid growth is to be sustained through increased exports and domestic savings. The extension of large parts of the EU integration mechanisms to partnership countries. investment. Of these the most important has been Egypt's inability to adapt to changes in market demand (loss of $ 2.The benefitsof rapid growth The outcome of this scenario indicates that GNP in real terms would reach a growth trajectory of about 6 to 7 percent. FOR INVESTMENTS. and can be argued to have reduced the options confronting Egypt. implies that a Koreanstyle policy mix-one that relies on protection of the domestic nmarket with a broad-based drawback mechanism to allow exporters to compete on world markets-has become less feasible.3 billion)..

* Customs procedures. See chapter 4 for specific recommendations. through strengthening jfinancial instruments and institutions for long-term saving. and less depletion of natural resources. Further. Egypt can continue to reduce the implicit energy subsidies that result in more rapid depletion of energy resourcesand low resourceefficiency.Egypt's success in achieving sustainable growth. In contrast. but would then gradually fall. such as oil and natural gas. * Forging buyer-se:ller links. gross national savings (and investment) would have to increase to a level even higher than that which might be suggested by international comparison (see table 1. and to infrastructure that facilitates private investment in productive assets. Thus. the genuine savings rate (as a percentage of GDP) is close to zero. Within this framework. and so forth).) and natural resources (oil and gas. In other words. The extent to which economic growth would be affecteu by the future decline in rent income could depend on policies adopted now that will affect how the current rent income is used. to replace the depletion of income generating assets resultng from the extraction of oil and natural gas. OVERVIEW STRATEGIC xix . the framework of national accounts needs to be adjusted to account for the depletion and/or accumulation of income generating assets such as generating assets have not increased much in Egypt in the 1990s. extracting oil and gas is bound to decline as the reserves are being gradually depleted. Our recommendations for encouraging exports focus on relaxing practical constraints or creating incentives in the following areas: * Trade logistics and transportation. * Attracting FDI. Therefore. Historically. the concept of genuine saving has been developed (World Bank 1997). Egypt derives a large share of its national income front the extraction of nonrenewable natural resources. due to substantial growth of gas production.7 to 3. Other forms of capital will have to be created to replace the income from oil and gas if the growth of national income is to be maintained. is gross national saving. Genuine saving. Valuing the depletion of oil and gas indicates that total income Increasing domestic saving Apart from reaching the general conclusion that Egypt could achieve additional per capita growth of 2. normally exceed 10 to 15 percent. the change in the international prices of oil from the income derived notwithstanding. returns to expenditure in education. These are estimated to be 45 percent of resource income in 1991 and 24 percent in 1995. the rate of return on the energy subsidies is estimated (based on cross-country data) to be negative at -5 to -7 percent. in light of increasing domestic energy demand. The need for higher saving rates is apparent from estimates of Egypt's genuine savings. and through efficient intermediation between savings and investments. and * Creating export nientality. the rent as a share of GDP declined from 14 percent in 1991 to 8 percent in 1995. To do this. Implications of resource extraction for saving and capitalfornation.4 Because of the decline in international prices of oil during the past five years. simply defined. Projections of oil and gas production indicate that Egypt's income from resource extraction could increase over the next several years.7 percentage points per year by adopting sound policies. The policy implication is clear. less depreciation of capital stock.9). * Quality control and product standards. for economic growth to be sustainable at a higher level. However. several specific policy and institutional issues at the sector levels need to be addressed. For this reason. The oil and gas reserves are national assets that generate income (rental) to Egypt. a substantial share of the rent income has been distributed in the form of implicit subsidies to petroleum product and natural gas consumers. rates of gross national saving will have to be much higher for economiesthat depend on extraction of natural resources. Egypt could become a net energy importer by the year 2010. Since subsidies result in inefficient use of energy resources. The central rmessage is that Egypt must save a lot more to maintain its capital resource basethat is. etc. physical capital (machinery and equipment. Egypt could maintain its income generating assets by directing resources toward human and infrastructure investment. Egypt can save a lot more through prizatization and reforms of public enterrises. The production of oil and gas averaged about 10 percent of Egypt's GDP and 50 percent of its merchandise export each year during the 1990s.

and a lack of competition among contractual savings institutions. The needfor these has been brought to the fore by the problems of the country's emerging financial markets. thereby enabling households and private corporations to borrow long term. the gains could be as high as 7 percent of GDP. Social insurance The social insurance system (SIS) provides one of the most important sources of long-term saving in Egypt (with contributions at 3. will both contribute to increases xx the development of contractual saving institutions. evidence from other countries shows that generous pay-as-you-go state pensions tend to depress household saving. The problems. 7his demographictrend is likely to increase the operating surplus of the social insurance system) making this a good opportunity for Egypt to implement much needed pension reforms.6 percent a year. as happens when specialized multinational firms buy such enterprises as telecommunications. INVESTMENTS. to maximize the gains to society.How much saving can comefrom privatization and reform of public enterprises? Privatization could increase savings. sound institutions. A sample of Egyptian public enterprises (PEs) analyzed indicated that assuming enterprise profits increase because of investment and productivity growth. Second. What policy and institutional changes will of saving in the next 15 years by about 24 percentage points. such as the life insurance industry. EGYPT IN THE GLOBAL ECONOMY: STRATEGIC . privatization may attract more savings from abroad. since the sample of Egyptian PEs analyzed only represents about a third of the sector. By ending government intervention in portfolio allocations. development of a capital market both supports and is supported by encouragelong-termsavings? Egypt's level of saving is likely to be boosted by its demographic trends. this could lead to lower taxation with favorable effects on public saving.5 percent of GDP domestic saving by attracting AND LONG-TERM GROWTH CHOICES FOR SAVINGS. Egypt has already undertaken the first of two actions required to bring private savings up to full potential. These problems have the effect of limiting private saving as evidenced in the underdevelopment of principal instruments of pensions funds and life insurance. in part because the transfer of ownership to the private sector is associated with higher productivity. Also. and that a mandatory saving scheme is most likely to increase household saving contractual saving. if the proceeds from sales are used to retire public debt. Moreover. The design of privatization transactions should commit the new owners to an investment program. The following will focus on three institutions that are key to the development of private longterm saving: pension schemes. contractual savings such as life insurance. The second is to encourage the development of more flexible and competitive long-term saving instruments and institutions. Higher productivity generates more resources that can be consumed or saved. Beyond these effects. This not only suggests that the gains from investment in the course of privatization are significant.4). which is about the amount Egypt needs to match the saving/investment ratio to GDP of the fast-growing economies. underdeveloped long-term savings instruments. tend to favor the formation of long-term financial assets over fixed assets such as real estate. many of them common to the financial markets of other developing countries.1). Third. include a concentration of investments in government securities. privatization and commercialization of the sample would bring additional annual savings to Egypt of about 2. privatization could stimulate saving indirectly. but also that care must be taken to ensure that investment will be forthcoming. It is estimated (using demographic data and GDP growth rates during 1960-94 to explain changes in saving rates in an econometric model) that the rising share of working-age population. the sample analysis indicates that the results are sensitive to variations in investmnent (see table 6. The latter is essential fo: encouraging long-term private saving and for more efficient intermediation between investments and savings. Another positive effect is improved competitiveness of other industries if privatization lowers the cost of producing intermediate goods and services. privatization can contribute to saving by boosting capital market development. which has been shown to contribute positively to growth. or roughly 1. and the capital market. More significandy perhaps. and the declining share of child dependency. Finally. It could augment foreign savings. In the first instance.4 percent of GDP (see table 6. this may indirectly contribute to increased private savings. where appropriate.

The first is to with which the improve the transparency government uses SIS resources.in 1994/95-a very low level compared with many other countries).5 million.9 years for women). compared with 330 in 1991. in government projects and. The contribution rates under the SIS are high (on the basic wage) relative to the pension benefits and the insurance it provides. while another 42 percent are invested in government bonds. The number of employees covered more than doubled during the period 1990-95. The eligibility criteria . It has been producing an operating surplus in the last 10 years due to the high ratio of contributors to pensioners (see table 6. Social insurance funds (new and reinvested) accounted for 68 percent of the fund sources of NIB during the past five years (see table 6. while those on variable wages are not. the dearth of financial instruments. These plans are typically set up by employers on a defined benefit basis. and SIS is likely to maintain its operating surplus. NIB raised the interest rate on incremental social security funds (including reinvested reserves) to 13 percent.9).to SHORT-TERM PROPOSALS: medium-term. but comparable with many developing countries. to almost 0. About 48 percent of the assets of the private funds are in fixed bank deposits. it is recommended that a multipillar system be put in place consisting of: . rhis provides a favorable environment in which reforms should be implemented without delay. 1995. Private pension plans provide a strong complement to the social insurance system. the second is to develop a portfolio and investment strategy that supports capital market development without compromising safety. The second is to protect those with low incomes by providing a basic income floor during old age (redistributive or poverty alleviation). the development of a more competitive and stable xxi . longevity. via the National Investment Bank (NIB). It effectively works as a pay-asyou-go system. Only about 7 percent are invested in equities and real estate. * A mandatory defined contribution private pillar that insures workers' wages above a certain level. Redistribution has been made by providing pensioners from the agricultural sectorabout 45 percent of total pensioners in 1995-with the equivalent of minimum wages (LE 45 per month). This represents significant erosion of the real purchasing power of the reserves at the SIS and a net subsidy to NIB. and the risk-averse nature of these funds have led to the concentration of investments in bank deposits and government paper. providing a positive real rate of return over the average inflation during 1992-96 of about 10 percent. In order to achieve all three objectives. Starting July 1992.5). even though inflation was about three times higher. Over the period 1987-96. until recent years.in line with inflation. under the major programs of Law 79/47) is lower than that of OECD countries (whose average retirement age is 64. LONG-TERM PROPOSALS: A country's social security system typically has three major objectives. Refonning the social insurance system. and by setting a minimum pension for those with a certain number of years' contribution. and the third is to improve the efficiency and sustamiability of the SIS by correcting certain design deficiencies. See chapter 6 for specific proposals. Pensions on basic wages are fully adjusted. pensions on variablewages are not automatically indexed or adjusted by the legislature. The number of voluntary private pension plans has been increasing significantly. The first is to enable the population to shift income from working years to old age (savings). the proposed reforms would aim to improve the efficiency and solvency of the existing system. In the short. In addition.4 years for men and 62. and inflation (insurance). such as disability. Lack of professional investment management capacity. however. there were 504 plans. The working age population will continue to grow. * A purely voluntary scheme that could supplement the first two pillars.for retirement in Egypt: (age 60 for both men and women. There are three priorities. the adijustments mandated by the legislature preserved the purchasing power of the basic pensions for most of the 10 years.as of June 30. with contributions made by OVERVIEW STRATEGIC both employers and employees. NIB used to pay interest on the SIS funds at 5 to 6 percent per year. This operating surplus has been invested. The third is to insure against certain types of risks. in public enterprises as well.A fully-funded mandatory defined benefit public pillar that insures workers' earnings up to a certain level.

4 billion. requirements to the D Focusing on disclosure public on prices and commissions to complement prices and of product the liberalization commissions. direct foreign ownership was only allowed in those companies operating in Egypt's free trade (export processing) zones. However. The deregulation of most insurance products shifts the focus of The supervision to solvency monitoring. of which eight transact all classes of insurance and business. At the same time. Currently.6 percent of and instruments GDP. INVESTMENTS. such as life and disability insurance and annuity products. The new regulations also deregulated the pricing of most insurance products. Total assets to GDP of all insurance companies (life and nonlife) in Egypt were about 4 percent in 1995. There are 10 insurance companies in Egypt. while life insurance assets alone -were 38 percent of GDP for average OECD countries. As discussed in the previous sections. regulations place a 49 percent limit on foreign ownership of direct insurance companies and no restrictions on foreign ownership of reinsurance companies. solvency monitoring requires good information and technical capability on the part of the supervisor. 1995 was LE 5. The consumption tax principle should be applied fully to all contributions and benefits. The industry is highly concentrated and virtually under state control. and two transact only nonlife. to encourage competition. and the largest three state-owned companies account for 93 percent of life and 89 percent of nonlife markets. the investments of private pension funds and insurance companies have been mainly in government securities and bank term deposits. and in June 1996. * Providing level treatment for both stateowned and private insurance companies. Total investment of the insurance industry as of June 30. the next generation of reform efforts should focus on the issues in competition and ownership structure. The largest stateowned company coi itrols 50 percent of both life and aonlife business.Following these regulatory reforms and current efforts to strengthen supervisory capacity. Among other things. The role of the capital market The principal role of a capital market is to mnake to readily and clieaply avoailable investors savings mnore by creating liquidity and reducing transaction costs. Thereform proposals. A new law on insurance was passed in 1995. this should result in greater benefits to savers in the form of lower contribution rates to pensions schemes and lower premiums for insurance. . regulations are basically in line with international (especially EU) practices and definitions. In the past. and savers have more alternatives than bank deposits. (This means that the 49 percent maximum ownership by foreign firms should be abolished). or real estate. Specific actions that EISA may consider include: Allowing the entry of new firms-including foreign insurance companies -as long as they meet more the licensing criteria. Capital markets would allow greater diversification and perhaps higher yields for these investments. The development of capital markets in Egypt and is supported by the both supports development of contractual saving institutions. representing 2. See chapter 6 for other specific details. precious metals.2 percent in 1995compared with 6 percent for average OECD countries. a new set of regulations was issued by the Egyptian Insurance Supervisory Authority (EISA). replacing price xxii control with price reporting. pools of funds from AND LONG-TERM GROWTH EGYPT IN THE GLOBAL ECONOMY: STRATEGICCHOICESFOR SAVINGS. thereby improving the of contractual saving financial performance institutions. Contractual savings-insurance The insurance industry in Egypt is still insurance premiums to GDP underdeveloped-life were an insignificant 0. thelaw requires distinction and separation of the reserves from life insurance and nonlife insurance businesses in companies that operate in both markets. Capital markets allow investors a wide range of instruments to finance investment. The public pillar would provide a minimum retirement income while the compulsory and voluntary private systems would enable workers to supplement the pension from the public pillar. Lack of financial led to very conservative investment policies have high concentration of investment in bank deposits and government securities. depending on how they are distributed. See chapter 6 for details.insurance industry should be encouraged to provide many accompanying services.

3. the barriers to exchange among nations are being rapidly reduced. The deepening of capital markets-as reflected in increased market capitalization . Under these circumstances. With the technological revolution in information and communications. debt dynamics are unstable. Capital markets provide more options for divestiture. while privatization increases the supply of securities in the market. tlhus providing the securities market with more depth. This rent is defined here as the difference between the economic value of the reserves and the cost of production and normal returns on capital equipment. the largest volatility arises from official transfers impacting particularly strongly on govermnent financing.o GDP. Notes 1. The debt estimate includes *he net governmenit borrowing from the National Lnvestaent Bank. STRATEGICOVERVIEW xxiii . either deficits will be higher in the future or the government will have to print more money in the future to keep the deficit constant. Generally. the increased printing of money in the future will mean more inflation in future. The debt increases. rather than replace. Foreign portfolio investors would focus on actively traded securities in the stock market. With private capital dominating the total capital flows to developing countries. greater liquidity (higher turnover to market capitalization).contractual saving institutions could be tapped through capital markets to finance investments. as externally-induced sudden changes in earnings from tourism. Eastern European countries and states of the former Soviet Union are rapidly integrating in the world economy. However. Finally. thus encouraging more froreign direct investment. If the future deficits are to be held constant. Suppose that the government tightens monetary policy by reducing its rate of printing money and increasing borrowing. and both China and India have been emerging as major low-cost competition in the world market. and an increasing shift toward equity financing. The vulnerability is economy wide. workers' remittances and exports of oil and natural gas affect the balance of payments. Accelerating growth through maintaining a stable macroeconomic environment and implementing bold and rapid structural reforms will prepare Egypt well for the challenge and opportunities of the twenty-first century. the development of capital markets and the process of privatization are mutually reinforcing. 2. Facing the twenty-first century Egypt is poised for accelerated growth into the twenty-first century. But the risks inherent in foreign savings would be kept to a minimum ifforeign savings augment. In addition. but global competition has intensified. the development of capital markets becomes essential in attracting private foreign savings. and the conclusion of major regional and global trade agreements. The existence of liquid capital markets gives a foreign investor better exit options. the expectation of future inflation increases current inflation. ancd less concentrauion of market activity on a few stocks-would enable capital markets to absorb the expected increase in portfolio investments from both domestic and foreign sources and would mitigate against the extreme movements of asset prices and the drastic reversal in portfolio flows. 4.domestic saving. H-ler prospects are good. active capital markets provide an enabling environment for attracting foreign savings.

5 17.2) that Egypt could reduce unemployment to 6.2 Source: dataprovided Ministry Planning.7 5. and investment through higher public saving and structural reforms. The numbers of those entering the labor force (assuming a constant participation rate) will expand at 2. At present. as a result of Egypt's remaining inward-oriented economic policies and a regional economic slowdown brought about by the decline in the price of oil.3 5. 1990191 3.2 86. From by of Ministry Finance Central of and Bank Egypt of . restrictions on capital movement and interest rate controls have been lifted.5 5. per capita income grew by a modest 10 percent from its mid-1980s level.3 16.9 9.7 1995/96' 5.1).0 7. Macroeconomic stabilization led to a strong recovery. and the external current account deficit has been kept at low levels.4 4.6 6.0 18. Our estimates show (table 1. In the early 1990s. more than one-fourth of whom will be of the 15-24 age group-a most politically vocal and active segment of society.7 9.8 percent a year.5 13. With the effective fiscal adjustment and management of sound monetary policies.2 17. At the same time.1 16. about 560.6 17.1 down to below 10 percent in 1995.1 5.9 11.5 percent a year from now Selectedeconomicindicators.9 69. Fiscal deficits have been reduced. and foreign direct investment.9 21. there will be yearly increases of more than one million in the working-age population.1 15.1 10. workers' remittances. Both poverty and unemployment remain high. The first phase of the stabilization policies has been highly successful.1 107.0 -18.4 49. Her most promising route to rapid growth is to achieve a virtuous circle of growth.9 16.2 1993/94 3.5 16.0 16. Egypt experienced a dramatic fall in growth and severe macroeconomic imbalances.2 7.5 1992193 2.2 6. she must sustain and acceleratethe current expansion. This will amount to.6 14.2 18.7 -3. inflation was brought TABLE1. achieved unprecedented economic E~'gypt E growth during 1975-85 following the adoption of open door policies boosted by sizable increases in foreign assistance. Economic growth offers an effective response to this challenge.2 0. it is essential for Egypt to create jobs and income opportunities to meet the rising expectations of the younger generation. official estimates of unemployment stand at about 10 percent.4 percent with GDP growth of 6.1 83.9 -1.3 0.4 83. Egypt has successfully recaptured growth through macroeconomicstabilization.7 percent in 1995. Egypt's long-term challenges remain daunting.4 16.1990191-1995196 (percentage of GDP. and continued its upward momentum into 1996 (table 1.3 13. Estimates. The Egyptian government responded by adopting adjustment policies to stabilize the economy and restore growth.1 83. Over the next ten years.0 58.6 89. This ended in 1986. GDP growth rose from the stagnation of the early 1990s.9 -1.0 -5.0 16.1 -2. To boost employmentand integration with the global economy.0 84. Thus.Chapter 1 Employment and growth-an overview After suffering reversal in the latel980s. to 4.9 55.2 8.1 14.000 new job-seekers.1 0. Notwithstanding these developments.9 23.7 1991/92 1.7 85.0 1994/95 4. unless otherwise noted) Indicator Real growth GDP rate Inflation (change CPI) in Consumption Investment Govemment investment saving Domestic (exduding grans) Overall balance fiscal Current account balance (induding transfers) Official reserves $billons Extemal debt/GOP a. saving.

They are: domestic saving. Egypt has the opportunity and the potential to achieve the growth target set by the government. with GDP growth at the level of 2 percent a year.6 - 1997 1997 nl. This would lead to a larger resource gap (that is..1percent labor rate Key population Note: assumptions: growth 2. or uncertainty and affect the level of domestic saving. Egypt.saving. countries with higher with the relance on exogenous resources.until 2002.2 of pa. slow accumulation of production factors.a. While these private and official transfers from abroad. disc expenditures. since a country's economic growth can exceed or fall below * Reliance on exogenous resources (remittance income. Thus.0 6. however.2 Growthandemployment Rate )1995 (percentage Ratmployment (percentage) Unemployment At2 percent GDP of growth of growth At4.0 available. income growth equation spelled out in the note. LONG-TERM FOR CHOICES SAVINGS.8percent anda participation of 47. there is Eypt' ncome and wouldincrase dometic little agreement among economists about how to 2 GROWTH AND INVESTMENTS.: force growth of 2. Suez Canal income. as a force for peace in the region.0 10. applicable not p. Across countries and over time. that is. 20. 1993a. prices of tradable goods (such as food and vegetables) are constrained by those forces. higher growth consequent . exports of oil and gas. investment. and being and growth-a virtuous Saving. n. Thus. circot close to key markets of the world. .3. The e reasons are twofold. Furthermore. transfers from abroad would give rise to higher prices of goods that cannot be traded internationally than of goods that can.3) associated with high levels of effectively tackled. particularly if perceived as transitory.5 percent GDP of At 6. levels of per capita income tend to save and invest a larger fraction of their national income. because societies generally tend to smooth their consumption over time.0 14.ent GDPgrowth -Not 1995 9. could capitalize circle on these developments and become a center of How can Egypt achieve higher rates of growth? growth and investment for the Middle East and North Africa region. TABLE 1. thevresultant . growth and these are indicated in the per capita and sh Lowlevelkofsdomestic. a 1ghea (od es The lack of domestic saving has been associated v wit higher grtherat Edwards 1995). Other things being equal. and to substantially reduce poverty and unemployment over the medium term. and foreign assistance) to finance domestic ectnthe as shown intlen1. STRATEGIC ECONOMY: IN EGYPT THEGLOBAL . transfers from abroad empirical relationships are well established. regional peace seems to be evolving. achieving long-term self-sustaining growth requires that Egypt tackle these structural problems. the level predicated by its level of investment. ~~~with higher growth rates (World Bank sving growth prospects. Source:Base year information 1995was provided CAPMAS. rate percent.a. both rates are associated with higher investment. 11.4 -9. would require One prerequisite for rapid growth is high levels of that two long-standing structural problems be investment (table 1. and large amounts of international capital are available for financing productive investment. for by remainder staffprojections. in most cases saving is likely to be compressed first. . and adopt policies to encourage domestic saving and to accelerate growth of exports. Declines in their income. World trade is growing at a rapid rate. the EU is seeking closer cooperation with the region. Furthermore. Low level of investment. Otherwise.a. and are relatively free to adjust in the domestic market. While prices of nontradable goods (such as land and labor) are not constrained by international market forces.a. First. creating vulnerability to external other important factors influencing economic shocks. higher human and physical.5 perr. and od n evcsta xot) n thus lower domestic saving. including goods that can be exported. more imports of goods and services than exports). this sort of relative price regime would encourage production of nontradable goods at the expense of tradable goods. Egypt will have to contend with unemployment rising to 20 percent of the labor force by 2002. But this is not sufficient. . clouds Egypt's long-term investment with higher saving. and higher saving growth prospects. need not lead to a proportional cut in consumption.3 2002 2002 n. transfers from abroad could be sources of income volatility iprso The Egyptian government has formulated a set of sound economic policies to accelerate economic growth to above 7 percent by the year 2000. from therefore its demand for both tradable and nontradable goods. This. The repancies.

the factors that create a good climate for investment also create a good climate for saving. A likely candidate is the saving behavior of firms or small entrepreneurs. a good model that explains investment across countries and over time will also be a good model that explains saving across countries and over time. In other words. This holds for both developing and developed countries. Saving responds passively to investment through mechanisms that are at present not well understood.5 2. (+). such saving is done. and growth are mutually reinforcing.equal. and is pooledfor the two periods 1970-80 and 1980-93.and middle-income countnes Asia. investment. In thlis way. This question has been addressed by examining factors and policies associated with the emergence and maintenance of a virtuous circle. who retain profits in order to finance investment. Deaton (1995) explains how this could happen: Investment GDP to Country China Hong Kong ratbos (percentage) 27 The international correlation between growth and saving rates comes from the response of growth to investment. macroeconomic instabilityevidenced by high inflation. and overvalued exchange rates-was found to be growth is anticipated 3 entrepreneurs. what matters is whether the same policies aimed at encouraging investment also encourage saving.3 Per capitaincome growthperformance. GDPCAPUS is per capita GDP Egypt 2.5 4. which increases to continue. (.4 Actual relative toexpected growth (+++)41 (++) (++) there is good reason to expect that higher saving (=investment) leads to higher growth. 1980-93 (percentage) Percapita growth (percentage) 8.). Although it is difficult to sort out at the macro level the different determinants of saving and investment. Policy makers do not have to be preoccupied with the exact mechanisms affecting saving investment and growth. saving. how a country can get stuck in a low saving-investmentgrowth trap.3 Note: The per capitaincome growthequation estimated follows:gdpeap is as = a+b GDPCAPUS+c INVGDP+d OPEN+e labpop+f PRENR70+g SCENR70: where gdpcap is GDP per capita growth rates.4 3. Hence. TABLE 1. EMPLOYMENT AND GROWTH-AN OVERVIEW . and SCENR70is secondaryenrollmentrates in 1970. the same factors (country characteristics and policies) that determine saving also influence investment in the same direction. to saving on the other. not by the mass of households. which accelerates growth at least temporarily.7 (+) (-) 44 40 28 33 Malaysia Chile Pakistan India SnLanka eypat 3. who Singapore Thailand Indonesia 5.2 5. labpop is growth circle.The sampleis 35 low.interpret them. and perhaps permanently (Harrod 1959). as predicted by a variety of growth models. As High as investment leads to rapid growth. MiddleEastand North in Africa. Both theories and empirical evidence support the view that there is very little deviation of saving from investment rates (Feldstein and Horioka 1980). This view suggests a virtuous the profits of firms and play little part in the process of aggregate in samplecountres relativeto the UnitedStates at the beginningof time periods.8 6. In any case. If one accepts the "mutual causality" argument. then the policies that promote growth and investment will also be ones that promote saving.a few relatively wellbut by off people or by firms. and directions of causality. to PRENR70 primaryenrollment is rates in 1970. While saving causes growth in this proximate sense.INVGDPis gross domesticinvestment GDP. and that increased saving provides more resources for capital investment. large budget deficits. in particular the exact interrelationships among saving. investment and growth seem to depend on certain policies and country characteristics.3 H 25 17 17 ~~~~~~~accuinulation. long in laborforce relative growthin population. there is no agreement on what causes saving. The answer appears to be strongly affirmative.1 3. It is easy to see how a virtuous circle can keep going once it has started. or whether there is reverse causality from investment and growth on the one hand. OPEN is a dummy to variable for openness as defined in Sachs and Warner (1995). investment and growth.2 3. these agents save and invest a large fraction of their profits. It is more difficult to see how a country can accelerate growth once it is entrenched in a low saving-investment-growth trap. or alternatively. Source:WDR1995. and Latin America.) (+) (+) (-) () 26 21 24 2. From this point of view. (-) indicateactual growthwas higher.or lowerthan expected growth. Higher saving.andstaffestimates. First.2 () (.

public expenditures targeted to productive areas. the relative rates of job creation in expanding sectors and job loss in declining sectors are important investment to GDP ratios that were 5 percentage points higher than those of closed countries. These include the macroeconomic situation and the relative competitiveness of existing industries. and Sachs 1996) show that Egypt could achieve 2. such as trade liberalization or reform of the regulatory regime. The short-run national effects on aggregate output and employment of opening a cointry to external trade depend importantly on initial conditions. open economies tend to have more rapid capital accumulation. Of course.5 percentage points higher than those of closed countries after controlling for determinants of growth such as education and investment (Sachs and Warner 1995). After controlling for these variables.5 shows the regression results (Dollar 1996) derived from the growth performance of 86 countries over the period 1966- EGYPTIN THE GLOBALECONOMY: STRATEGICCHOICESFOR SAVINGS. This latter finding suggests that taxation is not an obstacle to investment if the resulting income is used for infrastructure investment or productive expenditures on education or protection of property rights (Easterly and Rebelo 1993). The results of empirical growth analyses from two different sources (Dollar 1996. Consequently. The greater this flexibility. These are also countries with less nonproductive government consumption and less noninfrastructure public investment (that is.7 to 3. The most obvious example is government saving.ANDLONG-TERM GROWTH . property rights. and faster growth of GDP. In short. Openness to external trade is associated with both higher output growth per capita. and higher output growth per worker. considerations. also have a direct effect on saving by increasing the returns to saving. In the short run. or reducing strengthening transaction costs. some of the good policies spur saving directly. Countries with open policies in 1970-89 had 4 Trade openness and investment-friendly policiesfor a highergrowthtrajectory To what extent could Egypt boost itself onto a higher trajectory of growth by adopting policies associated with the virtuous circle? The results of empirical growth analyses using panel data3 from the World Bank and other sources can be used to analyze the key policies that have affected Egypt's growth performance.7 percent higher per capita GDP growth by emulating the economic policies adopted by same East Asian countries (table 1. many fear that there will be significant and immediate negative consequences in going from closed to open economies.detrimental to both the quantity and the efficiency of investment (Fischer 1993). government saving). with per capita incomes rising in the period immediately following trade liberalization.4). Elements of good management include: low inflation. higher export growth rates and more rapid increases in real wages. lower-income countries with open policy regimes tend to attain higher rates of per capita income growth. Third. good economic management is associated with the virtuous circle of higher saving. The production and investment decisions of enterprises that determine this are a function of the flexibility of the labor market. it may be that saving responds passively in the way envisioned by Deaton above. which is a direct contribution to national saving. Over the long term. and to identify areas of policy reform that could put Egypt on a higher trajectory of long-term growth (Dollar 1992). INVESTMENTS. higher investment. and also increase the growth impact of any given level of investment by making it more productive. there is a strong association between the degree of trade openness and rates of per capita growth. 2 In the longer run. Hence the flexibility of labor markets is crucial for reaping the benefits of trade reforms. Second. and experienced per capita GDP growth rates that averaged 2. and openness to external trade. according to the experiences of many countries. in state enterprises).' Although openness is good for growth. the more rapid the adjustment and the lower the net effect on employment. Table 1. various tax measures had no significant association with growth or investment. The mechanism at work is probably that these good policies spur investment by making it more profitable. But other policies. countries with rapid growth of private investment and per capita GDP are ones whose governments invested in infrastructure financed out of national revenue (that is. low fiscal deficit. Empirical studies suggest that the output response to significant trade reform can be rapid.

38) (0. The actual difference in growth was 5.06 (1) 0.21) 0. In analyzing growth performance.7 percent.7 percentage perenag points in growth. and high inflation all have a negative relationship with growth.4 percent.5 Growth and policies in 86 countries. with 6 percent per capita growth during EMPLOYMENT GROWTH-AN AND OVERVIEW FDI/GNP (percentage) 1994 2. Inflation -0.29) -0.93.02 (7. since the two have similar country characteristics.01 35)-0.2 ODA/GNP (percentage) 1994 6.600 32 53 R 0.31) analysis of a sample as a function saving surplus Govemment of 49 countries.02 the national rates. The differences in macroeconomic policies and in trade openness account for an estimated 2.06 (2) .19) -0. compared with 1.77) -0.7 shows the extent to which Egypt could boost its economic performance by emulating the policies already adopted by Indonesia.08 (3. and has an export base more diversified from exports of oil. In an alternative period initial (2.27 0. Egypt receives far more foreign aid: 6.87) (0.08 and macroeconomic empirical stability as by the BMP on the exchange rate.29) 0. parti- Female Male 89 105 69 112 116 Secondary school enrollment 1993 Female Male InvestmentlGDP 1994 (percentage) 81 18 6 39 48 29 30 Saving/GDP 1994 cularly very similar human capital bases.02 (7..00) 0.26 0. In this report. TABLE 1.0 percent lower real per capita GDP growth rate per year over the period of 1966-93.time 7 period (four-year averages). Both are large countries with similar per capita gross national product and social indicators.08 (3.05 (6) 0.3 4.16) (3.06 (2.6 provides some basic descriptive data. of which appear berobust. per capita GDP growth over the -0.9 (percentage) GNP capita intemational isconverted purchasing per in dollars at power Source: Dollar(1996).720 32 52 Indonesia 190.05) Egypt and Indonesia: comparative indicators Indicator Population (millions) Per capita (1994 $)a GNP Intl. Openness 2 0. high government consumption. Note:Thepolicy variables dropped are one-by-oneorder assess in to the robustnesstheresults.8 3. Indonesia is also far more involved in international trade. 1994) Primaty school enrollment 1993 Egypt 56.27 0. compared with 1.350 (1. with commodity exports of 23 percent of GDP in 1994. 1966-93 Variable Policy other policies.69) 0.4 1.0 9. the East Asian economies are often taken as a reference point to which other countries' policies and growth performance are compared.6 and degree of labor market flexibility.02 estimated to be 0. (3) 0.18 (6. The comparable figure for Egypt was only 6.426 (0.99) -0.3 30. size of BM(2.06) government. The impact of Egypt being less open to trade is estimated to be 2..07 of 1992-95 is estimated per capita income.3 percent for Egypt.47 (3. Source: Dollar (1996).0 4. is variables Budget (2. (5) 0. Included observations =474. A black market premium (BMP) on the exchange rate as a proxy on inflation also has a negative relationship with growth.63-6 -3. Indonesia is taken as a relevant comparator for Egypt.0 percent for Indonesia.41) (4) 0.2 percentage points.01 and an overall index of market efficiency. TABLE 1. Not available. They differ in that Indonesia has been growing much more rapidly.67) 9 (2.4 percent to GDP in 1994. Gini coefficient Infant mortality (per 1. to Dependent variable: growth of real rate capita GDP n=86 countries.4 Average tariffrates Egypt selected in and East Asian economies (percentage)Egp Country Indonesia Republic Korea of Average rates tariff 1985-94.02 -2.1) (1.26 0.02 -0.26 0.1 22.02 (7. of consumption (1.0 Exporls/GNP 1994 8.0 Source: UNCTAD-Trade AnalysisandInformation System Data on CD- TABLE 1. Table 1.82) (2.18 .41) 3 .02 (7.000.27) (2.4 3. The impact of consumption. Finally. Table 1.34) 4. The latter is based on the following indexes: openness of the economy to trade and financial flows. the size of government saving. (percentage) 5 .09 -0. The results confirm that a large fiscal deficit. measured Malaysia Thailand Egypt 6.

given current income levels (GDP per capita at purchasing power parity in 1993) and current market efficiency; and (2) the projected growth rate Estimated for Egypt for current income levels but an Policy Egypt Indonesia Idoeia Poiy gpt Impact ipat improved market efficiency index equal to the Growth per GDP ofreal capita 0.2 5.4 n.a. Budget (percentage surplus ofGNP) -5.4 -1.0 03 average for the East Asian economies. According to Govemment consumption 14.1 9.5 0.3 the regression estimates, improvement in Egypt's (percentage ofGNP) market efficiency to East Asian standards would Inflation (percentage) 16.5 7.7 0.1 Black market premium (percentage) 11.6 10.7 0.0 raise annual per capita growth by some 1.9 Open no yes 2.0 percentage points per year, to an overall predicted Total impactpolicies of na. n.a. 2.7 rate of 4.55 percent per year. If Egypt also had the n.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 are countries in terms of more openness, smaller included in the analyses, the general point is quite government (as measured by government robust. Egypt could buy itself about 2.7-3.7 per expenditure as percentage of GDP, and various capita GDP growth per year if it emulated the rates of taxation), and more flexible labor markets. policies adopted by the fast growing East Asian Among the 49 countries, Egypt ranks 22nd on economies, including of course Indonesia. The openness (with a rank of 1 being the most open), effects of these policies on saving may be quite 31st on size of government, and 40th on flexibility indirect in that, for example, trade reforms and
TABLE 1.7

Growth policies Egypt Indonesia, and in and 1966-93

TABLE1.8

Regression estimates Egypt for
(dependent variable: percapita real GDPgrowth 1992-95) Independent vanables Independent variablesVariable Log initalincome Saving (1995) rate Efficiency index Constraint
2 R

TABLE 1.9 Growth counterfactuals Seven Asian Egypt Percentage economies (-2.58) (2.20) (3.17) (2.18) 0.404 42 intali 2.77 Log inibal income 2.77 Saving 1995 rate 16.84 Effidency index 0.142 Growth 1992-95 -2.26 Egypts predicted growth (1992-95) rate = Predicted growthEgypt efficiency of if had index theseven Asian economies: 2.61+1.94 = Predicted growthEgypt had saving if also the rate oftheseven Asian economies: 4.55+1.78= Source: Sachs(1996). 3.67 3.67 35.01 0.563 6.33 2.61

-1.17 0.098 2.75 4.59

N Source: Sachs (1996).

of labor markets. The average score of the East Asian economies4 would rank 25th on openness, third on size of government; and ninth on flexibility (Sachs 1996'. (Sachs19). The basic regression for Egypt is shown in table 1.8. As expected, initial income enters with a siniicn significant neaiecefcet:poe.onre poorer countries negative coefficient: tend to grow more rapidly, all other things being equal. Also, as expected, more efficient economies (that is, those with a higher score on the efficiency index) tend to grow more rapidly. According to this equation, Egypt's growth is held back by its relatively poor ranking on the various components of market efficiency. To estimate the growth consequences of Egypt's efficiency index, regression estimates were used to calculate two growth rates: (1) the predicted growth for Egypt
6

6.33

macroeconomic investment and adjustments growth, and directly in spur these turn enuae angrothe ev d pved above show tat se plc eforms arevan efcve shows that these policy reforms are an effective way of spurring saving in the long run (table 1.9). Key elementsaof the policies th at ll proot got and t fore investmet and srvmogs include:
* Macroeconomic policies that ensure a stable

macroeconomic environment, high public trade, and national savings. * Trade policies that encourage growth through outward orientation.

EGYPT THEGLOBAL IN ECONOMY: STRATEGIC CHOICES SAVINGS, FOR INVESTMENTS, LONG-TERM AND GROWTH

* Financial policies and infrastructure that establish strong incentives for long-term private savings. Egypt's most promising route to rapid growth is the achievement of the virtuous growth, saving and investment circle through higher public saving and structural reforms.Higher public saving is needed to finance the initial growth; accelerated privatization, with sale proceeds used to retire public debt, would allow reduction in interest costs, and raise public saving. Trade liberalization, a critical element in the structural reforms, would give probably the largest impetus to further growth, which would in turn stimulate private saving, particularly through the development of long-term saving instruments and institutions.

Notes 1. Openness is usually measured by the extent of integration in the world economy, as reflected in variables such as trade to GDP ratios, the level of trade barriers, and the relative importance of foreign direct investment and intra-industry trade. 2. Using a large cross-country dataset, Sachs and Warner (1995) found that economic growth increased by an average of 1.3 percent following the opening of the economy. 3. The panel approach will enable us to pick up not just cross-country variations, but also variations over time for each country, thus giving increased confidence that the relationships being examined can be exploited by policymakers. 4. Hong Kong, Rep of Korea, Taiwan (China), Thailand, Philippines, Indonesia, and Malaysia.

EMPLOYMENTANDGROWTH-AN OVERVIEW

7

has Egypt obtained this condition? If so. Growth slowed in the first two years of the stabilization program. FIGURE 2. Such an inverted yield curve signals expectations of future interest rate declines and thus confidence in continued low inflation. Investor confidence in the economic policies followed by the government seems strong on all indicators._________ -did Mexico Argentina 1990-95 Egypt 1990-96 Israel 1985-90 19S7-92 Source: Based on data from World Bank 1995 (WDR) and staff estimates for Egypt. Fiscal stringency was achieved through both expenditure restraint and revenue measures.8 9 4007 g ___________. Over the past year. and was further facilitated by important concessions that the Paris Club made on Egypt's external debt.S. it not do so instantaneously. but it resumed by 1993/94. The first phase of the stabilization program can now be considered as successfullv concluded. how can Egypt sustain it. Thus.is now around 7 percent and falling. But long-term rates now lie below short-term rates. Egypt has gone through major changes since the reform process was initiated in 1991. If a sound macroeconomic environment is a necessary condition for achieving higher longrun growth. the stabilization effort brought inflation down to manageable levels without a major slowdown in output. interest rates on the Egyptian pound 6.Inflation. and the nominal exchange rate has been remarkably stable since Egypt switched to effective current account convertibility and unified the exchange rate system. One such indicator is the stronig international interest in Egypt's capital markets. dollar levels. remain above U. Another indicator can be derived from the term structure of interest rates in Egypt (figure 2.1 Averagegrowthrateforselected stabilizingeconomies The program was set up along orthodox lines: a strong improvement in fiscal performance provided the leeway to sustain a tight monetary policy. Although inflation came down relatively fast. and was followed by a relatively fast recovery. Several Egypt funds have been established and a large number of investment funds have shown interest in individual stocks. Egypt shouldfocus in the short term on addressingthe adverse effects of capital inflows and protecting the soundness of the banking system.21 3. 9 .5 2 2 .1). foreign activity has grown to almost 30 percent of the turnover on the Cairo stock exchange. and protect it from external shocks? Recentdevelopments Macroeconomic balances. Portfolio flows alone in the first half of 1996 amounted to about $ 500 million. GDP growth for 1995/96 is estimated at around 5 percent. which hovered between 20 and 30 percent in the late 1980s. Well over 100funds are currently active in the Egyptian stock market. notwithstanding the firmly fixed exchange rate. In general. Egypt's growth performance resembles those of other economies that carried out successful stabilization (figure 2.Chapter 2 Post-stabilization policy-managing macroeconomic success But the success of stabilizationbrings other problems that threaten the recoveryby boosting exchange rates and discouragingexports.2).

Although growth has resumed.As a consequence.. improved financial performance by Law 203 enterprises.I00) 140 120 10K 90 6 . a robust recovery of investment will require robust savings. The increase in public saving is particularly encouraging and indicative of the strength of stabilization.. spare capacity will progressively be eliminated. however. 0 1985 19S6 19S7 o~ 19SS 1989 1991 1991 1992 1993 1994 1995 Source: From data provided by Central Bank of Egypt. increased factor productivity. (Law 203 enterprises are owned by the government but re ath gorframewok at subjeterpto the samedby subject to the same regulatory framework as 10 Realeffective exchange rate ([ndex: 1990.3 Cairo.1 reveals that aggregate gross domestic investment as a share of gross national income (GNY) has been growing moderately. Attempts to both maintain monetary restraint and avoid nominal appreciation could only be reconciled through a strong sterilisation effort. Private saving -'*- ~._ has been accompanied by rising public saving and -~ P 14 -_ - 1i9 a modest current account deficit. the real exchange rate has appreciated significantly over the past five years (figure 2. This increase has resulted mostly from the reduction of budgetary subsidies and current transfers and from a decline in interest costs. the counterpart of Egypt's high reserve position is a substantial increase in its domestic debt. investmnent (as a share of GDP) has not returned to its pre-1990 levels (table 2. Thus it can be expected that.D 2. INVESTMENTS. thanks to reforms in the agriculture sector and the establishment of financial autonomy for Law 203 public enterprises. convertible International and domestic investors have clearly interpreted the opening up as a sign of confidence. though only up to a limit. Significant further increase in public saving is FIGURE 2. In turn.1).. If these trends are sustained and consolidated..3). In effect.2 private enterprises. which recorded aggregate profits in 1994-96.(excluding 99<1 Law 203 enterprises. Saving and investment balances.1 1s99 15 r It also shows that the increase in private investment 131 9 1. perhaps. Table 2. public saving should continue to grow. Capital intlows have been strong over the whole reform period. This was done in a straightforward manner: the monetary impact of foreign exchange purchases by the central bank was offset by sales of domestic securities. The exchange rate has not returned to its peak of the mid-1980s. reflecting contracting public investment and a significant almost 3 recovery of private investment-by Term structureof deposit interest rates Percent ____ ____ _______________ percentage points of GNY between 1993 and 1996. which since 1994 have experienced an increase in net operating profits and thus savings) is not yet showing signs of recovery. has also played a part. putting strong upward pressure on the exchange rate.. FIGURE 2. EGYPIT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS. and have responded strongly to the continued interest rate differential in favour of LE securities.) As the recovery progresses.. AND LONG-TERM GROWTH . The process of liberalization has now continued to the point where Egypt's exchange rate is fully even on the capital accounts... This appreciation came after a significant real depreciation prior to the reform process. This points to the existence of large spare capacity at the beginning of the recovery and. growth cannot be sustained. without a robust recovery of investment. having remained at around 11 percent of m_nth 36-month 12-month i 5-year Source: Estimates based on data collected by the World Bank mission in GNY since 1994.

5 15.5 1.2 91.5 8.6 15.8 25.2 24.1 3.6 89. based by of Central Bank.6 32.4 15.4.6 35.051 Petroleum petroleum and products 20. Estimates. based by of Central Bank.6 13.3 13.569 9.4 1.4 4.3 18.1 95. Includes electricity energy.Thepublic sector includes central local and government.547 12. b.1 12.0 36. Public and Enterprise Office.5 7. social trade.8 35.1 16.2 o/w housing 25.9 3.2 6.3 1.1 23.6 26. and and services.1 20.6 27. irrigation land and reclamation. on the composition of private investment (table 2. This decrease took place through a contraction of budgetary investment in economic sectors such as tourism and the decline in investment by nonfinancial state enterprises (from over 4 percent of GDP prior to 1992 to about 1.5 18.4 -6.8 27. public and enterpneses.1 Nonoil tradablesa 39. however.9 31.0 48.8 8.6 15.0 50.3 26.7 20.0 22.6 19.6 15.3 -2. relative prices between tradables and nontradables .9 91.2 15.2 23.1 96. Abstracting from developments in the petroleum sector-which are dominated by external factors-private investment has been increasingly concentrated in nontradable sectors.8 4.666 11.6 16. Although the data display significant year-to-year variation.2 1.0 19.1 93.2 16.1 19.6 8.9 38.5 1994/95 1995/96a 16.5 95.8 14.0 -6.1 financed largely by retained earnings. and construction.7 -6.0 26.0 32.9 6.5 25. it is likely that corporate saving has been increasing.5 9.8 7.3 28.unlikely until a comprehensive reform of the civil service is undertaken and privatization transfers the bulk of state enterprises and economic authorities to private owrnership.0 10. as it resulted mostly from a reduction of public involvement in the commercial sphere.5 5. an issue to be addressed in chapter 6.5 percent during the last three years).4 14.Total doesnotexactly match figures national from Income accounts.9 3.7 33.0 7.0 6. manufacturing mining.8 17.9 2.9 15.5 23.measured by consumer price indexes for tradables (TCPI) and nontradables (NTCPI) respectively-have shifted in favor of nontradables since 1991.5 17. Data are available.5 8.7 1.4 40.3 26.1 Private Private Gross national savingb Public Foreign saving Memo: GDP/GNY a.1 16.8 22.2 22.3 11.7 25.3 23.9 Total private investment(LE million)c 5. TABLE 2.0 -6.1 3.5 1990/91 1991/92 1992/93 1993/94 21. Public and Enterprise Office.1 18. and transportation. As shown in table 2. 2 It is thus likely that the stagnant performance of private saving is to be ascribed to the behavior of households.2 23.758 11. Among possible causes underlying the increased concentrationi of private investment in nontradable sectors.1 24. Source: Estimates ondataprovided theMinistry Planning.6 -0.7 Nontradablesb 40.3 21.7 11.5 31. However.1 20.508 9. b. this trend appears to hold generally for all nontradable sectors.2) that sheds some light on the determinants of its recovery and future prospects.9 41.7 39.7 24.1 -1. It is now unlikely that these trends in withdrawal of state involvement will continue.7 11.7 11. andSuez tourism Canal. as further significant reduction in public investment cannot take place without jeopardizing the government's ability to provide basic services and infrastructure.4 36.1 20.895 a. finance insurance. The decrease of public investment is also encouraging.705 10.3 15.7 3.6 20.9 20.1 92.9 4.4 0.0 1989/90 29.4 1.1 3. Data are not available to determine the extent to which the lower private saving is due to weak household or corporate saving.9 31. communications.7 -0.2 29.4 46.7 90.3 36.7 18.5 21.9 0.5 6. reflecting the large Recentdevelopments savingand investment in (inpercent) Share Shares GDP of Gross domestic investment Gross national saving Foreign saving Shares GNY of Grossdomesticinvestment Publicb 1986/87 1987/88 1988/89 26.3 20.4 5. POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS 11 . Includes agriculture.5 19.9 20.3 and table 2.8 -0.5 89.2 Distribution of private investment Investment 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 14.7 13.4 48. relative price changes have played an important role. Source: Estimates ondataprovided theMinistry Planning. since the recovery of private investment appears to be TABLE 2.3 14.7 35.1 31.699 7. c.

customs. and lower levels of private saving may restrain the extent of recovery.10 121 145 136 107 1992 0. owing to the dominance of administered prices. Fourth. b.11 100 100 100 100 1991 0. investment in housing and connected services may be responding to some overall demographic and urban concentration trends that are not captured by relative prce shfts. for Source:Fromdataprovided CentralBankof Egypt. and shipping. small. Realeffective exchange rate. These inflows are at the root of the difficulties in managing the macroeconomics of success. caution should be used in interpreting these price data. Import-weighted nominal effective exchange rate. Third. tradable sectors. where state enterprises account for more than 40 percent of total outputmay discourage private firms from entering. success presents its own challenges. These sunk costs would be attributable not only to quality and marketing prerequisites for breaking into foreign markets. textiles. Unless private 1993 1994 1995 255 277 308 259 285 300 99 97 103 a. TABLE 2. 3 Second.14 113 149 144 103 1993 0. by and saving rapidly catches up with the growth of investment.3 Tariff dutyto importratioand indexes of effective exchange rates (1990=100) Year Tanff Dutyl REERa NEER-XbNEER-Me Imports Trade Bias Index (NEER-x/ NEER-m)*100 concentration of state-owned enterprises in certain sectors-for example. which are not relevant for private investment decisions. Source:From data provided the Ministryof Planning CAPMAS.14 69 42 50 84 0. GDP.nontradable sectors. and government incentives to develop "new cities.4 1985 1986 1987 1988 the Gulf War.16 94 142 148 96 a. Post-stabilization macroeconomic is surprisingly difficult. because they expect collusive behavior on the part of the stateowned enterprises.adjusted importduty. It is in fact likely that the consumer price indexes (CPIs) underestimate the rate of inflation of nontradable prices. such as for food.14 98 136 137 99 1994 0. c. 12 EGYPT THEGLOBAL IN ECONOMY: STRATEGIC CHOICES SAVINGS. concentration of private investment in nontradables.exchange rate appreciation.17 95 137 143 96 1995 0. housing and public utilities.IMF(1996). However. labor-intensive enterprises." Managingsuccess:in capital inflowproblem Havig acheved stablization and icreases in private investment. food processing. In addition. high and probably increasing "sunk costs" of producing for export markets may make these activities substantially less profitable than nontradable activities. Why is there a problem? Capital inflows after a favourable shift in confidence put upward pressure on the exchange Factors other than relative price changes may also have played a role in promoting the concentration of private investment in nontradable sectors.decrease realappreciation.12 69 58 64 90 1990 0. and investnent shifts toward tradable and exportable activities. repatriation of savings accumulated abroad by migrant workers since the devaluation of 1991 and 0. is b. most of this chapter will analyse poststabilization macroeconomic problems. as Mexico and several other Latin American countries recently policy * a * * Indexes of domestic prices of tradables and nontradables(1987=100) Year 1985 1986 1987 Tradable CPI (TCPI) 69 80 100 Nontradable CPI 85 91 100 Salter Rabo (TCPI/NTCPI)'100 81 88 1988 1989 1990 1991 1992 121 145 178 202 240 208 110 120 139 164 100 110 121 128 123 116 leamed. However. by TABLE2. These would iclude among other things. Success breeds investor confidence and the capital inflows noted above that such confidence generates. Egypt now seems well placed for a takeoff to sustained growth. LONG-TERM AND GROWTH . Egypt's present recovery may go under. In any case.GDP.13 62 43 51 84 1989 0. the relative price shifts are negligible when comparison is made between 1987 and 1995. FOR INVESTMENTS. but also to administrative compliance. as other successful reform-cum-stabilization countries have experienced. the current private investment recovery may be dominated by the establishment of new. Export-weighted nominal effective exchange rate.20 73 38 48 79 0.25 74 31 42 74 0. First. and construction materials.

are more likely than not to default if things go wrong and a devaluation occurs. 'If inflation is reigning and capacity fully used. as happened both in Chile in 1982 and in Mexico in 1994. and dollarization declined from 51. with a corresponding impact on capital inflows. If inflation continues its downward path. particularly private capital inflows (other capital in figure 2. while lingering downward wage and price rigidity prevents the fall in wages and prices that could offset the appreciation's impact on product markets. by foreigners or domestic residents.8 percent to 29. short-term private capital inflows have a minus side too. pushes the exchange rate up. The fiscal and monetary stringencies adopted in 1990/91 have restored current account balances (figure 2.rate.4 percent in 1995. will make a real appreciation unavoidable. Tight monetary policy and a reliable nominal anchor based on a stable exchange rate send clear signals of a government's resolve. or whether it results simply from anticipation of future wealth. the debt-output ratio.d that the appreciation thus needs to be resisted. tight fiscal policy and an accommodation of the appreciation is needed. The banks may achieve what seems like a balanced position in foreign exchange by sharing the spread with firms. Sterilization-offsetting the monetary impact of foreign exchange purchases by the central bank through sales of domestic securities-is an attempt to avoid that choice. removal of restrictions on the capital account and liberalization of interest rates encouraged a major shift in favor of holding LE-based assets. If renewed optimism. If. as the rising real exchange rate makes home goods uncompetitive. and inventories start rising in relation to sales. Capital inflows may be an embarrassment of riches. banks talce a capital loss and may in fact become insolvent. downward pressure on inflation will result.5). Thus it becomes highly profitable for banks to borrow in dollars and lend in local currency. justified or not. Once that signal has been convincingly conveyed. indications are that asset markets are the driving force an. Strong spending on home goods. however. with inventories falling. in seemingly inconsistent directions. however. If the nominal exchange rate does not accommodate such pressure. a key indicator of Egypt's capitalinflowproblem Strong appreciation of the real exchange rate and continuing capital inflows pose new policy dilemmas for Egypt of a sort that are common to all successful stabilizers and could be described as an embarrassment of riches.4) and entailed a substantial rise in capital inflows. The exchange risk persists but in the guise of commercial risk. and slower growth magnifies the imapactof any given deficit on Such exposure may be hidden. a recession undermines fiscal stringency as tax revenues fall. a portfolio shift back into the country brings in such a large inflow of capital that the monetary policy or the exchange rate come under threat. POLICY-MANAGING SUCCESS MACROECONOMIC POST STABILIZATION 13 . However. but the real appreciation that results may abort the recovery newly underway. high inflation will bring it about anyway. This can be done through dollar loans passed on at a mark-up that may be significant but is still cheap compared with local currency loans. as the firms. Egypt's recent experience clearly demonstrates the issue. Of course. as creditworthiness A key question is whether upward pressure on the exchange rate is niecessary to accommodate a booming economy. but ignoring the issue may well cause serious problems later on. In addition. This in turn may threaten the hard-won success of stabilization. a slide back into recession becomes inevitable. Mexico financed huge current account deficits with remarkable ease through a continuing flood of short-term private capital inflows after a successful debt reduction restored investor confidence. The choice is between letting the nominal rate appreciate or letting money growth exceed its targets. if a devaluation does happen. The Latin American experiences indicate that the banking sector is a serious threat to stability in such circumstances. With the exchange rate appreciating and monetary policy still tight in the aftermath of the stabilization. output will go unsold as exports slow down and domestic expenditure switches to cheaper imports. Inflationary pressure and inventory levels thus provide key signals. domestic interest rates will remain high compared with foreign rates plus ex post nominal devaluation. the appreciation is purely the result of a portfolio shift into the country. who now carry the risk.

Social and health expenditure has been largely exempted from the retrenchment. 4 Tax reform may bring further consolidation. FIGURE2 5. it has avoided many of Mexico's errors and can take the necessary precautions. with inflation set to go into single digits for 1994. 1994 195 but flexibility to insure the program's ability to survive unforeseen setbacks takes on additional ' ECurre. Unlike Mexico. What this suggests is that several years into a successful stabilization program. and to demonstrate the government's resolve. When a huge refinancing requirement of nearly $30 billion approached. anticipation of refinancing difficulties brought the exchange rate down in late 1994. INVESTMENTS.Mexico found: if the confidence declines. Once this program is widely believed. rapid reversals can take place and lead to severe crises. tight money.tAccrntDeficit MChangeinNetinternationalReserves ECapital importance. Egypt's current situation is different from Mexico's in 1994 in several important aspects. Source:From data provided Central by Implications for fiscal and exchange rate policy A need for flexibility does not necessarily imply a wholesale move away from fixed exchange rates. But Egypt is in a much stronger position. in particular.change in reserves and Current capitalinflows credibility. and a rigid adherence to a nominal anchor strategy (for example. Early on. Mexico's crisis was due to a sustained effort by its government to mask the impact of political uncertainty on investor confidence. Mexico was in no way insolvent in 1994. Egypt faces no refinancing peak in any year between now and far into the next century.ANDLONG-TERMGROWTH EGYPTIN THE GLOBALECONOMY: STRATEGIC . the fiscal position seems more firmly based than Mexico's was. Mexico's experiencedoes contain some lessons. Mexico went for a flexible rate after the collapse of its exchange rate regime because its loss of reserves credibility the crisis and reduced during afterwards. CHOICESFOR SAVINGS. _-W-~~~~~~~~~~~~~~~Prvate -Investm-ent (net-) OtficialCapitalGrantos U Net Foreign Lending -OtherCapitalFlows Source:Fromdataprovided Central by Bankof Egypt. given its heavy reliance on exogenous resources. the pension system in Egypt is actually generating surpluses (see Chapter 6). This is especiallyso for Egypt. importantly. Moreover. While fiscal stringency remains confidence. its effort had gained considerable stabilization 14 (see Chapter 6). through a fixed exchange rate). Hence the importance of fiscal restraint. Egypt has a remarkably smooth debtservice schedule. its public debt was less than half of what it was prior to the debt crisis. important to provide long-term flexibility and robustness against external shocks may become more of a challenge. left it no other choice. But as a result of Paris Club negotiations. and to offset reserve outflows through a rapid issue of dollar-denominated debt in an effort to offset reserve outflows. the policy challenges change. 2.4 FIGURE account balance. the priorities change. Moreover. Lower debt US$Miion 8000 6000 5000 4000 2000 rooo S00 0 -0 -2000 990 1991 992 -J |113L_l creates more room for expansion if needed later on. the key objective is to convince investors of the consistency and sustainability of the reform program. ______ Bankof Egypt. and. Egypt has an external debt comparable to Mexico's at that time. p u 000 7000 P 500-L 4000 3000 t__ 990 _ 2000 ° - _ 1991 992 ________ _ 1993 E3 1994 199S For all the differences. thus Egypt's dollar liabilities signal no future crisis.

the credibility of restrictive monetary and exchange rate policies is determined by the fiscal backing they receive. given Egypt's relatively underdeveloped capital markets.5 More worrisome is the internal debt.and exports Percent 30 I 25 20 4 15 10 Inflation netory/sales 5 ~ -----L 0 -5 L---" \ -* Growth of non- 10 -20 oilexports L 1991 1992 1993 1994 1995 1990 Source: Estimates based on data collected by World Bankmission Cairo. maintaining a fiscal deficit that will lead to a gradual decline in debt-output ratios is imperative. The sterilization effort of 1992-94 led to an increase in marketed government debt equal to 12. since the latter is projected at 12 percent for 1996/97). it is not known how many such liabilities exist. At current growth and interest rates. at a face value of about 47 percent of GDP.There are strong arguments against increased flexibility in the exchange rate at this time. All this evidence points to an asset market explanation for the upward pressure on the exchange rate. and some indicators point towards rising inventories. In the presence of asset market uncertainty or. with upward pressure on the nominal exchange rate thus becoming ever harder to resist. monetization becomes the likely alternative to debt finance. the Maastricht criteria call for a 60 percent debt ratio. promises to make up for 15 . Currently. inventory. However. Thus. the debt-output ratio will decline: the nominal interest rate. Inflation. has shown no sign of increasing. whatever the exchange rate system. given the difference between the cost of internal debt and the return on foreign assets. and by Egypt's high level of internal debt. driven by a boom in goods markets rather than a portfolio shift into Egyptian assets-the correct response would be to tighten fiscal policy so as to create room for export production. a large share is short term and at high real interest rates.7 percentage points of GDP by 1995. as in Egypt now. But the boom in goods markets is unlikely to be the explanation. For comparison. start to seriously undermine fiscal stringency. is actually around 30 ino percent once its concessional nature is taken into POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS account. Clearly Egypt is not insolvent. Of course. Implicit in the above discussion is a second issue-the level of Egypt's debt. which apparenily is attracting substantial foreign interest. Claims on state enterprises by such paries may ultim ate enterpie external parties may ultimately become the government's liabilities. will be difficult. Concerns arise nevertheless. FIGURE 2. and in fact increasingly expensive. One. Currently the debt stands at around 50 percent of GDP. This problem is made more acute by the privatization drive. for two reasons. currently slightly lower. If debts spiral out of control (although that is NOT happening now) because of interest rates in excess of the nominal growth rate of GDP. with Egypt's domestic currency debt already high. is roughly equal to the nominal growth rate of GDP (in fact. as interest rate differentials persist. Sterilization.6). the high debt level restricts the government's ability to engage in more sterilization efforts on a large scale. Fiscal policy is severely constrained by the need to maintain confidence in the stabilization program's continued success. nominal flexibility will lead to spurious real volatility. with all the consequences for capital flight that were seen in Mexico in 1994.6 Inflation. Its external debt. Ultimately. repeating that experience would. if the exchange rate pressure is real that is. SuchL capital inflows may be difficult to manage. although on the high side. in Potential liabilities that are not explicitly counted as government debt must be taken into consideration. it is obvious from the strong investor interest in Egypt and in Government of Egypt paper that the government's solvency is not in doubt. such numbers are arbitrary. at around 11 percent. clear shifts in investor confidence. justifying the government's determination to resist further appreciation and to accommodate any down-ward pressure that might develop (figure 2. This makes Egypt's overall total debt around 80 percent of GDP (taking the concessional nature of some of Egypt's external debt into account).

the debt ratio will decline either with inflationor with real GNP growth the absence newborrowing. If growth slows down. But sincethe denominatorof the debt ratiois nominal GNP. Assume first that the real interest rate on debt exceeds the growth rate. liabilities debt shot up (figure 2. Source:FischerandEasteriy 990). If growth Central Bank of Egypt (CBE) has excess reserves of slows down. of public enterprises to the utilities. In consequence. and the size of Holding such a high level of internal debt. The noninterest deficit has to be financedwith new debt to the extent that this deficit exceeds the amountof moneycreationby the centralbank. At current debt levels. Tcalculations are another concern. has a simpleintuitiveexplanation. The monetary impact of the central bank's foreign exchange purchases was offset by sales of domestic currency- 16 EGYPT THEGLOBALECONOMY: STRATEGIC IN CHOICESFOR SAVINGS. The conclusion deservesemphasis:if the governmentis runninga primarydeficit largerthan the amountof seignorage can obtain. Egypt's LE trading companies have not yet been met. A cautious strategy to reduce reserves would problems could arise from this surplus. in of GN . thus making debt The dynamics of debt and the sustainability of fiscal a more serious problem. the loss is maturities. At zero growth. as is likely. In the immediate future.S.1). at nonperforming assets in bank portfolios are.1 deficits and larger fiscal deficits. 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 the vulnerability to downturn. INVESTMENTS. indicating that the Egypt stays out of direct confrontations. nominal interest expenditureshave to be refinancedwith new debt. and it becomes impossibleto run a permanentprimarydeficit that exceeds the amount of revenue the governmentcan obtain throughseignorage. All this will lead to larger external BOX 2. however. Further turmoil in the Middle East might this would still be only about one third of what undermine tourism revenues even if. is obviously undervalued in bank portfolios. andtheprocess for to willhaveto be broughtto an end by cuttingthe budgetdeficit. two specific risks require attention. Then debt dynamics are unstable. but not impossible safe level of three months coverage to six months.and if the real it interest rate exceeds the economy's growth rate. reserve accumulation. that requires a correspondingly larger. an active deficit policy-while growth is still high-to reduce the The changein the debt ratio (d)is equalto: debt-output ratio to much smaller numbers is debt-output much smaler to raio numbers isChange in d = (primarydefjciVlGNP)(seignoragelGNP) called for. Higher national saving would provide a solid foundation for Egypt to cope with long-term external shocks. with a maximum loss of 2 primary surplus of between 3 and 5 percent of GDP percent of GDP if the foreign assets earn no return for stability (box 2.7) as reserves accumulated. rather than further debt-financed Slow growth will lead to less private saving. and protecting the success of stabilization. that distinctly unfavourable. expenditure. bill rate. and pressure for more sterilization strategies are followed.growth x d rate rate) vulnerable to a crisis from external shocks. Equity and real estate are the equally high foreign reserves. At and nominal growth rates of GDP would turn a 5-percentage point interest differential. the debt to GNP ratio will continuerisingwithout limit. either. In addition. which is the key to understanding debt dynamics. or about 16 percent of GDP. thus be called for. the short term U. but loan losses undesirable from a fiscal point of view. At some point it will be impossible thegovemment sell itsdebt.ANDLONG-TERMGROWTH . For this reason.rwhi heasneo e borwn. A may not be adequately provisioned for. Sterilization problems The large inflows in 1993 and 1994 were sterilized in classical fashion.Anandand vanWijnbergen (1 (1989). The dynamics of debt and the sustainability of deficits are particularlyaffected by the differencebetween the real interest rate and the growth rate of GNP. policy focus should shift toward raising national saving. at all. a slowdown in dollar. In Egypt. the comparison between interest rates around $ 11 billion. for the interest rates substantially in excess of the return on time being. Egypt is currently holding. as will happen if traditional less tax revenue. 5-percentage-point difference opening up at short If the return on assets is lower. If we double the reserves for imports from a economic growth is not likely. unknown. Risk in the immediate future The discussion so far suggests that with stabilization and resumption of growth. there is a makes for an annual loss of about 1 percent of GDP. This equation. Treatment reasonable estimate of the return on dollar assets of government guarantees in loan loss provision would be at most 5 percent. this would make the government less + (real interest .high purchase and low selling prices for cotton to denominated securities.

Since domestic interest rates are over 10 percent. whether state-owned or private. so they will default on Domestic as percentage totalpublic debt of debt stock Percent 55 so 450 40 35 30 25 1990 1991 1992 _ ii i jjw 0 X23_l l | l | ' | _ 1993 1994 1995 Source: From data provided by Central Bank of Egypt. they are remunerated at London interbank offered rate (LIBOR). and has the added advantage of encouraging capital oufflows when inflows are too high from a macroeconomic point of view. are the Achilles heel of many reform programs. As noted above. or a large fraction of the banks' profits per pound lent. banks are encouraged to borrow in dollars. typically the borrowing firms are not. and the banks become extremely vulnerable to a devaluation.7 rate. Domestic deposits face a 15 percent reserve requirement over which no interest is paid. of course.A dangerous alternative would be to reduce reserves by encouraging a larger current account (CA) deficit through. such as U. in turn. bank loans after a devaluation. A third policy measure (that should be considered for other reasons.. dollars and lend in local currency (figure 2. Thus. Issues in banking Banks. reserve accumulation should be stopped by eliminating undue incentives for capital inflows. the problem remains. While running a larger CA deficit might slow down the reserve accumulation. Although the banks will then be matched in foreign exchange. A recession in the early phases of a stabilization program will lead to a deterioration in the quality of loan portfolios. as firms. reversed. Jordanian banks receiving foreign exchange deposits were required to hold an equivalent sum in assets abroad. One key incentive' that unduly encourages capital inflows is asymmetric treatment between bank loans funded from foreign sources and loans funded from domestic sources.) A strong policy recommendation is either to start paying interest on reserves against domestic deposits. but. because of the persistent interest differential in the face of a stable exchange FIGURE 2. In the upturn that follows. Even if dollar deposits are matched with dollar loans.6 Through this asymmetry.S. (This is discussed below in the section on "Issues in banking". while reserve requirements against foreign exchange deposits are also high at 15 percent. this asymmetry not only encourages capital inflows. or to stop paying interest on reserves against foreign deposits. but also puts the capital of the banks at risk by providing undue incentives to increase foreign exchange exposure. where high but volatile capital inflows were funding a large CA deficit. and. this greatly raises the cost of funding loans from domestic deposits. by widening the pension system's ability to invest abroad i(chapter 4). foreign exchange exposure opens up.. such interest differentials. The inflows may easily be. in distress because of the recession.S. make it attractive for banks to borrow in U. import tariff reduction that is not offset by other equivalent revenue-raising measures. The resulting pattern could be very much like Mexico's in the period leading up to its crisis. for example. wiping out the 17 POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS . profitability will stay high. the real exchange rate typically appreciates. but the CA deficit is much harder to efil. it would significantly increase Egypt's vulnerability to a crisis. This forced banks to match capital inflows with oufflows of equal size. stop servicing their debts. On the other hand. but that will have an impact on reducing net capital inflows) is to allow the pension system to invest in high-grade foreign assets. This will allow the funds to spread risks better. This makes for a differential cost of almost 1 percentage point. and long periods persist when nominal rates on domestic currency stay above foreign rates plus the ex post rate of devaluation. government paper or blue chip equity. they have a strong incentive to lend in local currency. Over time. As long as the exchange rate stays fixed. for example.nate.8). Before the Palestine switch out of Jordanian dollars (JDs) triggered Jordan's current reserve problems.

This issue is becoming acute. a careful audit based on international auditing standards (IAS) is very urgent to bring out their true capitalisation. A pure recapitalization merely gives bank management more taxpayer money to squander. so as to strengthen the banks. and again in 1994. dollar loans is apparently mounting. Credit Lyonnais. although modem loan classification schemes and provisioning rules were introduced in 1993. After each recapitalization. careful bank supervision and aggressive provisioning against bad loans are absolutely crucial in the post-stabilization period. the preceding audit should be a hard-nosed one done by an experienced foreign audit company. or at least make the extent of their distress clear to managers and regulators alike. The extent to which these two problems exist is not altogether clear in Egypt. Their true capitalisation cannot really be assessed on published data alone. the behaviour will thus continue. as experience tells us. or whether more drastic measures are required. the quality and foreign exchange exposure of the borrowing firms will have to be considered explicitly. INVESTMENTS. Egyptian audit companies may be competent. Thus. but is transformed into foreign exchange-related commercial risk. A recapitalization without further reform signals to the bank that the behaviour that led to the problems is rewarded with subsidies. second. and all problems will reappear with a vengeance within. The state banks were recapitalized in 1992. and are apparently enforced-at least for the private banks. it is not clear how stringently these rules are being enforced for the state banks. What is to be avoided at all costs is straight recapitalization without more drastic reform in the incentive structure of the bank and its officers (not to mention management change). for a cumulative total equal to 10 percent of Hungarian GDP..banks' capital. interest rate / / 5 / xchange-rite adjustedLIBOR - 1990 1991 1992 1993 1994 1995 by bank clients to give U. AND LONG-TERMGROWTH . The central bank needs to be extraordinarily vigilant in preventing excessive foreign exchange exposure in banks. This makes it highly unlikely that banks have been able to provision sufficiently against the portions of their portfolios that apparently went bad prior to 1993. LLP is not deductible under corporate tax. but may also be concerned about future business with the bank in question or its clients. What was wrong was the grossly inadequate provisioning for specific loan losses. This happened during the banking crisis in Chile in 1982. and Banesto all had capital adequacy ratios in excess of the Basle norm of 8 percent on the day of their collapse). the risk of devaluation notwithstanding. First of all.8 Domesticvs foreign interestrate Percent 25 20 \ /Domestic 15 . FIGURE 2. A foreign auditor without an office in Egypt faces no such incentive problem. The four main state banks (with 70 percent of the loan portfolio) are clearly exposed to a substantial number of bad loans. during the big Mexican crisis in 1982.S. each time for $ 1 billion. as pressure problems were back in less than a year. they seem to have made substantial profits during the sterilization period of 1992-94. This in turn will indicate whether cost cutting and improved loan approval and credit quality control procedures are enough. This is a crucial question: almost all major banking crises in the West and the East involved banks that seemed adequately capitalised (Continental Illinois. The audit should assess the adequacy of loan loss provisions (LLP) and thus report on the accuracy of the current value of capital. LLP must come out of current profits. banks continued their poor loan quality control. since they are the lenders to state enterprises. and the 18 Source: From data provided by Central Bank of Egypt. Hungary is a good example. This may also be a problem in Egypt. presumably losses can only be taken when loans are actually EGYPTIN THE GLOBALECONOMY: STRATEGIC CHOICESFOR SAVINGS. exchange risk remains. In this case. most of which were used for provisioning. A final issue concerns the tax treatment of LLP. Simply matching dollar assets with dollar liabilities and such is not enough. If recapitalization is needed. On the other hand. 1993 (twice) and 1994. one year.

relying usually on family members or business relations. loan losses. This rolling over of 4. the present value of contractual loans to the construction sector are now probably debt service-which takes into account the good. or an early warning sign of borrower distress? Is the risk of the GDP loan portfolio as a whole adequately assessed? All 5. new small businesses are in fact less likely missed interest payments that are simply rolled to post vacancies to recruit. The ratio of present value downgrade a loan? Finally. Allowing at least a partial tax 2. needs to be carefully over 1 minus 15 percent). Can subjective criteria (instead calculated using a discount rate of 10 percent in of the objective one of rnissed payments) be used to future service payments. whose investment has contracted modestly in real terms during the last three years. costs only 88 basis points per pound lent (5 percentage points interest differential over a 15 percent reserve requirement. declined from 45. foreign exchange to face value of debt stock was 64 percent for 1995. Is 1995 while government expenditures on health and rolling over simply a matter of maintaining credit educationincreasedfrom3. but if they all withdraw tomorrow.8percentto4percentof relations with a creditworthy client. scaled up by (1 minus 15 percent). It should be noted ithat the definition of private investment used here excludes Law 203 enterprises. which show no significant are not met. The cost difference between foreign and domestic sources of funds is thus a full 88 basis points (0. and with the data on classify a loan.88 percentage points) per unit lent! SUCCESS POSTSTABILIZATION MACROECONOMIC POLICY-MANAGING 19 . 3. Total government expenditures as share of GDP interest presents auditors with a difficult problem.3 percent in 1991 to 28. and this is a major issue. This is consistent with data on business registration. The share to the private sector of total domestic deduction on LLP would obviously strengthen the credit fluctuated around 55 percent between 1993 incentives to provision adequately against specific and 1996. But change. dollar borrowers. Notes 1. payent Butlicn not~~~~~~~~~~~juste the missedesamotistio not just the missed amortisation payment. the entire loan has to be downgraded.written down. over are apparently no reason for downgrading. as the exchange rate remains stable. If part of the amortisation payments posted job vacancies.4 percent in one that is currently ignored in Egyptian audits. 6. Foreign funding. as long monitored and kept wit-hin manageable bounds. Fifteen percent at zero rate adds 176 basis exposure. which show a large increase in the A second issue concerns the criteria used to number of new enterprises. both of banks themselves and of their points to the cost of a loan (10 percent of 15 percent major U.S. By convention. this concessional nature of external debt-has been outlook will change.

.

external balance is likely to deteriorate. or if The base case scenario The base case scenario (the "base case") is predicated on the condition that the macroeconomic policies are internally consistent. Conversely.therebyalso boosingpublic saving. They will illustrate the magnitude of the investment and saving efforts needed to support either moderate growth or high growth. However.flexibilityin the exchangeregimeshouldbe considered. The other two goals each center around one of two key questions that cannot be ignored. how can that be achieved without triggering a balance of payments crisis? as long as expansion continues the government's macro policies remain internally consistent. however. but much more needs to be done. and a Mexican situation may develop. the second challenge is to define policies to support it.1. The respective outcomes of the two scenarios are summarized in table 3.Egyptneedsto reduceinternaldebtto maintainherfreedomof action. the current expansion of private investment. in particular. investment must remain strong or accelerate (the second challenge itemized in the preceding Divergentgrowth scenarios Two medium-terrn scenarios have been devised to address the challenges outlined above. Fiscal stringency will be maintained and the external debt to GDP ratio will continue to decline.She coulddo this in part by applying revenues from pnvatizationof publicenterpnses. it may be determined that the exchange rate requires a downward adjustment. will be assumed to be underpinned by substantial efforts at structural reform (see section below on "Long-term consistency issues").Chapter 3 Long-termy policy challenges Whateverhappensto growth. the real exchange rate may be sustainable. the third challenge is to determine a response to a slowdown in investment or any other important expenditure category. paragraph). Assuming expansion continues or if it accelerates. The existing favorable circumstances present three long-term challenges of which the first two concern. thus increasing headroom for managing internal debt and expansionary policies if needed in the future. Solving immediate problems outlined above the would reduce Egypt's vulnerability to crises. If the expansionslows. 'ihey will also demonstrate the scale on which the divergent payoffs of moderate growth or high growth will affect employment and income growth. Real GDP 21 . Growth of broad money will be kept below growth of nominal GDP. For growth to nudge further up as envisaged in a proposed scenario for high growth considered below. Only the high-case scenario. Macroeconomic consistencies are assumed to underlie both scenarios. While this may be sustainable for a long time. Conversely. since strong continued expenditure will support its appreciation. The achievement of long-term consistency centers around fiscal balance and external financing. Inflation will be comparable to that in OECD countries. if the investment expansion does not accelerate. and it probably cannot continue indefinitely. The first of these two is to ensure that other expenditurecategories slow down too much to sustain output on a high growth path (the third challenge). in the absence of a strong recovery in private saving and given the concentration of private investment in nontradable sectors (chapter 2). with private capital inflows financing a large current account deficit. If this happens. the Mexican experience amply demonstrates that high growth with a deteriorating external balance is a vulnerable situation. If so.

6 84.4 5.9 5.4 12.2 81.6 16. growth real rate GDP capita. By choosing to maintain its current levels of international reserves (at more than 12 months of imports).7 17.0 0. percentage of labor force ConsumptionlGNP Gross investmentlGNP Grossdomesticsaving/GNP Gross national saving/GNP Overall budget deficit/GDP CurrentaccountbalancelGDP Non-oil merchandise growth exports. First.growth will be at around 4.5 percent.0 5.3 1999/2000 4.5 6.6 16.0-1. structural reforms will move slowly.2 1997/98 4. despite the large foreign exchange reserves that it holds against external shocks.3 -0.5 2003/05 4.9 83.8 -1.3 4.6 4.7 17. LONG-TERM AND GROWTH . and deregulation. growth per real rate Unemployment percentageoflaborforce Consumption/GNP Gross investmentUGNP Grossdomesticsaving/GNP Gross nationalsaving/GNP Overall budget deficiUGDP Currentaccountbalance/GDP Non-oil merchandise growth exports.1 7.3 5.7 6. Egypt would maintain internally consistent macroeconomic policies strengthened by vigorous structural reforms in trade.7 18.7 9.5 6.1 9.4 80.2 16.0 4. This means that the debt stock will decline in real terms.2 5.8 4.0 10. FOR INVESTMENTS.5 2. rate M2 growth rate Source: WordBank estimates.3 0.0 13. The large fiscal costs arising from holding reserves limit the headroom for expansionary policies.5 6.0 25.0 7.8 18.9 0. capital and labor markets.3 0.4 19.0 4.5 4.0 -0.1 5.5 14.1 9. problems impeding growth of saving and Thehigh growthscenario The high growth scenario is based on the vision that Egypt should and must grow faster. privatization.7 84.4 4.8 4.6 4. grwthrate Inflation.0 6.3 4.0 -1.1 15. and extemal financing requirements will be minimal.0 4. Second.5 22 EGYPT THE GLOBAL IN ECONOMY: STRATEGIC CHOICES SAVINGS.5 billion a year during 1996-2002. Moreover. This scenario is characterized by the following features.4 4.5 24. while the macroeconomic policies will continue to be internally consistent.5 4. First.1 5.3 17. deflator GDP GNP.5 7.3 0.4 2. growth real rate Gross national disposable income.4 12.0 6. The constrained private sector investment TABLE 3.7 4. Egypt would be able to cope with external shocks with relative ease.2 17.0 20.2 2.0 4.6 19.0 19.7 16.4 18.7 -1.9 19. Egypt would choose to limit foreign borrowing (on a commitment basis) to the range of $ 1.4 6.0 85.6 -1.4 3. and relative to output as well.5 2.6 6.5 3.0 85.1 21. In particular.6 4.5 6.1 84.9 20.1 5.0 28. and the current recovery of private investment will not accelerate. growth per real rate Unemployment.1 0. rate M2growth rate High-growth scenario GDP market real at price. and that the benefits of rapid growth outweigh the potential risks.5 16.0 29.2 15.3 20.2 85.0 2.0 16.3 7.2 18.2 1998/99 4.5 19.6 0.3 2.0 13.0 13.6 22.4 5.8 -1.5 7. as well as by strengthened incentives to raise productivity growth.3 84. staff 1995/96 1996/97 4.9 7.5 4.9 -2.4 -2.6 17.2 20. Egypt would find itself denied an opportunity to attract private and foreign investment through rapid structural reforms.4 6.3 -2.2 7.6 4.8 8.4 2000/02 4.3 0.6 15. growth real rate Gross national disposable income.0 4.2 2. thus the fundamental will lead to limited growth in job and income opportunities.0 13.0 84.0 -0. growth real rate GDP capita.9 85.0 5.2 10.7 9.2 -0.2 1.4 5.0 75. growth rate Inflation.7 0.6 2.4 5.8 6.0 13.0 24.3 6.7 3. and therefore to further increases in unemployment.0 4.0 20.5 5.5 4. slow growth of nonoil merchandise exports (at 5 percent) will limit the scope for Egypt to reduce its reliance on exogenous resources.2 11.9 19.4 2.0 26.7 20.7 4.5 9.0 6.6 4.5 4.3 6.5 19.0 0.1 9.4 7.6 22.0 21.1 5.2 9.2 20.5 21.1 15.0 19.6 16.7 7.5 15.9 7.0 5.1 5.4 5.7 17.0 23. a rapid investment will remain.1 5.0 13.2 9. Divestiture of public sector interest will be limited in scope. deflator GDP GNP. This scenario is characterized by two features.7 6.7 84.1 Outcome thetwoscenarios Egypt of in (percentage) Indicator Base-case scenario GDP market real at price.4 -0.0 13.0 13.5 2.

better budgetary results are expected earlier in the high growth case. also by Nonetheless. An issue that will come up. fiscal stringency would give rise to increased public sector saving. which would contribute to rapid increases in domestic saving.4 percent in the base case). To the extent that saving did not rise sufficiently and quickly to support the growth of private investment.3 billion over the next six years.4 respectively in the base case. and inflationary pressure would emerge. savings would have to be relied upon. Rapid growth. More specifically. The decline in foreign exchange reserves (to no less than 9 months of imports) would be mnoderate. as the privatization process gathers pace and LONG-TERM POLICY CHALLENGES Long-termyi consistencyissues The current fiscal stance of the government appears internally consistent. But an open question is whether such a structural dependence on volatile private inflows is in fact desirable. Second. Private saving would be boosted subsequently by rapid per capita income growth and other structural policy reforms. and petroleum.2 percent in the base case). The current level of $2 billion per annum will obviously not continue indefinitely. If Egypt's reform process continues. This reinforces the 23 . Gross domestic saving as percentage of GDP would be in the 17-18 percent range in the high growth scenario. against 16-17 percent in the base case. * A rise in the level of trade integration (export plus import) to 33. A case can be made that it is not. is the likely decline in longterm external assistance. however. private inflows will doubtless take the place of diminished external official flows. However.6 percent in 1996 to 8. the growth of GNP would be much faster. requires. The deficit is small. are expected to grow at similar rates in both scenarios. Benefits of rapid growl:h Overall. the Suez Canal. leading to heightened concern about vulnerability. and nominal export earnings (of nonoil merchandise) would grow at more than 15 percent a year. such as tourism. * Addition of about 5. As under the first scenario. The simulation indicates that. However. the high-case scenario would offer the following improved outcomes over the base case: * Addition to national income on the magnitude of $ 37. * Increased per capita income to $ 1. The following increased discussion is based on the assumption that Egypt should pursue the high growth scenario.9 million jobs. therefore keeping the growth of debt stock well behind the increases in Egypt's capacity to carry and service debt. Export earnings from sources vulnerable to external shocks and depletion of natural resources.465 in the base case). in this scenario.650 a year by 2002 (compared wvith$ 1. Real exports of agricultural and manufactured goods would grow at about 10-15 percent in the high growth scenario. the debt problem would be well contained (Egypt remains "moderately indebted"). the viability of this scenario depends on the level of domestic saving. maintaining macro policy conisistency.7 percent in 2002 (compared with 9.8. GNP in real terms would reach a growth trajectory of about 7 percent. the increased domestic saving would not be large enough to finance all the investment requirements. * Reduced vulnerability to external shocks. as the enlarged current account deficits are expected to be financed increases in foreign borrowing. as well as adopting the policies necessary to sustain growth firmly supported by domestic savings. of course. foreign government spending is prioritized to provide basic social services (including a social safety net) and public infrastructure. It also shows that while the debt stock would grow with increased foreign borrowing. This would result from decreases in exogenous resources as a share of GNP from 12. the high growth scenario would imply an investment/GNP ratio of 22-25 percent and an incremental capital output ratio (ICOR) of 3. in contrast to 18-20 percent and 4.and large-scale privatization program would be complemented by rapid growth of private investment. The fiscal deficits as shares of GDP are estimated to turn to su. as envisaged in the high case scenario. a significant gap would still have to be filled with portfolio and foreign direct investment and foreign borrowing.1 percent of GDP by 2002 (compared with 25.rplus by the turn of the century in both cases. and interest and growth rates are such that the current primary surplus is high enough to foresee a medium-term decline in overall debt-output ratios (as implied in both scenarios above). compared with 5-7 percent in the base case.

Once again. First. 24 EGYPTIN THE GLOBALECONOMY: STRATEGIC CHOICESFORSAVINGS. Although Egypt is not insolvent. However. measures to increase saving to levels closer to East Asian ones are strongly recommended. and oil exports. Figure 3. and such measures are considered below.06 . The government has now initiated a program to carry out civil service reforms in the medium term. it is unlikely to be enough. theory notwithstanding. is thus strongly recommended. further reduction is limited. the hard measures will have to be taken.16. Although a successful reform could reduce the dead weight on the economy. there is ample practical evidence that raising public saving Uncollected installments 34% Financial restructuring 23% Re-investment 13% Bank deposits 17% Transaction fees & tax 13% Note: Salesfromall transfers assetsto privateownership of estimated LE at Source:Calculated fromdata provided PublicEnterprise by Office.17 0. FIGURE 3. for whatever reason.case for measures to increase saving. Most savings come from one of three sources. but such a configuration will make Egypt highly vulnerable to reversals of investors' confidence. once the privatisation comes to an end. Applying privatisation revenues to debt reduction should be considered as it will also stimulate public saving. and the proceeds of privatisation will have been wasted. or accelerates to levels necessary to achieve the 6 to 7 percent GDP growth rate required to absorb new entrants to the labour force. Thus a strict fiscal policy. Thus.04 0. This highlights the need for Egypt to reduce internal debt so as to increase the headroom for coping with external shocks. INVESTMENTS. and government measures can be classified accordingly.2 Volatility Egypt'skey revenuesources of ta o 0. In fact. aimed at significantly reducing the level of internal debt with respect to GDP. the Suez Canal. is recommended.02-* oi OilanldGas Suez Canal --Tourism Worker OfficialGrants Rernittanoes Much has been done in the last few years to reduce public expenditure. private capital inflows are most likely to be available to fund such deficits. 0.2 demonstrates high volatility of key revenues derived from foreign aid. A strict policy of applying tirivatisation revenues to debt reduction. These measures will also need to include fiscal measures if it turns out that internal debt is not falling sufficiently as a percentage of GDP. the last three years saw no proceeds from privatization being applied to reducing government debt but rather to propping up ailing state enterprises through reinvestment and restructuring (figure 3. and the scope for source Calculated dataprovidedbyCentral from BankoFEgypt FIGURE3.1 e What should be done while the investment Distribution sales proceeds fromprivatization of expansion lasts? If investment remains strong.1). one has to be cautious with regard to the size of fiscal saving that could be generated in the short term. ANDLONG-TERM GROWTH . In the meantime.08 0.07 005. This practice should be avoided. rather than to finding state enterprise deficits. growth does slow down. Egypt may have to cope with uncertainty in its key revenue sources. the high level of internal debt restricts the government's ability to use expansionary fiscal policy in a slowdown.180. Its sustainability could come into question if.35 m 0. Propping up those enterprises postpones their adjustment to new realities and wastes taxpayer money.14 012 010 001 0. increasing external deficits can be anticipated on the current account.

an earnings. as argued in chapter 1. The enterprises working in casfocner. Another cause for concern is the speed of a saving. '- gestation and quick payoff and with relatively high LONG-TERMPOLICYCHALLENGIES 25 . th most ountrieoffuds. In stance. mnexat d sector. rp The second main source oftaing i ate Whatshould be done ff investmentexpansion does not accelerate? thereenldb causes are fo Despite this optimistic outlook. in particular real estate assets. . Privatisation. The recent supporting policies.' In addition. two types of investment could be in commercial activities (see paragraph on "Forging considered: first.hou bsfheonsidere on eamleow 2. The c i first group makes private investent more radable sectors. improving the regulatory growth.all tradables face the need to upgrade their capabilities contribute to this end. thus the speed of export recovery is environment good for iivestment is also good for critical. . is a . investment with short capital. not the first~~~~~ measures are required. intensity or. there is a danger that the recovery may be held back by saoving. this deduction has no extent that investment is intermediated through the useful incentive effect once the size of statutory A capital has been decided upon. Since ~~This t. To the statutory capital is fixed.Snetercvr for concern. second. first area where araweemau'saerqie. This prediction is responsive supporting policies are also needed to not only by the curre-nt sound macroeconomic als the by decnin publicinv men ensure quick and timely export supply response. and a Egypt's capital markets now offer a wider choice rise in private investment in tradables in response and higher returns than ever before. and competitive environment. the productivity of attractive and therefore funding for it more private investment will suffer. Dmay bring about another problem.measures >afll all ~~~cause concern. The rise of capital good rise of private inivestment also offers further imports needs to be balanced by growth of export optimism.snes since so much hs bee done n thisfield alredy mche hsalreandy been donrce thvisg in fied. Much has already been done to encourage Ajor expor recov. The successful export experiences saving. with improved to the improvement of price regimes and transparency and investor protection. a ocr. ore inved mearnig the size of the domestic market. to the exprviethre. thus limiting further valuable. This is. but . but * the case of Egypt. shoru a leas eonsder. Since the recovery has been led by private investment in nontradable activities. Second. for retained earnings. main source of fundsufor investment extent that the concentration of private investment in nontradable activities is a result of lack of encourage companies to retain more earnings. . e above senario major export recovery. If.Tentpieswkngn pontrocedures. If there is a crash or a drastic realignment of in is as relative prices. be absorbed tnot only by investors using their own already done in some countries so as to encourage fnsbtas ybnsuigfnsfo coprt savng funds but also by banks tising funds from corporate saving. however. The shift in relative prices (tables 2. simplifying the The concentration of investment in government's still complex administrative nontradables. Yet they are Secoined expicitr at measuresd toi promot attracting far fewer resources than the real estate retained thearnin. The above scenario saving by those with considerable surpluses: envisages increases in capital good imports. and by further characterized by relative high capital and skill development of the capital market.some but not all government saving.4) since 1990 and the concentration of investment of discriminahton is the practice of allo i nontradables undermine the ability of Egyptian ery industries to engage in production of tradables. investment of a long gestation. Another alternative would be to allow the demand is satisfied and market euphoria is investment credits that are explicitly limited to over. Thus. for procedures. Strong and private saving as well.3 and againstcthem. and using ex licit tax .andusingexplicit tax measuresewill. then the current rebound in private demonstrate that a sound relative price incentive investment will likely bring about a rebound regime is necessary but not sufficient. buyer-seller links" in chapter 4). the resulting losses would have to investmdnen fina frome countrietsoained earnings. The third source of national saving is private depositors. explicit tax measures to promote and to compete more successfully. not . further measures to increase fiscal surpluses and reduce deficits will certainly help. One alternative would be to extend the privilege to retained The real estate boom is expected to end as soon as earnings.

Should export response turn out to be slow.labor and low capital intensity. private saving remain insufficient. Egypt's overall exposure to external shocks is already very high-owing to the large contribution of oil exports. LONG-TERM AND GROWTH . A crawling band sets rates of change to both an upper and lower bound within which the exchange rate can move freely. The long-term response to a slowdown in investment and to the need to actually sell the goods the recently constructed capital helps produce is key to long-term success. A further cause for concern is the timing of the response of private saving. and concentration of investment in nontradables continue. for example through the adoption of a crawling band. FOR INVESTMENTS. Note 1. introducing an element of flexibility in the exchange rate. 26 EGYPT THEGLOBAL IN ECONOMY: STRATEGIC CHOICES SAVINGS. the current growth recovery may very slow down. Even in the high case scenario outlined above-where the strong recovery of private investment itself brings about an increase in private saving-a significant lag in the response of private saving would necessarily be accompanied by a widening of the current account deficit. Resumed growth and stabilization may enable Egypt to attract a large amount of foreign savings to further finance the recovery. is equivalent to that of a metropolitan area in Europe. before the fixed rate is perceived as a matter of prestige. Such a slowdown would require a real exchange rate depreciation at some stage. but there is a limit. But achieving a real depreciation while maintaining the fixed exchange rate is exceedingly difficult. workers remittances and foreign grants to the current account-and would be increased by higher reliance on foreign savings. should be considered seriously. To forestall these possibilities. The supporting policies indicated in this report are aimed at generating investment with quick export payoff. Egypt's national income of about $ 60 billion. it requires sustained inflation rates below the main trading partners' inflation.

producers must have access to raw materials and inputs that allow them to produce goods of the quality required by consumers in any given market at a price that is competitive. Chapter 5 and chapter 6 will tackle the mobilization of savings. has been both an oil) advantage and a disadvantage. electronics. worker remittances. In recent decades. therefore reducing the current account imbalances that are likely to emerge if the current investment expansion accelerates.000 million by the year 2000 (often cited as a government target). The existence of other sources of foreign exchange (Suez Canal. While these resources created a bigger domestic market. where foreign exchange necessary for imports is being earned primarily through services and other activities. then exports should have reached $ 6.3 billion). producers must have accessto world class inputs at world prices. tourismn. Focus on exports is critical to achieving competitiveness. Egypt has been essentially an import oriented economy. Three have emerged as central to getting issues on a path of hig]her growth: first. it is estimated that 27 .3 billion rather than $ 3. While it is encouraging that Egypt has not suffered a major loss in competitiveness. The first issue has been discussed in chapter 3.The causes of this lag are the failure to change to export markets that were growing rapidly (loss of $ 0. exporters' inability to adjust to changing product demands and to penetrate new markets points to a lack of agility in Egypt's manufacturing sector For Egypt's nontraditional exports to reach $ 10. To be competitive in world markets. merchandise exports would need to grow at an estimated annual rate of 35 percent.1 billion. as it provides the mechanism to modernize the economy and enhance productivity-not only in the export sector but in the rest of the economy as well.current account imbalancesmay occur. fiscal stringency is needed to maintain internal consistency.Chapter 4 Promoting outward orientation through exports If domestic investment accelerates. Egypt should encourageexports to balance the current account and to hasten her integration into world markets. the residual measures the loss in international competitiveness ($ 0. this large domestic market absorbs supply that otherwise would be exported-especially since the domestic market is protected (profitable) in potentially exportable sectors. and needs to be madefar less cumbersomethan at present. The second issue is the topic of this chapter. lightweight products such as software. Her comparative advantage may lie in the export of high value-added. second. one calculates that if Egypt's exports grew at world rates during the period 1983-93. supporting policies must be adopted to substantially increase allocation of resources to production of tradables and exportables. At such a growth rate. Egypt's "underperformance" amounted to an annual loss of $ 3. The import/exportprocess imposesprohibitive costs. longterm domestic savings must be mobilized to cope with the volatility of external inflows. Using CMSA.7 billion) and not adapting the composition of commodity exports to changes in world demand (loss of $2.2 billion). Addressing these three issues is the starting point for establishing the basis for long-term growth.2 billion in 1993. and to increase the headroom for managing short-term risks (through reducing internal debt). The environment Egypt needs an internationally competitive economy that produces world-class goods. or highly perishable horticulture items. and third. In other words. and to support domestic investment.

Tunisia. The agenda for action A key matter is to determine what policies and institutions can help to expand exports. The government's most recent economic program. Turkey. An increasing number of these enterprises have in turn become miultinationals. The tariff level was reduced. The government has done a great deal to reduce the magnitude of. Egypt would be a world player-capturing 1 percent of world merchandise exports (the level of Brazil in 1972. efforts have been made to maintain the exchange rate competitiveness against the upward pressure 28 brought about by the large inflows of capital discussed in chapter 2. Sustaining that rate for 10 years.Egypt would capture 0. Account must be taken of the changing external environment in designing the trade policy component of this growth strategy. INVESTMENTS. As more market-friendly regulatory mechanisms are introduced and tariffs are gradually eliminated in the regional economies and worldwide. investment. This stance is likely to continue in order to prevent the erosion of Egypt's export competitiveness. All suspensions of letters of credit for imports were lifted. AND LONG-TERM GROWTH . and Israel implies that a Korean-type of policy mix relying on protection of the domestic market with a broadbased drawback mechanism to allow exporters to compete on world markets has become less feasible. Jordan.25 percent of world merchandise exports within five years (almost catching up to it's share in 1970. Controls by the General Authority for Investment and the General Organization for Industrialization on imports of equipment were abolished. as were import restrictions maintained by the Ministry of Military Production and the jurisdiction of the Industrial Monitoring Authority over imports. shows a continued commitment to tariff reduction and to using the exchange rate as a policy tool. The issue is to what extent and over what time frame. enhance the transparency of applicable trade policies. Greater transparency was achieved through the adoption of the international Harmonized Commodity Classification and Coding System (HS). Korea in 1978. and technologies has intensified. The trend in the world at large of moving to a free trade and investment environment for both goods and services has changed the rules of the game. The trend toward adopting more and wide-reaching bilateral and multilateral trade disciplines implies that firms located in these countries must become more competitive on a global scale. as compared to 55 before 1989. investment and production decisions continue to confront a distorted incentive structure. and approximating the share of Thailand in 1970). At the same time. Egypt has little choice but to follow suit. This clearly requires a quantum leap-making export development high on the government 's agenda. sourcing from all over the world. Legislative efforts have been undertaken to eliminate the discriminatory treatment of foreign trading companies. import restrictions. The technological and managerial changes that have occurred in the last decade or so have induced the OECD countries to initiate structural reforms gradually to enhance the competitiveness of firms located on their territories. which was 0. and eliminate export disincentives. Despite the reform program pursued by the government. and the tariff structure rationalized. For many producers and traders the protected EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS. and thus help to achieve the government's objectives of raising GDP growth and employment. Levels of tariff and nontariff protection remain high. supported by the International Monetary Fund (IMF). and Thailand today).27 percent. Competition for markets. and the foreign exchange quota system for public enterprises eliminated. The extension of large parts of the integration mechanisms to countries such as Morocco. Achievements The trade liberalization effort of the last five years provides a good basis on which to move further towards integrating Egypt into the world economy. The number of imports requiring prior government approval was reduced to zero. Egypt's ongoing process of integration with Europe is of particular importance (World Bank 1996b). The foreign exchange system was decontrolled and unified. and may have reduced her available options. allowing them to operate on an equal footing with domestic competitors as far as exports are concerned. The pace may be slower than the IMF would recommend but the government feels comfortable with as being sustainable.

many producers and traders are short of incentives to sell in the world market and prefer to adhere to the domestic PROMOTINGOUTWARDORIENTATION THROUGHEXPORTS market for larger profit and less competition. The threat of foreign competitionwhile very powerful-is rarely sufficient to ensure that internal marke!ts will become more competitive. like Singapore and Indonesia. The following two sections cover: import transaction costs and export transaction costs. These are to a greater or lesser extent all "service issues" in that greater competition in the service sector could eliminate or help offset such weaknesses. sufficient oil and gas reserves). and one-tenth of that in Israel or Tunisia).55 per hour is only one-third of that in Cyprus at $ 1. improving the predictability and transparency of customs administration. fulfilling Egypt's economic growth potentials. stimulating entrepreneurs to face competition. the monopoly provision of port services. Domestic prices can be even higher than world market prices. have already achieved rapid export-led growth.72 per hour.rained or skilled work force and management. both lacking in their current operation. Perhaps more importantly. Doing this would go a long way toward the design of optimal policies to remove these obstacles. the latter to the lack of export competitiveness. and ultimately building a strong and vigorous economy. Experience in numerous countries suggests that such actions include privatization. which are.domestic market remains much more profitable than exporting. Egypt does not occupy a clear competitive niche on the world market. unfortunately. and the strategy of export development will fail. Import substitution prevents foreign competition from accessing Egypt's market. Egyptian products command high prices but deliver low quality. and demonopolization of services. cumbersome and complex import and export administrative procedures. Worse still. and convenient geographical location (Suez Canal and Mediterranean ports). As lack of competition breeds lack of competitiveness. that the twin effects of import substitution and domestic monopolization have been the major culprits behind this "high cost" character. while domestic monopolization stifles internal competition. abundant cheap labor (Egypt's labor rate at a minimum of $ 0. and allowing more competition in the service sector are key to accelerating export growth. A cursory study of Egypt's economy reveals. or nontradable -is high. Identifying the sources of high transaction costs is a first step toward understanding their role and importance. not surprisingly. These two areas are interrelated. entrepreneurs and firms will continue to orient inwardly. Should this asymmetry prevail in its current form. export-oriented. Reducing the burden of regulatory oversight. Egyptian industries may go under in the face of increased import competition brought about by trade liberalization. Trade and tax policies and their administration. an inability to satisfy foreign technical specifications or standards. the introduction of hard budget constraints for public enterprises. and inadequately . the regulatory burden that affects the private business sector in Egypt-wwhether import-competing. As a result. because when imports are used as 29 .88 or Turkey at $ 1. and uncertainty regarding the objectives and planned policies of the government are important disincentives to investment and export-oriented production. the absence of adequate information on foreign markets. The former contributes to high domestic prices and the weak incentive to export. without reducing transaction costs. Interviews with private sector firms suggest that export development has been constrained by the low quality and high cost of support services. The incentive regime -asymmetric between import and export prices Successful competition in both international and domestic markets requires that Egyptian products be of low cost and high quality. This section details many of the existing transaction costs in the import and export processes that contribute to high domestic prices in Egypt relative to competitive world market prices. Supporting actions are required. yet similar economies with even less favorable endowments. Egypt has been dubbed a "high cost" economy. A more efficient service sector is a necessary conldition for firms to be able to compete in international markets. the domestic market will remain more profitable. All these features seem rather unusual for a developing country like Egypt which possesses superior natural resources (high-valued agricultural products.

In other words. and quality control. Import transaction costs Considerable effort has been taken by the Egyptian government to reduce the magnitude of its high levels of import restrictions. there are stiff tariffs on fertilizers (30 percent). and tax rebate have been developed by the Egyptian government. in addition to import bans on seeds.s subject to local content requirement-only if the local content of final products reached 20 percent or more shall the imported components be eligible for a tariff reduction. (6) customs form 13. An exporter has to go through each of the following eight steps to obtain a refund or a permit: (1) customs form 22. they are more tangible and therefore more accessible for immediate policy actions. Also. schemes such as temporary admissions. A multitude of problems at the ports. It has reduced tariff rates and reformed the tariff structures. whereas duty drawback and tax rebate reimburse tariffs and taxes to exporters should they use imported goods in the production of exports. cumbersome drawback and rebate schemes. clothing and High tax sales Net effect 16percent 31percent 70percent Infinitely increasing level protection the of forthedomestcindustres. Tariffs and taxes. (5) production reviewing process by industrial control authority. Egypt's seaport service charges for imports triple that of competitors (Hoekman and TABLE 4.poultry. poultry. consumption. on tax even inputs exported for goods. Besides. low service quality. All these duties. textiles. of textiles. There is a sales tax of 10 percent applied to all commodities. Darmietta. such as high service charges. further elevating prices and downgrading competitiveness. delays. (3) release permit. LONG-TERM AND GROWTH . To ensure that exporters can circumvent these trade barriers and have access to imported inputs at world market prices. Port Said. these export-promoting schemes have become another form of transaction cost. (4) a form to industrial surveillance authority. the added import costs translate into the extra costs of exports. contributing to the high cost of production. money. and (8) determination of refund by a committee (SRI International 1995). In general. These procedures are inevitably costly in time. and export from Egypt (table 4. In addition. tariffs. INVESTMENTS. They only partially alleviate the h-igh import duties and remain insurmountable for small enterprises and emerging exporters.intermediate inputs into the production of exports. creating large distortions in the relative prices. The high tariffs are further compounded by a number of fees and surcharges that make the import tax regime less transparent and discretionary. However. EGYPTIN THEGLOBAL ECONOMY:STRATEGIC CHOICES FORSAVINGS. bans. and Alexandria. such as marketing. management skills.2). However.1). Souse: WorldBankstaff estimates. finances. 30 Temporary admission allows exporters to import commodities free of border taxes. these schemes involve cumbersome procedures and excessive paperwork. Port handling services nnd freight rates. as transaction costs are more regulatory and bureaucratic. information. There are also immense production costs on top of transaction costs. However. and taxes inevitably increase the cost of imports. duty drawback. even to inputs for export goods. tariff differentials between different product groups and within each group are quite large. has grown to the point where the ports could well become a major impediment to the growth of export (table 4. and it has enhanced the transparency of import policies by adopting the HS. and so forth. with the import-weighted tariff at 31 percent and the manufacturing-wide effective protection rate at 70 percent. and other smaller ports are essentially state-owned monopolies. effort. (7) export form. The section on import transaction costs is divided into four parts: tariffs and taxes. and clothing. (2) letter of guarantee or insurance letter. and attention. step-by-step documentation of each transaction for refund is difficult. import clearances. the average tariff rate still remains at a high level of 16 percent. 10percent sales is applied. and e'ligibility . trucks (70 percent) and agricultural machinery (50 percent). All these costs are only part of many existing forms of transaction costs. nonsale indirect tax cannot be rebated. Dekheila. port handling services and freight rates.1 Tariffsandtaxes affectingEgyptian exports Barier/impediment High rate taiff Overall rate tariff Average imported-weighted tariff Average manufacturing-wide effectve protection rate Bansonimports seeds. and deterioration of port installations and equipment. The four maritime transport services.

of physical Nearly 10 percent of chargeable time. and delivery to consignee's transport) for containers on liner terms range from approximately container and testing for radiation and in time between unloading cargo and the departureof the vessel. double that of. the vessel lost nearly $ 10. a 43. insurance. The average cost of air freight from/to Egypt on EgyptAir to/from northern European cities ranges from $1.000. excessive bureaucracy still remains one of the main THROUGH EXPORTS ORIENTATION PROMOTING OUTWARD Source:SRI Intemational (1995). high Airport services $ 183 to $ 225 for a 20-foot dry $ 367 to $ 441 for a 40-foot unit.41kg) other MiddleEast countries (e. Imports of the same product in consecutive time periods are subject to repeated sampling. the food control agency of the Ministry of Health. foreigners still find doing business in Egypt extremely difficult. container handling costs of condition the port and poor quality service. The freight charge on a 20-foot dry container from Northern Europe to transportrest to (stevedorng. as well as inefficient bureaucratic practices. 1996).000 higher for a 40-foot container. Terminal handling charges (stevedoring. the animal quarantine body and the Government Organization for Export and Import Control (GOEIC).70 hours.2 Effectsof expensiveEgyptian Barier/impediment port services services Seaport Container rate freight Neteffect Overall charges triple that of some perishable goods requiring refrigerated containers. Air-freight is twiceas much rate as ($1. There are multiple steps. which raise cost. Clearance of imported foodstuffs is a particular problem that involves five agencies in authorizing entry: the atomic energy agency. The cumbersome import procedures add another 15 percent to the costs of imports. The physical condition of the infrastructure is mostly fair to poor.50/kg). and charges. These are still cumbersome. Import clearances. Freight plus port costs are as much as 40 percent of the CIF price for TABLE4. Even though the import/export paperwork process has been greatly simplified compared with the past. of which nearly 10 percent was dead-time. Air-freight rates are considerably higher than those of other Middle East countries. inspections. Israel $0. Housekeeping and maintenance are practically nonexistent. Inc. transport) Housekeeping and Nonexistent. resulting in poor maintenance Vessel lost tme Alexandria is between $ 280 and $ 500 higher than to Piraeus. Due to a long delay in testing the ship and cargo for radiation and waiting time between unloading the cargo and departure of the vessel.00 to $ 1. if imported intermediate goods account for 60 percent of production cost..450. Generalremarks:It wasestimated theseaport that chargesraiseCIFcostfor imports Egyptby over percent-a to 10 relatively cost. 15-20 percent higher than other C cost Container handing Terminal handling charges Mediterranean ports.Bernard 1996). Container freight rates to Alexandria are competitors. Port costs for containerized cargo represent 9-14 percent of the CIF price (Nathan Associates. impediments to trade. licenses. and particularly bad in Alexandria.45-$ 0. say. generally 15 to 20 percent higher than to other Mediterranean destinations. the agricultural quarantine body.g. largely because EgyptAir flights tend to travel loaded only one way so the charges have to assume the costs of an empty return flight.50 per kilogram. 31 . In particular. rhe administrative process for complying with customs regulations and the resulting red tape are still considered a major stumbling block.3. transport to the first point of rest. and $ 650 to $ 1.500 deadweight (DWT) bulk carrier was charged with wheat at Alexandria. due to nontransparent procedures and regulations. double the costs in Antwerp at $ 109 and $ 117 and in Zeebrugge at $ 100 (20 or 40). due to delay in total are about $ 225 per 20-foot container. As an example. and freight (CIF) charges for imports to Egypt by over 10 percent-a significant number. 2-3 times that of nearby ports Doublethat of nearbyports. Israel at an average of only $ 0. they are only $ 120 to $ 180.40 per kilogram. then a 5 percent increase in import costs of intermediate goods would contribute to a 3 percent increase to the cost of export production.000 per day for excess waiting time or demurrage ($ 500 per hour). Vessel time lost in port appears excessive.0-1. in nearby foreign ports. total chargeable time was 196. In Alexandria. For Egypt as a whole. Assuming $12. as shown in table 4. Egyptian customs procedures are particularly complicated and rigid.

at least 1 percent of each consignment must be sampled and inspected for compliance with the relevant Egyptian standards. while imported cars are not. In manufacturing. LONG-TERM AND GROWTH . In fact. Total amounts days there a delay tothree and is storage bome importers. Fees charged for inspection activities are subject based on either the weight of a consignment or the number of units it contains. quarantine and body theGOEIC. Certain imported products removed from the list of banned imports were put on the quality control list.11 if imports are financed throughbank. Importers that regularly buy the same goods from the same foreign suppliers remain if the required equipment is not prcing. storage extra charges. The GOEIC. Permit delivery. customs gate for another Delays.3 (see table 4. it is even questionable that all the mandatory quality control regulations are based on health. but many times others have to be involved as well. Due process is -the process by which laws. The system for this is restrictive. the and lost time efforts and inspection. The pervasive application Of quality control reflects a fundamental confusion between quality standard and safety standard In theory. It is surprising. The first deficiency is the Barrer/impediment Net effect Multiple clearance Clearanceimported of foodstuffsparticularly multiplicity of agencies involved in issuing and is a agencies problem five with agencies involvedauthonzing enforcing the regulations. as well as of one or more of the otlher bodies mentioned earlier for certain goods. The second deficiency is the lack of transparency and due process in the system. a a form.550 tariff lines or 25 percent of the tariff schedule is subject to quality control. manager for tarff for delays. health. for example. food the control increase in cost due to multiple inspection fees. intermediate represent percent goods 60 of producers thena further percent cost. As is the case for tariff rates. charge by to inspection on a shipment by shipment basis. and sometimes to protect Egyptian consumers from low quality produce.4 for details). technical specifications or any other official designation are implemented. for some products such as meat it takes at least two weeks before releases are issued and another ten days to complete the paperwork. Once applicable duties have been paid on goods subjected to inspection requirements. customs control inspection. quality control has become a means to protect local industry. servicecharges. agrcultural of of the quarantine theanimal body. which can be dangerous items too. of which about half are foodstuffs. fees for General remarks: costs These amount a tarffequivalent percent to of 15 (a conservative If imported figure). Testing of industrial products sometimes takes a long time. giving all affected parties advance knowledge of proposed changes. decrees. effectively retaining the import restrictions through long delays in approval. that spare parts for cars applied if the good is not prepared for retail sale. reportedly ignores internationally recommended methods of testing and certification. Inspections the Atomic from Energy Authority. are not TABLE 4. Effectsof cumbersomeEgyptianimportclearances The current quality control system has two main deficiencies. calculation ofcustoms sales duties. quality controls are mandatory for a number of imported products. Adequate information. product loss in the clearing process.' Final release of imports requires the approval of the GOEIC. can provide input into exporters' decisionmaking. GOEIC has been responsible. and higher facilitation and overhead costs. 5 increase producers would in cost contribute3percent toa increase cost exports. Clearance of foodstuffs is particularly time consuming. for example. however. and quality grounds. The GOEIC inspects a sample of every consignment of goods enterinig Egypt that is on a list of products subject to quality control. Some 1. standards. the Ministry of Health is also involved. procedure etc. especially available. atomic energy agency) sample consignments. primarily for health and safety reasons. tax. This in turn leads to an in entry-the atomic energy agency. of FormNo. FOR INVESTMENTS. and that imported playing cards are 32 and does not recognize internationally known and EGYPT THE IN GLOBAL ECONOMY: STRATEGIC CHOICES SAVINGS. Fees range from 0.and a 15 percent increase would add to a 9 percent increase in the cost of export production. are subject to quality control. safety. however. Multiple procedures and licenses Multple inspections and charges agency theMinistry Health.000 per consignment. In practice. agriculture. included in quality control list while toys and hand tools. Transparency covers the ability to know clearly what regulations apply to a product. control department for determination of preliminary custom duties sales specific and tax. as all the bodies involved (GOEIC. tothe of Source: SRi internationali0s99) gnr goods at leat tie at least that are intended as lar as large for retail as sat sale are that are are generally twice as those Quality control. According to one recent study. for pharmaceuticals and medical devices.5 piasters per kilogram to a maximum of LE 10.

in General remarks: It is estimated that the qualitycontrol system increasescosts to affectedproducersand traders by 5-90 percent. Highcompliance costs Excessivesampling testing. and GDP By discouraging loses by more than 1 percent trading activity. others.000of productper officialper year.5 pilastersper kilo to a maximumLE 10. It is estimated (Nathan Associates 1996b) that the current system of quality control increases direct and indirect costs to affected producers and traders by from 5 to 90 percent. Exporters need to have timely access to the imported inputs that are required to satisfy export orders. and make it more difficult and costly for firms to obtain inputs that are required for export production.color. and thus exports. of which about half are foodstuffs.000perconsignment. Executives may be production required to spend valuable time dealing with administrative red tape problems.by an estimated9 percent 12 percent. industry.TABLE 4. or halt temporarily. as a consequence increasedimport costs.GDP losesby morethan 1 percent. unnecessarily rejected products. only 112069imported commodities 1991. to Source: Intemational SRI (1995). mandatory For Extensive. Fees Each agency that undertakesinspection charges a fee. Manufactured components and intermediate inputs are often key elements of export-oriented production in the industrial sector. time that could be much more productively used managing their business.000. They impose large welfare losses in the aggregate. Some 1. Lowefficiency Customsclearance rate is valuedat $ 600. 111in 1992.The of highestcosts are for food procluctsand importedfinal consumergoods. Enforcement: Variousqualitycontrolministries Contentstandard Shelf-lifestandard Qualitycontrolsharedby 5 ministries agriculture. over half or more of Egypt's regulatory Overlapping duplicative and centersof authority. farmers producing for export must have ready and reliable access to seeds and plant cuttings so as to be able to develop and grow varieties that are demanded by export markets. Exports decrease by at least an estimated 9 percent to 12 percent as a result of these costs.4 Effects of restrictive Egypitian quality control system Barrierlimpediment Standardcontrolset by Ministryof Health: Food and healthrelatedgoods EgyptianOrganization Standards for (part of Ministryof Industry) Industrialproductsand services.159in 1993was underqualitycontrol. shape. in Wth little coordinationbetweenthese ministries.For example. 33 . The lack of transparency and due process in Egypt increases uncertainty in decisionmaking and has a negative impact on imports and investment. The policies briefly described above directly affect imports. For example. Timeandeffort consumed Clearance takes 2 to 3 times as longas other Mediterranean ports. Delays in clearing customs or passing inspection can be extremely costly.amountof ink in a ballpointpen andthe lengthof matchesare.but manyare inconsistent. In Europe. health. reduces product variety and availability. The highest of these added costs are for food products and imported final consumer goods. Producers may find themselves having to rent THROUGH ExPoRTs PROMOTING OUTWARD ORIENTATION substitute machinery at' high cost. to Lackof transparency due process and Inducestransaction uncertainty.for food. and supply Extensive mandatory inspectionitems Neteffect on Restrictive standards size. reducesimportsandinvestment. accepted quality and certification marks (such as that of the European IUnion or the International Standards Organization (ISO). decreases foreign and domestic investment. the system also reduces access to the regionally important Euro-Mediterranean market.andtexture and.550 tariff lines or 25 percentof the tariff scheduleor 116of imports is subject to quality control. exarnple.000 Singapore. multipletest requirements analyticalcapacityis devoted qualitytesting. among items.compared with _$ 666.economy. Exportvalues decrease. and wastes government resources on duplicative and unnecessary activities.on fat andsugar content.granulatedsugar has a shelf life of 24 monthswhile powdered sugar has 12 months.extended and port charges due to delays. according to industry. based on weight or unit-0.

transportation. exporters report that the serious constraints on increasing sales abroad include: high and uneven import tariffs. services should be iternationally competitive.AND LONG-TERM GROWTH . Government measures have included regulating seaport charges with the aim of making them internationally competitive for exports. an outrageous air-freight rate adds 40) percent to the cost of grape exports. Infrastructure Outdated infrastructure can pile up bottlenecks. More fundamental reforms are necessary for export-led growth to take place. and ack nfomatin f acessto o foeignmaretS lack of access to information on foreign markets and product standards. competing on equal terms against each other and against existing state-owned companies. An important factor raising the costs of exporting is the quality of the services provided and the level of port service fees for handling and storage of goods. . (4) the shipment cost of containers carried by the Egyptian Navigation Company were reduced by 50 percent.0-$ 1. Overall. (5) transport of containers within the port is now free.. sral (S0. upgrade their quality. and (8) a 1989 decree imposing afee on refrigeratedgoods that were not held in public sector storagefacilitieswas abolished.052per consignment. inspections from customs. bank export form and statement of accounts. workers poorly prepared for the jobs available. many of these efforts can be perhaps best characterized as alleviating symptoms. Israel ($ 0. and delays for customs and various inspections during import and export. insufficient incentives to export. the government has also eliminated almost all quality restrictions on exports. (2) exporters have been exempted from fees for safety-security procedures. International 1995). fees. Experience in other countries has demonstrated that great efficiency gains can be achieved through Coreareasfor action The government is aware of the problems outlined above and the concerns expressed by the exporting community in Egypt that the high transaction costs reduce their competitiveness on global markets. Only through competition will Egyptian industries become stronger and will service suppliers be given the incentives to expand the diversity of services quality. to nadd 40e percmlen name one example. piloting fees and dock storage charges were lowered by 20 to 75 percent. thanks to government intervention aimed at encouraging exports. As noted above. the air-freight rate remains lofty. cumbersome duty drawback and temporary admission regimes. Seaports. low-quality domestic inputs. ad price services upgrade th ofe offered. tmeefof inspecthreedeaysi(R sotrorag andtlosity completing include compu qncluarantine. chapter focuses on competitively. firms are still administrative cumbersome with burdened procedures that again involve multiple inspections. (3) many of the port service fees charged to exporters have been reduced. export costs LE 1. The rest of the and price services th ctions eto en re orts by reducin transatoncostsgo im ports desreduabove n dsrbdaoe fiprsa cot trnato by creating strong buyer-seller links and an export mentality. (7) regulations relating to overtime incurred in applying export-related administrative requirements were eliminated for exports. Port services. certificates.4-S . export and import control authority. fees for inspection. and so forth are not natural monopolies. Procedures agriculture for forms of Custfoms Formcul13 quarantine purchase ofCustomsForAlthough completing certificate of origin. recent government actions have been substantial. sealing. and charges. As a result.45-$ 0. These 34 EGYPT IN THE GLOBAL ECONOMY: STRATEGICCHOICES FOR SAVINGS. handling. IneAltional 1995or Although seaport services are not signicanyin expensive for exports.4 per kilogram)compared with. say. the same distance costs double the price in Egypt ($ 1.50 wit. sy. Charges and quality of port handling i . customs certificate. excessive paperwork.Exporttransactioncosts In general. (6) handling and security chargesfor export goods and the electricity cost of refrigerated containers were reduced by 50 percent. Nevertheless. because of the empty back hauls of EgyptAir. These are some of the ways to unblock bottlenecks to the growth of exports.50 kiloramcomare per kilogram). export transaction costs are not as prohibitive as those of imports. One estimate shows that to complete all the required steps for a typical initiatives include the following: (1) the number of forms to be used to register compliance with export regulations has been reduced to one. The costs of doing business in Egypt must be reduced if Egyptian industries are to compete more successfully in world markets . This can be achieved by permitting private national and foreign companies to engage freely in port service operations. Many initiatives have been taken by the government to address these concerns. INVESTMENTS.

the ability to import quickly and at the lowest costs is crucial for maintaining a competitive advantage in exports-particularly in countries such as Egypt where dependence on imported raw material and inputs is relatively high. The results were immediate. Temporary admission and duty drawback schemes. Since Egypt's comparative advantage may lie in exporting high value-added. Currently. Customs clearance procedures should be greatly simplified. the average cost of air freight from Egypt on EgyptAir to northern European cities is anything from two to three times higher than its main competitors. Under the World Trade Organization (WTO). exporters must pay for both the fully loaded "headhaul" and for the empty back haul when the aircraft returns. while container turnover went up by almost 50 percent. Airports. electronics. Often these reference prices are imposed by customs. the basis for valuation is the invoice presented by the importer. Actions can be taken to further improve the temporary admission and drawback systems. small and medium sized firms that would otherwise be marginal have been able to expand their export activities (World Bank 1993b). Extending access to agricultural producers should also be pursued. must abide by the requirements of the agreement on customs valuation. Establishing a set of standard inputoutput coefficients for broad categories of goods could help in expanding the use of these mechanisms. Procedures for obtaining duty drawback or using the temporary admission mechanism cal be simplified and made more transparent and efficient. Customs valuation is generally considered an uncertain process by importers to Egypt unless Egypt's minimum or reference prices are used rather than invoice values.greater competition in this area. developing countries that were not party to the 1979 (Tokyo round) agreement on valuation-which includes Egypt-may delay implementation of the agreement for five years 35 . As noted above. service market segmentation was eliminated. Egypt is one of the few countries in the region where exporters usually PROMOTINGOUTWARD ORIENTATION THROUGHEXPORTS must pay air freight costs both ways-that is. developing adequate capacity in cost-effective air shipping services is vital to export developrnent. Deregulation and privatization of port services had a major impact in Mexico. or highly perishable horticulture items. including developing countries. The ability to deliver competitively-priced products fast and on time is considered a prerequisite of effective linkages with key markets. The Egyptian government may wish to consider the following actions: * Relinquishing monopoly control of air transport and easing regulations restricting competition from non-Egyptian airlines and charters. and firms were allowed to subcontract freely and set prices according to market forces. the Egyptian government may wish to consider the following reform actions. This requires that. lightweight products such as software. Eliminate interlocking directorships and shareholdings between port authorities and operating companies or among port operating companies. It is imperative that Egypt improve customs administration to reduce transaction costs of imports so as to encourage exports and modernize industry. all members. In Egypt the introduction of these multilateral rules may require a change in current procedures. However. Thus. in principle. * Start legislative p:rocess to terminate the legal and regulatory status of state monopolies in port services. Customs reforms In today's increasingly competitive global marketplace. Law 12-1964 and other regulations pertaining to such state monopolies should be abrogated or changed to permit the participation of private national and foreign companies. Entry into the relevant service activities was made free. In one year the cost of services in the port of Veracruz declined by some 30 percent. Similar elimination of barriers to compettion in the provision of port services n Chile led to substantial reductions in operating costs (by about 50 percent over two years). become more automated and move towards a paperless environment. and may be higher than what was actually paid for the goods. * Reducing costs by permitting tourist charter flights to accept air freight on the backhaul or return flight. since they inhibit competition and impede effective supervision by the port authority of companies with port policies. . By reducing the costs of shipping by almost 50 percent. Import inspection and valuation.

Customs officers would be obliged to allow sealed containers to pass through customs without inspection and harassment upon payment of duties. Furthermore. There would be no inspection of merchandise. Importers would be able to obtain documentation classifying and valuing consignments from a small number of accredited international inspection firms selected by the government. Such efforts could also help firms in improving quality control and management systems. Although there is a fair amount of slack built into the agreement. as noted above. free of taxes and duties.after the date of entry into the WTO. and disputes. and aid them in obtaining internationally recognized "quality" certification. health an-d safety related. the transaction costs associated with obtaining relief under these schemes are often prohibitive for small enterprises. unlike officials in other countries. The relevant international standards for this are the ISO 9000 series of standards. * Focusing testing on safety concerns rather than quality standards. and any violation would be subject to penalties. Egyptian enterprises producing for export must then be able to source quality imports at world market prices. Moreover. or technically in conformity with specifications required by foreign buyers). Efforts could be made to stimulate the awareness of quality control and the importance of satisfying foreign standards (whether they be mandatory. It would reduce required signatures. These firms would inspect and seal containers. Repeat violators would be removed from the list of exporters eligible to use the green channel. * Developing a comprehensive plan for customs reform that would minimize face-to-face contacts between importers and customs officials. claims. * Adopting a principle of voluntary preshipment inspection. they are generally seen as only partially alleviating the high import duties that are applicable to many imports of intermediate inputs. The associated 36 costs would be borne directly by the importers.3 The Egyptian government may wish to consider the following actions. The Egyptian government may wish to consider the following actions: o Establishing a "green channel" through which exporters can import intermediate raw materials and capital goods to be assessed for duty on the basis of invoices submitted by accredited exporters. This will require training. Although temporary admission and duty drawback systems exist. A review processincluding on the panel international experts with extensive experience in this area-should be initiated to determine whether existing standards CHOICES FOR SAVINGS. and rely on an enforcement mechanism based on spot checks and stiff penalties for cheating rather than the current system that requires inspection of most shipments. greatly increasing the average time involved in obtaining decisions. 2 Furthermore. but a provision for random ex-port factory audit should exist. in the medium term Egypt will have to alter its customs valuation procedures. * Revamping the inspection process by establishing a single authority for inspection and testing. One option that could be explored is to establish a "certification fund" that can provide matching funds for ISO 9000 certification and for the services of consultants to audit companies. Cases involving drawbacks in Egypt are generally passed on to higher levels of authority. who can handle cases. customs officials in Egypt appear to be unwilling or unable to take responsibility for such nonroutine decisions. Qualitycontrols Streamlining the quality control process and focusing it on safety concerns would reduce the cost of doing business and move Egypt towards a system that is consistent with its obligations under WTO and Europe and Mediterranean Agreement (EMA) membership. Examples include Societe Generale de Surveillance (SGS) or Bureau Veritas. subject to the terms and conditions required by the other WTO members. INVESTMENTS. substantial efforts to improve quality will also be necessary in order to raise the international reputation of Egyptian products. Duties would be paid on the basis of value and classification determined by the preshipment inspection body.AND LONG-TERM GROWTH EGYPT IN THE GLOBAL ECONOMY: STRATEGIC . as well as upgrading of the information base on product prices available to customs officials. Developing countries that currently value goods on the basis of officially established minimum values may request a reservation to enable them to retain such values on a limited and transitional basis. if they are not to operate at a cost disadvantage. consolidate required inspections.

Options to achieve this include the following: i A small group of experienced sales professionals could be created (perhaps reinforced for a short time by outside specialists to deliver training and offer advice). * Supporting standardization of laboratory quality through certification by the National Institute of Standards. The purpose of this board would be twofold: to assess the performance of the agency and to advise it on key aspects of industrial trends and international investment. and local companies-and of officials and ministers. Egypt needs a honed inward investment promotion agency4 with a highly targeted approach based on current best practice. * Reducing inspection levels to minimum spot checks that use compliance history as the basis for the frequency of sampling and testing of imported products. * Recognizing international standards certification for nonfood imports. foreign test results of-and certification by-internationally recognized bodies should be accepted. an infrastructure that meets minimum standards of quality. 37 Maximizing FDI and its benefits Trade and factor flows have become increasingly complementary over time as firms specialize and diversify the production process geographically. but also the availability of an adequately skilled and productive work force. * Increasing transparency and due process by giving advance notice of any proposed new rules. One advantage of this model lies in the fact that it would create a group completely dedicated to kickstarting the country's FDI promotion efforts. but rather would focus exclusively on sales and marketing. given the size of the internal market. and its vast labor pool. * Establishing a "certification fund" that can provide matching funds for ISO-9000 certification and for the services of consultants to audit companies. and providing a clear appeal process. If this approach were adopted. Increasing the level will require marketing as well as continued efforts to ensure not only the absence of overt discrimination against foreign companies. Results from any certified laboratory should be acceptable.are necessary. providing an opportunitv for public comment. it would require close monitoring to ensure that performance targets were achieved. Private testing agencies and laboratories should be allowed to contest the "inspection market" once certified on the basis of objective criteria-as laid out by procedures developed under auspices of international organizations such as the ISO. It might also make sense to place within it Egyptians who would become the corps of a new investment body in due course. thereby eliminating multiple testing and increasingtransparency by assuring quality of laboratory results. and plants. animals. * Introducing cost-based fees for inspection services rather than the currently used specific fees. aftercare and sector development. whether they are compatible with international ones. and the availability of efficient service suppliers. If not. The new agency would not have a control function. its strategic location. Attracting inward foreign direct investment-both equity and nonequity-is particularly important in fostering exports. establishing known implementation dates. Such controls should be motivated only by the health and safety of consumers. the protection of intellectual property. and. Egypt's level of FDI is well below its potential PROMOTINGOUTWARD ORIENTATION THROUGHEXPORTS . if so. international norms should be adopted where possible. This elite group might be drawn from across different parts of the civil service and should be distinguished by a strong commitment to making Egypt the premier FDI location in the Middle East. In addition to creating employment and contributing directly to export growth. FDI also brings with it great opportunities to nurture indigenous industry by helping the latter to enter export markets. Tasks such as assisting local companies with quality and delivery programs would be considered separate and would have to become the responsibility of another body to allow the private company to fulfill its targets and to focus exclusively on winning investments. * The entire FDI business could be privatized by giving it to a group that works to specific and agreed targets by volume of investment flows and is also responsible for other areas such as aftercare development. The body could have a supervisory board made up of both foreign investors-those already in Egypt.

The latter requires knowledge of available technologies that can be used to produce specific products. the knowhow necessary to bring existing plant to the level where it can meet foreign market specifications. Weaknesses in this regard reflect historical circumstances: a relatively closed economy. and absence of financial and other inputs from the latter. but their services are usually mandated by foreign buyers and not demanded by local producers. the potential of export processing zones to attract investments could be enhanced by providing "one-stop shopping. and boost productivity." ensuring no bureaucratic obstacles such as with customs and quality control. This inquiry should be done with care to avoid the appearance being a high-pressure tactic. independent certification bodies like SGS or Bureau Veritas. INVESTMENTS. export experience. Very few intermediaries exist that can supply information services. and orderliness of taxi queues. and capital equipment. * To meet this situation. with much of its manufactured exports occurring in the context of trade based on negotiated protocols with former centrally planned economies. insufficient permanent dialogue and interaction with the beneficiary enterprises. they cannot and should not do the work of these companies. airport customs. Of course. * Similarly. They are weaknesses in marketing and establishing a presence in overseas markets by Egyptian firms. But this is not the case. It is also necessary to be able to identify potential clients and obtain a contract. Relatively little use is made of outside.* A focus on aftercare could be developed by appointing a key official with responsibility for regularly contacting existing businesses investing in Egypt. these visits would be an opportunity to find out if companies use domestic sources and if not why not. it should also lead to simplified customer service and access. and the GOEIC into one agency to boost their effectiveness. and if the businesses could be encouraged to invest more in the country. the Egyptian Export Promotion Corporation (EEPC). Were this deficiency compensated for by a buoyant FDI marketplace -which can attract export activity by experienced overseas companies that do not require assistance to export-then perhaps the situation would be less grave. and there are many outstanding examples of this happening. raw materials. enhance coordination. access to labor inputs.AND LONG-TERM GROWTH . Such an approach would liberate economies of scale thereby releasing both financial and manpower resources. if something could be done to facilitate integration with the local suppliers. * An environment friendly to FDI could be created by attending to the details that affect first impressions: for example. one-stop-shop export promotion center. and the lack of attention given to meeting quality standards required by foreign buyers. it must meet their product specifications and deadlines. Many Egyptian firms are weak in all these areas. Two deficiencies in this respect are mentioned most often as being particularly pressing. In the tiger economies. In the context of letting them know that their investments are highly valued. it is necessary to be able to produce a good or service that meets the requirements of foreign buyers -that is. Large foreign retailers and other specialized buyers and trading houses are generally absent in Egypt as buyers of products. these bodies are compatible with and facilitate the efforts of firms and are especially important for those small. the Egyptian government could create a single. but the services they do provide can make a critical difference to exporters.and medium-sized enterprises with limited. The exact nature of the new structure could be the subject of a task-force to include representatives of the Egyptian Businessmen's 38 EGYPT IN THEGLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS. inter alia. the government has created support agencies for exporting firms. components. Such firms are established in Egypt. and the supply must be reliable). low public-sector pay scales. by limited resources. Their functions and activities are constrained. Marketing and associated skills were not required in such an environment. Unfortunately Egypt's public export agencies are not sufficiently resourced or coordinated to offer the kind of support common in many other parts of the world. and mechanisms to ensure that quality standards are met. lack of staff training and motivation. This would require the centralization of Trade-Point. if any. To export. visa requirements. Forgingbuyer-seller links As in many of the 'tiger' economies.

It also * A media campaign could be used to explain misses the opportunity to achieve a radical break the importance of exports. it has been used * Enhanced information management systems. It also contributes to an environment so doing would instill confidence in the new body friendly to the private sector by ensuring the timely among the private sector as a whole. support investors already in the country. res onsible for admiisterin the temporar vp g ry admission and drawback systems is located in Cairo. the government needs to set ambihious export goals. to continue to pursue its own interests. 2 For example. Industries (FEI). an important step toward integration with international standards. as opposed to LE 500 per ton if packaged for retail sale. by the Ministry reward entrepreneurs who open up new markets or of Trade and Supplies. The rationale is that small and medium sized firms may be financially constrained and/or unaware of the need for ISO-9000 certification. the department of Customs 2. The board would give This can create an excitement and awareness about direction to the management of the agency. Setting such ambitious targets has the advantage of making clear that tinkering on the margin will not be successful and that fulLlscale change in the way PROMOTING OUTWARD ORIENTATION THROUGH EXPORTS face a fee of LE 2 per ton if unprepared for retail sale. fee 'escalation" animal lard. protected domestic market. not in the ports. and reference document. and engage in public relations policy campaigns. successfull. Quantitative performance could be (Transfer of Know-How through Expatriate measured by using nontraditional export growth in Nationals) program could be used to help bring the designated export sectors and in countries expertise and marketing know-how back to Egypt. and in exports. it could set an ambitious export target and strive to meet it. create an environment in which goals can be met. and target new investors. The government could do this in several ways. iniplementation status. First. it could follow up with specific actions foreign exporter. 3. selected by the body for targeting. client companies could be asked for an academic and cultural exchanges. fats. the Federation of Egyptian business is done is required. . and to help stimulate an export mentality and to both Egyptian small microenterprise (SME) and educate the public. for example.Association (EBA). exports would need to grow at an estimated amnual rate of 35 percent. Or UNDPs TOKTEN bounty" basis. with past practices that have not worked. availability of information. one of the more extreme examples of To give document. the General Authority for Investient (GAFI) is basically a control agency and does not act to market Egypt. sector-dominated board. and margarine Creating exportmentality an Current producers are content to service a large. possibly someone from a major Second. * Egyptian industrialists overseas could be * Entire responsibility for exports to be lodged encouraged to return to Egypt for 1 to 3 months to with a private body funded on a "performance work with sister companies. For a qualitative In Egypt this program has so far been used only for measure. The disadvantage of this introduce new products. recommended action. . such as Vietnam and China..000 million by the year 2000 (an oftencited government targel). The president could model is that it is unlikely to gain a vote of present awards. 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. 4 As currently constituted. Retention of the existing bodies but with much * Annual national contests could be held that greater coordination. which is likely press coverage of the winners' activities. 39 . Creating such a fund on the basis of matching with firm's contribution should help accelerate ISO-9000 certification. and a data base containing information from Notes reports/studies such as area of reform. say a Japanese trading house. The following are types of large company representatives. To create an export mentality. But in countries opinion on the new body's performance. ~~~~~~~1. They are comfortable in the current protected environment. for industrial exchanges. For Egypt's nontraditional exports to reach $ 10. and there could be substantial confidence from the private sector.

.

--- Share of petroleum exports Percentage 00 14. and we will do so in this and the following chapters. Countries that derive a significantshare of their national income from the extraction of nonrenewable natural resources are faced with several issues related to the sustainability of economic growth. and has been relatively stable at about 44-46 million tons since 1988 (figure 5.She may considerapplyingoil and gas revenues.from slightly more than 10 million tons to more than 40 million tons.. ----......0 12.2).1)... How important are noinrenewableresources in the macroeconomy? What are the effects on output growth of the future rate of resource extraction? How much of the resource rent should be consumed FIGURE5...that is. In addition several specific policy now as opposed to being saved for consumption in the future? And in what should the resource rent be invested to support sustainable growth? Nonrenewable resources Nonrenewable natural resources have played an important role in Egypt's economic development. . 41 ... by From Source: data provided the CentralBankof Egypt...3).. ...1 the 1990s.. . ...0 l -... to replace the depletion of income generating assets resulting from extractionof oil and natural gas....... So far we have addressed the general conclusion that Egypt could achieve additional GDP per capita growth of 2....and accounted for roughly 50 percent of total merchandiseexport (figure5..0$ -__ ~~~~~~~~~~~~~~~80 60 - 8.0 -_ __ _ _ _ _ ____ _ _ _ _ _ _ _ _'_ _ i 2 0 l 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: EgyptMinistryof Planning.and continued its increase from less than 4 million tons of oil equivalent in 1985to more FIGURE 5.. ...... The central question is how much more does Egypt need to save in order to maintain its capital resource base .. percent) in Percentage 1 8~~~~~~.2 Shareof oil and gassectorin GDP (at constant prces.0~~~~~~~~~~~~~~~~6 8.to developinghuman capitaland infrastructure.7to 3.. Egypt must developother incomeproducingassetsto maintainthe requiredrate of savings and growth. 16..now used to subsidizeinefficientconsumption.. These consist of oil and natural gas.7 percentage points per year by adopting sound policies that lead to a virtuous circle of higher growth and higher rates of saving and investment..The crude oil and petroleum product exports have been close to $ 2 billion during and institutional issues at sector levels need to be addressed.0.. _. . . which contributed about 10 percent of Egypt's GDP during the 1990s(figure 5..' Oil production increased almost four-fold during 1975-84... Marketable natural gas production also grew during 1975-84.Chapter 5 Natural resource depletion and savings Wel beforeoil and gas resourcesrun out in twentyyears time.

. or close to 60 years of current production levels. and cost of production and return on (current inpercent) prices. The issue of the resource rent has a significant 2 = _. Reserves are sufficient to allow an average annual increase of 8 percent over the next 15 years and a stabilization of production thereafter beyond the Gas o0 ___ 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 scenario time horizon.3 Oil and gasproduction (million tons) tonnage 5000 3000t ^~~t wz Oil ~ Gas 2000- ~ l 75 76 77 78 79 80 81 82 83 8485 86 87 88 89 90 91 92 93 being depleted. Two scenarios are developed for the 20 years from 1995 for which assumptions are presented in table 5.5 billion a year during 199195. . 0 1991 1992 1993 1994 1995 macroeconomic dimension. Thus. Oil and gas reserves. normal return on capital. natural gas is mostly consumed at home. Natural gas is produced under similar arrangements and the price of gas received by the international companies is tied to the international fuel oil price. Source: staffestimates Bank basedon official statistics. .4).world prices of crude oil. LONG-TERM AND GROWTH . Overall the rental income from oil and gas as a share of GDP (based on current prices) declined from 14 percent in 1991 to 8 percent in 1995 (figure 5. - 12 '------=--= = - : .. __1 . and rate of oil Estimated andgasrent oil US millon. The oil resources are primarily extracted under production sharing agreements by international oil companies whose output share corresponds to their cost of production and return on capital. Thus. 42 EGYPT THEGLOBAL IN ECONOMY: STRATEGIC CHOICES SAVINGS. Bank estimates.. Based on estimates of the cost. other forms of capital will have to be created to replace the income generated from oil and gas. . As oil and gas reserves are finite.ovidedby theCentral Bankof Egypt tham 10 million in 1994. the reserves will only generate income over a confined time period.5 to $ 1 billion (figure 5.1. or 10 to 11 years of current productionlevels. service. Proven oil reserves stand at about 3.2.. $ current 60005000 4000 -----. the gas rent increased from $ 0. and economic value of oil and gas resources. and agricultural sectors. as the nonrenewable reserves of oil and gas are FIGURE 5.FIGURE 5.-------- and gas extraction. Wodd staff barrels. Percentage 20 18 16-_ 10 6-. like productive capital in the manufacturing.4 Projected and gas rent oil Projection of future oil and gas rent depends on the magnitude of new oil and gas discoveries. production costs. . i .5 rentIGDP ~~~~~~~~~~~Resource Source: Fromdatap. The resource rent-the difference between the economic value of oil and gas. While a substantial share of oil is exported. The oil rent fluctuated between $ 3 and $ 4 billion but was generally decreasing. no distinction in gas productionrate is made between the two scenarios. - _______ Oil _ ' 3000 _ _ _ 7t _ 2000_ -- _ __ _ _- _ __ __/_ two scenarios is a slower decline in oil production and higher real oil prices in the "high" scenario. the resource rent (see annex to this chapter) has been in the order of $ 4-4. capitalaccrues to Egypt. The fluctuations in the oil and gas rent are due to fluctuations in intemational crude and fuel oil prices. The difference between the ~ __ __. FIGURE 5..4 billion Source.5). are income generating assets. -- - - - - - - -- - - . FOR INVESTMENTS. home. Current gas reserves are at least 23 trillion cubic feet.

0 3. either threuss: obiou irs. Projections of future oil prices entail substantial uncertainty. . It can be argued that Egypt's policy has been and is a combination of the three. EGPC exports and sells domestically Egypt's oil production share.0 1.4 0. In this case. Given production sharing con*acts with interational partners and a policy by EGPC of retaining after-tax profit. Thus. -7. public investment that does increase the productive capacity. and domestic petroleum product prices. s .5 0. second. The rent falls below the 1995 level after 8 years and by $ 2. 1996-2015 Reserve High case Low case Proven reserves oil (billion bbis) Additional discoveries oil (billion bbis) Gas production increase (percentage/yea. an oil and gas fund.7. The projected oil and gas rent for the 20 years r rss . although FIGURE 5. . EGPC also manages oil product imports and sale of natural gas. the rest is used to cross-subsidize operations of ° 4 .0 0 ~~~~~~~~~~~~Source: World staff Bank estimates.Thus. Some aspects of the possible use of the oil and gas rent are discussed below. The competinguseof the oil and gas rent The rent from the Egyptian oil and gas rent has Three obvifrous uses: Egypirs uli cndgasumnti expenditure that does not increase the productive capacity of the economy.6. from 1995 in the high case scenario is presented m figure 5. . 43 . urdess substantial new oil reserves are discovered 'n tn in Oilproducion increase (percentageyear) Year 1-6 Year7-20 llncreasereal in crude fuel prices and oil 0 -5.° - . The low scenario may be the reality of the future. It shows an increase in rent for the first 7 years.0 0.7 8.) In the high case.600 million in year 20. through investment in physical income generating capital or investment in ]human resources. The main domestic player in the oil and gas sector is the Egyptian General Petroleum NATURALRESOURCE DEPLETIONAND SAVINGS ss Note: isrelative 1995 Rent to level. The oil rent is 70 percent of crude oil prices in both scenarios (the same as in the 1990s). a substantial share of the rent has been distributed to the population. international oil prices. revenues and is a way of distributing the resource rent among the general population. The projected rent in the low case scenario is presented m figure 5.1 Scenarioassumptionsfor nonrenewableresources (oil andgas). pbhcconumpion Consumption Historically. 1995-2015-high-case scenario am_ -- The public sector has the dominant role in allocating the oil and gas rent. while they are constant in the low scenario. The projected oil and gas rent does not fall below 1995 levels until after year 18. The impact on future iode d l on the use of the oil and gas rent today. whether crude or refined products. The gas rent is fuel oil price minus long-run marginal cost of production (see annex to this 3. Most of central government revenues from the oil and gas sector are from taxation of and profit transfer from EGPC. the oil and gas rent peaks at about $ 400 million higher than the 1995 level after 6 years.6 Egypt's projected oil and gas revenueover 20 years.1. the magnitude of additional discoveries has a bearing on production levels over the next 20 years as can be seen in table 5.6 8. keeping domestic petroleum product prices below economic value implies a loss of goverunment r ' (percentage/year) the next few years. and third. TABLE 5.4 1.0 =-=-=------ public sector companies or invested by these companies in gas transmission and distribution infrastructure. the maiin factors that affect the level of goverment revenues are magnitude of oil and gas production. The decline in oil and gas rent coiild have negative inmpacts on future income could The n vpact on future income s Egypt. Source: WorldBankstaffestimates.0 Year 1-15 Year16-20 chapter). peaking at $ 800 million higher than the level of rent in 1995.5percent. real oil prices increase at an annual rate of 1. Most of the rent is made available to the central government budget.0 0. Corporation (EGPC).5 0 0. investment in income generating financial assetsthat is.

For petroleum products. Not implicit in the sense that they are not budgetary but only did this benefit larger consumers more. In terms of combined subsidies to the four o____ ___ E_____E _ products : in 1991 and 1995. and most Eastern European countries (and all Western European countries). Increased gas consumption. although they have in real terms deteriorated significandy since 1993. The 44 expenditures for current consumption does not provide a basis for sustainable economic growth if it is accompanied by underinvestment in the economy's productive capacity in other sectors. and international spot prices plus allowances for distribution cost (see annex to this chapter). while subsidies to fuel oil only declined by 13 percent. to Source: World Bank estimates. these subsidies can be considered a tax on 1991 and 1995. for instance.050 million in 1995. the estimate is based on bulk prices and consumption of gas. Morocco. Implicit subsidies. but it has also resulted m nevertheless. However. unevenly.-234507891011121314151 =7181~ delivery price increases in Egypt. The subsidies are estimated at economic allocation of investment resources.050 520 2. it should be significantly higher than the current level. and internationalfuel oil prices (FOB) as a proxy for the economic value of gas. 45 percent and 24 percent of the estimated oil rent in Moreover. prevail as a consequence of price regulation.respectively. had the effect of significantly increasing the ueecconsumption implicit subsidies to gas between 1991 to 1995. Estimatedimplicit subsidies to major petroleum products and gas (millions $) of Fuel Gasoline Gasoil/diesel Kerosene Heavyfuel oil 1991 -50 725 430 1995 -295 235 110 450 1. INVESTMENTS.____ __ and kerosene declined substantially from 1991 to 1995. and amounted to $2. if the gasoline retail price were to reflect the cost of road infrastructure and social cost of traffic accidents and pollution. the estimates are based on petroleum product prices and consumption in Egypt. and the implicit tax has increased substantially as a result of domestic price increases. which occurred despite an increase in bulk gas prices of more than 60 percent. Distribution cost from refinery to retail outlet or delivery used in the estimate is one-half the costs in the United Kingdom and Germany. the relatively wealthier. to diesel __ . Invesfment Petroleum product retail/deliveryprices and gas prices have been adjusted upwards substantially The use of the oil and gas rent on public since 1990. 1995-2015-low-case scenario caistt US 150-.7 Egypt's projected andgasrevenue oil over20 years.2. in total dollar terms. staff rate. EGYPTIN THE GLOBALEcoNoMy: STRATEGIC CHOICESFOR SAVINGS. The only major product with an implicit tax (in negatives) is gasoline. Tunisia. about s ] N reduction can be attributed 65 percent of the retail or -1200D- to nominal -1500-2 Plower _ -25D . -000 gasoline price in Egypt remains substantially below the price prevailing in.FIGURE 5. 27 percent to a decline in international spot prices. in the form of indirect consumption Although the estimated subsidies are indirect or subsidies (prices lower than opportunity cost). the subsidies repTesent a large budexcessive consumption.000 a4 2e000 atual Total tl( Soutre:lWored Bankstaff estimates.000 million in 1991 and $ 1. 11 percent to domestic consumption and -3 percent to the slight nominal depreciation in the foreign exchange 1 2 3 4 5 6 7 8 910111213141S1617181920 Yeas Note:Rentis relative 1995level. Such underinvestment could be drawing resources from areas such as health and education (to increase human capital) or basic infrastructure (to support and increase efficiency of economic activities) where public sector contributionis needed. that is. waste. Estimated subsidies for major petroleum products and gas are presented in table 5. AND LONG-TERMGROWTH . and inefficient getary revenue loss. the future generation as the oil and gas reserves that would be available are being diminished. For gas.

and constant real prices of crude oil and fuel oil. Indirectly.8. Oil and gas fund An alternative. Infrastructure: developing to in Report 1994(retums transport 1983-92)presented WorldDevelopment highways. as envisage(d in the low case scenario presented in figure 5. Egypt has taken a step in the right direction. Return to education clearly depends on more than education expenditure. Returns to energy subsidies are estimates for Egypt in 1995. but still has further to go. Returns to education are cross-country estimates. and can be greatly affected by variables in quality of education and by TABLE 5. are for projects averages airports. ports. The purpose of the fund is also investmnent and development of altemative ____ 500 0 *-ll. that is. Still to be resolved.1 to Energy Education Primary Secondary Higher 1 o2 11 18 to 10to 12 18to21 13to17 infrastructure Transport Irnigation drainage and Psacharopoulos 1994 estimate Egyptin 1995. Egypt's fund from oil and gas revenues stood at about LE 5. These rates of return can only serve as indicative for Egypt. and how much should be placed in the fund each year? The latter depends largely on three parameters. are two questions: how large would such a fund have to be if it is to generate an income equivalent to the rent lost through the reduction of oil and gas production revenues. The fund increased from LE 0. the future price of oil and value of gas. or part of it. labor market policies. A substantial degree of uncertainty is associated with the first two parameters.andrailroads).8 Annualincremental investmentover 20 years to compensate for decline in rent in low-case scenario Constant US$m 2500 2000 __1500 __ - ____ 'moo _ _ _ - ---- revenue stabilization furtd in the event of declining intemational oil prices. and the rate ot return on the financial assets. They are based on estimated subsidies and their efficiency costs in leading to higher energy consumption.Education: for Source:Energy: regions of across averages anddifferences for reflectsestimated (the range World Bank projects (1974-82 and countres). a range of rates of return for alternative uses of government revenues-resource rent is presented in table 5. The of bonds.8 billion in 1989/90 to LE 3. In doing so.8 billion in 1990/91 and has increased modestly in each succeeding year. in financial assets to compensate for the depletion of income generating oil and gas.3. This assumes new oil discoveries of 20 percent above known reserves to be added to current reserves.1 billion ($ 1.a* __ | i 1 2 3 4 s 6 7 8 9 1011 121314151617181920 energies to reduce domestic dependence on consumption of fossil fuels. As such it could DEPLETION SAVINGS AND NATURAL RESOURcE Years estimates. the annual oil and gas production to the year of depletion.To illustrate the possible scope of such losses. The low case scenario is used to estimate the annual contribution to the fund. The real rate of return on the financial assets of the fund is assumed to be 4 percent. Many oil and gas producing countries have established such funds. Annual contributions to the fund are FIGURE 5. World Bankstaff source: 45 . Incremental annual investment would start in year 6 to meet rent decline from year 9. already adopted by Egypt. Similarly. use of the oil and gas rent. The estimated annual incremental investrnent to yield an income (incremental GDP) equivalent to the amnual rent decline is based on an incremental capital-output ratio of four and a straight line depreciationrate of 10 percent. is raised through the issuance fund primarily held by EGPC.n oil and gas rents could be for by higher private sector compensated investment.5 -7. return to infrastructure would depend on factors such as the level and quality of current infrastructure. or supplementary.3 rates of returnon publicsubsidies Illustrative (percentage) Rate return of Subsidy -5. An eventual decline i. is to invest the rent. The fund serves as an oil cushion a decline in future oil and gas rent. the fund also serves as a transfer of oil rent from the present to the future. however. returns to infrastructure are averages for World Bank projects during 197492.5 billion) in fiscal year 1995/96.

or 24 percent of the resource rent.AND LONG-TERMGROWTH . rising to $2 billion a year (above current levels) by the year 2014.5 percent to -7. and amount to two-thirds of the projected annual oil and gas rent in the period before depletion begins. Constant $m US 4000 3500 3000 2000 - -- -_ 1000 500 0>-- _ ----4 S 6 7 ----!-. well spent investments in education and priority basic infrastructure could yield a return on the order of 15-20 percent. and oil and petroleum product exports at about 50 percent of total merchandise exports. Estimated implicit subsidies to petroleum products and gas stood at more than $ 1 billion in 1995. Although declines in oil and gas rent may be avoided during the next 6 years.4 billion. INVESTMENTS. In this case. while the value of gas is approximated by the price of heavy fuel oil (FOB). and health improvements seem like viable alternatives to the anticipated future decline of oil and gas rent. alternative uses for oil and gas revenues during this period deserve serious consideration. In contrast. The "low" scenario could become the reality-a decline in oil resources toward human and infrastructure investment. would compensate for the anticipated decline in resource rent from oil and gas. but have declined in real terms since 1993. A contribution at that level would obviously have significant negative impact on current income.presented in figure 5.1 percent. Notes 1. heavy fuel and gas being close substitutes. the combined oil and gas rent would fall below the 1995 level in year 2004 and thereafter decline rapidly to only 40 percent of the current level in year 2015.9. Petroleum exports (crude and products) and merchandise export figures do not include exports by international oil production partners. (low-case scenario) FIGURE 5. quality education. 2. value of oil and gas less production cost and normal return on investment-is estimated at about $4. Two scenarios of projected oil and gas rent have been envisaged. 46 EGYPT IN THE GLOBALECONOMY: STRATEGIC CHOICESFOR SAVINGS. or 8 percent of GDP. This can be achieved by reducing the implicit energy product subsidies that result in more rapid depletion of nonrenewable resources and low resource efficiency.9 production of 7.5 percent a year from year 2002. The resource rent-that is.i 1- __ ___ X- -4---1 1 2 3 8 9 10 11 12 13 14 15 16 17 18 19 20 Years Source: Bank staff estimates based on official statistics. The level of future oil and gas production and consumption could have significant bearings on future output growth. AnnURE5. Estimates of the efficiency cost of energy subsidies in Egypt in 1995 suggest that energy subsidies have a rate of return to the economy of -5. Incremental private sector investments. Fostering private investment already forms part of Egypt's growth strategy. contributionsto Egyptianoilrevenuesince Annual contributions Egyptian revenue to oil stabilization from1995 fund. Egypt could maintain its income generating assets by directing Summary conclusion and Nonrenewable resources account for importantt parts of the economy with oil and gas production at 10 percent of GDP. Petroleum product and natural gas prices have been raised significantly 1990. Fostering private sector investment and investing in priority infrastructure. The policy implication is clear. The economic value of oil is the price of Egypt's crude oil.

08 July-August -2.2 -2.2. heavy Calculation of oil and gas rent Source: Energy PricesandTaxes. The Suez Blend pricing formula with differentials during 1992-95 are presented in table 5A. The other Egyptian crudes were tied to the Suez Blend. The economic value of the natural gas is the international high sulphur heavy fuel oil price multiplied by the number of tons of oil equivalent of gas TABLE 5A.8 -3. The petroleum product replaced is predominantly heavy fuel oil. and the price was tied through price diffe:rentials to the Dated Brent and the Iranian Heavy crude by a weighting formula.5 percent (19 percent).2 -1.1 Pricesof Egyptian crudes.54 -3. i. The o 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 Years international spot price of high sulphur average fuel oil is presented in figure 5A.95 -1. the Suez Blend served as a reference crude.03 -2.5 -0.4 -3.18 -3. Ras al-Bihar about 14 percent (11.0to-0. In fact.1992-95 (differentials relative crudes weighting to in formula: $/bbl) Weiht $ 3.5 -0.65 Egyptian crude oil prices The Egyptian crude oil prices have traditionally been set on the basis of a formula with weighted average differentials to selected internationally traded crudes.65 (more expensive).e.5 0. and Belayim about 13. production agreements with international oil companies in Egypt set the price of natural gas received by the oil companies relative to the international annual __ __ market price of heavy fuel oil. 47 .1996 (average differentials relative to Dated Brent: $/bbl) Crude Firstquarter -1.6 -1.18 -2.00 Second quarter -1.5 percent).36 -2. OECD.45 -1. The formula was simplified in January 1996 with export crude prices set relative to the Dated Brent. Production of Suez Blend crude was about 32 percent of total production in 1993 (against about 32 percent in 1992).2to-1. Ras Gharib about 20 percent (22. FIGURE 5A. -35 __ _ .85) to + 0.5 Suez Blend 20 parnty panty parnty parity Crude Source: Oiland Gas Arab (various issues 1992-95).85 (in $ per barrel.1 SuezBlend Rasal-Bihar ZeitBay Belayim -2. The price of heavy fuel can therefore serve as a reasonable Priceof Dated Brent MOWb. In the pricing formula prior to 1996.44. cheaper by The annual realized oil and gas rent is the economic value of annual oil and gas production._ = 30 _ _ _ _ _ 25_- J _ 2__ 10 I proxy for the economic value of natural gas. The average differentials of major Egyptian crudes to the Dated Brent are presented in table 5A. The price differentials of the other Egyptian crudes relative to the Suez Blend during 1992-95 were in the range of -3.1 for historic annual average price of Dated Brent). 1996 Economicvalueof naturalgas Natural gas produced in Egypt is consumed domestically and there are so far no pipelnes for export. (percent) 1992 1993 1994 1995 Dated Brent 60 -2.A nnex " TABLE5A.2 Priceof Suez Blend.03 -1.63 -1.9 to to to Iranian Heavy 20 -0.60 -1.13 -3. An export parity price is therefore not available.03 Gas (various issues).33 RasBudran Ras Ghab Source: Calculations basedonmonthly differentials published Arab Oiland in -3.1.7 -0.33 -0.5 percent).2. The differentials are reviewed monthly. less costs of production and normal return on capital. Ras Budran about 19 percent (12 percent). of these Dated Brent was the most important (see figure 5A. Natural gas consumed domestically is largely replacing the use of petroleum products in power plants and industry. The economic value of the oil is the Egyptian crude oil prices multiplied by the quantity of the respective crude production volumes.

1 37.000 barrels per day.5 millon tons. 1993/94 ($per1000 meters) cubic Gasfields Existing fields Existng discoveries Basecase 11.3 Mostlikelycase 11.3. the costs have been deflated. Proven reserves have been relatively constant for several years. Thus. Petrobel'sproduction at a little over 12 million tons. However. the oil rent is estimated at 67-70 percent of the economic value of crude production. 48 Unproven reserves 40. Gupco. In contrast. equivalent to about 10 to 11 years worth of production at current annual production levels of about 45 million tons. .signi to sustain es toal annual productle However. and Egypt's policy is to continue gas production at or about this rate of increase. Thus. accounting for slightly more than 80 percent production capacity of 35. or about 3. although this may understate the rent in periods of high oil prices and overstate the rent in the 1970s. Thecosts are summarized in table 5A. or almost 600 billion cubic meters. 25 20 15- _ _ - _ _ ---------------------_--- - A91 92 93 94 95 10 s 0 75 76 77 78 -79 80 81 82 83 84 85 86 87 88 89 90 Year Soure EnergPrices Taxes. British Gas calculated long-run marginal costs for EGPC m 1994. SIX were discovered in the 1980s. The long.3 Th long run marginal cost of existing fields have been applied to calculate the gas rent of current and historic gas production. implying that recent discoveries have replaced annual production.Figures for the cost and normal return on capital in use for oil production are not readily available. and OECD since the mid-lo 80si while Petrobel's output has been inceteid-i The companies have recently intensified increasing.Gupco's annual oil production stood at somewhat more than 20 million tons. In 1993. AND GROWTH CHOICES SAVINGS. the oil companies' FIGURE 5A. ThescowhileePetaober'seoutputnhassbeen efforts to increase recovery rates from existing fields . and Suco's production at almost 4. The most recent years are more relevant for assessing both the role of the rent in the Egyptian economy today and future policy associated with the rent. For historic years. and Suco are the three largest operators in Egypt. substantial discoveries will have to be made to sustain annual production at about 44 to 46 million tons. Gas production has increased at an annual rate of 8 to 9 percent in the 1990s. Seven fields account for about 80 percent of total oil production.1 38.4 billion barrels as of January 1.5 40. less emphasis has therefore been placed on an accurate calculation of the rent in the earlier period of the 1970s and 1980s. annual production in 1995 was a little more than 10 million tons. The aggregate annual production share has been in the neighborhood of 30-33 percent in the five-year period between 1990 and 94. output from existing fields is projected to decline over the coming years. These measures contribute . If annual production is increased at an annual rate of 8 percent until it reaches about 30 billion cubic meters. The coss are smmarize in tabe A. since most of Egyptian oil production is under production sharing contracts with international oil companies. p tio fom new field discoveries tends to be relatively low. Four fields started production in 1994 with a total Oil andgasreservesandproduction Proven oil reserves in Egypt stood at about 3. lft and water injection) and by developing new extensions to their fields. LONG-TERM ECONOMY: STRATEGIC EGYPT THEGLOBAL IN .9 percent of total annual production from all productionfields.7 of total oil production. To obtain figures for natural gas. Thus.3 Source:Calculations EGPC/Brtish by Gas. 1995. However. Petrobel. FOR INVESTMENTS. the rent calculation has been based on 70 percent of the crude oil value. Of 23 principal oil fields in Egypt. the reserves of almost 600 billion cubic meters will last TABLE 53 marginal cost of gas explorationand Long-run production. Natural gas reserves were estimated at about 21 trillion cubic feet in 1995. and then levels off at around 33 billion cubic meters.2 Heavyfuel oil price VW 30 production shares serve as a good proxy for the cost and return on capital.

5 Estimated annualdeadweightloss in Egypt (1995) Elasticity Deadweight loss ofdemand (US$ million) -0.7 1991 May 0. but have not been adjusted since 1993.4 with a linear approximation of the energy demand fucto inter. ps is the subsidized energy price (LE/ton). All prices were substantially increased from 1990 to 1993.00 0. World staff Deadweight loss (percent estmated of subsidy) 5.27 100 94 1992 December 1.30 0.5 7. price regulations have kept retail prices below economic value or opportunity cost for all major products except gasoline.70 0. users of energy will tend to reduce energy consumption as long as energy efficiency improvements and conservation cost less than the increase in thLe energy price.25 0.Qe)/2 (2) Efficiencycostof energysubsidies Historic energy subsidies in developing countries have been substantial for many reasons.30 0.90 0. When a subsidy is removed. and it is unlikely that no more discoveries are madle.1 8.80 0. and e (<0) is the price elasticity of energy demand.10 0. Thus.20 0.36 130 122. DWL= (pp)(Qs .90 0. TABLE5A. Petroleum product end-user prices in Egypt Product Premium gasoline Regular gasoline Kerosene Gas oil Gas (forpower) oil Diesel oil Fuel oil Gas (bulk) Unit LE/Atr LE/Atr LE/ltr LE/ltr LE/ltr LE/ltr LE/ton LE/th n9 1990 May 0. estimates of edeadwe os in 1995 are prestinatable the deadweight loss in 1995 are presented in table 5A. A methodology often used to assess the annual efficiency cost of subsidies is the estimation of deadweight loss.for at least 20 more years.30 0.15 0.30 0.5 Source: As published various in ministerial decrees. and the cost of saving energy.vnpierne Based on the consumption of major petroleum ducts one kosene.55 0. Policy makers' arguments have included protection of the poor and of infant industries.00 0.4 75 0.10 0. is the deadweight loss (or resource waste) in the presence of a subsidy.7 1990 September 0.09 50 46.5 for vanious assumption of the price elasticity of d femand.30 0. domestic prices. of diesel.20 0. The annual deadweight estimated in two steps: loss (DWL) can be Petroleum productand gassubsidies Retail (end-user) prices in Egypt for major petroleum products and gas bulk prices are presented in table 5A. However.5 92 Source: Bank estimates. the difference between the economic value (opportunity cost) of energy saved.10 0.80 0. ue oil) and natural gas. and estimated economc value of the products and gas.40 0. TABLE 5A.25 0. where Qe is energy consumption (tons) in the absence of subsidy.7 The DWL as a percentage of estimated subsidies can be seen as the (negative) economic rate of return to providing energy subsidies.5 1993 July 1.35 0.45 0.3 58 -0.27 130 122.40 0.15 0.30 0.resutin in xcesive use eergyeffiienty. implying that implicit subsidies prevail. NATURAL RESOURCE DEPLETION SAVINGS AND 49 .70 0.90 0.00 0.18 80 75 1992 January 0.60 0.09 50 46.10 0. pe is the price at economic value of energy (LE/ton).55 0. Qsis energy consumption (tons) in the presence of subsidy.50 0. Although budgetary subsidies to petroleum products are almost nil.35 0. The deadweight loss can be seen to represent the resource waste in the economy.4. subsidized energy prices (direct budgetary transfers and price regulations) provide reduced incentive to use nerg effcietly.27 80 75 1992 June 1. reultig inexcesive consumption compared with the level that would prevail if prices reflected the opportunity cost of energy.

II .

could Egypt increase public sector savings? Furthermore. In addition. which has been shown to contribute positively to growth (ILevine Renelt 1993). privatization could contribute to saving indirectly by boosting capital market development. and begin a process of catching up with the fast-growing economies. and rapid growth of the working-age population (Shi and Yang 1996)-how could private savings be encouraged? Thescope for further expenditure reductions is Increased savings lfrom privatization and publicenterprisereform It is often thought that countries like Egypt are unable to compete in a more globalized world because they are saddled with large. can help jump-start the growth process. An important question in this context is: how is it possible to raise saving from reform of PEs. privatization could stimulate saving indirectly. Because the potential gains in saving depend on the initial conditions of the PE sector (including its level of efficiencyand size). Higher productivity. inefficient PE sectors. which may not occur without privatization. The fact that the gains from reforms. and by how much. Egypt is one of those countries. Privatization could increase savings. telecommunications. and growth. Beyond these first-round effects.and exploringthe roots of the problem.we start by measuring the past performance of the PE sector. and fiscal revenues remain volatile (chapter 3). limited. in turn. of pension funds). power. especially in terms of savings. 51 . Finally.Chapter 6 Increasing long-term savings to build the basis for growth Egypt has a golden opportunityto catch up with fast growing economies by shifting public enterprisesto pnivate hands. along with other reforms (for example. with favorable effects on public saving (Sachs 1996). World Bank 1995). The irony is that the same countries can be said to have an opportunity to gain rapid productivity growth by shifting the assets of PEs to more efficient use. can be substantial suggests that some countries have a real opportunity to break the vicious circle. privatization could attract savings from abroad. this could lead to a reduction in the size of government through lower taxation. which can either be consumed or saved. As financial sector reforms increase household saving. generates more resources. and what is the magnitude of the potential increase in savings from privatization? The methodology used in addressing these questions is based on comparing the saving from the PE sector under continued public ownership and its saving under the counterfactual scenario of privatization and 2 commercialization. privatization in life insurance and pension reform together couldpromote private saving through developmentof the capitalmarket. given the favorable demographic trend in Egypt-that is. investment. For example. This typically happens when specialized multinational firms buy such enterprises as power and telecommunications. privatization. a stable elderly population. thereby triggeringpublic and corporatesaving. if the proceeds from sales are used to retire public debt. and The positive link between privatization and saving has important implications for countries keen to grow fast but unable to wait for savings to accumulate from economic growth. thereby creating a virtuous circle of saving.1 Another example relates to the favorable effect of privatization on the competitiveness of industries if it were to lower the cost of producing intermediate goods and services (for example. How. To such countries. in part because the transfer of ownership to the private sector is associated with higher productivity (Galal and others 1994. services).

the PEs in Egypt have 'oeen self-sufficient.1 Of course.31.1987188-93194 MVi. and their fixed capital formation. telecommunications. the gap for the PE sector in Egypt averaged -2 percent of GDP over the period 1987/88 to 1993/94. v^ 8 #deteriorated ' . saving as a percentage of GDP has between the beginning and the end of the period. the improvement in the S-I gap of the PE sector in Egypt came primarily from a reduction in capital expenditures. -. INVESTMENTS. power. The S-I gap reversed from -7. FIGURE 6.1 - --R-----3g -i-* * - ' a.. .5 . The reasons for the deterioration in saving are low rates of return on capital and low productivity. but the few missing PEs. foreign borrowing. The banks were the second major contributor to PEs. Capital expenditures were cut sharply twice (in 1988/89 and 1991/92).4). domestic saving. Since then. before transfers to or from the government. and never recovered since. i 000 _ - - - Source: Calculated fromCAPMAS data (varousissues). known as the "economic authorities" in Egypt.4 percent for 46 developing countries (figure 6. The shift of financing from the government budget to the banking sector could pose problems. -3 8 Egypt " .-. but the Egyptian PEs did better over time. and this contribution increased in recent years to partially offset the reduction in budgetary transfers dictated by tighter fiscal policies. are relatively important ones. or a mix of all three. and the railway. their ope surplu ree to apd was operating surplus relahve to capia employed was 52 EGYPTIN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS. Saving-investment gap as a percentage of GDP in Egypt and 46 developingcountries. given that banks are also publicly owned.5 Between 1986/87 and 1993/94. rather than from an increase in saving (figure 6.4 This _ gap is notably higher than the average of 0. given that previous analysis has shown that the economic authorities tend to perform less well than other PEs on average (World Bank 1987). although the budget's contribution fell dramatically in recent years. but they made only modest rates of return on capital (figure 6.2. 1987-93 Perce-tof GDP 2 1 46 devloping Cowits .. For the sample analyzed. Current surplus is defined as operating revenues minus operating expenditures. As can be seen from figure 6. generating most of tie resources they needed for operation and expansion. 1- . 1 . the way this gap is reduced matters.' ° -. AND LONG-TERM GROWTH . While a smaller PE S-I gap is desirable because i frees sourcer tE mor producive priate it frees resources for the more productive private sector. and include such large entities as the Suez Canal.The PE saving-investnentgap and its roots Availability of consolidated accounts for the entire PE sector in Egypt limited the analysis below to 356 enterprises. Unfortunately.1). -0-ou _ _ _-_ _. Egypt: computed from CAPMAS data (various issues). whatever gap Egypt's PEs accumulated in the past had to come from elsewhere in the economy: the government budget. At the same time. the government clearly carried the bulk of the burden. The bias in the sample favors PEs. plus net nonoperating income before taxes and dividends.3). this means that commercial criteria may not have been followed in allocating these funds. 3 These enterprises operate in almost all branches of the industrial sector.3 percent of GDP in 1987/88 to a surplus during 1991/92-1993/94.' _____________ ~ j__-~ Source: Developing countries: World Bank (1995). " -000 1 2000 - 1 -- > - .2 Egyptiansaving-investment and its sources of gap finance. Egyptian PEs were not net losers on average. The PE saving-investment (S-I) gap is defined as the difference between the PEs' current surplus. of LE ___ _ . FIGURE 6.

the performance of the sector lags significantly behind those of such successful reformers as Korea. the government has also made substantial progress. Profit-. the government has attempted to address the two causes of the problem of PEs in Egypt.9 percent._ _ _ I Cl O 0 £ 0 1200 t data issues) from Source:Calculated CAPMAS (various SAVINGS BUILDTHEBASISFORGROWTH TO INCREASING LONG-TERM Oflice. the government has sold stakes in 39 companies (figure 6. gap P. LE Notweiafing l~~~amo 11 SpliS 40+0 E ~ 0 o 6j ~ -0 ~ e ( -- 8 _. As for commercialization.1994 September _. a process was initiated a few years ago. along with the partial sale of 21 enterprises on the stock market.5 11. but the nature of privatization changed in favor of the sale of majority stake. and picked up more marketconditions. of 1986187-93194 Percat 14_xd _ of in Proceeds from privatization Law203companies 1996 to Egypt.3 1987188-93194 Saving-investment of PEsin Egypt. Productivity is difficult to measure for the entire PE sector. net of taxes and subsidies to net worth reflect an average return below the deposit rate over the last few years. the private sector acquired a majority of the shares in 18 of these (4 acquired by anchor investors and the remaining 14 sold on the stock market). "'.-ja.-St To be sure." __ ~and-------.nt GOP r0 _ - _ lPEs average performer. in some cases to anchor investors. So far.5). Moreover. ! Source: Calculated from CAPMAS data (various issues).4 in Financialperformance publicenterprises Egypt. and Mexico. The total proceeds from sales to date are .. Finally. It incorporated PEs under Law 203 and provided a framework in wvhich a legal distinction has been rnade between FIGURE 6. In addition.5 percent during the period. by Enterprise Source: From dataprovided Public 53 . which is relatively low given that the surplus represents the returns to owners as well as lenders.p rD .Not only did the proceeds from sales increase in the first nine months of 1996. the government sold a majority of the shares in 11 comparnles to employees.5. the rates of return on revalued capital only averaged close to 5. The roots of the modest performance data of in general are relatively well known: o The government has overextended itself in commercial areas not suited for public ownership..FIGURE 6.' .. in part because no meaningful composite price indices exist for outputs and inputs. a comparison between real per unit variable cost and operating surplus to sales of the PE sector in Egypt and a sample of eight countries indicates that thie PE sector in Egypt is an FIGURE 6. With respect to privatization.ust below$ 1 billion. However. steam in 1996. * Managers of PEs face little incentive to behave efficiently or to respond to consumer tastes 8 e 4 N_ _ !: _ - ~ E -> ° r-----° *2 -47 .. Chile.

the gains from privatization (2.1 percent of GDP) are much more substantial than from commercialization (0.2 TABLE Estimated increases in savings from reforming PEs.095 privatization. Table 6. Notwithstanding the progress on privatization and commercialization.4 of privatization. Competition has been enhanced by opening up the economy and allowing the private sector to participate in many sectors previously reserved for PEs. Simulation results. rather than on the budgetary impact 50percent 50ppercent commercialization 140. privatization and commercialization of the sample of PEs analyzed are expected to bring about additional savings to Egypt to a magnitude of 2. INVESTMENTS.6 As argued at the outset. For reasons explained above.9 Total 2. the emphasis is 89.751 7. The holding companies are proving to be less than keen on privatization.1).4 2. data from Source:Calculated CAPMAS (various 2. given that the FE sample analyzed only represents about a third of the PE sector in Egypt.1 0. these additional savings could come from behavioral changes at the firm level.153 -0.4 percent of GDP (table 6.879 priatization 50 percent epai 2. the addition to savings could be much more. More significanty perhaps.1 centered on the addition to savings as a result of 42.TABLE 6.967 45. with limited progress on measures to improve saving.937 -9. how much additional savings will of (millions LE) of1995 Type reform of such reforms bring about? 50percent In answering this question.2 shows the distribution of these gains between the two of ownership and management responsibilities.1).967 0 59. success in reducing the relative size of the sector to restore a healthy balance between the public and private sectors in the economy remains to be seen. they could be as high as 7 percent of GDP. budget transfers to PEs have been reduced.937 50. The next section elaborates the methodology followed to estimate the addition to savings. In short. some PEs still receive constraintwas imposed subsidies.4 -0. This is about the size of the gap Egypt needs to bridge if its ratio to GDP is to increase saving/investment sufficiently to match the fast-growing economies. unless returns on the gains in savings diminish unexpectedly.1 Estimated reforming increases in savings PEs: total from Potential gains in savings from reforms: a simulation Assuming that the government undertakes the in increase increase Annual NPV profits Total of savings necessary reforms to improve the performance of taxes in savings before (percent1995GDP) the PE sector.0 2. 6.153 issues). the sharp cut in investment and the relatively low rates of return on capital suggest that there is some room for squeezing more savings from reforming the PE sector.216 commercialization132. such as improved productivity and increased investment.9 0. by govemment and private sector in Total increase savings of (millions1995LE) sector Private Govemment in Annual increase savings GDP) of (percent 1995 Total Govemment Typeof reform prvatzafion 50percent 50percentcommercializabon and percent pnvatzation 50 commercialization 50percent -17. despite the improvement in the PE S-I gap in recent years.4 per-cent of GDP).9 0. On the commercialization front. Based on the assumptions (box 6.216 7. data (various from Source:Calculated CAPMAS 54 AND LONG-TERMGROWTH EGYPTIN THE GLOBALECONOMY: STRATEGICCHOICESFOR SAVINGS.814 59.5 Private sector 2.4 issues). . The gains in savings from privatization and commercialization would be made by both the government and the private sector. 17 holding companies were formed with a view to in autonomy more managers giving decisionmaking. This means that what matters is whether or not privatization and commercialization generate additional resources that could be consumed or saved by the public or the private sector.Theihardbudget by cutting investment. In this context. Banks have not been prudent in lending to PEs. Finally. and the banking sector is being encouraged to lend to PEs on commercial grounds. as it diminishes their power. Indeed.032 50.

This is done here.4 2. it is useful not only to separate the effect of each assumption from the effect of the other.5. representing another extreme counterfactual. and can be used by the reader to accept or reject anv of the assumptions and still obtain useful results. the gains to the country are greater when both behavioral differerncesare present because of synergies.cenario (100 one commercializaticn). Second.300 6.153 19. This not only suggests that the gains from investment in the course of privatization are significant. a larger stock of resources is used more efficiently. or the interaction between productivity and investment.0 percent for privatization) and various investment possibilities (15. various productivity diffierentials (1. 10. future.4 THEBASIS GROWTH FOR LONG-TERM SAVINGS BUILD TO INCREASING 55 .1 0. reforms of the sample of PEs investigated here can produce gains in savings of 1. the results are least sensitive to variations in the discount rate. costsarethe resources The benefits. assuming that commercialization leadto an improvement productivity will in of by 1 percent per annum. and intermediate the ip Source: Galal(1996). are The No-Reform scenario. and presented in table 6. Given that the results depend on the assumptions made.3 0.950 42. representing effect on saving is positive (2. First. but also that care must be taken to ensure that investment will be forthcoming.3 extreme counterfactualscenario (100 percent scenario.including costs of labor. They are TABLE6. capital. accompanied no change in The result is an NPV of the sector. 20 and 25 percent of net fixed assets). however. costs and investment according to their historicaltrends. in which the performanceof the sector is also projected into the future. and as high as 4. The design of privatization transactions should commit the new owners to an Estimated increases in savings from reforming PEs: origin of the change Total increasesavings in (millions 1995 of LE) Productivity Additional improvement investmentSynergies Total 11. three scenarios first constructed. and investmentwill increaseannually 20 percent by relative fixedoperating to assets.950 50. Two broad conclusions can be drawn from table 6. Sensihivity analysis.3 percent of GDP. The gains are split almost evenly between origin.6 1.1 0. and most sensitive to variations in investment. NPVsare calculated discounting the by the streani of benefits antdhe ofer the reus tofthembuyers osum estimateby the usedto generate andsellers.966 23.in which the currentperformanceof the sector is projectedinto the future by extrapolatingthe sector's revenues.300 Annual increasesavings in (percentage of 1995 GDP) Productvity Additional improvementinvestment Synergies 0. but also to explore the sensitivity of the results to these assumptions. investmentbehavior. thus on savings.0 0.1 0. and full commercialization. table 6. scenario).3 shows the gains in savimgs from privatization and commercialization by origin. When both are present. For each of these scenarios.216 7. The BOX6.. and 12 percent).0 0. Profits beforetaxes are then discounted at 10 percentto obtainthe NPV underthe NoThe Privatization scenario. and 2.903 23. The table shows the results under two extreme scenarios: full privatization of the sample of PEs analyzed. and Reform scenario. In all instances. From the threeNPVs additin tosaving theserealistic assumption the making that the governmentwill sell the only half the sector and commercialize operationof the rest. the results are shown for various discount rates (8.3 1. The remaining issue is to explore the sensitivitv of the results to the key assumptions.4 1.0.2 percent of GDP at a minimum.4percent of GDP). investment and productivity.1 Methodology assumptions and The potential gains in savings from privatization and commercialization the PE sectorare obtainedby subtracting of the net present value (NPV) of profits before taxes under continued public ownership (or the factual scenario)from the NPV of profits(orthecounterfactual privatization and before taxes under ~~~~~~~~~~~~~~~commercializationTothisend. in whichthe performanceof The Commercialization the sector is projected into the . 1.The sameprocedure with respect to discounting is then applied as in the No-Reform scenario.937 6. The result is another NPV of the sector. but under the assumption that productivity will improve annually by 1.4.937 0 0 7. witlout taking into account the price to be paid by the private sector to the government for the purchase of 50 percent of PEs in the sample.0 Type reform of 50percentprivabzabon 50percent commercializaton 50percentprivatzabonand 50percent commerdalization Calculated CAPMAS (various from data issues). and there is a compounded effect on performance.4. Source: Total 2. Finally. The separation of the impact of each assumption has already been done. moderately sensitive to variations in productivity.5 percent. The projectionsare madefor all items in the incomestatementand balancesheet. More interestingly.them.

the public investment share of total investment in Egypt averaged about 68 percent. To the extent that pension reform and privatization programs increase household and corporate saving respectively. Sensitivity analysis (annual increase savings percentage GDP)a in as of Investmentb Typeof refomm 100 percent privatization Productvivtf 25 7. By way of comparison.8 2.8 0. the of in and in respectively.4 0. It also shows that a mandatory saving scheme is most likely to increase household saving.8 1.9 15 1.2 3. where maximize the gains to society. precious metals. and developing capital markets. LONG-TERM AND GROWTH . have a clear impact on the composition of savings. are Source: Calculated fromCAPMAS data (various issues). by favoring long-term financial assets (invested by financial institutions). attract private foreign savings. to conditions. equivalent to about 21 percent of gross domestic saving. and crowds out the private sector-during the period 1970-94. capital market development.7 8 4. over fixed assets such as real estate.5 percent. the SIS effectively works as a pay-as-you-go system. Increasessavings in include interaction changes productivity changes investment. capital market development has an impact on the level of private saving. Percentage net fixedassets. Annual growthrates of productivty under privatization. restructuring the insurance industry. The surplus from the SIS is invested via the National Investment Bank (NIB) -a governmentowned instituticn that finances primarily government projects. Econometric work for this report shows a negative correlation between private saving and government spending on social security as shares of GDP. of c.1 2 4. In addition. b.5 percent.5 1. Financial sector reforms to increase private saving Saving is affected in various ways by different financial policies and institutions. under certain TABLE 6. even though it is not clear whether sound contractual saving institutions lead to higher aggregate saving.5 percent of GDP.6 0. With well-developed contractual saving institutions. social protection and public finance. combined market capitalization in both stock exchanges was about 13 percent of GDP at end-1995. tax policies that are biased in favor of investment and against consumption could encourage saving by both households and the corporate sector. and accumulated reserves were 33 percent of GDP in mid-1995. such as the life insurance industry. Three policy areas that could increase the rate and improve the composition of private saving will be addressed in this section: reforming the pension system.8 0. The insurance industry also supports pension reform by providing specialized products and services such as annuities and life-disability insurance.1 100percent commercialization 0. FOR INVESTMENTS.5 percent and 1.5 4.investment program.8 2.3 and 1.4 0. Thus. appropriate.4 Discount rate 10 4. contributions bv employers and employees to the pension fund amounted to 3.3 1.2 2.8 0. Benefit payments and fiscal transfers (wage taxes and investment income) to the pension fund were 2.4 Thesocial insurance system The Egyptian social insurance system (SIS) has an important impact on several macroeconomic and welfare issues. Furthermore. There is increasing evidence that generous payas-you-go state pensions tend to depress household saving.4 50percent pnivatzabon 50percent commercializabon a. and land (invested by individuals). The national reserves of the SIS at the NIB represent public debt due in the future when the SIS starts incurring a deficit.4 4.3 percent of GDP in 1994/95. such as saving.9 2. The corresponding rates under commercialization 0. redistribution. capital markets.0 0. the contractual saving institutions. though the empirical evidence still appears unsettled.5 percent. 1 percent and 1.7 20 4.8 2. SIS inflows (including investment income) less outflows was 5. 56 EGYPT THEGLOBAL IN ECONOMY: STRATEGIC CHOICES SAVINGS. Access to cheap funds appears tc increase the propensity of governments to spend. In 1994/95. Finally. households and private scorporations are able to borrow long term (Poterba 1994).7 1 3. respectively (table 6.1 12 3.5).

8 57.5 3.9 1.5 2.6 36. Nonetheless.8 4. The SIS covers a high proportion of the work force.TABLE 6.2 36. The average total taxable wage in 1994/95 was LE 267 per month for civil service employees and LE 149 per month for noncivil service employees.9 1991/92 1992/93 1993/94 1994/95 3.4 8. including the OECD. and to the ratio of population over 60 to that aged 20-59 years (demographic dependency ratio). World Bankstaff estimates. basic wage was 42 percent of total taxable wage for civil service employees and 46 percent for noncivil service employees.6 gives some comparative public pension scheme and demographic indicators.2 2.5 37.7 Pensioners to population 60 over 84.5 2.5 1. the contribution rates are too high in TABLE 6. and the employer pays the remainder. INCREASING LONG-TERMSAVINGS BUILD THE BASIS FOR GROWTH TO 57 .3 2.0 18.3 Population 60 over to population 20-59 34.9 1.0 2.0 Annual surplus 5. far below the maximum taxable amounts.8 5. the Treasury 1 percent. In 1994/95.0 146.1 Sofurce: Staffcalculations ondatafrorm based Ministry SocialInsurance.3 23.7 31.9 38.5 6. For those covered under the main program (Law 79/47).4 Source:Staffcalculations based data provided Ministryof SocialAffairs.5 13. since no contribution is assessed on job exit indemnity. and 36 percent for government workers.5 22.0 13.6 4.3 41.3 3.Social security contributions must be paid on workers' basic and variable wages. .0 0.5 12.1 Pensioners tocontributors 39. total contribution rates 9 on basic wages are 41 percent for private sector employees.1 Transfers from Treasury 1.4 5. using mostrecentdata (population inpercentage) ratios Region OECD Latin America MiddleEastandNorthAfrca Asia Afrca Egypt (1995) Contributors to work force 93. and loss of earnings due to unemployment or illness. Table 6. of The saving effect of a mandatory scheme is therefore offset by increased government spending. Funded systems that strengthen the link between benefits and contributions (such as defined contribution plans) eliminate many of the clistortions of a pay-as-you-go system. On the other hand.which is out of line compared with other regions. on by OECD(1994). with a maximum taxable amount for each category of wages (LE 450 per month for basic and LE 500 per month for variable).3 4.4 4.5 3.0 27.0 3.6 4.1 1.1 30. this indicates a system that is quite generous or lax in its eligibility requirements.2 1.5 Accumulated surplus 38.a ratio of 146 percent . SIS provides penision benefits and insurance against disability.2 33. Workers contribute 14 percent.2 32.5 11.8 There are more pensioners than persons over the age of 60.5 Benefits 2.6 Comparative publicpensionschemesand demographic indicators. death.3 2. The ratio of pensioners to contributors (the system dependency ratio) is high relative to other developing countries.5 5. 39 percent for public enterprise employees. government borrowing becomes a transparent process.4 83.2 21.1 4. The contribution rates on variable wages are lower. 7 about 83 percent in 1994.9 31.3 1.5 1.1 2.6 3.1 5.1 3.0 30.6 4.3 24. The SIS reaches very high contribution rates on (basic) taxable wages relative to benefits.2 2.0 0.5 33.5 Social insurance systemindicators (percentage ofGDP) Year 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 Contributrion 5.3 29. Contributions.5 2.5 14. a truly fully-funded system that invests in financial instruments at market rates has the potential of developing financial markets -even if the system invests in government securities.

Redistribution occurs in two main areas.3 Investment income 11.9 Middle East and North Africa 2.7 Note:Regional numbers simple are averages sample of country data.5 14.7 provides the contribution rates for both basic and variable wages for different types of workers covered under Law 79/47 Eligibility criteria.9 5. For variable wages.2 Egypt1995 2. FOR INVESTMENTS.2 17. the benefits are higher than would be afforded by the contributions.7 pension for those with a certain number of years' contribution. TABLE6. The normal retirement age for Egypt (age 60 for both men and women. Source: OECD 1994andestimates WordBank by staff.2 35.3 19. the pensionable variable wage for a 30-year contribution period would only be 55 percent of real wages. 102 percent for civil service employees and 147 percent for noncivil service employees in 1995. within Law 79/47.0 7. The determination of the pension amount at retirement depends critically on the treatment of wage and price inflation. with the differential greater for noncivil service workers. Pensions on basic wages are fully adjusted. LONG-TERM AND GROWTH .8 68.e wage Total 36 34 31 Publicpensionspendingas sharesof most recentlypublished indicators (percentage) Share receipts of from Public pension Public pension Region spendingGDP to receipts GDP to OECD 9.1 19. The ratio of average monthly pensions to average covered monthly wages (replacement rate) indicates that social insurance provides monthly benefits that represent a high percentage of average taxable wages. since the basis used is the average wage during the covered period adjusted by an annual inflation factor of 2 percent. but is in line with many developing countries. which covers civil service employees and the formal sector. the method of computing for the pensionable amount is particularly sensitive to the inflation rate.2 9.7 Asia 1.4 Africa 0. At a 10 percent annual inflation rate.5 20. Table 6.0 16.6 63.0 0.0 2.relation to the benefits.3 45. Given increasingly productive life spans. Given the very low flat contributions by agricultural workers and farmers (currently LE 1 per month).8 61. Second. while those on variable wages are not. The eligibility criteria for retirement constitute a major variable in determining the financial viability of any defined benefit plan. under the major programs of Law 79/47) is lower than that of OECD countries (whose average retirement age is 64.4 1. Contribution for social rates insurance (percentage) Basic wage (up LE to 450/month) Program Worker Employer Govemment Prvate sector enterprises 14 26 1 Public enterprses sector 14 24 1 Governmentoffices 14 21 1 Source: dataprovided Ministry Social From by of Affairs.8 Total 41 39 36 Worker 11 11 11 (up LE to 500/month) Employer Govemment 24 1 22 1 19 f Variab. the replacement rates were 89 percent and 103 percent respectively. First.5 7.6 General revenues 35.1 13.4 ECA 8. the pension formula sets a minimum TABLE 6.1 Latin America 2.0 23.5 0.4 63.9years for women).8 4. Benefits.1 58 EGYPT THEGLOBAL IN ECONOMY: STRATEGIC CHOICES SAVINGS. Wage taxes 57. pensioners from the agricultural sector-about 45 percent of total pensioners in 1995-are provided the equivalent of minimum wages (LE 45 per month).3 24.4years for men and 62.1 77. many countries are improving the financial viability of their pension systems by raising the retirement age. In 1986. Inflation adjustments on pensions have been greater than the growth of average wages of contributors.

percent) in 1990/91 Social insurance fund Postal savings fund Investment certificates Bank's surplus Credit Others 67 2 11 14 4 2 1991/92 64 2 3 19 10 2 8. Among other things. NIB also financed the PEs. and general revenues.149. This represents a significant erosion in the real purchasing power of the reserves and a net subsidy to NIB. NIB's exposure to the PEs has gone down to almost zero.6 Total 6. investment income (fiscal transfers). As noted above. Currently.555.In addition. thus raising the hurdle rates for investment projects. Because the inflation adjustments on basic pensions approved by Parliament are financed from general revenues.4 1993/94 53 3 33 7 4 1 14. Financial conditions. Prior to 1987. over the past 10 years. INCREASING LONG-TERM SAVINGS BUILD THE BASISFOR GROWTH TO 59 .203. there is rno automatic indexation of benefit payments during retirement to protect the value of benefits from inflation. pensions on variable wages are not automatically indiexedor adjusted by the legislature. the SIS has been producing operating surplus (contributions less outlays) due to the high ratio of contributors to pensioners. interest rates charged to government projects and PEs were negative in real terms. Over the period 1987-96. NIB paid interest to SIS on the funds at 5 to 6 percent per year. but since the adoption of Law 203.3 1994195 45 3 29 17 4 2 20. interest rates paid NIBfunding sources percentage total as of (LEmillion. the purchasing power of pensions declined significantly. they would have increased to a figure 60 percent higher than the sum they reached in 1995. In the past. which is the current rate. This rate is higher than current bank term deposit rates (12 percent) but lower than interest on NIB investment certificates (17 percent). because funds available through the SIS were cheap. NIB is the effect of using pension funds to provides long-term financing to public investment* projects approved by the parliament. total receipts by the SIS come from three sources: wage taxes.During the period 1985-95. Thus.548. In the 1980s. and charges interest to recover operating costs. NIB raised the interest rate on incremental social security funds (including reinvested reserves) to 13 percent.2 Total 56 3 23 12 5 1 59. Egypt also has the biggest differential between public pension spending to GDP and public pension receipts to GDP.3 1992/93 67 2 23 1 7 1 9.365. because the government did not raise basic pensions regularly. However. This amounted to a negative real rate of return since the C:PIwas increasing by about 18 percent per year during the same period. with the increase in interest rates on social insurance funds to positive real rates since 1992. in addition to the adverse impact of inflation on the computation of the pensionable variable wage on which the initial pension benefits are based. However. providing a positive real return on incremental and reinvested funds. In July 1992. NIB is responsible for evaluating and financing the government investment program. Table 6.8 shows the shares of the different sources of financing for the SIS. annual basic pension adjustments were made to prevent the decline of basic pension benefits in real terms. the NIB has also increased interest rates on its lending.4 Source: From data provided National by Investment Bank. Average inflation during the period 1992-96 was about 10 percent. the legislaturemandated adjustments preserved the purchasing power of the basic pensions for all but three of the past 10 years. Funds are disbursed to various public sector entities. and economic agencies such as the public utilities. During the period 198090. service agencies such as hospitals and universities. However. In effect the reduction in value of reserves over the 10-year period between 1980 and 1990 is equivalent to more than seven years of (1995) benefit payments.9 retum. the resulting variable wage pensions are not protected from inflation during retirement. including central and local governments. operating surpluses of the insurance funds are invested by the SIS in the National Investment Bank.477. Had the insurance reserves been earning even a zero real TABLE 6.

With a policy objective increasing the share of private sector in total investment.727.1991-95 1990/91 1991/92 1992/93 1993/94 1994/95 Number Contributions 000) (LE Reservefund (LE 000) Coverage 330 256. Nearly all of the private pension plans operate on a defined benefit principle. while representing only 1. The number of private pension plans has been increasing significantly-as of June 30. but with an annual growth rate of more than 30 percent over a five-year period.10 provides data on the growth of private funds. have been growing by about 30 percent per year over a five-year period. Lack of professional investment management capacity.921 496. Private pension plans. although a recent decree forbids contributions by government organizations to these funds. As of June 1995. Figure 6.1 percent of GDP a year. there were 504 plans.717.9). In many countries.25 percent. Over the past 10 years. respectively. where the majority of the plans provide salary-related benefits in return for salaryrelated contributions. The SIS is the main source of funds for NIB.421 504 602. the role of the NIB and the utilization of SIS funds need to be reviewed. Social insurance funds (new and reinvested) accounted for 68 percent of the fund sources of NIB during the past five years. while deposits of postal savings funds contributed 3 percent (table 6.201 376 369. Investment certificates (10 years with 6-month coupons) issued to the public made up another 29 percent of funding sources. and are under the supervision of the Egyptian Insurance Supervision Authority (EISA). To complement the social insurance system.379.063 3.5 million.300. Private funds are covered by Law 54 (1975) and regulated by Decree No 78 (1977). about 33 percent of GDP.6 shows comparative returns for selected pension funds during the 1986. voluntary pension plans have emerged in Egypt. Private pension Growthof privatefunds.386 Souse: Egyptian Insurance Supervision Authority annual reports.662 1. SIS funds available for lending averaged 4.511 1.768 203.885 408 380. These plans are typically set up by employers on a defined benefit basis.10 governed by Act No. SIS reserves in NIB were LE 67 billion. About 48 percent of the assets of the private funds are in fixed bank deposits. 60 EGYPTIN THE GLOBALECONOMY: STRATEGIC CHOICESFOR SAVINGS.403 471 585.by NIB for social insurance funds and postal savings funds are 13 percent and 13.333 2. Privatelymanaged funds. 54 (1975) and Executive Regulations Decree 78 (1977). Less than 10 percent were set up by private sector companies. The negative real interest rates paid to the SIS during the 1980s imposed a hidden tax on contributing workers and probably encouraged more public investments than market-based rates would have induced. making SIS a major financier of public investment. The reserves held by these funds (LE 3. Table 6. the dearth of financial instruments.129. however. 1995.265 292. INVESTMENTS. and the risk-averse nature of these funds have been cited as the main reasons for the concentration of investments in bank deposits and government paper.6 percent of GDP. 1995). Efforts are under way to update the law and introduce appropriate regulatory and supervisory arrangements. publicly managed funds required to invest a major portion of their portfolios in government securities (including lending to PEs) tend to charge below-market rates. while another 42 percent are invested in government bonds. What is the effect of using pension funds to finance government investment? The privileged access to public pension funds is a less transparent way of financing government projects and lacks the disciplining effect of capital markets. A majority of these funds were established by public sector organizations. AND LONG-TERMGROWTH . with contributions made by both employers and employees.928 216. compared with 330 in 1991. Only about 7 percent are invested in equities and real estate. less than 1 percent of GDP.3 billion as of June 30. The number of employees covered more than doubled during the period 1990-95. tend to achieve higher real rates of return.855 408.310 2. Private pension plans in Egypt are TABLE 6. to almost 0. Contributions to the funds in 1994/95 were LE 600 million.

0 160 Soure: WorldBankstaffestimates. custodians. and actuaries. minimum and maximum investments in different types of investment vehicles.0 40 0. FIGURE 6. individualized accounts.6 Comparative performance selected of pension funds pmum EDw Egm)t '-__19ett . professional fund managers.to medium-term measures There are several reform initiatives that could be undertaken in the short. which may request an external actuary to review the submissions. Also.funds must be registered with the EISA. and every five years a financial statement prepared by an actuary registered with the EISA. consistent with the development of capital markets and financial infrastructure.0 J. portability. -~~~~~ 6 41tt4 1344 136018) Ni&m1aid(-Qonq~Wu) Prvatdynuiaged LLK (ocampdIaid) Chle.(DIs) 40. Investment regulations prescribe auditors. which requires that each fund submit annually a financial statement audited by an extemal auditor. The regulations should deal with pricing (fee structure).~~~~~~~~~~~(9 da~ TK(alcey - 2. (2) developing a portfolio and investment strategy that supports capital market development. -O -210 PvdtageraL -14. In particular. INCREASING LONG-TERMSAVINGS BUILD THE BASIS FOR GROWTH TO 61 . and their likely changes in investment strategies in response to developments in the capital market. and the supervisory capacity of EISA developed. fund administrators. These reforms focus on: (1) improving the transparency of govermunent uti(ization of SIS resources to ensure a neutral impact on government spending decisions.0 edrai Ow lrVtlMn 10.to medium-terms to improve the efficiency and solvency of the current system. a decision on guarantee arrangements would be necessary. Prudential guidelines on investment should be developed. the legal and regulatory framework would have to be revised. thenewlawnd regulations should deal with the emergence of defined contribution plans. Reforming the social insurance systemshort.I0 -30. and marketing issues.0 60 10i. without To deal with the rapid growth of private pension funds.

In addition to the hiring and training of personnel. adjusted at 2 percent per year for inflation. A third area of reform is the treatment of inflation. such as disability. Finally. A spillover benefit of this reform would be the increased supply of long-term savings to be intermediated by the capital market and others to the private sector. This would entail the elimination of the special access of the NIB to SIS funds.ANDLONG-TERMGROWTH . These short. the contribution rates should be reviewed. raising wages sharply right before retirement). relative to the full benefit available at normal retirement age. The amount of government contributions to fund redistributioin programs should also be reviewed. INVESTMENTS. a fully-funded mandatory defined benefit (DB) public pillar that insures workers' earnings up to a certain level. and (3) correcting certain design deficiencies to improve efficiency and financial sustainability of the SIS. the early retirement provisions should be revised by raising the early retirement age to 60. First. using the average of the last two years' basic wage does not take inflation into account. A transition plan would have to be put in place to reduce NIB's existing holdings of social security funds. although this requires a better information system. Workers who elect to receive pensions between the ages of 60 and 64 should receive benefits that are actuarially fair. second. designing an investment strategy by targeting a certain portfolio mix. the current retirement age implies an increasing dependency ratio. rather than awaiting legislative action. Improved returns on reserves and less generous retirement (eligibility) provisions should result in lower contribution rates. The SIS should pursue technical assistance in this area. and inflation (insurance). Second. The amount of wages that would be subject to the contribution rates should also be automatically adjusted. to enable the population to shift some income from working years to old age (saving or wage replacement). NIB would have to strengthen its competition for the SIS funds by paying market rates (that is. and third. while a following section gives the longer-term reform recommendations for the pension system. This section focuses on these initiatives. and has requested technical assistance from the World Bank. and putting in place a control system. and also introduces an incentive for manipulation (for example. since one system cannot efficiently achieve all objectives. The current method of using variable wages during the worker's entire career. the net impact of alI the above reforms on the contribution rates should be determined. results in a defective pensionable wage. second. thus increasing costs to the system. identifying investment vehicles and participating financial intermediaries. to protect those with low incomes by providing a basic income floor during old age (redistributive or poverty alleviation). On the other hand. and the establishment within SIS of an investment management capability. the normal retirement age of 60 should be increased over time to 65. The reform of the pension system in Egypt should move to establish three pillars to assure adequate retirement incomes: first. to insure against certain types of risks. The SIS already has plans to develop portfolio management capability. a mandatory defined 62 EGYPTIN THE GLOBALECONOMY: STRATEGIC CHOICESFOR SAVINGS. some of the tasks necessary to ensure proper management of the reserves include development of investment objectives.11). Reforming the social insurance systemlonger-term proposals A country's social security system typically has three major objectives: first. longevity. Pension benefits should be adjusted for inflation automatically.to medium-term reforms would serve as a foundation for the longer-term reforms described below (Table 6. One solution to consider is a formula that uses the average career earnings adjusted for wage inflation. using a formula that takes into account wage inflation. rates paid by the NIB certificates of deposit). a combination of systems (the multipillar system) is recommended. Given the present trend of improved mortality rates.compromising safety objectives. although the impact of revising the pensionable wage computation to better account for inflation would result in higher costs. The most critical reform initiative in the shortto medium-term should be to improve the management of social security funds. to achieve both rate of return and security objectives. 7he multipillar approach. Another area of reform is retirement provisions. In order to achieve all three objectives.

The contribution rate for the public scheme would depend on the average replacement ratio (average pension payments to average covered wages). which has elements of income redistribution. Under this plan. assuming a minimum number of 20 years' contribution. the private schemes should improve capital accumulation and financial market development.and medium-term reform plan in the context of the longer-term design. to the extent that the required contributions by the employees are less in the new system. which would be modified by reviewing contribution rates. while the compulsory and voluntary private systems would enable workers to supplement their public pensions. Workers INCREASING LONG-TERM SAVIINGS BUILDTHEBASISFOR TO GROWTH 63 . the dependency ratio (the ratio of pensioners to active workers). At the same time. Under a DC scheme. such as life and disability insurance and annuity products. The public pillar. The SIS should seek technical assistance to review the current system and develop a short. say. An actuarial review would be necessary. the development of a competitive and stable insurance industry would provide many accompanying services. In order to make a smooth transition to the new system. and 1 to 2 percent for management) to a fund that earns 5 percent in real terms (that is. Transition issues would have to be reviewed carefully. the determination of such a contribution rate would largely depend on the real returns on the contributions. the current basic pension scheme could be modified to form the public pillar. 70 percent of pensionable wages. The current minimum is 50 percent of reference wage. The contribution of the employers to the variable pension scheme could be merged as part of the compensation of the employees. In addition. and the rate of return on accumulated reserves. The contribution rate in relation to the target replacement rate should be much lower than is currently the case for variable pensions. The three schemes should be portable across employers. thus minimizing the problems of evasion and manipulation. The public pillar would provide a minimum retirement income. workers would effectively get a pay increase. The second pillar would be a privately-managed defined contribution scheme. the variable pension scheme would be replaced by the mandatory private pillar discussed below. which would mature when the worker retires. The contribution rate should allow the attainment of a certain replacement target. Disability and survivors' benefits could be purchased from insurance companies. as experienced in other countries. and would have to be financed from alt additional contribution. Under a private system. A contribution rate of 10 percent (plus 3 percent for disability and death insurance. the public pillar would be built on the current basic wage pension scheme. and third. disability rates. The public pillar is recommended to be a filly-funded DB scheme with a required contribution from employees and employers. the minimum pension would be correspondingly lower if the number of years of contribution is lower. 4 percent over the real wage growth rate). redistribution objectives. while the ]DB public scheme would require a minimum number of years of contribution. and the minimization of fiscal transfers. The mandatory private pillar effectively replaces the variable pension scheme of the social insurance system. involving compulsory contributions from earnings in excess of the public pensionable wage but below some maximum. The private pillars have the advantage of closely linking benefits to contributions. would achieve a replacement rate of 70 percent of wages over the retirement period of 16 years (indexed to wage inflation). the level of desired funding.contribution (DC) private pillar that insures workers' wages above a certain level. automatic adjustment for inflation. maximum taxable amounts. a purely voluntary scheme that could supplement the first two pillars. and. It may be prudent to review whether this formula achieves the safety net objective. (about 3 percent in many countries). The public pillar would achieve the objective of dealing with old-age poverty. Past contributions to the variable pension scheme of the SIS could be converted into a bond carrying a market interest rate. mortality rates. Thus. Mandatory private schemes. and vesting should be immediate for the DC private pensions. participating private pension funds and fund management companies would have to be licensed and regulated. Redistribution is achieved by introducing a minimum basic pension to those with low incomes. assuming that the pensioner contributed for 32 years.

n ty The insurance sector can play a very important part in the development of the private sector. and adopt appropriate prudential regulations to cover the development of individual accounts under DC schemes managed by licensed fund professionals. workers would be able to combine their accumulated funds with their pension accounts. as they already do. In addition. creating a more liquid and deeper financial market. increasing the size of their pensions. The consumption tax principle should be fully applied to this as to all types of contractual savings.and middleincome workers. including good information flow to participants.ANDLONG-TERMGROWTH . In addition. irrespective of whether they pay income tax. allowing adjustments to be made before the mandatory private system is capital market put in place. This would allow firms to offer pension plans in excess of the mandatory ones. Either contributions to contractual savings would be fully deductible and investment returns would be tax exempt. since it would also benefit nontaxpayers. These funds would be subject to the same regulatory framework as those in the mandatory schemes. Upon retirement. EISA should recommend the replacement of the 1975 Law on Private Insurance Funds. in addition to the mandatory contributions. and mandatory contributions would be automatically withheld from wages by employers and placed in accounts. Furthermore. This would imply one of two things. Under the third pillar. INVESTMENTS. Because the system is susceptible to fraud and mismanagement. especially the life insurance sector. the insurance industry is a significant component of the economy. the industry. would be to offer a (credit transfer) to government contribution pension members. but provides weaker incentives to workers to participate in voluntary pension funds. and may in fact be one and the same fund. given that that there is a growing number of private pension finds. this approach would generate a higher level of loigterm financial resources than a tax treatmrent based on deductibility. The latter approach provides cash flow advantages for the budget. currently used in the Czech Republic and Australia. since no tax income is lost up front. but both investment returns and pension benefits would be tax exempt. while pensions would be taxed like any other source of income. it enables enterprises to better manage their financial affairs. Voluntary Private Funds. As the credit transfer would be added to the individual retirement saving account of each worker. A review of the issues of tax treatment should be made. to save for their retirement. appropriate regulatory and supervisory systems should be in place. This alternative would be more redistributive than the other approaches. Workers could change individual any impact on past employers without contributions. As recommended above. or contributions would not be deductible. The credit transfer could be limited to active workers. Since the transition to a mandatory private system would probably take some time. This would provide the foundation for the development of a mandatory private pension scheme managed by the private sector.could choose among the licensed funds managed by professional management companies. development would have to advance. Currently. Workers should also be able to move their accounts from one fund to another with minimal cost. the development and experience of current regulatory efforts and private fund management constitute a pilot from which lessons could be learned. workers would be able to make voluntary contributions with a cap. it would offer a strong incentive to low. and protects households from financial losses arising from accidents or injuries. instead of a tax credit or exemption. mobilizes long-term savings that can facilitate the financing of both enterprises and households with resources that have a much longer maturity than traditional loans from the banking sector. the Egyptian tax treatment provides for tax deductibility of contributions and tax exemption of pension-fund investment income and pension benefits. A third alternative. thus improving labor mobility. and the modernization of the securities markets. and could be paid only to those workers who save a specified percentage of their income and do not withdraw their balances until they retire. Tax treatment. life insurance companies' reserves to GDP range 64 EGYPTIN THE GLOBALECONOMY: STRATEGIC CHOICESFOR SAVINGS. thus ensuring competition among the funds. In most developed countries. By covering certain economic and financial risks. the emergence of a private pension system.

12). The state owned insurance companies accounted for 91 percent of investment. However. and tIhree companies account for 93 percent of life and 89 percent of nonlife markets.2 percent in 1995. The obligatory ceding requirements INCREASING LONG-TERMSAVINGS BUILD THE BASIS FOR GROWTH TO 65 .4 billion. The law requires separation of the reserves between the two businesses in companies that operate in both markets. The industry is highly concentrated. As mentioned earlier. Legal and regulatory framework. the state owned insurance companies should be included in the current privatization program (Table 6.1 percent. EISA should allow the entry of new firms-including foreign insurance companies-as long as they meet the licensing criteria. On the regulatory aspects. a new set of regulations was issued by the EISA. The insurance industry in Egypt is underdeveloped-life insurance premiums to GDP were an insignificant 0. a new law on insurance was passed. and in June 1996. In 1995. The three largest insurance companies and the sole re-insurance company are state owned. The insurance companies invested the bulk of their funds in fixed-term bank deposits (39 percent of total) and governrment bonds (38 percent). the next generation of reform efforts should focus on the issues of competition and ownership. In addition to solvency requirements. The deregulation of most inLsuranceproducts shifts the focus of supervision to solveincy monitoring. The reserves of nonlife business accounted for 60 percent of total reserves in 1995. The rest was used to purchase real estate and provide loans to policy holders. the regulations impose certain guidelines on investment by insurance companies. To encourage competition. Over the period 1990/91 to 1994/95. which will be deregulated in 1999. to complement liberalization of pricing of products and commissions.from 13 percent to 34 percent. Egypt's insurance industry. Finally. This means that the 49-percent maximum ownership by foreign firms should be abolished. There are 10 insurance companies in Egypt. solvency monitoring requires good information and technical capability on the part of the supervisor. In the past. Total investment of the insurance industry as of June 30. 1995 was LE 5. making a distinction between reserves from the life insurance business and reserves front the nonlife segment. The only exceptions are in the fire and motor vehicle insurance lines. Another 18 percent was invested in corporate paper. compared with 68 percent in 1991. Investment. With the changes in the legal and regulatory framework and the ongoing institutional development of supervisory capacity. The regulations are basically in line with international (especially EU) practices and defirntions. The new regulations also deregulated the pricing of most insurance products. replacing price control with price reporting. EISA should focus on disclosure requirements to the public of prices and commissions. thus making the sector virtuallyv under state control. there is a high concentration level in the industry. The largest company controls 50 percent of both life and nonlife business. Conservative investment policies and lack of financial instruments have led to the concentration of investment in bank deposits and government paper. or export processing. regulations place a 49 percent limit on foreign ownership of direct insurance companies and no restrictions on foreign ownership of reinsurance companies. Two have been set up as joint ventures with foreign investors to operate as businesses exclusively in Egypt's export processing free zones and are not allowed to offer their services to the rest of the market. while life insurance assets alone were 38 percent of GDP for the developed economies sample. Currently. Total assets to GDP of all insurance companies (life and nonlife) in Egypt were about 4 percent in 1995. Reform proposals. to encourage companies to operate in the free zones.0 percent to 10.6 percent of GDP. investment grew by 18 percent per year. direct foreign ownership was only allowed in those companies operating in the free zones (Egypt's free trade. EISA should also ensure a level treatment of both state owned and private insurance companies. which allowed for the creation of companies as joint ventures. The state owned insurance companies also own shares in five of the private insurance companies. and premiums to GDP range from 3. The exception was granted under the Investment Law. and two transact only nonlife. representing 2. compared with 6 percent for a sample of developed economies. All are publicly quoted joint stock companies. which is indicative of problems of competition. of which eight transact all classes of insurance and business. zones).

rather than replace. which offer higher expected returns and enable risk diversification. corporations have a wider range of instruments to finance investment. However. the development of capital markets both supports and is supported by the development of contractual saving institutions. As for the corporation issuing long-term securities. From the point of view of the investor. domestic savings. more financing opportunities become available to corporations to implement projects with long-term pay-offs. In the case of Egypt. and the other is privatization of state owned enterprises. therebv improving the financial performance of contractual saving institutions. financial statements of insurance companies should be available to the public. and these statements should be audited by qualified and independent auditors. to improve the transparency of the sector. securities markets have developed in parallel with-and have supportedtwo initiatives that have an important impact on private saving: one is pension reform (such as the transformation of pay-as-you-go to fully-funded systems). liquid securities markets allow the acquisition of assets that can be sold quickly in case of a need to access savings or alter a portfolio. To the extent that pension reform and privatization programs increase household and business saving. and an increasing shift toward equity financing. ways of financing an investment. But what is unambiguous is that the composition of saving is improved by the introduction of liquid capital markets. this should result in greater benefits to savers in the form of lower contribution rates to pensions schemes and lower premiums for insurance. some studies have shown that there is a positive relationship between private saving as percent of GDP and financial sector development. In addition. the development of capital markets becomes essential in attracting private foreign capital. respectively. The existence of liquid capital markets gives a foreign investor better exit options. Accounting standards and auditing guidelines for insurance companies should be provided by EISA. Long-term investors need not relinquish their saving for long periods. Savers purchase long-term securities. which includes capital market development. Capital markets would allow greater diversification. active capital markets provide an enabling environment for attracting foreign savings. although the channels through which this relationship is defined are numerous. liquid capital markets allow them to divest quickly and inexpensively. investment by private pension funds and insurance companies has been mainly in government securities and bank term deposits. Many studies conclude that the impact of stock markets on the level or rate of domestic saving is ambiguous . securities market development has an impact on Thecapitalmarket and its link with saving Capital markets affect economic activity through the creation of liquidity and the reduction of transaction costs. for these investments. when they do. but augmented domestic savings in East Asia. Thus. it has access to a larger pool of funds and has better information about the relative cost of different. Tight regulations on employment of foreigners should also be relaxed to enable insurance companies to acquire needed expertise quickly. stock markets are seen to increase investment. thereby increasing national income. With private capital dominating the total capital flows to developing countries. For example. But the risks of foreign savings would be kept to a minimum if they augment. The experiences of two regions that attracted the greatest shares of private capital flows had two different outcomes-foreign savings replaced domestic savings in Latin America and the Caribbean. thus encouraging more foreign direct investment Foreign portfolio investors would focus on actively traded securities in the stock market. or real estate. precious metals. As discussed in the previous sections. At the same time. but the level of private saving. The positive experience of Asia is attributable 66 EGYPT THE GLOBAL IN ECONOMY: STRATEGIC CHOICES SAVINGS. In the process.savers may merely shift funds from one saving instrument (such as bank deposits) to securities. and thus increasing the level of domestic saving. FOR INVESTMENTS. Finally. In several countries.and price controls on reinsurance should be eliminated. LONG-TERM AND GROWTH . and savers have more alternatives than bank deposits. and perhaps higher yields. the existence of pools of funds from contractual saving institutions could be tapped through capital markets to finance investments.

which in 1995 numbered 2 7 million out of a total work force of 19. while privatization increases the supply of securities in the market. hard budget constraints. Notes 1. which measures the retums to all contributors (the government as equity holder. 6.1 million. the development of capital markets and the process of privatization are mutually reinforcing. WVherethe budgetary impact of privatization is the main concern. and (2) the flow of funids the government gives up by privatizing (including the taxes and dividends from PEs minus the subsidies and other transfers made to PEs).to macroeconomic policies and institutions that encouraged domestic saving and investment. which reflects the retums to the government. For further discussions of this point. and creditors). greater liquidity (higher turnover to market capitalization). 5. which Egypt's Central Authority for Public Mobilization and Statistics (CAPMAS) attributes to liquidation and privatization. 7. (2) the ratio of profit before taxes and other transfers to or from government to net worth. and less concentration of market activity on a few stocks-would enable capital markets to absorb the expected increase in portfolio investments from both domestic and foreign sources. Tandon. 9. Contributors to the social insurance svstem during 1994/95 to labor force in 1995. and (3) the ratio of current surplus before taxes to revalued capital employed. Capital markets provide more options for divestiture. Returns to capital are measured using three indicators: (1) the ratio of operating surplus to capital employed. 8. 3. Excluding 1992/93 because the reported data show a sharp drop in gross fixed assets. two flows of funds have to be compared: (1) the flow of funds from the private sector to the government (in the form of sale price and taxes from privatized firms. it has been argued that $1 in the hands of government is worth less than $1 in the hands of the private sector. such as old age pensions. and mitigate against the extreme movements of asset prices. Finally. 2. recipient of taxes. as if it were a private owner. Different contribution rates are assessed for different types of benefits. because raising $1 by government through taxation is distortionary. Commercialization refers to a package of reforms: increased competition. The number of PEs in the sample declined from 364 in 1991/92 to 356 in 1992/93. death. From a welfare perspective. INCREASING LONG-TERM SAVINGS BUILDTHEBASISFORGROWTH TO 67 . it is important that all flows to and from the treasury are taken into account. thus providing the securities market with more depth. Details on methodology and key assumptions are provided in Galal (1996). Work force includes Egyptians working abroad. see lones. Privatization refers to the transfer of ownership and/or control to the private sector. 4. and Viogelsang (1990). unemployment. disability. financial market reforms. and incentives to managers to perform efficiently. and end of service indemnity. The deepening of capital markets-as reflected in increased market capitalization to GDP. regulation of monopolies. where capital is revalued using the perpetual inventory methodology. In particular. minus the cost of privatizing).

TABLE 6. more including firms foreign Deregulate prices Improve supervisory capacity Ensure neutralitytax of treatment on saving Increase oflisted supply securities Improve financial infrastructure Improve Information and quality access * implement recommendatons from intemational consultants and (Coopers Lybrand) Eliminate duty life stamp for insurance reduce and stamp fornonlife duty insurance * Review tax ofinsurance income rates companies context overall review inthe ofan tax * * Contnue privatizabon process Develop custodial depositoryimprove and payments and settiement under services private initiative sector * Ensure accountng auditing proper and offinancial accounts * Automate informabon companies on listed * Develop prudential regulation and strengthen supervisory capacity Coordinate regulabonsupervision and ofinvestment managers EISA with * 68 .medium-term to actions * Medium long-term -to actions privatizeother the state-owned insurance companies allow competitive offire motor pricing and vehide insurance TPL * Improve structure competitive and conditions privatze ortwo * one insurance companies * allow entry. custodians. auditors. developing markets capital * Introduce law allows defined new that for benefit individual accounts sets flexible and a framework for the regulation Reduce contribution rates Introduce mandatory pillar private convert varable pension to scheme mandatory contributionmanaged defined plan by the private sector * Develop legal new framework Strengthen regulatory framework develop issue regulations and new toinclude coverage offund managers. administrators.long-term to actions manage SISfunds all the management ofSIS * Developinvestment focusingthe an strategy. and framework forvoluntary pension private schemes.supervisory legal. and actuaries * * * 3djust regulabons asnecessary Strengthen supervision capacity implement institutional development ofEISA TABLE6. on identficaton ofinvestment obiectives Adjust benefits inflation for Review fortreatrnent formula ofinflatondetermining in inital benefitsboth and for basic variable pensions * Index benefits automaUcally inflabon towage * Review toadjust how maximum wage taxable automatbcally * * Review actuarial assumptions and determine whether there scope reducing is for contribution forboth rates basic and variable pensions * Develop infrastructure formandatory pillar private by strengtheningregulatory.medium-term to actions * Develop portfolio management capability * Develop to placefundscurrently NIBunder plan with * Medium.12 Actionplan for insurance industryreform Area reform of Short.11 Actionplan for social insurance systemreform Area reform of Improve retums on surplus Short. strengthening the insurance and industry.

" Policy Research Department. 1989. (ed. D. "Growth and Saving: What Do We Need to Know. 1996. Cairo. Washington. 1:1-118. 1996. William R. and What Might We Learn. 69 . Various issues.C." Working Paper. Distinguished Lecture Series III. and Sweder van Wijinbergen. Feldstein. 1994. Deaton. "Fiscal Policy and Economic Growth: An Empirical Investigation. Angus. Dollar. World Bank. Washington. Sachs. and Charles Horioka." World Bank Economic Review 3 (anuary): 17-38. 1993." The World Bank ResearchObserver 2: 127-42. Harrod. William. 1996. Unpublished. and its Implications for Savings and Education Expenditure. Shi. Cairo. Leroy Jones. Direction of Trade Statistics Yearbook. 1995. Cairo. "Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs. September. Psacharopoulos. Cairo. Washington. Cambridge. David. Public Policies and Household Saving.C. F." Working Paper." Journal of Monetary Economics32 (3): 485-512. and Sergio T. "Domar and Dynamic Economics. Levine. Nathan Associates Inc. D. IMF (International Monetary Fund). Unpublished." Consultant study funded by USAID. R. Unpublished. Financial and Economic Statistics of Public Companies. _ Galal. "Returns to Investment in Education: A Global Update. World Bank. "Growth and Savings in Egypt: Lessons from the Empirical Growth Literature. Sebastian.C. D. Jeffrey D. Ahmed. Anching." EconomicJournal 69 (275): 451-64. "A Sensitivity Analysis of Cross Country Growth Regressions. Ritu. Mass. 1994." NBER Working Paper 5097. Martin. "Trade and Investment Liberalization: Issues and Options for Egypt. Stanley. "The Quality Control System in Egypt." Journal of Monetary Economics (3): 417-58. 1993. 1996. "Egypt: Options for Increasing Market Competition in Maritime Port Services. 1959. Pankaj Tandon." EconomicJournal90 (358): 314-29.. Egypt. 1995. Paris.. 1996b. . Fischer. Chicago: University of Chicago Press. 1990. 1993. 1994." World Development22 (September): 1325-43. Egypt. NBER Project Report. George. Paris. "Egypt: Long-Term Demographic Trend.Washington. Egypt. 1996." American Economic Review. "Domestic Saving and International Capital Flows. "The Role of Macroeconomic Factors in Growth.). Washington. 32 Edwards. 1996a.Selected bibliography Anand. Energy Pricesand Taxes.C. "Economic Reform and the Process of Global Integration. Rebelo. "Achieving Rapid Growth: The Road Ahead for Egypt" The Egyptian Center for Economic Studies. and Easterly. Poterba. Ross and David Renelt.C.. Taxation and Household Saving. and Andrew Warner." Brookings Papers on Economic Activity No." Working paper. 1992. "Inflation and the Financing of Government Expenditure: An Introductory Analysis with an Application to Turkey. and Chang-Po Yang. 1996." Consultant study funded by USAID. 8. Fischer. D. World Bank. Bernard. 1994. Galal. Egypt. 1976-85" EconomicDevelopment and Cultural Change40 (3): 523-44. James M. and Ingo Vogelsang. "Why Are Saving Rates So Different Across Countries? An International Comparative Analysis. Unpublished. CAPMAS (Central Authority for Public Mobilization and Statistics). Ahmed. "Savings and Privatization. World Bank. "The Economics of the Government Budget Constraint. New York: Oxford University Press. Easterly. 1995. OECD (Organization for Economic Cooperation and Development). Jeffrey D. The Egyptian Center for Economic Studies. Sachs. National Bureau of Economic Research. 1980. Stanley. D." Working Paper No. Hoekman. 1996. Welfare Consequencesof Selling Public Enterprises: An Empirical Analysis.

D. "Trade Analysis and Information System Data. Switzerland. 1996b. New York: Oxford University Press. 1995. 1995. 1995. New York: Oxford University Press. The East Asian Miracle: Economic Growth and Public Policy. ." Report No. 6421. New York: Oxford University Press. . Geneva. D. 17. "Expanding the Measure of Wealth: Sustainable Indicators of Environmentally Development. . Bureaucrats in Business: The Economics and Politics of Government Ownership.C. 1996a. World Development Report: Economy in Transition. "Maximizing the Benefits of Free Trade with the European Union-Challenges and Options for Egypt. . Washington. Washington. Washington.SRI International. Egypt. . "Egypt: Review of the Finances of the Decentralized Public Sector." Consultant study funded by USAID. 70 . 1987. D. 1993a.C. D. "Achieving Egyptian Export Growth.1993b. World Bank. Unpublished. World Development Report: Workers in an Integrating World." CD ROM." Working paper." Environmentally Sustainable Development Studies and Monographs No. Middle East North Africa Region. ____ . 1997.C.C. Washington. . Latin America and the Caribbean: A DecadeAfter the Debt Crisis. New York: Oxford University Press. UNCTAD. Cairo. ___. World Development Report: Infrastructure for Development. 1987. New York: Oxford University Press.1994.

Statistical Appendix .

727.968.9 104.1 27.5 214.0 68.227.0 30.0 15.342.500.0 24.000.9 42.128.043.000.140.6 22.228.855.0 48.4 80.335.408.0 12.9 34.5 103.6 32.386.5 20.6) 40.672.084.0 36.580.0 47.5 14.7 148.915.4 119.3 12.501.8 14.067.286.9 1.5 35.048.659.757.487.0 10.4) 146.286.154.0 38.0 38.0 73.4 35.5 139.0 19.1 B.072.4) 11.2 45.4 155.301.2 (8.0 11.6 137.7) 18.5 48.0 18.6 50.027.0 157.249.2 (1.320.0 26.1 2.1 25.8 60.5 26.8 77.581.0 9.063.0 150.0 (1.268.575.336.6 95.0) 1.6 163.958.0 48.437.0 23.259.5 141.826.450.0 0.316.170.5 (3.6 98.2 50.0 26.0 8.439.173.022.803.0 61.6 27.1 118.092.2 54.474.222.000.9 125.5) 15.9 25.6 (5.5 118.650.414.360.981.946.263.623.7 14.069.4 110.828.0 106.7 24.0 14.255.798.600.411.7 118.100.680.471.116.850.5) 37.046.052.109.9 131.0 34.783.178.677.9 171.0 10.620.700.400.200.0 122.740.0 25.0 164.8) 122.513.0 36.680.0 28.989.272.648.151.2 35.6 60.2 75.553.0 2.1) 9.8 169.104.902.5 (2.128.626.001.828.5 24.0 139.630.398.0) 0.351.423.299.6 140.377.057.8) 42.931.2 84.8 92.0 900.0 11.0 53.9 136.970.5 147.4 33.7) 142.0 17.1 217.0 46.0 111.0 29.343.100.5 21.1 163.864.0 91.328.5 15.391.700.323.645.877.461.6 24.7 18.700.0) (1.5 22.0 17.0 (1.645.934.354.6 18.427.346.3 11.460.0 20.100.0 108.900.376.8 28.630.4 (13.988.331.5 82.550.0 (7.349.1 89.9 22.3 (3.200.8) 117.228.0 (1.414.910.232.0 66.5 14.416.1) 40.0 25.139.0 16.0) 11.9 19.0 18.200.879.6 213.0 16.307.0 167.000.7 92.3 16.9 27.127.1 202.9 0.1 (4.0 83.995.0 11.536.198.171.500.685.800.8 35.1 53.7 228.970.955.880.5 112.924.526.7 9.658.969.1 20.973.1) 16.540.6 50.4 172.667.1 89.4) 11.5 52.3 103.846.9 147.0 (9.0 99.100.0 16.348.873.5 42.922.620.9) (10.0 3.0 73.0 47.0 143.1) (13.0 13.420.0 39.0 0.8 59.253.500.0 146.7 0.354.9 (2.079.1) 43.285.918.132.108.911.6 39.8 9.8) (10.042.797.0 10.1 36.813.227.0 34.0 19.5 145.4 47.0 (7.395.2) 32.4 25.353.608.585.6 31.853.700.0 12.0 12.542.0 300.0 (1.6 163.462.0 27.0 14.091.9 134.587.579.505.0 14.472.9) 154.9 30.553.7 (7.089.0 0.347.0 16.730.300.762.6 147.4 0.987.445.207.335.005.6 117.5 1.7 79.095.0 31.022.496.0 12.8 112.309.7) 5.5 (1.174.8 15.708.373.605.440.0 12.971.4 33.269.578.480.0 4.536.4 48.200.0 32.441.2 (7.606.1 (1.4) 162.473.537.9) (9.6 Source:Govemment Egypt.500.150.592.4 12.0 58.602.7 (6.206.213.0 20.064.547.690.826.2 15.9 50.392.1 30.749.0 202.700.0 53.506.2 102.336.5) 51.7 163.7 27.935.379.729.6 24.0 76.7 41.5 24.693.964.272.4 46.0 8.503.8 135.6 26.036.823.7 26.669.200.3 28.4) 44.0) 41.8) 10.9 11.0 26.178.9 20.0 21.141.5 15.449.919.0 14.8 192.7 131.3 26.207.0 65.9) 40.1 17.969.0 36.393.9 69.154.213.0 9.852.160.739.182. Incurrentprices LE) (mil GDPat market prices Netindirect taxes GDPatfactorcost Agriculture Industry ofwhichmanufacturng Services Resource balance Exports (GNFS) Imports (GNFS) Total expenditures Consumpton expenditures Govemment Private Grossdomestic investment Govemment Private Totalfixed investment Totalinvestment stocks in Domestic saving + Netfactorincome (NFY) + Netcurrent transfers (NCT) = National saving Gross national product Gross national disposable income Secondfive-year plan period: actual 1989 1990 1991 1992 Third plan period: actual 1993 1994 1995 | Estimate 1996 61.116.5 21.0 27.500.0 28.536.8 139.0 27.5 47.150.760.2 47.858.735.891.9 107.069.969.626.0 16.TABLE1 Nationalaccounts (LE million) 1988 A.6 119.825.6 112.027.667.975.2 33.6 182.9 74.000.110.182.9 239.691.309.473.340.793.769.983.160.763.5 8.4 124.573.161.0 (6.050.3) 45.762.0 10.4 156.5 479.512.0 16.909.5 36.798.683.0 129.7 (3.0) 41.5 (9. of 72 .873.500.0 96.0 47.536.230.0 17.945.0 (6.251.4 (2.910.066.300.1 16.945.6 37.202.9 27.423.0 11.719.0 2.346.0 32.5 29.0 11.742.0 25. Inconstant 1992prices GDPat marketprices Resourcebalance Exports (GNFS) Imports (GNFS) Totalexpenditures Consumption expenditures Govemment Private Grossdomestic investment Govemment Private Total fixed investment Total investment in stocks Terms of trade (TT) effect Gross domestic income Domestic saving (TT adjusted) 119.480.0 (1.419.1 32.317.991.3 66.287.684.0 193.370.513.913.9 41.8 14.525.0 175.8 28.5 (6.0 43.075.0 136.176.848.0 (1.6 (2.255.598.3 239.630.0 30.5) 18.347.7 49.6 154.700.693.625.9 128.0 22.8 32.9 15.1 (9.146.0 11.315.5) 6.0 131.177.9 184.828.1 11.7 32.0) 41.0 19.0 126.203.484.289.266.271.0 27.5 230.046.6 31.200.660.129.239.996.2 45.128.1 107.800.894.0 96.945.254.174.5 47.0 14.515.6 (1.7 134.0 0.8 205.322.099.981.766.

800.9 21.780.0 139.341.8 78.630.2 2.6 18.674.9 76.0 24.6 20.0 2.687.1 1.076.252.0 26.5 1.485.621.0 2.5 123.7 8.0 10.0 45.8 8.054.0 5.087.060.0 2.3 8.605.0 2.3 9.452.0 2.1 5.122.0 73.875.0 7.772.6 18.609.7 64.470.495.220.8 7.0 5.7 6.3 13.9 8.3 12.597.0 10.602.0 11.852.345.0 6.389.607.3 57.595.0 2.1 9.0 2.0 92.0 2.568.778.795.146.525.3 64.680.6 21.740.335.708.833.2 127.8 12.365.8 87.572.0 14.131.056.5 20.0 61.0 47.6 336.886.0 2.525.902.731.494.279.544.0 7.6 4.726.0 23.0 10.2 21.442.361.369.3 2.0 85.334.141.652.039. 73 .555.0 92.0 22.0 25.TABLE 2 National accounts (LE million) Second five-year plan period: actual 1988 GDP at factor cost (at constant 1992 prices) Commodity sectors Agriculture and irrigation Manufacturng & mining Petroleum& products Electricity & energy Construction Productive services sectors Transportabon& communicabon Suez Canal Trade Finance Insurance Tourism Social services sectors Housing Public utilities Social & personal services Social security Governmentalservices Third plan period: actual 1992 1993 1994 1995 Estimate 1996 1989 1990 1991 113.6 4.3 37.388.360.0 21.0 111.7 19.7 43.173.3 131.0 400.623.0 9.789.0 50.4 39.0 66.194.0 10.0 4.296.0 24.703.632.2 6.516.860.203.1 1.6 2.0 9.728.8 59.0 25.120.0 44.0 7.2 21.056.0 22.898.541.681.939.565.375.0 22.7 118.6 22.0 11.349.9 5.299.474.006.046.225.0 21.781.0 4.435.055.7 18.0 5.7 1.955.6 20.680.8 374.0 23.613.582.365.4 9.0 70.107.196.0 153.0 426.1 6.005.3 2.074.655.3 41.0 Source: Government of Egypt.0 146.0 9.520.2 8.629.8 353.0 5.909.0 10.365.0 2.0 2.0 2.7 19.210.891.295.1 19.0 11.1 6.2 65.072.0 9.8 1.819.0 97.720.298.0 13.893.122.7 72.2 85.7 8.124.220.683.0 22.891.0 20.0 23.971.851.0 1.2 5.345.462.6 8.936.0 532.079.0 9.6 81.9 397.266.0 25.5 71.372.0 102.245.334.9 9.1 1.469.0 459.3 2.0 26.124.658.293.6 6.0 104.0 5.4 17.9 20.909.0 14.0 23.3 19.008.0 2.0 495.406.0 14.622.6 73.260.857.345.9 21.6 134.0 4.419.848.1 8.0 5.8 1.741.2 4.3 2.970.800.756.4 8.382.0 79.712.7 12.016.310.0 76.351.7 42.068.8 12.350.735.3 6.0 5.0 2.7 71.264.592.

3 6.471.5% -13.715.4 6.274.1 3.988.2 6.3 42.202.4 2.7 900.292.4 397.524.4% 27.4 2.687.4 868.8 11.354.8 209.1 1.322.019.5 4.9 1.7 9.0 2.552.5 3.4 138.886.861.5 4.130.244.8 1.9 998.114.631.5 443.807.7 10.2 5.922.6 3.438.1 1.2 2.9 3.4 3.5 800.212.6 378.7% -23.9 2.213.743.4% -22.9 4.741.4 4.0 10.0 1.340.2 2.8 990.9 406.424.5 2.3 3.077.085.8% 38.5 4.9 1.135.5 540.990.6% 20.9 2.160.716.1 232.2 2.1 10.808.4 1.199.371.630.358.652.808.0 1.8 2.716.753.0 2.998.004.6 446.6 885.500.401.2 584.035.150.2 6.054.359.4 7.3% -13.1 1.8 10.8 1.335.6 4.044.0 466.388.635.8 478.869.0 70.0 2.392.7 3.102.217.1 873.0 2.9 4.8 279.8% 9.6 5.657.548.5 937.071.868.1 1.1 667.473.309.5 6.5 7.6 961.661.601.9% 5.5 36.0 635.2 1.891.9 1.8 9.516.7 1.1 1.9 6.7 850.9 1.3 1.903.2 266.1 2.6 2.280.5 2.5 2.2 2.6 4.8 888.510.5 5.8 4.9 4.190.3 4.1 1.7 1.441.0 12.8 1.7 845.6 2.0 10.447.566.8 504.191.6 516.5 5.2 5.361.7 2.2 10.7 721.669.9 2.0 490.9 575.709.4 1.5 1.572.1 2.6 2.0 932.1 1.919.8 3.6 1.1 6.4 4.0 2.212.1 2.3 1.) Totalmerchandise exports Primaryproducts of whichpetroleum' of whichcotton of whichotheragriculture Manufactured goods ofwhichtextiles of whichothermanufactured Total non-factor servicereceipts ofwhichtourism ofwhichSuezCanal Total merchandise imports Food Other consumer goods POLand otherenergy Intermediate goods Capitalgoods Totalnon-factor servicepaymentsa 4.8 4.9 1989 1990 1991 1992 Third plan period: actual 1993 1994 1995 EsUmab 1996 6.0 2.8 4.8 162.920.5 4.0 191.5 2.865.9 4.6 442.7 8.7 3.2 1.9 4.5 3.8 3.2 84.3 1.935.3 623.8 2.880.6 2.039.0 5.610.2% 0.6 Memorandum items Exportvolume growthrate Importvolumegrowth rate 35.4 3.7 6.058.5 389.631.2% -4.107.709.854.036.0 3.4% -11.628.856.894.233.828.4 572.1 3.892.9 3.161.266.1 4.206.8 298.0 11.5 5.255.8 233.9 2.927.2 547.2 287.7 244.1% -3.9 549.340.202.110.941.439.579.9 5.TABLE 3 Merchandise trade (US$ million) Second five-year plan period: actual 1988 A.5 848.4884 1.571.2 2.349.149.5 3.826.8 3.906.727.436.8 2.0 2.190.4 4.301.458.3 5.940.5 7.8 2.1 1.1 640.779.) Totalmerchandise exports Petroleum* Cotton Otheragriculture Textiles Othermanufactures Totalnon-factor servicereceipts of whichtourism of whichSuezCanal Totalmerchandiseimports Food Otherconsumer goods POLand otherenergy Intermediate goodsn.6 594.9 964.904.829.790.415.5% 74 .755.313.074.0 371.573.0 B.526.133. Capitalgoods Total non-factor servicepayments5.1 1.5 7.595.3 1.1 4.1 132.1% 5.882.7 4.7 3.6 114.118.i.4 222.082.2 4.4 3.5 3.6 3.509.4 35.950.371.404.3 663.9 2.532.065.7 1.6 342.5 2.0 220.679.6 83.3 1.8 8.3 8.790.690.631.605.5 306.089.2 4.4 222.597.408.6 4.0% 5.454.1 771.561.1 2.9 7.182.1 3.3 1.6 174.e.5 354.149.1 930.113.279.2 460.2 569.319.253.3 1.7 1.4 1.727.124.9 101.7 2.908.2 144.335.065.5 4.5 11.2 1.2 358.0 1.1 575.724.3 11.4 35.4 11.950.4 2.728.423.1 528.268.1 573.8 1.2 142.085.9 327.5 2.657.4 309.9 1.6% 23.4 3.037.3 6.8 4.0 187.457.1 393.6 1.2 2.2 2.4 1.5 5.2 945.182.298.7 2.8 164.042.1 4.306.1 803.2 584.403.206.696.0 1.360.9 11.6 3.049.510.687.9 2.361.982.0 2.018.1 8.0 1.5 81.5 1. Valuein constant 1992prices (USSmil.4 708.1 2.8 2.272.7 10.675.2 1.2 547.9 6.0 2.875.8 1.406.9 1.284.8 546. Valuein current prices(USSmil.2 10.0 450.941.074.120.2 3.6 2.4 250.3 1.7 3.5 4.531.5 1.610.1% -2.4 186.064.899.6 161.759.6 1.8 4.028.5 681.9 2.212.540.6 4.7 878.374.793.3 3.385.406.0 584.

0 93.6 102.1 88.5 93.2 74.2 83.1 99.8 87.0 105.0 99.2 70.8 93.1 95.5 103.7 151.9 117.2 112.6 104.0 100.3 102.TABLE 3 (contd) Merchandisetrade (US$million) Secondfive-year plan period: actual 1988 1989 1990 1991 1992 C.5 90.8 100.2 94.4 88. Priceindices (1992= 100) Merchandise exports Merchandiseimports Merchandise termsof trade 86. Non-factor serviceindices (1992 100) = Exports NFS.7 104.7 98.8 104.0 100.8 103.8 96.6 84.9 74.9 102.2 107.0 86.1 75 .0 100.4 107.volume of index Exports NFS.9 100.4 99. '' Includes payments return foreign in for partner's investment Source: Govemment Egypt.1 91.0 90.9 112.5 88.priceindex of ImportsofNFS-volumeindex Imports NFS-priceindex of ' Includes foreign partnersshare.8 112.9 94.0 89.7 95.1 96.9 102.1 107.6 Third plan period: actual Estimate 1993 1994 199 | 1996 D.0 107.3 88.9 88.0 99.1 92.0 94.9 100.1 95. of 61.2 90.1 108.3 100.

0 500.557.561.550.452.9 2.2 124.5 992.9 895.728.9 (2.3 75.449.997.9 140.4 5.054.920.975.5 5.279.0 2.039.8 20.904.5 4.9 6.0 3.0 (2.0 (2. n.0) 776.8 2.477.6 0.433.4 1.5 (3.0 12.9 12.5 140.8 (51.068.6 680.621.2 6.566.625.7 6.999.730.7) 1.5% -1.7 358.3) 697.4 480.960.347.0 208.1 (404.0 -1.8% -0.9 (3.2 19.301.5 943.8) 617.5) (1.361.829.1 14. X-rate (1990 = 100) (decreaseis real appreciation) Current account balance as % GDP Source: Government of Egypt.082.4 8.9 3.0 124.5) (818.383.7 2.0 9.6 19.189.049.8 7.3 2.3 1.9 1.5 10.0 220.928.0 560.3 (1.593.360.605.910.133.9 6.5 3.6 0.9 4.709.655.2 1.113.e.4 1.161.9% -1.5) (724.5 5.4 (2.573.6 2.9 16.8 2.1) (949.1 3.905.9 1.5 535.0 1.8 3.327.5 4.211.1 2.142.2) 813.4 3.631.013.4 3.6 89.727.7) (1.1 6.532.4 81.4 3.477.9 1.4 136.039.1 1. Third plan period: actual 1993 1994 1995 12.960.1 864.1 295.2 1.6 124.8 315.122.9 2.1) 624.3) (792.1 26.891.4 Estimate 1996 15.7 6.977.875. Change.0 12.3) 1.TABLE 4 Balance of payments (US$ million) Second five-year plan period: actual 1989 1990 1991 1992 9.6 1.7) 1.3 1.5 597.0 (622.190.552.232.2 971.0 3.280.2 (3.5 3.9 2.742.595.083.9 3.238.790.6 2.3 2.9 1.803.4 83.357.9 1.0 0.6) (2.1 1.279.344.416.4 3.4 15.7 3.0 1.572.5) 853.6 15.5 2.134A4 4.6) 1.5 13.697.2 3.6 3.9 4.828.0 8.0 2.6 3.578.3 75.1 1.9 2.9 11.8 5.544.258.9) 711.989.673.0 964.5 7.0 1.3 92.424.9 0.279.8 8.441.9 5.8 1.2 741.4 14.0 1.6) 1.360.438.366.0 472.750.8 (2.0 4.4 3.2 0.7 13.383.229.4 3.659.0 453.0 (288.1 19.0 3.7 1988 TotalexportsofGNFS Merchandise Non-factor services Total imports of GNFS Merchandise Non-factor services Resourcebalance Netfactorincome Factorreceipts Factor payments Interest Otherfactorpayments Net private current transfers of which workers remittances Net official current transfers Currentaccountbalance Official capital grants Private investment (net) Direct foreign investments Portfolio investments Net foreign lending Disbursements Repayments Other capitalflows. in months of imports Exchangerates Annual average (LE/US$) At end-year (LE/US$) Index real avg.3 11.0 940.0 1.222.776.742.128. net intemational reserves [plus indicates increase in assets] Memorandumitems: Net international reserves (NIR) NIR.2 3.1% -1.0 4.668.805.3 3.1 4.567.8 2.7 102.991.8 591.3 99.5 910.1) (598.833.1) 918.080.5) (790.178.0 14.4 10.6 676.532.179.186.2 1.1% 1.488.232.597.5 1.0 35.7 136.6 6.6 1.142.750.184.0 453.728.9 1.249.5 2.6) 636.9 6.034.4 0.088.5 (143.424.i.9 3.189.0 (1.8 4.7) 1.6 3.093.3 358.3 8.1 1.2 9.5 10.117.1 14.0 (1.0 28.7) 1.526.9% 0.489.530.120.6 3.574.2 0.0 3.5 17.374.854.532.236.3 15.4 88.287.0 5.371.3 92.988.326.5% 0.2 20.5 1.679.9 5.4 1.6 12.454.2 (55.405.4 12.3 11.4 3.2 30.1 1.0 10.326.5 1.254.4 6.723.4 2.230.0) 734.218.1 6.9 3.747.0 (113.5 189.4 1.5 12.018.486.3 106.7 1.2 3.2 3.099.552.142.8) 1.3 7.8 24.442.0 58.755.0 4.3 3.2 3.0 124.0 (1.9 0.6) 1.108.6 4.2 3.805.0 0.2% -0.618.149.9 838.715.1% 76 .0 3.0 1.452.0 5.456.284.1 1.

1 169.730.1 20.9 1.0 0.0 200.967.142.5 C.8 2.9 B.1 101.1 201.8 95.5 46.028.5 1.7 238.9 0.2 0.0 30.0 238.3 0.0 203.0 35.0 560.4 579.5 758.4 194.915.2 911.0 13.8 1.0 -4.4 214.0 0.6 10.8 322.0 200.4 1.0 11.2 -57.7 17.0 364. stocks and flows (US$ million) _______________________ Second five-year plan period: actual 1991 1992 1989 1990 1988 Third plan period: actual 1995 1993 1994 Estimate 1996 A.0 187.441.0 3.7 90.0 0.5 0.0 943.3 4.3 137.2 -215.9 -40.8 57.0 206.4 69.3 1.7 1.0 233.062.0 75.0 1.0 185.7 321.044.0 270.2 844.3 -93.3 285.575.0 1.8 31.3 -441.0 1.059.178.7 -32.9 637.0 769.4 488.0 348.9 1.0 1.385.184.018.0 943.610.4 958.2 487.655.8 88.5 1.3 -102.2 0.0 364.2 550.018.062.1 6.0 -250.3 95.9 51.0 189.8 1.5 121.0 1.3 13.8 154.0 6.0 0.5 769.4 370.0 0.7 412.1 0.8 -231.5 -160.405.9 -30.9 189.4 0.4 77 .8 -50.0 20.6 627.0 153.7 120.0 1.133.6 226.189.0 1.0 1.0 1.424.0 706.9 503.254.7 157.9 140.3 0.7 662.9 449.2 0.7 -113.0 16.5 82.0 0.186.TABLE 5 External debt.0 120.0 -125.8 147.5 -46.6 3.4 743.0 98.8 150.5 0.7 83.1 0.4 777.5 294.7 18.068.5 0.0 3.2 1.1 0.6 -7.3 11.8 50.9 0.2 2.0 3.5 303.405.0 1.196.7 -83.1 320.3 375.9 0.0 180.825.0 1.0 1.9 -74.6 671.0 142.3 1.4 266.5 435.064.452.305.8 378.2 1.1 94.0 1.1 0.0 1. Amortization Public and publicly guaranteed Official multilateral of which IDA of which IBRD Official bilateral Private creditors (guaranteed) of which bonds Private creditors non-guaranteed Total LT loan net disbursements Net credit from IMF Total repayments 679.8 1.0 0.9 200.0 20.0 -100.4 385.9 2.9 1.2 373.3 1.333.590.5 0.9 28.1 -0.0 220.6 0.8 590.268.5 152.8 -171.3 1.133.4 79.0 1.8 120.9 12.0 60.0 1.5 641.3 -0.4 26.8 70.9 0.9 1. Gross disbursements Publicand publicly guaranteed Official multilateral of which IDA of which IBRD Official bilateral Private creditors (guaranteed) of which bonds Private creditors non-guaranteed Total LT loan disbursements Drawings from IMF Total disbursements 1.0 2.0 187.5 370.2 75.738.1 1.7 258.0 66.8 192.0 75.7 87.0 -143.8 1.0 647.621.6 4.3 1.266.269.5 -143.945.1 187.0 2.0 1.8 321.186.8 154.999.997.0 245.3 692.3 206.3 56.0 0.9 0.0 0.6 745.0 1.7 0.0 2.5 1.3 1.2 519.4 0.6 155.4 119.8 0.3 838.0 40.361.0 1.6 8.0 2.049.0 1.8 176.8 1.2 281.621.3 1.391.133.6 -0.219.8 257.2 0.5 292.6 -52.9 416.6 6.3 450.5 221.2 138.2 -132.5 321.3 -50.8 33.7 675.0 -119.5 0.5 14.2 29.6 4.0 3.7 861.9 312.5 481.2 0.0 829.184.366.190.668. Net disbursements Public and publically guaranteed Official multilateral of which IDA of which IBRD Official bilateral Private creditors(guaranteed) of which bonds Private creditors non-guaranteed Total LT loan net disbursements Net credit from IMF Total net disbursements 1.9 19.5 895.347.9 178.6 38.3 295.3 -144.295.5 0.4 0.108.5 -69.2 57.6 123.6 331.0 220.5 22.5 382.775.4 334.0 1.0 90.

452.1 1.2 131.2 1. Debt & debt burden indicators Total debt service (mil US$) Interest (LT+ST+IMF) Principal (LT+IMF) Total debt (DOD).0 0.0 8.360.6 1.176.398.9 0.7 22.guar.932.6 12.1 212.8 2.560.052.6 1.021.505.2% 92.4% 12.2% 78.5 2.369.3 2.844.1 1.1 123.7 1.0 8.2 684.7 104.6 1.335.5 32.057.688.7% 25.6 29.8 850.3 3.952.595.0 155.4 644.0 4.9 7.1 1.142.254.272.8 99.4 174.3 887.3 21.805.5 155.338.036.0 141.452.0 741.238.8 0.717.241.578.0 1.1 28.3 6.9 1.238.1 3.133.692.4 1.9% 12.9 90.3% 48.8 1.4 3.443.4 1.7 0.236.9 260.371.421.8 3.0 35.108.8 190.0 2.0 0.7 1.9% 16.0 600.386.248.0 305.220.232.9 63.2 32.6 10.1 1.6 1.9% 13.416.0 12.6 7.3 189.8 113. 78 .351.0 33.6 1.5 1.9 1.5 4.4 175. External debt (DOD) Public and publicaliy guaranteed Official multlateral of which IDA of which IBRD Official bilateral Private creditors (guaranteed) of which bonds Prvate creditors non-guaranteed Total LT DOD Short-term debt Use of IMF credit Total DOD (ST+LT+IMF)of which: F.233.8 943.6 3.1 1. Interest and charges Publicand publically guaranteed Official multilateral of which IDA of which IBRD Official bilateral Private creditors (guaranteed) of which bonds Private creditorsnon-guaranteed Total intereston LT loans Interest on short-termcredit Interest on IMF drawings Total interest (LT+ST+IMF) 358.4 2.4 105.327.565.4 210.8 7.2 1.7 940.4% 69.0 29.2 465.0 17.340.0 3.0 6.105.1% 85.149.5 213.040.8% 13.655.0 192.5 4.7% 60.4 0.7% Source: Central Bank of Egypt and World Bank.2 22.5 1.8 908.7 1.250.0% 52.0 33.0 54.675.8% 57.805.254.7 32.4 10.8 232.0 29.394.0 1.7 107.0 418.4 293.0 22.TABLE 5 (cont'd) External debt.1 998.327.0 28.8 1.8 117.6 938.0 38.841.401.166.0 0.7 7.2 32.737.4 83.211.380.407.964.1 2.) / GDP ratio TDS Iexports (GNFS+WR)rabo 29.9 898.018.4 1.2 363.042.4 1.6 7.4 218.673.743.997.3 1.0 850.0 1.081.184.748.9 264.493.5 14.9 51.4 0.3 749.8 34. total debt service (TDS): DOD/exports(GNFS+WR)rato DOD I GDP ratio MLT DOD (public+pub.6 741.5 2.1 116.949.0% 176.0 21.4 2.055.750.2 13.520.871.6% 173.7 340.5 1.0 1.858.4% 62.0 35.5 3.0 200.0 0.344.248.4 160.7 696.637.3 940.3 73.4% 54.211.6% 58.4% 66.975.2 3.9% 165.2 2.3 11.6 1.2 0.430.1 4. stocks and flows (US$ million) Second five-year plan period: actual 1988 D.6 31.8 1.236.1 144.3% 72.0 29.1 21.7 781.7 6.0 31.6 52.8 1.0 119.7% 19.1 E.0% 77.8 912.5 1.5 284.8 258.3 104.1 172.9 3.551.062.155.0 448.0 375.298.7 214.593.2% 69.8 29.1 25.0 29.5% 13.7 34.2 4.8 0.973.803.0 10.024.8 973.4 895.2 4.131.0 30.2 1.271.3 892.0 242.2 7.3 2.3% 195.5% 12.525.4 1.332.1 1.4 124.322.3 1.5 1.5 2.2 2.236.5 20.3 35.054.1 1.5 2.1 Third plan period: actual 1992 1993 1994 1995 Estimate 1996 1989 1990 1991 1.7 0.538.2 23.3 1.0 1.0 30.542.519.024.7 159.0% 252.5 1.635.1 3.8 910.5 0.705.4 1.8 107.6 26.164.4 206.0 375.4 1.3 1.5 713.2 154.3 116.0 500.9 768.9 109.8% 227.888.054.6 144.2 6.7 902.339.2 2.8 6.333.0% 87.5% 58.0 6.9 26.3% 102.3 4.4% 149.0 4.0 41.308.0 22.371.7 838.7% 200.098.0 175.025.8 144.927.0 4.

0 8.678.5 142.0% 79.7 539.4 24.7 47.645.377.213 0 14.831.847.157.0 2.2 162.245.981.7 31.295.517.0% 1.480.151.0 3.166.023.9% -3.0 23.7% -5.178.9 256.2% 7.538.947.0 14.451.496.0 6.0 22.6% 5.0 4.4 11.0 29.791.8% 5.0 12.0 4.5% 5.2 124.0 24.8 11.4% 3.4% 4.659.001.0 -3.017.1% 25.9 1.0 64.0 1.518.0 Shares of GDP at current prices Currentrevenues Current expenditures Budgetary savings Capital revenues Capital expenditures Overall balance(minus = deficit) Foreignfinancing Monetarysystemcredit OtherdomesUcfinancing 20.8 20.771.4 3.247.547 9 24.5 11.971.6% 8.834.0 43.333.2 5.0 12.399.0% 26. taxes dom G&S I pdv.0 11.0 12.0 -2.0 3.964.886.0450 46.0% 6.0 498.0 1.7% 79 .149.3% 14.8 23.7% 23.2% 0.8 46.231.0 11.2 166.5% 79.2% 2.0 492.697.095.607.5480 36.804.016.6% 27.358.719.805.7% 25.3% 1.0 -16.3 2.0 19.0 19.1% 0.0% 5.192.0 2.5% 13.519.591.0 -14.925.0 49.015.572.152.847.9% 6.0 3.0 -2.3% -2.826.9% 7.5 4.771.337.2% 4.651.450.116.0 18.8% 5.3 2.730.2% 4.0 -5.182.6 4.408.461.3 -3.925.5% 3.3% 21.635.0 6.0 3.4 11.4% 8.096.0 19.0 2.1% 18.2 99.987.0 12.735.1 27.120.045.5% 4.5 -9.4% 0.9% 4.915.304.791.9 1.2% -15.633.0 6.0 8.0 11.471.5% 7.631.682.0 -650.0 8.0 3.694.613.5701 3.9% 17.443.224.656.2 87.571.0 15.7% 49.0 16.0% 3.0 2.8% 6.0 -76.1 53.8 15.653. consum.867.0 7.178.951.0 687.0 12.297.0 1.7% 26.042.418.2 117.185.0 11.0 -11.0 9.0 9.002.2% -1.367.9 4.765.0 22.0 5.922.783.365.697.2 11.202.394.359.267.6 90.6% 15.636.0 1.0 179.4% 28.0 6.6% Govemmentdebt (DOD.0% 1.TABLE6 Fiscal accounts (LE million) Second five-year plan period: actual 1989 1990 1991 Third plan period: actual 1993 1994 1995 EstImate 1996 1988 Govemmentbudiget(mitLCUs) Total current revenues Direct taxes Indirecttaxes On domestic goods and services On intematonal trade Non-taxreceipts Total currentexpenditures Intereston extemaldebt Interestondomestcdebt Transfers to pnvate sector Transfers to other NFPS Subsidies Consumption Wages and salares Otherconsumption Budgetarysavings Capital revenues Total capital expenditures Capital transfers Budgetaryfixed investment Overall balance(minus= defict) Sourcesof6nancing Foreign finaning Monetarysystem credit Other domestc financing Residual sourcesand discrepancies 1992 12.713.849.0 950.0 3.927.3 14.0 43.7 2.6% 4.0 0.2% 9.969.071.7% 2.251. imports Source: Govemmentof Egypt 4.0 464.408.635.0 57.8 0.7% 23.2% 1.9% 47.285.588.3% 9.0 42.0 3.2 3.0 18.200.0 37.0 -3.0 17.8% 5.0 10.4% 5.608.0 8.1 121.312.0 10.292.0 174.4 8.613.4% 10.9% 9.1060 7.0 10.665.0 23.2 -1.3 2.967.0% 6.201.6 -211.0 12.664.0 13. taxes on domesticG&Sl GDP Indir.0 5.357.2% 26.998.0 5.3% 13.640.909.917.0 7.5 18.0 11.8290 13.0 3.2 117.312.846.517 0 14.796.0 130.7 52.1% 55.0 13.0 2.2% 1.828.0 5.579.0 16.616.299.515.0 2.9 3.0 40.4% -5.500.097.9 377.4% 5.2% 4.9% 1.831.0% 25.0 7.0% 19.915.538.5% 5.053.581.0 4.437.0 5.0 5.0 -981.730.0 14.228.1% 6.2 3.9% 7.0 10.242.0 9.1% 9.0 5.0 30.9% 6.1760 -1.6 6.4117 2.0 10.6% 1.4% 5.750.0 1.465.9 111.697.959.0 -153.156.118.120.0 14.0 7.0 10.250.951.0 10.5 -3.4% 4.9% -17.0 3.0 16.0 11.0 4.004.849.818.167.0 -10.992. Taxes intl trade/merch.624.926.308.6% 4.1% 7.072.0 2.0 6.8 9.3% -0.072.0% -0.2% 14.731.9% 18.8% 7.0 3.499.346.948.0 9.0 46.0 39.2% 2.012.0 5.5% 52.696.0 -3.1% 2.0 12.8% 7.4 46.3 27.1% 3.984.0 11.769.687.414.8 49.3 46.752.047.2 17.690.0 -304.029.985.0 3.9% 7.228.0 15.022.0 4.0 0.0 105.449.796.0% 9.3% 24.0 11.5% 2.0 52.2% 7.3 2.168.0 6.503.0 5.5% -15.794.036.7% 14.0 16.7 4.8 3.0 13.0 1.3210 3.123.0% 14.0 -5.0 -80.0 4.0% 92.0 3.248.7% -3.3% -0.0 5.4 2.3% 5.870.105.5% 1.741.617.7 47.178.0 11.1 2.956.0 4.9 4.819.911.0 10.end of year) Extemal debt (LE mil) Extemal debt (USSmil) Debt to monetarysystem (LE mil) Otherdomestc debt (LE nil) Total govemmentdebt (LE mil) Total govemmentdebtas percentGDP Tax burden indicators(%) Dirct taxesIGOP Indir.1980 3.7 14.9 185.653.0 -675.7% 7.0 13.963.565.805.8 85.1% -15.396.9 81.7% 1.548 9 0.6 42.2 2.0 7.0 25.994.0 2.0 152.4% 92.644.0 2.9 2.0 -385.9% 84.0 100.2% 26.0 3.5 5.0 51.0 6.2% -1.336.0 10.0 2.454.0 19.193.0 -6.679.0 10.064.0 11.0 15.176.294.987.0 6.5% 1.4 2.783.9% 1.723.0 3.0 -4.0% -2.114.0 -659.4 674.238.3 26.527.0 7.053.8 3.0 9.816.9 20.3 10.0 4.7% 4.5% 27.847.0% 22.456.588.459.0 2.0 188.4% 1.0 -2.8% 23.951.0 21.0 129.461.0 6.2% 12.750.553.512.446.157.589.3 21.0 11.268.996.8% 17.8% -2.708.0 3.996.0 3.229.6% 10.6460 47.

reserves (US$mil.072.083. End-of-year stock Netforeignassets Domesticcredit on Net claims govemment Creditto privatesector Creditto PE sector Totalassets= liabilities Moneyand quasimoney (net) Other liabilities 1.9 12.651.3 15.9% 12.2 19.0 1.029.0 1.2% 100.850.0 136.4% 100.054.0 166.785.475.6% 17.491.704.553.2 20.905.0 101.0 17.040.236.6 46.0 5.7% 8.975.7% 100.0 11.0% 31.800.396.179.4% 34.0 1.3% 17.2% 100.123.0 23.0 8.0 19.0% D.6% 20.0 145.2 16.0 51.8 4. creditand prices M2 / GOP AnnualgrowthrateM2 Annualgrowth privatecredit GDPdeflator.0 78.153.163.0 47.0 55.4 46.276.989.2% 11.0% 28.053.898.618.0% 37.740.489.102.8% 77.0 21.0 123.675.0 7.310.8 -1.9% 29.0 152.flow Monetary system.265.330.6 6.0 20.112.0 24.0% 7.618.8 6.4 30.0 40.504.8 27.228.2% 39.3 19.0 11.0 52.0 118.1 2.0 47.5 18.TABLE7 Monetary survey (LEmillion) 1988 A.) Monetary system. growthrate Govemment Egypt.0 -1.9 15.0 20.825.0% 26.0 5.9% 39.765.4% 78.676.4% 30.886.698.0 24.2% 14.004.611.196.6 82.2% 14.285. Memorandum items Netintl.0 1.593.2% 39.0 38.218.017.0 14.4% 14.6 19.1% 33.8 71.0 3.0 13.0 18.7 32.4 6.530.0 16.844.0 171.824.308.7 14.328.6 -846.894.4% 13.8 5.0 47.925.0 716.4% 16.564.3% 5.0 64.0 9.161.236.021.0 6.728.9% 24.544.0 4.2% 33.293.0 1.3% 19.4% 82.0 11.0% 34.045.3 617.5% 18.0 19.2% 12.0% 74.9% 100.7% 16.593.707.0 29.640.6% 7.487.6 180.7 11.7% 16.990.175.723.0 5.7% 34.0 22.0 1.6 15.440.0 4.0 2.201.5% 8.358.2 43.3% 15.7% 100.528.0 17.0% 0.0 13.3 636.0 20.6% 41.4% 21.6 134.537.513.0 -1.194.4% 80 .9% 47.0 24.4 153.9 B.285.008.5% 18.0 1.553.2% 19.578.8% 50.140.0 121.711.0 2.076.6 6.498.357.853.9% 16.558.802.1% 19.4 7.0 91.9% 14.0 104.6% 100.0 458.1 13.0% 100.472.0 10.0 3.270.813.0 4.0 64.1% 17A% 17.280.360.065.003.801.540.662.334. Factorsaccounting for monetary expansion % MOM) (as Netforeignassets Netcreditto govemment Credit privatesector to Credit PE sector to Other liabilities (net)(-) Totalmoneyand quasi-money 2.5% 9.659.543.972.608.908.987.3% 27.0% 30.928.488.649.0 372.0 31.7 6.0 18.613.936.0 81.stock in monthsofimports 1.7% 15.0 -4.5% 7.916.0 7.864.0 100.142.0 -4.6 28.2% 13.128.174.0 3.0% 8.0 -1.605.0 107.0 18.0 12.8% 53.0% 35.1 19.7 806.793.0 5.7% 34.0 15.0 11.2 2.860.991.170.673.2% 74.9 16.5% 75.639.008.086.072.8% 78.0 9.9% 58.6 -211.963.0 -302.550.4 C.0 2.0 29.2% 100.9 15.8% 74.0 33419.0 31.0 10.4 28.351. Money.9 E.0 46.8 3.0 63.0 14.841.4 16. Annual flowsduringthe year Netforeignassets Domesiccredit Netclaimsongovemment Claimson privatesector Claimson PE sector Totalassets= liabilities Moneyandquasimoney Other liabilities (net) Secondfive-yearplan period: actual 1992 1989 1990 1991 Estimate Third planperiod: actual 1993 1994 1995 | 1996 1.0 54.521.0 47.0 3.0 106.890.639.415.0 4.0% 20.7% 19.1 26.2% 15.0 17.0 7.1 6.0 8.500.0 9.0 3.0 8. of 82.0 26.936.461.277.130.792.6% 21.034.631.4% 16.9% 52.738.5 41.5% 16.0 -4.067.0 53.0 9.3 24.9% 15.229.5 8.5 213.336.6% 18.450.0 25.228.0 59.0% 31.0% -5.147.057.1 60.6% 60.934.4 12.

0 66.4 (2.1 217.286.9% 103.639.736.3% 25.913.033.6% 30.465.7 315.2 344.400.4 250.2 (8.432.9 41.9 59.3 239.4) 11.0 (9.647.8 50.087.0 344.4 38.8 409.499.1 72.132.9 22.9 239.988.2 3.6% 18.383.3 0.3% 21.2% 24.6 73.761.3) 68.0 347.3% 104.9 32.9 287.019.8% 20.3% 50.106.350.050.447.0% 75.8 41.1% 81.393.0 (8.7% 5.734.779.5 21.385.6 361.0% 4.2 47.7% 49.411.2% 30.8 192.000.075.5 315.298.4 0.032.920.487.3 15.2 15.9 30.8 227.8% 81.884.5 47.176.511.6% 100.083.7 228.5 112.5 256.7) 11.3% 103.6% 21.0 99.6% 13.2 84.6 14.508.5 68.4 275.320.108.1% 23.4 63.787.0% 16.0 61.0° 5.300.0 101.370.718.3% 25.5 336.7% 4.8% 25.0 7.2 302.3 12.915.0 60.4 17.137.9 49.2 35.6% 10.347.6 63.6 83.4% 67.028.158.2 38.5% 24.3% 23.9 18.4 1.509.0 11.651. Sharesof GCP (current pnces) Gross domestc product Net indirecttaxes Agriculture value added Industryvalue zidded of which manufacturng Services value added Resourcebalance(X-M) Exports (GNFSI Imports (GNFS) Total expenditures Govemmentconsumpbon Private consumpton Govemment investment Private investment Gross domestc saving Gross nationalsaving Memorandumitems: GDP deflator(% change) Consumer prce index (%change) Total GDP (millioncurrent USS) Conversionfactor used(LEAIS$) Per capita gross nabonalproduct [AUas method: in ConstantUSS] 100.4 58.4 940.4 1.7% 23.445.2% 5.4 Net current transfers (NCT) National saving Gross nabonal product Gross natonal disposableincome B.297.7% 30.495.4 62.607.9 42.5 (2.5% 14.4% 5.2 (8.924.4% 4.029.505.0 4.8% 15.5) 14.5 230.6 (2.0 262.8 (10.4 85.5% 100.1% 20.0% 4.0% 5.5 93.8 333.5 42.037.8 394.7 304.4 (2.6% 5.363.8 287.5% 50.6% 103.6) 74.9% 30.972.3% 30.048.7 307.6 17.814.0% 4.265.9 112.766.267.0% 22.5 214.625.1% 20.738.8% 103.0% 100.2% 100.472.6% -3.3% 5.862.7 29.3 16.764.1 202.0 56.4 63.5% 20.5% -2.370.7 72.6 3.0 (10.391.170.270.8% 73.7% 22.108.9% 19.9 301.126.423.3% 19.5% 22.6 67.7 3.0 36.7% 73.0 45.762.1% 5.5 24.958.4 124.0% 12.0 75.377.868.5% 72.6) 53.0) 11.7% 14.0% 25.417.7% 26.3 55.2 3.3% 10.3 166.271.2 14.1% 16.579.4 102.282.7% 18.900.383.193.0% 31.700.1% 22.106.818.6% 22.7 151.299.9% 16.1 48.069.6% -3.6 375.7) 13.5% 18.8564 42.875.683.970.6 (2.6% 15.5 233.435.5% 15.9% 14.390.8 16.6 213.399.2 54.9 0.994.4% 15.795.0 1.0 380.334.320.0 81 .476.580.0 182.4 78.650.0 150.0 5.477.0 32.8 67.174.050.163.3476 51.319.5% 13.7% 5.0% 14.098.4 1.915.0 48.752.919.4) 11.7 186.0 38.645.0% 60.4% 100.TABLE 8 National accounts (LE million) Actual 1996 A.880.032.4 25.717.3% 5.8 59.4 47.6 398.0 262.919.6% 4.7 99.6 289.0 167.0 4.879.2% -3.4% 30.400.1% 30.8 (3.037.358.8 54.147.9 11.8 20.5 251.021.4) 44.0 4.5) 51.8 0.7 1.0% 15.4% 15.001.9) 57.4 59.0% 5.268.6 364.001.0 278.430.8% 75.816.8 1.213.6 4.154.8% 15.030.160.575.8 264.3% 12.2 3.9 54.745.1) 13.0 193.3 76.2 253.1 53.8% 4.2% 100.335.0 5.0% 9.2 317.1% 73.473.3% 25.783.1 137.6% 93.833.1) 81.8% 49.2 92.6 211.9% 103.262.5 44.392.0) 13.711.5% -4.484.7% 87.581.9% 25.8 0.7% 8.2 205.228.2 47.9 69.2 0.684.5% 15.2 (10.1% 14.691.2 27.093.2% -3.4 172.8 281.6% 10.0% 102.983.6 34.9040 13.852.271.423.0 4.419.4% 7.2 3.955.729.841.7% 12.2) 88.4% 15.578.8 92.7 330.424.128.027.6% 13.9% -3.2% 22.661.3% 25.6% 13.513.837.540.686.9% 49.9 408.424.3% 75.351.346.154.9 50.752.581.573.606.512.0% 5.9 0.0 31.470.3% 25.328.5% 103.0% 5.0 34.7 (3.619.0 42.6% 24.8 240.3 375.6% 100. In current prices (mil LE) GDPatmarketl rpces Net indirecttaxes GDP atfactorcost Agriculture Industry of which mariufacturng Services Resource balance Exports (GNFS) Imports(GNFSI Total expenditures Consumptionexpenditures Govemment Private Grossdomestc investment Govemment Pnvate Total fixed investment Total investmentin stocks Domesticsaving + Netfactorincome(NFY) + = Estimate 1996 1997 1998 Projection:base case scenario 1999 2000 2001 2002 205.9 1.617.896.078.5% 74.316.0 52.5% 9.0 46.762.0% 5.9 (2.347.029.0 61.927.873.3% 75.5% 14.835.867.124.9% 5.9 3.309.9 0.127.7% 48.9 (10.331.825.0% 49.367.610.7 200.0% 48.1% 9.2 274.0 32.334.056.3% 16.210.362.158.5 123.2% 9.2 50.9% 100.6 44.9 67.989.486.9% -3.1 54.4 12.132.

8 18.8 11.498.8 26.0% 4.4) 52.497.0) 211.011.9% 3.7 39.5% 4.2% 4.6 24.5 185.4 10.0 Estimate 1996 1997 1998 Projection:basecase scenario 1999 2000 2001 2002 Grossdomestc investment Govemment Private Total tixed investment Total investmentin stocks Termsof trade (TT) effect Gross domestc income Domesticsaving (TT adjusted) D.5% 4.174.9 17.3 56.1 10.5 26.846.4 170.0% 4.0 (734.9) 49.0 (1.0 (1.7 193.900.2 194.0 8.9% 9.099.2 155.103.9 12.0 40.8% 2.936.047.092.9 0. In constant 1992 prices GOP at market prices Resource balance Exports (GNFS) Imports(GNFS) Total expenditures Consumpton expenditures Govemment Private 155.5% 2.864.4% 4.2% 4.1% 4.108.011.3 29.922.853.7% 2.8 (7.4% 3.302.1 25.375.161.7% 1.5% 2.883.4 10.2 212.9 37.381.227.335.108.199.9 39.5% 3.798.8 112.2% 3.2% 10.0 27.0 28.259.2% 3.261.223.8 35.9 129.475.3% 1.7 134.534.754.313.6 32.2 17.5% 4.0 (826.6% 2.865.3) 45.4 17.9% 2.0 151.4% 4.7% 2.4% 2.7% 2.2 61.7% 5.7% 3.722.036.836.581.5% 4.9% 5.0 (7.597.4% 4.7 (6.5% 4.9 25.072.5% 2.077.2% 2.1% 4.736.884.3 28.3% 2.2% 2.509.395.1 0.3) 169.429.3 59.923.0 0.3 37.3% 2.4 176.2 184.3% 4.828.0% 2.0 27.4 53.4 0.1% 4.283.652.9 36.782.2 (6.286.010.0 (964.316.5% 3.1 37.916.727.6 117.793.5% 4.3% 4.121.0 16.804.4% 4.991.255.5% 4.3 27.8 159.052.7% 2.471.2% 4.449.0) 47.7 29.4 201.036.7 49.5% 1.884.2 177.7 0.763.6 137.3 (6.856.540.3 37.0 36.7 163.104.089.0 63.0% 2.849.271.5 147.4% 4.5% 4.9) 193.6% 2.244.4% 4.0 16.5% 4.6% 3.2 18.6 203.9) 154.8% 5.398.5% 4.0 162.8% 3.9% 82 .2 163.155.832.5% 4.326.087.182.5 (6.9) 59.5) 185.1 169.5 218.6% 1.4 209.8 17.059.6% 2.7 9.853.020.856.5% 4.708.6% 4.4% 3.496.8 31.440.9% 11.700.0 (745.461.024.2 177.5 52.099.9% 2.345.5 144.0 (1.3 4.8 0.3 0.4% 3.2% 2.510.5% 4.7% 4.5 27.336.3% 4.964.748.828.4 0.4 33.936.108.0 (759. 33.323.003.589.6% 1.048.3% 5.207.3 12.325.9) 176.4% 3.700. Annual growth rates (1992 prices) GDPat marketprices Exports(GNFS) Imports (GNFS) Total expenditures Consumption Investment Gross domestc income Grossdomestc savings Per capita growth rates: Per capita GDP (mp) Per capita total consumption Per capita privateconsumpton Source: WVordBank.376.581.227.5 65.4) 162.5 38.2% 4.4% 2.4) 56.0) 202.2% 4.2% 2.0) 41.8 169.257.2) 54.349.5 40.5 (6.2 33.187.4 38.5% 4.6% 4.891.1 35.8 (7.6% 4.7 123.960.3 140.5% 4.5% 4.458.0% 2.0 129.TABLE 8 (cont' d) National accounts (LE million) Actual 1995 C.

8817 3.3 92.061.3 147.904.652. Includespaymentsin retum forforeign partner's invest ent Source: Woodd Bank.9 112.045.6 2.9 998.0 2.6 1.289.5 5.4 83 .7991 1.2 120.7 4.912.0 5.1247 8.1 108.4 2.059.4 2.5 2.2 127.373.813.0773 1.1 104.2 2.175.279.383.6 516.8 373.965.635.2 107.160.8% 3.5 2.234.6 104.378.5 1.781.4 12.671.5 4.525.6 104.2 5.9 6.9% 3.5 7.8 4.5 3.0 382.975.0 2.1% 5.8 1.1 759.3 395.0 4.1 122.2 2.9 9.439.212.586.6 626.6 3625 449.154.317.4 1.998.871.8 9.492.677.228.0 5.746.035.687.880.779.4 3.3 13.759.3 5.8 6.5 800.3 2.9 1.550.0 7.1 3.058.6 2.0 121.8 5.2 2.186.5 4.519.036.9 117.055.643.868.7% 5.0 403.041.405.9 1. Value in constant 1992 pnces (US5 mll.5 306.5 352.891.e.4 343.275.0 15.0 11.452.345.4 816.640.854.025. Capital goods Total non-factorservicepaymentsMemorandum tems Export volumegrowth rate Importvolume growth rate 4.793.6 1.193.6 4.2 3.7 721.3 130.4 1.1 4.7% 3.0 2.3 3.385 8 233.9 305.8 1.009.533. - 99.6 3.202.261.531.040.567.895.431.840.596.9 116.322.182.637.008.9 819.9 1.285.1 5.5 2.7 1.1 1. Non-factorservice indices (1992 =100) ExportsofNFS-volurneindex ExportsofNFS-pnpceindex ImportsofNFS-volumeindex ImportsofNFS-priceindex Includesforeign partner'sshare.859. Value in current pnces (US$ mil.8 110.457.2 460.5 443.8 12.5 4.025.886.5 3.1 854.9 10.) Total merchandiseexports Petroleum' Cotton Otheragnculture Textiles Othermanufactures Total non-factorservice receipts of which tourism of which Suez Canal Totalmerchandiseimports Food Otherconsumergoods POL and other enerqy Intermediategoods r.484.7 5.948.2 16.9 2.7 92.361.6 3.1 118.6 1.089.4 115.332.308.2 112.4 92.2 1.5 5.009.6 106.9 3.4 2.8% 3.3 -3.4 5.545.9 1.818.0 2.3 124.6 3.1 232.344.8 3.155.597.378.5 706.3 92.8 2.202.443.829.4 4.6 2.7 987.5 1.301.4 2.6 3.3924 5.7 14.6 5.257.4 3.218.9 327.5 3.441.005.7% 5.0 11.9 2.3 5.841.844.6 1.056.5 7.3 533.4 6.1 8.3% 3.3 11.4 2.TABLE9 Merchandisetrade (USSmillion) Actual 1995 A.5 4.8 1.3 489.3 128.9 1.4 375.406.6 115.879.107.1 2.520.9 2.973.7 5.813.9 2.0 118.4 1.2 1.348.5 124.579.996.130.103.4% 27.8 4.313.551.902.9 12.395.4 2.0 2.864.8 6.3 111.741.3 2.282.1 2.760.3 128.0 125.9 4.5 104.557.5 369.8 2.935.0 1.8 9.8 Estimate 1996 1997 Projection: case base scenario 1998 1999 2000 2001 2002 B.892.1 1.873.635.8 3.1 6.250.1% 3.5 568.3 121.280.693.666 3 1.6 14.1 259.9 17.7 3.8 279.5 2.182.3 3.572.1 275.6 10.6 5.4 107.081.877.1 4.675. Prce Indices(1992 = 100) Merchandiseexports Merchandiseimports Merchandise terms of trade D.085.0 12.042.3 91.113.9 102.9 1.153.7 1.1 92.153.7 313.4 309.8 1.6 4.044.2 113.6 1.5% 3.9 2.693.114.2 267.4 2.908.7% 3.0 5.9 127.3351 1.243.5% 3.298.1 3.2 115.7 3.627 5 2.2 140.3 484.1 3.1 4.4% C.937.601.9 966.6 6.667.0 7.2 4.7 #40.9 11.444.302.9 2.868.5 3.848.290.188.0 2.493.3 2.438.404.927.0 10.7 2.842.3 2.9613 1.696.5 558.8 3.679.5 332.946.7 5.7 13.520.9 292.i.856.987.9 9.9 6.1 1.4 11.0 4.6 510.1 107.212.137.3 154.0 920.2 603.2 596.7 7.037.2 4.9 13.4 91.371.134.109.454.255.631.4 10.985.998.9% 5.6 5.) Total merchandiseexports Prmary products ofwhich petroleum' of which cotton of which other agriculture Manufacturedgoodts ofwhichTextiles of which other manufactured Total non-factorservice receipts of which oursm of which Suez Canal Total merchandiseimports Food Other consumergoods POLandotherenergy Intermediategoods Capital goods Total non-factorservicepayments4.9 2.7 2.7 925.0 3.217.8 886.2 3.7 6.8 414.675.7 5.682.241 5 655.1 295.2 14.458.516.1 1.5 4.406.847.5 3.7 845.8 361.0 2.6 114.2 134.0 3.8 112.750.9 319.9 1.0 13.0 2.830.292.200.109.491.4 2.695.191.1 2.735.0 1.7 2.1 3.1 1.8 478.3 4.4 130.222.2 1.5% 3.197.348.8 5.0 283.447.0 5.9 6.2 2.9 5.0 252.1 122.6 2.0 1.598.3 13.4 3.7 244.561.0 119.4 124.4 133.3 3.745.177.9 1.7 113.400.0 5.378.900.6 1.0 11.0 1.7 817.2 3.4 116.0 93.1 5.

455.840.526.4 1.9 4.0 4.9 2.627.4 4.6) 1.5 1997 16.5 (856.3 1.574.776.2 25.9 1.983.0 (2.497.4 3.7 16.5 4.1 0.426.233.4 3.9 838.8 (2.1) 907.088.1) 1. n.7 1.3 1.6 75.597.1 22.6 676.4 3.0 0.3 3.4) 3.830.2 1.326.1% -0.TABLE 10 Balance of payments (US$ million) Actual 1995 TotalexportsofGNFS Merchandise Non-factorservices Tota! importsofGNFS Merchandise Non-factorservices Resourcebalance Net factorincome Factor receipts Factorpayments Interest Other factorpayments Net prvate cunrenttransfers of which workers remittances Net official current transfers Currentaccount balance Ofricialcapital grants Pnvate investment(net) Directforeign investments Portfolioinvestments Net foreign lending Disbursements Repayments Other capital flows.057.9 1999 18.i.0 936.7 6.3 3.1 (521.388.281.4 3.7 6.5 1.5 221.870.1% 0.0 719.2 0.117.0 1.2 22.0 3.2 1.0 964.840.9 220.579.5 189.231.7 11.8 1.1 0.8 3.4 20.2 3.032.0 0.649.9 34.2 1.109.035.0 12.095.416.5483 1.376.579.0 7.7 2.2 13.326.0% 0.643.2 21.280.3 40.5) (736.890.376.752.3 15.9 37.5 1.484.4 3.0 0.1% 84 .8 5.6 11.8 292.6 19.796.5 7.7 5.0 (2.1 6.673.746.514.8 3.0 8.698.478.8 (2.8 14.450.9 11.7 1.679.481.339.0 145.7 (2.8 3.287.7 0.0 6.9 3.4 3.452.2 926.578.113.0 876.3 1.0 81.3 21.2 3.449.0 3.1 3.3 0.153.6 2.820.807.0 200.4 77.4 23.5 13.698. in monthsof imports Exchange rates Annual average (LEIUSS) At end-year(LEAJSS) Index real avg.0 5.631.3 3.868.8 1.877.0 1.2 1.2 1.494.122.7 17.0 58.3 20.456.627.1% 0.854.859.697.7 3.4 3.073.530.9 23.3 3.3 2.530.248.0 (42.277.1 1.0 9.8) 2.3 2.067.9 81.0 854.668.1 1.279.491.088.158.3 17.973.8 19.608.0 3.0 2.659.478.0 114.637.151.502.6) 1.910.4 3.0 3.7 1. Change.171.637.5) (818.140.991.781.7) 4.9 1.583.5 2.134.327.2 1.354.1 19.5) (734.567.693.8 945.5 2.1% 0.881.153.778.3) 2.9 322.1 18.3) (793.5 5.013.2 2.493.0% 0.3) 3.7 4.0 3.4 81.4 (2.5 2.032.128.0 3.0) 2.027.285.9) 4.1) 918.0 (2.948.583.8 (51.550.9 30.3 19.0 (288.5) (775.392.8 22.774.5 3. net intemational reserves [plus indicatesincrease in assets] Memorandumitems: Net intematonal reserves(NIR) NIR.211.7) 889.7) 1.6 1.3 6.1 2.6 660.5) (752.275.0 266.033.212.750.6 5.8 2.5% 3.5 5.487.4 15.0 4.4 83.279.0 7.6 680.5 2.813.2 47.146.827.5) (790.334.1 1.785.047.4 (479.1 1.0 (2.3 13.7 871.8 13.8 20.9 52.8 1.4 Estimate 1996 15.1 3.9 81.8 2.922.454.896.308.3 (680.7 2.5) 2.5 14.0 1.1 295.1 1.426.0 104.5 762. -0.847.8 3.0 2000 2001 2002 22.849.755.530.0) 2.3 757.0 2.1 242.793.1 1.5 2.1) (777. X-rate (1990 = 100) (decrease is real appreciabon) Currentaccountbalanceas%GDP Source:World Bank.0 12.5 1.9 1.734.e.177.7 3.4 3.8 81.0 3.0 29.562.133.2 28.438.7 3.325.527.084.6 43.134.625.3 Projection: base case scenario 1998 16.0 3.656.7) 2.5 10.737.1 (565.108.2 0.2 2.0 (99.405.315.279.

4 266.0 175.0 0.5 401.7 175.0 227.7 489.8 440.150.4 474.0 2.1 0.8 31.8 444.5 240.201.0 200.2) 0.1 489.9 1.0 2.0 0.8 1.0 80.2) 29.5 121.0 (69.5 0.2 1.9 503.8 1.110.4 1.1 546.0 340.3 0.3 789.2 281.158.275.3 391.7 0.0 0.0 441.2 0.890.3 340.2 484.3 121.0 8.0 1.4 0.013.5) 936.4) 120.367.0 0.8 0.0 421.2 378.0 875.1 6.3 56.2 0.7 19. Net disbursements Public and publicallyguaranteed Officialmultilateral of which IDA of which IBRO Officialbilateral Private creditors(guaranteed) of which bonds Prvate creditorsnon-guaranteed Total LT loan net disbursements Short-termcredit (net) Net credit from IMF Total net disbursements 364.0 224.9 568.7 53.2 73.1 1.8 0.315.068.0) 560.9 230.668.0 250.3 31.034.5 400.2 0.0 0.1 C.4 0.0 1.0 200.2872 85 .3 Estimate 1996 1997 1998 Projection: base case scenario 1999 2000 2001 2002 8.0 352.8 0.0 203.0 200.0 0.1 264.723.6 (240.0 1.4 4. Amortizabon Public and publiclyguaranteed Offidal mulilateral of which IDA of which IBRD Offiaat bilateral Pnvate creditors(guararneed) of which bonds Prvate creditorsnon-guaranteed Total LT loan net disbursements Net credit from IMF Total repayments 769.5 1.6 730.1 119.8 154.1 0.0 0.4 644.062.1 585.1 293.4 370.8 0.2 421.6 38.9 146.8 512.3 528.4 0.406.0 1.0 206.2 54.3 0.7 377.108.8 173.9 65.028.8 127.0 1.6) 352.5 303.2 15.0 116.4 102.9 1.0 124.268.7) 71.3) 295.0 2.9 45.8 205.0 281.0 (45.034.0 200.0 1.0 364.0 224.9 400.0 1.5 2.0 381.5 578.0 1.0 201.7 107.9 412.3 1.7 120.8 40.8 1.0 189.0 1.095.7 0.562.315.0 392.0 1.8 0.308.8 395.5 (276.7 1.9 44.5 497.6) 215.2 0.9 1.062.TABLE 11 External debt.0 1.311.450.0 (170.6) (16.6 331.4 133.0 2.3 36.8 491.0 333.1 144.0 210.0 0.4 0. Grossdisbursements Public and publiclyguaranteed Officialmultlateral of which IDA ofwhich IBRD Official bilateral Private creditors(guaranteed) of which bonds Private creditors non-guuiranteed Total LT loan disbursements Short-termcredit (net) Drawingsfrom IMF Total disbursements 1.2 635.1 123.8 32.1 81.182.3 0.8 348.5 14.0 1.0 348.7) 0.8 70.0 1.133.3 13.6 0.0 165.0 281.8 23.0 187.8) 384.0 1.6 1.0 177.6 48.281.0 1.013.013.027.7) (7.5) 719.6 (119.568.9 0.0 (46.8 378.6 347.0 16.0 0.8 79.676.6 532.442.6 64.9 201.190.5 46.9 72.0 0.4 336.7 708.0 1.133.4 69.807.281.3 378.8 88.2 456.8 703 88.8 (171.5 0.7 1.5 0.1 97.450.5 472.0 1.088. stocks and flows (US$ million) Actual 1995 A.883.4 624.3 168.6 0.0 1.5 (160.0 215.0 1.212.1 0.0 0.5 1.5 382.0 1.4 (8.4 334.7 607.133.5 1.0 314.3 17.0 0.2 341.9 51.7 (113.9 0.9 (150.2) 147.0 769.3 (144.3 375.1 0.0 54.0 1.0 40.7) (53.9 185.3 838.0 1.0 1.0 1.3 00 0.9 637.5 1.3 58.167.2 0.4 245.737.6 0.5) 221.1 198.5 54 0 38.5 1.0 0.527.1 201.0 (54.2 89.

0 1.5% 12.412.7 0.9 1.3 1.4 10.060.4 34.256.1 86 .0 1.2 0.2 2. Interestand charges Public and publically guaranteed Oficial mulblateral of which IDA ofwhich IBRD Official bilateral Private creditors (guaranteed) of which bonds Pnvatecreditorsnon-guaranteed Total intereston long-term loans Intereston short-termcredit InterestonlMFdrawings Total interest(LT+ST+IMF) 1.0 35.297.577.0 1.2 1.561.450.064.281.913.7% 165.7 120.2 2.5 1.327.3 4.701.2 0.8 5.698.698.0 43.372.2 1.3 2.619.6% 41.622.1 0.8 1.2% 131.8 1.1 1.7 1.0% 44.5 0.360.025.4% 43.752.5 94.055. 195.542.361.403.6 1.7 1.9 0.3 1.2 32.149.3 0.234.7 26.6 1.5 9.0 400.4 2.5 1.6 26.8 153.810.7 0.036.752.1 1.035.322.4 0.1% 2.5 1.2 4.013.7 10.0% 52.932.5 10.225.961.0 96.0 33.315.032.0 1.2 1.794.647.9 116.4% 152.7 1.5 2.0 375.stocks and flows (US$ million) Actual 1995 D.0 35.013.250.398.5% 138.2 2.188.684.9% 46.2 1.312.560.9 63.9 26.435.225.581.973.108.1 2.5 97.8 2.0 25.416.7 172.649.6 108.4% 54.1 2.502.8 258.641.6 1.478.0 34.523.9 1. Externaldebt (DOD) Public and publically guaranteed Official mulblateral of which IDA of which IBRD Offirial bilateral Pnvate creditors(guaranteed) of which bonds Private creditorsnon-guaranteed Total LTDOD Short-term debt UseoftMFcredit Total DOD (ST+LT+IMF) which: of 32.6 31.665.0 36.9 109.382.386.583.608.949.072.151.0 33.TABLE11 (cont'd) Extemal debt.0 834.147.2 286.0 37.465.2 E.8 138.5 1.6 7.472.8% 34.7% 43.7 10.0 95.750. guar.5 0.0 17.436.1 1.5% 58.0 119.1 3.5 128.551.5% 11.5 1.1 Estimate 1996 1997 Projection:base case scenario 1998 1999 2000 2001 2002 1.2 1.729.590.820.5 1.7 124.0 1.8 35.5 1.7 2.0 0.517.5 0.5 323.2 21.525.2 1.0 1.0 33.5 2.0 1.9 26.1% 11.4 2.0 200.0 1.351.4% 11.1% 38.0 111.5 2.518.8 1.649.5 0.452.548.0 1.5 1.812.490.0 1.069.7 1.0 345.275.5 1.3 1.3 1.0 0.6 26.608.082.0 1.7% 40.9 898.4 1.3% 48.6% 37.1 116.1 1.2% 159.2 0.930.518.4 105.7 104.1 998.6 33.1 4.327.9 8.676.5% 12.7 33.665.548.4 3.0% 176.430.635.502.0 986.169.8 371.2 0.862.421.0% 39.3 35.767.233.1 0.9 34.8 232.6 33.1 1.0 37.9 34.5 0.5 32.6 1.4 10.236.1665 1.total debt service(TDS): DOD/exports (GNFS+WR)rabo DOD /GDP rato MLT DOD (public-pub.716.8 8.)IGDP rato TDS/exports(GNFS+WR)rato Source: World Bank.339.0 36.459.0 624.2 4.1 5.0 1.856.264.7 838.0 33.6 1.9 23.6% 11.886.3 26.5 1.8 0.4 1.5% 11.0 1.9% 36.2 1.858.0 1.0 8.0 1.8 305.9 93.0 1.2 1.673.3 1.6% 144.9 0.1 26.993.452.086.6% 42.143.3 1.286.5 35.3 2.9 8.6 26.3 0.3 73.1 1.332.9 34.493.4 1.0 62.0 8.158.4 269.4 1.254.055.4 0.3 0.3 11.272.3 1. Debt & debt burden indicators Total debt service(mil USS) Interest(LT+ST+IMF) Principal(LT+IMF) Total debt (DOD).6 0.6 5.625.5 1.202.0 1.5 28.5 4.7 1.0 79.8 0.055.047.5 35.7 F.5 25.4% 12.616.4 1.

1% 25.0 498.3 8.136.538.6% 4.180.6 188.1% 0.604.0 11.7 207.612.760.4 21.518.846.9 49.176.257.2 13.1 5.599.0 21.8% 57.926.4% 5.0 179.2 29.4% 23.4% 5.5) (3.831.5 15.925.0 3.568.3 14.5% 16.538.6 (280.1 185.564.9% 7.0 3.583.1 (612.7% 1.9 0.taxesondomestecG&S/GDP Indir. endof year) Extemal debt (LEmil) Extemal debt (USS mil) Debt to monetarysystem(LE mil) Other domestc debt (LE mil) Total govemment debt (LE mil) Total government debt as percentGDP Tax burden indicators(%) Direct taxes/GDP lndir.0 19.4% 13.2% 19.494.9% 7.9 24.522.6) 0.275.231.5% 0.916.2) (2.0 42.6% 1.417.2) 0.6% 1.5% 1.0) 11.1 17.708.294.9% 1.0 78.485.1% 22.4 18.0 (567.3% 1.9% 18.315.0 9.7) 2.1% 9.353.473.2% 1.2) 0.533.548.0 15.1% 9.0 13.5% 4.633.0 (604.804.475.2% -0.8 13.9 28.8% 7.848.6% 19.592.021.6 27.619.0 (656.655.231.9 17.259.4 (3.7% 5.206.063.4 19.5) 3.1% -0.346.0% 1.077.1 13.1% 9.9 0.0% 9.228.2% 23.736.8% 7.0) 2.4 (2.4% 5.238.0% -0.507.519.2) 20.996.4% 14.9 (636.203. imports Source: World Bank.7% 92.0 (890.7% 5.0) (432.0 27.3% -0.967.610.4% 5.8 9.0 27.1% 18.0 47.0 7.9 9.0 19.5 23.6% 24.9 29.646.8% 23.3% 23.7 39.7% 5.936.3% 21.7% 25.890.3% -0.129.8 34.TABLE12 Fiscalaccounts (LE million) Actual 1995 Governmentbudget(mit LCUs) Total currentrevenues Directtaxes Indirect taxes On domestc goods and services On internabonaltrade Non-taxreceipts Total current expenditures Intereston externaldebt Intereston domestc debt Transfersto pnvratesector Transfersto other NFPS Subsidies Consumpbon Wages and salaries Other consumption Budgetary savings Capital revenues Total capital expenditures Capital transfers Budgetaryfixed inivestment Overallbalance (minus= deficit) Sourcesof finanding Foreignfinancing Monetarysystemcredit Otherdomestccfinancing Residualsources and discrepancies Sharesof GDP at current prces Currentrevenues Currentexpenditurets Budgetarysavings Capital revenues Capital expenditures Overallbalance(minus = deficit) Foreignfinancing Monetarysystemcredit Otherdomesticfinancing Governmentdebt (000.5) 4.3 14.0 17.8 0.5 9.0 32.7% 75.8 27.5) (502.1 90.0 61.819.715.7% 1.8 27.5 15.292.123.741.1 92.510.2 19.7 4.0 53.875.0 51.9 57.423.2 (1.6) 16.0 25.1 16.0 16.2% 71.9 4.5% 23.2 97.404.267.275.0 10.156.8 13.8% 7.250.8) 3.7 15.584.2 25.396.5% 1.477.5% 2.9) 0.423.5% 1.304.0 5.4 (906.727.5% 20.0 3.0 8.028.0 3.6 4.5% 1.0 72.0 12.702.9 69.1 12.2% -0.1% 9.920.7 15.1 46.074.0 13.6% 1.0 10.0 0.0 65.659.0) 2.253.3) (1.297.0 5.0% 1.6 106.533.181.213.988.246.721.0 26.7 26.205.854.0 5.9% 1.358.4 (1.336.449.585.0) 4.9 0.0 7.128.0 (675.8% 7.292.9% 103.4% 5.7 61.454.796. Taxes intitradel merch.9% -0.3% 5.078.8 27.607.278.634.1% -0.5 26.2% 3.8% 53.461.6 37.6 27.4 42.1 11.768.878.013.2 890.0% 4.3 3.950.3 27.5% 17.6% 5.500.0 11.0 2.094.2% 1.822.9) 4.0 3.8 (1.0 24.689.7% 5.4% 5.3) 15.0 12.1 33.849.1) 4.915.0 7.893.5 209.4% 0.046.2 28.080.0 12.0 18.459.7 3.1% 52.6 69.240.1 65.447.2 16.0 57.0 13.3 17.2) 0.3 4.624.3 20.144.0% 104.385.695.6) 1.0 12.731.5 62.420.5 21.4% 1.3% 3.8 17.8 (387.0 20.794.878.057.9% 1.3 30.083.963.653.0 11.5 73.3% -0.9 21.3 61.903.7% 7.2% 2.8) 1.9 (2.7 22.0 22. 5.4% 5.630.2% -1.0 18.911.730.8 (609.835.343.5) 0.178.1 26.357.299.0 15.2% -1.8 211.0 (2.7 (530.490.0 16.715.106.875.760.5 (1.0% 22.4% 10.674. consum.532.0 (659.952.955.856.4% 81.9% 2.664.800.802.996.7 4.753.6 4.045.3 92.747.0 10.9 (1.904.1 65.509.343.8 9.0 84.6 0.8 45.168.1 14.715.501.017.3% -0.1 73.7% 5.487.3 46.2 0.0 91.283.4 46.9% 18.845.7% 7.063.108.7 24.0 19.5 3.0) 12.9) 22.9 190.185.9 (633.708.0% 9.0% -0.9) 256.200.0 Estimate 1996 1997 1998 Projection: basecase scenario 1999 2000 2001 2002 87 .4% 0.0 12.547.602.5% 19.4% 15.0 54.227.349.0 (76.8% 20.192.675.320.581.6 16.9) (590.7 19.354.0) 14.taxes dom G&S / priv.613.2) 3.3% -0.8 4.861.4 30.045.7) 4.698.3) (3.1 30.0 (2.3 15.334.3% -1.1% -0.0 (2.053.199.326.2 10.0 3.4 35.973.280e7 45.617.675.719.0 14.410.7 11.875.501.2% 9.9 34.0 (385.063.4% 5.0 0.229.666.399.9 (15.232.5 7.9 68.3% -0.0 10.0 210.123.922.9 1.0 14.2% 0.990.3 58.7) 18.1 21.2 107.7 200.

825.668.302.6 25.523.7% 74.5 152.0 180.9 1.501.5% 4.064.530.8% 15.2 (2.591.415.0 1.0% D.9 23.4 20.950.1 361.481.2% 100.5% 41.382.5 60.8 19.4 46.698. End-ot-yearstock Net foreign assets Domesticcredit Net cdaimson govemment Credit to private sector Credit to PE sector Total assets= liabilities Moneyand quasimoney Otherliabilites (net) 46.987.345.2) 16. Money.498.4% 88 .360.747.4% 30.2 4.8 17. credit and pnrces M2 I GOP Annual growth rate M2 credit Annual growth pnivate GDP Deflator.273.053.0% 11.1% 12.2 272.5 16.0 18.712.9 86.3 403.3% 74.2 22.3 21.6 153.7 173.0% 52.2 27.128.8 81.9% 24.9% 51.1 232.2 (3.8% 74.5% 10.3% 13.0% 74.1 38.887.517.1% 33.500.2 54.5) 23.6% 18.390.649.5% 17.8 30.7% 9.9% 12.2 189.643.723.6% 9.0 131.6 1.4% 48.0 40.9 34.4 218.1 29.360.3 26.153.329.126.4 17.2% 100.1 249.4 30.532.4 29.3 4.241.564.811.4 22.3 32.156.6 21.084.0% 78.0% 28.1) 13.7 E.336.957.157.9 37.784.1 195.310. Factorsaccountingfor monetary expansion(as % MQM) Net foreign assets Net credit to govemment Credit to pnvate sector CredtitoPEsector (net)(-) Other liabilibies Total money and quasi-money 30.3 39.4 Estimate 1996 1997 1998 Projection: base case scenario 2001 2000 1999 2002 B.0 24.455.3% 15.828. Annual flows dunng the year Nettoreign assets Domestccredit Net claimson govemment Claimson pnvate sector Claims on PE sector Total assets = liabilites Moneyand quasimoney Otherliabilities (net) (846.8% 100.8 171.0% 50.4% 4.850.8 52.6 207.6 3. reserves(USSmil.473.353.622. 74.1 19.4% 5.697.802. stock in months of imports 1.280.7 213.179.1 17.090.9% 59.6 C.4 25.608.7) 31.4 267.639.395.4% 74.5% 100.6 886.6% 41.0 43.5% 4.611.313.487.293.4 63.TABLE13 MonetarySurvey (LEmillion) Actual 1995 A.1 21.092.0% 41.113.4 12.8% 64.394.087.045.0 (302.5 243.510.) Monetarysystem.970.3 22.6% 74.872.474.455.0 14.431.5 (1.1 19.860.360.516.0% 47.8% 4.3 155.8 173.5 17.0% 26.5 45.768.7 32.2% 10.0 153.8 (1.057.163.9 27.2% 36.934.707.234.0 716.870.9 112.829.118.7 20.063.6 (3.1 19.6% 12.3 34.8 39.532.1 134.0 19.991.603.1) 26.886.5% 7.6 297.2 46.704.396.4 70.229.9 47.6% 14.9 12.3% 19.4% 10.8 19.3 146.796.5% 5.4 23.102.164.760.8% 74.320.0% 24.9% 47.238.489.0 19.129.0% 100.1 1.5 227.0% 45.355.231.082.6% 100.3% 23.2 136.0% 35.4% 13.922.1 118.2 42.4 94.5 18.586.6 294.659. Memorandumitems Net intl.8% 9.7 25.108.998.2% 11.041. flow Monetarysystem.6 39.5 28.550.7 101.594.6% 19.073.7 806.4 15.8 242.938.6 45.871.2 321.0% 28.2 201.9 3.121.857.779.526.413.0% 37.8% 69.9 1.793.495.3 19.5 21.1% 74.228.2 2.9) 28.7 103.9% 45.870.0 28.7% 21.8 4.467.929.472.9 74.9 10.978.4 46.487.076.4 30.1% 100.9% 53.7% 21.252.4% 16.1 42.280.325.2 23.5% 11.1 22.5% 9.755.9 3.329.146. growthrate Source: Vorld Bank.9 4.5 18.6 450.4% 14.7% 9.257.9) 15.5 972.7% 16.2 21.0% 100.004.3 2.4 28.4 41.5 19.6 282.1 123.9 15.

9 27.8 124.332.4 0.598.491.7 198715.4474) 13.0364) 14.5 (3.899.573.1 65.9 41.0 6.8 120.2 1.211.711.3 27.8% 20.1 339.8% 100.764.0% 5.1% 20.892.0% -3.3 72.5955 305.629.0 378.6% 5.1 104.5% 18.942.904.0 73.6) (4.0% 29.9 42.320.420.4% 15.0 4.032.6% 5.299.630.424.6% 8.3% 29.5) (14.0 275.5 59.033.4% 15.6% 89 .3 (3.639.0 59.640.650.433.5 24.2 47.9 228.9% 23.7 47.9 22.038 0 B.3 1715596 (8.1) (18.4 109.7% 12.6% 24.400. In current pnces(mil LE) GOP at marketprices Net indirecttaxes GOP atfactor cost Agrculture Industry of which minufactunng Senrices Resourcebalarice Exports(GNFS) Imports(GNFS) Total expenditures Consumptionexpenditures Govemment Prvate Grossdomesticinvestment Govemment Pnvate Totalfixed investment Total investmentin stocks Domestc saving .9 78.666.0 143.2 247.2 429.8% 22.5 230.5635 29.9 172.4 1.7% 56% 18.3 292.0% 12.0% 5.3 22.3 78.4 11.8 58.495.255.403.4% 14.924.132.0 193.9% 55.2) (15.3% 22.2 70.501.0% 5.5% 72.5 353224.988.4 0.6 31.9345 107.0 7.1 202.266.5 91.0 18.825.2 24.7% 200% 22.8% 15.8% 104.4 47.9 121.5% 15.580.7 497.819.761.328.2% 13.8% 23.529 9 111.919.378.414.548.9% 13.6% 0.2% 50.0 25.654.058.086 6 425.0 38.4% 93.4199 69.5% 52.9% 74.7% 26.4% 24.700.5 -2683.3 3.7% 5.6% 159% 16.520.0 0.4 239286.9 0.050.6% 10.8767) 51.2% 27.958.050.400.008.1 53.3) (13.606.6 11.9% 7.6 344.6% 22.1% 28.302.5% 85.318.9 121.1% 16.764.3) (17.910.329.5% 100.629.4 12.2 54.7 102.1% 23.6% 25.675.5% 4.1 89.5 274.899.396.010.797.7% 48.255.8 275509.154.2 51.927.3% 71.0 00 33.213.119.0 502968.0 32.484.0 149942.4 79.6% 15.996.4% 23.767.7 34 940.5% 22.7% 19.0% 5.9 -2817.013.055.1% 14.0% 7.0 6.126.3% 30.595.9% 72.729.7% 6.8% 5.8 378.992.296.344.3% 68% 7.0% 17.5 1129892 38.370.396.8% 19.4 11.3 261.0% 112.581.2 218.0 6.4% 7.133.9% 27.406.162.670.0% 5.6% 22.8% -4.2% 100.377.905 4 63.2 15.144.5 42.7 0.2% 74.6% 10.6 389.0 217.390.1 130633.7% 4.7% 50.907.243.7% 105.0 100.0 85.734.4 15.747.970.TABLE 14 National accounts (LE million) Actual 1995 A.7 19.154.2 3.731.1 1.0 119.0 21.0 34.2 99.3875 61.8 4.6 46.708.8 49.7 14.4 316.934.9% 104.3 214423.3 28.457.9% -3. Net factor income(NFY) + Netcurrenttransfers(NCT) =National saving Grossnabonalproduct Grossnatonal disposable income 205.7 54.9 42.1% 1000% 4.2% 53.3% -5.492.0 61.834.3% 237% 51.000.9% 20.0 40.160.127.862.9% 23.276.602.034.196.8 109.900.885.1 83.116.9 100.021.4 308.0 150.7% 73.450.1% 102.5% 29.7% 31 3% 105.309.6 21.7% 86.1 245.4 375.1% 14.6 213.8 331.5% 6.203.8% 1000% 5.8 35.0 6.4 124.029.1 359.0% 31.0 46.675.0 7.873.0 6.2% 5.1356 70.1% 6.0 49.5371 46.662.0 440.8 Estimate 1996 11997 Projection: high case scenario 1999 2000 2001 1998 2002 61.733.2 4.259.1% 28.0658 344.3 1.8 239.5% 27.001.5 60.105.1 304.1% 7.1 21.347.4 1.4 18.0 32.797.1 78.4 334.590.2 138.7 88.0 31.991.8% 103.2 167.1% 5.4 -2805.0 63.3 83.8 58.2 269.2 3.5 194.4 1.5% 18.994.400.4% 20.298.910. Shares of GDP(current prces) Grossdomesticproduct Netindirecttaxes Agriculturevalue added Industryvalue added ofwhichmanufactunng Servicesvalue added Resource balance(X-M) Exports(GNFS) Imports(GNFS) Total expenditures Govemmentconsumpton Private consumpbon Govemmentinvestment Privateinvestment Grossdomestcsaving Grossnational saving Memorandumitems: GDP deflator(% change) Consumerprce index (%change) Total GOP (millioncurrent US$) Conversionfactorused (LEIUS$) Percapita gross nabonalproduct [Atiasmethod: in constant US$] 12.302.5 56.8 97.7 3.9% 100.6% 15.7 79.0% 76.0% 6.9 258.1 91.0 0.4 44.113.167.309.2 246.228.0 993770 -9423.6% 19.3 11.128.7970 87.351.0% 4.157.7 2304128 97.5 107.0755 192.842.058.3 482.5 220.180.608.0 40.9% 103.6% 21.9 11.3% 104.4% 6.6% 9.926.2 159.5% 9.458.9% 29.912.546.2% 32.729.0% 60.0 11.5% 73.048.8 135.907.2% 26.1 280.0% 5.9 -2783.578.5 267740.0% 48.7 54.3641 408.0% 16.3% 104.615.3% 25.3% 100.0 16.9 1.5% 32.4% 67.0% -5.997.5% 28.825.3 0.546.445.0) (5.579.1) (18.316.460.8 309144.747.4% -4.192.6 295.4 15.915.065.8 12.174.4 71.347.704.1 13.9 397596.7 464.5 447167.

9% 9.3) 45.9% 3.174.0 (1.473.4% 6.5 95.9 12.261.072.582.395.4% 5.9) 154.1 16.604.2 33.2 (9.8 (11.991.3% 4.1 15.1 0.7 81.0 182.7 9.8% 6.183.9% 2.154.318.573.946.5 65.344.099.6 45.2% 0.7% 4.8 149.682.092.8 16.8% 16.0% 2.052.394.4% 4.8 41.5 66.864.4 35.9 164.8 112.7 49.342.6 24.769.5 11.708.042.817.0 8.7% 8.5 0.5 52.2 244.161.6 16.353.0 (1.042.685.700.0 0.455.0% 4. Annual growth rates (1992 prices) GOP at market prices Exports(GNFS) Imports (GNFS) Total expenditures Consumpton Investment Gross domesfc income Gross domesticsavings Per capita growthrates: PercapitaGDP(mp) Per capitatotal consumption Percapitapnvateconsumption Source: Worid Bank.5 0.8 172.6 0.6) 171.8 157.7 0.212.915.4 35.963.278.536.0 (1.471.7% 5.6% 6.275.7 163.7 32.763.4% 0.6 (8.7 Total expenditures Consumptionexpenditures Govemment Pnvate Gross domesticinvestment Govemment Private Total fixed investment Total investmentin stocks Termsoftrade(TT)effect GrossdomesUcincome Domesticsaving(TT adjusted) D.1 6.400.471.9 25.6 49.400.0 0.911.227.7 59.3% 12.506.0 171.152.7 183.0% 11.1% 8.7% 8.7 14.9% 11.141.128.0% 15.2% 10.2% 2.1 4.9% 2.5% 5.8 29.8 129.7% 1.3% 11.6 221.136.TABLE 14 (con't) National accounts (LE million) Projection: high case scenario 1997 1998 1999 2000 2001 2002 Actual 1995 Estimate 1996 C.4% 2.212.7 0.8% 6.8% 2.213.6) 50.7% 4.6 11.4 33.1 25.4% 6.2% 4.1 207.0% 5.0 (1.773.551.3% 7.455.923.256.9 43.398.8 35.5% 11.869.1% 90 .0 (1.341.397.987.294.336.187. In constant 1992 prces GDPatmarketpnces Resource balance Exports(GNFS) Imports (GNFS) 155.9) 70.207.8% 4.1% 3.117.458.335.964.2 55.9 88.1% 3.0) 181.0 16.914.7% 10.1 134.9% 4.0 (1.4% 7.0% 7.4) 235.9% 8.861.857.824.0% 11.9% 5.287.3% 2.9% 18.1 218.8 (12.0% 6.306.5 65.3) 62.241.398.0 10.828.7 163.9 0. 163.343.363.946.337.7% 4.0 143.115.440.8 127.3) 87.2% 2.594.9 59.886.540.835.4% 0.036.0 169.1) 78.104.5% 1.9% 46% 2.4) 162.2 39.275.4% 6.0) 41.886.9 31.0% 3.089.859.4 61.6 133.083.5 16.700.3% 1.6 148.900.241.6 117.8% 3.6 231.4) 193.4% 5.5% 3.7% 3.5 (6.1 6.8 49.7 15.930.749.158.0 155.455.1% 16.0 (7.707.9) 219.6% 16.741.233.5 13.1 53.918.0 (1.496.3 48.0 (1.341.4 43.903.1 11.6% 1.367.2% 5.0% 4.0 (10.425.9 (10.8 75.4 27.7) 56.508.8 39.1 53.0% 2.8 41.1% 6.641.0 27.4% 4.1% 10.3% 12.6% -2.243.259.2 194.5% 4.227.0) 205.6% 10.6 206.897.8% 11.2% 2.9% 5.5% 8.9% 5.6 193.108.8% 4.0 37.0 236.939.0 16.2 50.639.7 141.6 179.

TABLE 15 Merchandise Trade (US$ million)
Actual 1995 A. Value in current prices (USSmil.) Total merchandiseexports Pnmary products of which petroleum* of whichcotton of which other agnculture Manufacturedgoods of which textiles of which other manufactured Total non-factorservice receipts of which tounsm ofwhichSuezCanal Totalmerchandiseimports Food Other consumergoods POLandothereenergy Intermediate goods Capital goods Total non-factorservice paymentsB. Value in constant 1992 prces (US$ mul.) Total merchandiseexports Petroleum' Cotton Otheragnculture Textles Othermanufactures Total non-factorservice receipts of which tounsm of whichSuezCanal Total merchandiseimports Food Otherconsumergoods POLand other energy Intemnediate goods n.e i. Capital goocis Total non-factorservice payments" Memorandurrl items grwth rate Export volumne Import volumegrowth rate C Price indices (1992= 100) Merchandiseexports Merchandiseimports Merchandisetermsof trade D Non-factorserviceindices (1992 = 100 Exports ofNFS - volume index Exportsof NFS-priceindex Importsof NFS- volumeindex ImportsofNFS-pnceindex 104.1 107.9 102.4 107.9 117.2 1121 108.8 112.1 128.7 115.3 1281 115.3 141.6 118.2 137.0 118.2 1580 1212 153.6 121.2 172.1 124.3 156.5 124.3 190.0 127.3 180.6 127.3 2100 130.4 196.1 130.4 99.2 107 1 92.6 104.9 112.0 93.6 105.1 113.9 92.3 105.5 114.8 91 9 108.3 117.3 92.3 112.0 120.4 93.0 115.6 123.5 93.5 119.1 126.7 94.0 -3.4% 27.1% 5.9% 5.5% 12.5% 19.1% 12.8% 8.7% 13.1% 12.5% 133% 8.3% 13.6% 8.4% 13.8% 84% 4,892 9 2,385.8 233.1 232.9 998.6 1,042.5 7,675.2 2,130.9 1,908.0 10,531.4 2,457.5 443.7 845.1 3,904.5 2,880.5 4,292.5 5,182 8 2,212.7 244.8 279.1 1,191.1 1,255.1 8,635.6 2,856.7 1,927.0 5,832.2 2,367.6 257.0 321.0 1,405.5 1,481.0 9,488.8 3,199.5 1,975.2 6,578.5 2,533.4 269.9 369.1 1,558.5 1,747.6 10,439.8 3,583.4 2,024.6 7,437.7 2,710.7 283.4 424.5 1,957.0 2,062.2 11,500.2 4,013.4 2,0752 8,4288 2,9005 297.6 4882 2,309.2 2,433.4 12,683.1 4,495.0 2,127.1 17,541.0 2,873.5 557.1 1,125.5 6,492.5 6,492.5 6,977.1 9,573.6 3,103.5 312.4 561.4 2,724.9 2,871.4 14,003.0 5,034.4 2,180.3 19,005.8 2,864.2 579.6 1,201.6 7,180.2 7,180.2 7,569.0 10,898.0 3,320.7 328.1 645.6 3,215.4 3,388.2 15,476.2 5,638 5 2,234.8 20,602.7 2,844.6 603.4 1,286.3 7,934.2 7.934.2 8,217.5 4,854.0 2,652.0 2,036.5 306.4 3091 2,202 0 1,077.3 1,124.7 8,2804 2,298.9 2,058.4 11,279.9 2,759.8 478.7 721.4 4,212.4 3,107 6 4,631.0 5,4380 2,6961 1,998.9 327.5 369.7 2,741.9 1,335.1 1,406.8 6,128.8 2,800.9 2,096.9 3118 3923 3,327.9 1,620.4 1,707.5 6,9432 2,918 7 2,1447 3319 442.1 4,024.6 1,959.6 2,065.0 12,335.6 4,234 1 2,392.2 16,526.5 3,175.2 603.8 841.3 5,9531 5,953.1 6,785.0 8,058.8 3,187.9 2,294.3 364.2 529.4 4,870.9 2,371.7 2,499.2 13,937.4 4,863.9 2,515.0 18,997.1 3,241.5 648.9 8941 7,106.3 7,106.3 7.799 3 9,4388 3,5452 2,5304 391.5 6232 5,893.7 2,869.7 3,024.0 15,761.4 5,586.0 2,643.3 21.119.1 3,308.5 692.3 981.9 8,068.2 8,068.2 8,670.5 11,0626 3,935.8 2,779.5 420.9 735.4 7,126.8 3,470.1 3,656.7 17,8326 6,411.3 2,776.5 23,478.1 3,376.1 738.1 1,076.2 9,143.9 9,143.9 9,639 0 12,9755 4,362.8 3,0410 452.6 8692 8,612.6 4,193.6 4,419.0 20,184.6 7,354 0 2,914.7 26,105.4 3,444.4 787.0 1,178.0 10,348.0 10,348.0 10,717.6 Estimate 1996 Projection: high case scenario 1999 2000 2001

1997

1998

2002

9,679.5 10,9398 3,202.0 2,160.0 3,688 7 2,277.3

12,454.0 15,078.3 3,044.6 3,109.5 516.5 800.9 4,687.8 3,404.3 5,113.0 566.9 830.0 5,285.9 5,285.9 6,190.4

11,114.9 13,238.8 2,548.2 460.8 886.5 4,182.2 3,037.2 4,561.6 2,640.3 491.8 937.1 4,584.8 4,584.8 5,369.3

14394.8 16,190.8 2,813.6 511.0 993.8 5,038.2 5,038.2 5,742.2 2,871.7 535.5 1,056.4 5,863.6 5,863.6 6,435.4

Includesforeign partners share. I'ncludes paymentsin returnfor foreign partners investment Source: World Bank.

91

TABLE 16 Balance of payments (US$ million)
Actual 1995 TotalexportsofGNFS Merchandise Non-factorservices Total imports of GNFS Merchandise Non-factorservices Resource balance Net factorincome Factor receipts Factorpayments Interest Otherfactorpayments Net prvate current transfers of which workersremittances Net officialcurrent transfers Current accountbalance Official capital grants Pnvateinvestment(net) Direct foreign investments Portfolioinvestments Netforeign lending Disbursements Repayments Othercapital flows, n.e.i. Change, netintemational reserves [plus indicatesincrease in assets] 13,134.4 4,854.0 8,280.4 15,910.9 11,279.9 4,631.0 Estimate 1996 15,117.5 5,438.0 9,679.5 17,567.0 12,454.0 5,113.0 1997 17,068.5 6,128.8 10,939.8 21,268.7 15,078.3 6,190.4 (4,200.2) (824.1) 1,696.0 2,720.0 1,502.1 1,217.9 3,376.1 3,376.1 0.0 (1,648.2) 945.2 1,697.0 1,497.0 200.0 719.3 1,807.8 1,088.5 218.3 1,731.6 Projection: high case scenario 1998 19,278.8 6,943.2 12,335.6 23,311.5 16,526.5 6,785.0 (4,032.7) (828.7) 2,047.7 2,876.4 1,548.3 1,328.1 3,426.7 3,426.7 0.0 (1,434.7) 926.3 2,067.9 1,847.9 220.0 876.9 1,890.2 1,013.3 (854.8) 1,361.6 1999 21,996.2 8,058.8 13,937.4 26,796.3 18,997.1 7,799.3 2000 25,200.2 9,438.8 15,761.4 29,789.6 21,119.1 8,670.5 2001 28,895.2 11t062.6 17,832.6 33,117.1 23,478.1 9,639.0 (4.221.9) (1,061.0) 2,579.5 3,640.4 1,698.2 1,942.3 3,583.2 3,583.2 0.0 (1,699.7) 871.9 2,774.6 2,481.8 292.8 1,212.5 2,527.6 1,315.1 (688.7) 2,179.8 2002 33,180.1 12,975.5 20,184.6 36,823.0 26,105.4 10,717.6 (3,662.9) (1,162.0) 2,785.8 3,947.8 1,752.2 2,195.6 3,637.0 3,637.0 0.0 (1.187.9) 854.4 3,057.0 2,734.9 322.1 1,287.2 2,737.3 1,450.1 (728.6) 2,960.0

(2,776.5) (2,449.5) (790.6) 1,625.5 2,416.1 1,327.7 1,088.4 3,279.0 3,279.0 0.0 (288.1) 918.6 680.6 676.5 4.1 295.1 1,133.9 838.8 (51.7) 1,550.4 (818.6) 1,755.5 2,574.2 1,452.1 1,122.0 3,326.2 3,326.2 0.0 58.0 964.5 762.3 757.7 4.6 560.4 1,668.9 1,108.5 99.2 2,439.8

(4,800.2) (4,589.4) (881.8) 2,211.5 3,093.2 1,608.5 1,484.7 3,478.1 3,478.1 0.0 (964.0) 2,388.4 3,352.4 1,649.0 1,703.4 3,530.3 3,530.3 0.0

(2,203.8) (2,023.2) 907.8 2,275.1 2,033.1 242.0 936.5 2,095.0 1,158.5 (1.161.8) 511.7 889.7 2,514.2 2,248.0 266.2 1,027.3 2,308.7 1,281.4 (648.4) 1,493.4

Memorandumitems: Net intemationalreserves(NIR) NIR, in months of imports Exchange rates Annual average (LEIUSS) At end-year(LE/US$) Indexrealavg.X-rate(1990=100) (decreaseis real appreciation) Currentaccountbalance as % GDP Source:Worid Bank. 28,128.6 19.2 30,588.5 17.2 32,300.1 16.6 33,681.7 15.1 34,173.5 13.8 35,668.9 12.9 37,846.7 12.3 40,806.6 12.2

3.4 3.4 83.2

3.4 3.4 81.0

3.4 3.4 77.3

3.4 3.7 73.3

3.9 4.0 81.0

4.1 4.1 81.0

4.2 4.3 81.0

4.3 4.4 81.0

-0.5%

0.1%

-2.1%

-1.7%

-2.6%

-2.2%

-1.7%

-1.1%

92

TABLE 17 Extemal debt, stocks and flows (US$ million)
Actual Estimate 1995 1996
A. Grossdisbursements Publicanclpublirlyguaranteed Official multilateral of which IDA of which IBRD Offioal bilateral Pivate creditors(guaranteed) of which bonds Pnvate creditorsnon-guaranteed Total LT loan disbursements DrawingsiromIMF Total disbursements B. Amorlizabon Publicand publidy guaranteed Officialmulblateral ofwhich IDA ofwhich IBRD Officialbilateral Pnvate creditors(guaranteed) ofwhich bonds Prvate creditorsnon-guaranteed Total LT loan net disbursements Net credit orm IMF Total repayments 769.4 334.3 13.1 201.8 154.2 281.0 0.0 0.0 769.4 69.3 838.8 1,062.5 382.5 14.0 2030 348.6 331.3 0.0 0.0 1,062.5 46.0 1,108.5 1,034.0 421.2 15.0 215.8 348.1 264.8 00 0.0 1.034.0 54.5 1,088.5 1,013.3 391.0 16.1 198.8 395.0 227.3 0.0 0.0 1,013.3 0.0 1,013.3 1,110.0 381.3 17.8 173.5 497.9 230.8 0.0 40.0 1,1500 8.5 1,158.5 1,201.4 370.7 19.9 146.4 624.8 205.9 0.0 80.0 1,281.4 0.0 1,281.4 1,190.3 340.8 23.1 123.6 730.1 119.4 0.0 124.8 1,315.1 0.0 1,315.1 1,275.2 341.8 32.0 116.3 789.1 144.2 0.0 175.0 1,4501 0.0 1,4501 1.133.9 637.9 51.8 88.3 375.7 120.3 0.0 0.0 1,133.9 0.0 1,133.9 1,068.9 503.8 70.8 31.8 378.0 187.1 0.0 200.0 1,268.9 0.0 1,668.9 1,167.8 491.4 102.9 45.0 340.4 336.0 0.0 200.0 1,367.8 0.0 1,807.8 1,182.2 456.1 97.8 79.2 378.6 347.5 00 224.0 1,406.2 0.0 1,890.2 1,311.7 489.2 89.8 127.8 444.7 377.8 0.0 250.9 1,562.6 0.0 2,095.0 1,442.1 546.2 73.9 185.4 474.2 421.8 0.0 281.0 1,723.1 0.0 2,308.7 1,568.7 607.2 54.4 245.1 489.5 472.1 0.0 314.7 1,883.4 0.0 2,527.6 1,6762 6353 36.0 281.8 512.3 528.7 0.0 352.5 2,028.7 00 2,737.3

1997

Projection: high case scenario 1998 1999 2000 2001

2002

C. Net disbursements Public and publically guaranteed Offlialmulblateral of which IDA of which IBRD Official bilateral Prvate creditors(guaranteed) of which bonds Private creditorsnon-guaranteed Total LT loan net disbursements Net credit fromIMF Total net disbursements D. Interestand charges Publicand publically guaranteed Official multilateral of which IDA of which IBRD Official bilateral Prvate creditors(guaranteed) of which bonds Prvate creditorsnon-guaranteed Total intereston LTloans Intereston short-term credit Intereston IMFdrawings Total interest (LT+STvIMF) 1.236.8 232.6 71 116.9 898.4 105.8 0.0% 17.5 1,254.3 73.3 11.4 1,327.7 1,398.8 258.0 8.0 119.0 1,036.7 104.0 0.0% 8.5 1,430.4 10.1 1.6 1,452.1 1,412.4 269.8 8.9 116.3 1,047.0 95.6 0.0% 25.5 1,478.2 21.2 1.7 1,502.1 1,436.2 286.5 9.7 120.5 1,055.9 93.8 0.0% 43.5 1,523.9 23.3 00 1.548.3 1,472.8 305.5 10.5 128.0 1,072.5 94.9 0.0% 62.0 1,581.5 25.7 0.1 1,608.5 1,490.5 323.7 10.8 138.5 1,069.5 97.3 0.0% 79.5 1,619.5 28.2 0.0 1,649.0 1,518.0 345.4 10.8 153.8 1,064.6 108.0 0.0% 96.1 1,665.6 31.1 0.0 1,698.2 1,551.8 371.7 10.7 172.4 1,055.7 124.4 0.0% 111.7 1,716.4 34.2 0.0 1,752.2 364.5 303.6 38.7 (113.5) 221.5 (160.7) 0.0 0.0 364.5 (69.3) 295.1 6.5 121.3 56.8 (171.2) 29.3 (144.2) 0.0 200.0 206.5 (46.0) 560.4 133.8 70.3 88.0 (170.7) (7.7) 71.2 0.0 200.0 333.8 (54.5) 719.3 168.9 65.1 81.6 (119.6) (16.4) 120.2 0.0 224.0 392.9 0.0 876.9 201.7 107.9 72.0 (45.7) (53.2) 147.0 0.0 210.9 412.6 (8.5) 936.5 2407 175.5 54.0 38.9 (150.6) 215.8 0.0 201.0 441.7 0.0 1,027.3 378.4 2663 31.3 121.6 (240.6) 352.7 0.0 189.9 568.3 0.0 1,212.5 401.1 2934 4.0 165.5 (276.8) 384.5 0.0 177.5 578.6 0.0 1,287.2

93

0% 117.9 1.2% 10.767.151.5 0.5 0.9 109.435.8 1995 Estimate| 1996 1 1997 1998 Projection: high case scenario 1999 2000 2001 2002 32.9 0.060.0 35.275.548.616.1 26.673.9% 39.2 834.810.0 36.225.5 4.625.7 2.5 2.332.608.total debt service(TDS): DOD/exports(GNFS-VVR)ratio DOD/GDPratio MLT DOD (publicvpub.0 34.649.360.8 35. Debt & debt burden indicators Total debt service(mil USS) Interest (LTvST-IMF) Pnncipal (LT-IMF) Total debt (DOD).327.1 1.guar.5% 12.4 3.297.7% 158.0 34.583.5 1.0 375.676.234.3 35.3% 48.2 2.5 35.1% 43.0 1.6351 998.3 1.1% 10.5 0.351.4 2.0 2.6 26.7 2.6 1.913.035.4 1.8 1.7 26.9 1.0 32.2 1.0 200.3 1.5 0.7% 30.3 1.3% 36.577.2 4.9 8.0% 52.5 1.0 986.794.7 1.272.147.820.158.701.382.1 5.5 35.3% 8.949.665.4% 54.5 32.4 1.7% 8.0 1.752. 195.149.0 33.812.0 1. Stocks and Flows (US$ million) Actual _ E.2% 38.281.0 33.421.525.6 1.2% 46.233.188.886.5 2.493.025.403.5 1.1 624.0 35.312.6% 144.)/ GDP ratio TDS/exports(GNFSvWR)ratio Source: World Bank.5 2.2 400.6 5.1 2.641.7 838.0% 2.2 1.6 2.4% 106.0 37.2% 36.729.361.465.2 1.4% 33.6% 95.590.4 1.386.3 26.416.8 5.2 1.502.013.088.0 33.6 1.2 0.1 0.3 4.6 1.108.169.518.055.698.6 2.9 26.0 36. Extemal debt (DOD) Public and publically guaranteed Official multilateral of which IDA of which IBRD Official bilateral Prvate creditors (guaranteed) of wthichbonds Private creditors non-guaranteed Total LT DOD Short-termdebt Use of IMF credit Total DOD (ST-LT+IMF)of which: F.993.858.202.973.2 1.2 4.5 0.2 1.3 1.0 33.322.225.166.0 37.622.4% 12.452.0 33.0 33.264.932.450.0% 9.0133 2.TABLE 17 (cont'd) External Debt.7 1.5 2.647.517.2 0.560.3 1.9 34.5% 58.8 1.930.315.0 1.250.1 176.9 8.6 26.7 0.4% 39.9 63.862.1 4.6% 33.143.3 0.856.0 1.9 34256.0 1.1 3.1 1.339.459.3% 130.372.032.7 1.6 26.561.684.6% 41.4 0.3 1.0% 11.286.542.750.082.9% 42.9 26.961.9 2.4 1.0 33.1% 94 .2 1.

501.094.6% 23.1495 69.0138 0.5% 1.4) 0.4% 5.224.0 21.5 28.0) 4.3 27.9 57.8 7.6 (668.0 17.0) 12.0% -0.6% 7.674.5% 2.7 23.9% 95 .053.9 17.0% 22.646.740.6% 1.0 42.5) 4.0 9.336 0 3.1% 1.314.0 (659.7310 24.4% 2.9 28.0 10250.1% -2.259.8% 9.2) 3.0) 2996.065.3 46.2% -0.4% 10.994.299.357.045.845.0 14771.9 3.2 115.0 47.896 1 23.2% -2.8 61.6% 6.4% 93.4540 54.481.0 11.2% -1.7% 5.4% 5.9 0.257.3 27.760.0 7.0 179.9 (18.217.5180 16.4% 232% 19.250.206 4 27.5% 1.0 (2.1% 17.741.712.519.883.4% 5.6% 1.0 0.364.494.8 16.6 (773.736 3 70.0 (604.4 46.3% 14% 53% 1.0 20.8 19.529.7168 14.423.0 Sourcesof financirig Foreign financing Monetarysystemcredit Otherdomestc financing Residualsourcesand discrepancies Shares of GDP at current prices Current revenues Currentexpenditures Budgetarysavings Capital revenues Capital expenditurns Overall balance(minus= deficit) Foreignfinancing Monetarysystem credit Otherdomesticfinancing Govemmentdebt (DOD.449 1 205. Taxesint'ltradelnmerch.607.826.7 19.0 14.2 (1.778.7% -0.8 33.6 20.2% 0.979.028.7 5.0 26. taxes domG&S I prv.0 2.936.2 99.8 13.0 243546 33.TABLE 18 Fiscal accounts (LE million) Actual 1995 Govemmentbudget (mil LCUs) Totalcurrentrevenues Directtaxes Indirecttaxes On domesticgoods and services On intemational trade Non-tax receipts Total current expenditures Interestonextemaldebt Intereston domesticdebt Transfersto prvate sector TransferstootherNFPS Subsidies Consumpbon Wages and salanes Otherconsumption Budgetarysavings Capital revenues Totalcapitalexperuditures Capital transfers Budgetaryfixedlirvestment = Overallbalance(mrrinus deficit) Estimate 1996 1997 1998 Projection: high case scenario 1999 2000 2001 2002 52.5 16.664.323.8 52.0 3.5 22.8 25.352.5% 3.9 24.6% 9.1% 73.8) (775.627.9% 61.630.429.9) 3.0 3.9 0.548.3% -0 6% -0 1% -0 3% 13% 241% 187% 5.634.0 (675.0 (2.5 29.3 92.0 (76.5 36.4 45.2% 25.187.4% 118.0 47.0 18.1) 21.653.311.1% 13.885.473.3) 27.2% 1.0 51.0 (9326) 0.200.4 (2.404.0 80.666.907.9250 12.891.045.988.3% -0.500.6 25.362.7% 25. 5.3% 1.4% 5.336.0040) 0.087.2% 168% 5 5% 6.1 26.911.9% 7 2% 9.7% 92.2567 28.4 19.5 176.3% -0.156.9% 17.0 12.1 14.3) (20.7 (8.2% 1.4912 18.8% 6.9 (1.5 111.0 5.3) 4.887.796.753.140.3) (7.9 0.180.922.0 498.396.1) 73.201.078.557.0 3613.1 4.475.731.9457 22.180.017.123.9) (292.996.imports Source:WorldBank.0) 11.0 13060.185 0 11.9) 4.6 26.6 49.2 5.9% 1.1 12.4 4.4789 23.232.2% 2.0 14.6 0.836.1 (720.0 57.2 5.178.9% 6.354.915.433.0 200.248.8% 1.3% 5.7% 10% 23.661.5 (779.2 0.1% 23 7% 16.385.0 114.5 26.6% 9.5 15.9 15.5 4.192.0 9.8% 9.0 12.8) 0.967.2% 1.495 5 4.599.4 17.2% 23.1% 16.3% 1.9% 6.7% 5.633.587.2 189.4 30.1% -01% -3.4372) (464.0 10.526 3 4.1 13.5 (387.6% 208% 2.6 17.7% 5.0 5.7 15.800.7 27.1356 13.0 191.879.1% 14.399.846.168.0 8.779.568 5 11.9% -0.9% 6.0 46.5810 (2.2 13.2184 75.614.999.9% 3.5 14.6 (1.034 2 8.634.417.726.160.427 8 6.213.150.8 18.1% 18.082.021.6 27.2% -1.068.538 0) 2538.5255 22.0 25.459.0 13.0 18949.294.594.7466 (650 0) 16.7 (15.1% 15.0 19.983.9 28.297.9 (5381) 4.0 61.504.821.437 2 (13.0 (385.7% 5.9 43.9 16.0 13.563.1 3.0) 24.7 29.0 3.928.6 38.0 10.712 5) 1712.0 68.0 200.5 27.9) 18.266.7% 5 7% 6.end of year) Extemal debt (LErnil) Extemaldebt (US$ mil) Debttomonetarysystem(LEmil) Other domesticdebt (LE mil) Total govemmentdebt(LE mil) Total govemmentdebt as percent GDP Tax burden indicators (%) Direct taxes I GDP Indir.587.9) 256.4% -0.667.228.636.5 190.187.0 90.159.322.397.711.5% 9.6 27.0 0.963.0 53.8 58.7) 00 21472.9) 3849.0590 31.8 (2.322.772 7 66.4% 5.0 62.9% 7.6 11.4% 108.446 9) 2446.708.3 15.731.5% 7.794.2 13.403.3% 82.0) 14.828 9 5.673.4 4.0 22.6 90.0 12.8% 23.0 16722.9% 18.9 (3.475.893.292.0 101.9 31.0 7.9) (547.5% 15.4% 5.8727) (6251) (11.5018 38.0 15.201.4 (1.689.4% 54% 3.3) (15.0 11547.685.3547 42.7% 9. consum.0 12.579.4397 29. taxes on domesticG&S I GDP Indir.8 35.294.9 34.106.9% 1.904.1 6.624.689.203 3 15.1% -4.396.9 (4.991.1% -0.459.0 38.9% 1.2 10.173.362.8% 67.6 44.7 65.861.715.451.769.7 9.231.872.314 2) 0.9 185.

0 28.6 194.0% 14.0) 29.049.0 30.2 2.1 20.947.2 1.217.6% 22.617. 74.126.3% 69.894.4 63.2 76.8 252.952.0 31.6% 13.076.3 34.5% 13.5% 13.0 249.1 1.123.0 22.0% 34.4 13.701.806.2% 11.5 171.9) 15.0% 74.124.1% 8.4% 74.841.093.698.8 30.769.9 15.4 29.605.4 821.8 1.173.7 (15.8 37.5 214.0 for C.9) 36.1 134.550.5 11.661.4% 19.7 4.9 33.666.8 81.6 12.182.4% 13. Factors accounting monetaryexpansion(as % MQM) Net foreign assets Net credit to govemment Creditto private sector CredittoPEsector Other liabilities (net)(-) Total moneyand quasi-money 30.1% 33.158.2 45.1% 7.168.5 13.0 25.5 8.4% 14.5 37.500.4% 9.588.917.4% 52.2 1.990.7 35.6 43.4 (7.9 1.012.7 87.1 65.685.5% 23.9% 1.143.4 42.6% 11.4% 23.2 (7.721. growthrate Source: Word Bank.6% 6.217.336. End-of-yearstock Net foreign assets Domestic credit Netclaims on govemment Credittoprivatesector Credit to PEsector Totel assets= liabilibes Moneyand quasimoney Otherliabilibes (net) 46.6) Estimate 1996 1997 1998 Projection: highCaseScenario 1999 2000 2001 2002 B.6 33.416.500.0 11.0 4.223.123.3 2.472.898.711.843.649.850.0 (302.020.3 25.310.7 330.0% 33.9 12.300.0% 35.0 24802.418.8 4.4 (11.192.8% 12.5 17.5 152.3% 19.4% 100.4 1.573.2 96 .1% 74.0 20. credit and pnces M2 I GOP Annual growthrate M2 Annual growth prvate credit GDP deflator.2 47.934.7 25608.9 101.7 213.8 272.8% 6.6 912.7 96.0 40.882.991. Money. Memorandumitems Net ing.7% 13.0% 35.9% 10. Annual flows during the year Netforeign assets Domesficcredit Net claims on govemment Claims on prvate sector Claims on PE sector Total assets = liabilities Moneyand quasimoney Otherliabilibies (net) (846.stock inmonthsofimports E.793.6 282.7 364.4 27552.0% 34.0% D.4 39.0% 33.7 34.320.968.544.688.493.0 1.7 15.8% 100.1% 8.684.3% 26.478.082.1 17.113.TABLE 19 Monetary Survey (LE million) Actual 1995 A.6 1.417.9) 26.0 9.4% 30.2% 22.5% 100.9 33.179.860.186.7% 19.1) 252.304.) Monetarysystem.4 173.731.340.0% 28.4 108.439.1 511.010.764.5% 100.264.0 302.413.534.0 18.7) 16.633.9% 12.5% 74.4 44.6 19.4 35.045.404.960.9) 23.2 30.2% 63.245.4 180.6 220.303.725.045.8 (1.1 2.9% 24.2 46.7% 74.494.711.2% 60.2) 16.3% -4.361.9 (5.0 30.3) 33.707.149.1 16.3% 20.276.1 18.406.9 270.704.1 320.7 12.0 716.0 125.0 238.9 19.177.160.7% 6.7% 16.7 32.8% 56.1 (15.219.5% 7.flow Monetarysystem.4 196.7 806.075.0 14.3) 12.6% 6.040.0% 100.031.0% 34.257.444.0 180.4% 74.138.526.2 6.093.407.163.8% 9.430.004.0°h 74.8 28. reserves(USS mil.2 18.057.836.459.3 53.358.2 (9.7 27.0% 1.7 124.6 30.838.6% 41.044.5% 21.1) 14.396.943.9% 66.8% 100.9 2.8% 13.0 (775.309.8% 100.4% 13.1 22.2% 25.4 46.293.3 153.9 151.323.6% 16.2 43.6 33.862.9% 6.9% 47.4% 18.4 28.611.7 360.975.5% 100.7% 13.5 234.0 52.3 26521.178.0 19.663.1 23.8% 12.613.228.568.5% 17.881.5 60.488.629.3 215.053.441.3 18.9 395.5 (20.6 32.737.

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