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WORLD ECONOMIC

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MIDDLE STUDIES

EAST

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NORTH

AFRICA

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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

Contents
Foreword vii

Acknowledgments viii Abbreviations,acronyms,and definitions Currencyand exchangerates Strategicoverview xiii 1 xi ix

Chapter 1 Employment and growth-an overview

Saving, investment and growth-a virtuous cycle 2

Trade openness and investment-friendly policies for a higher growth trajectory Notes 7

policy-managing success macroeconomic Chapter2 Post-stabilization

Recent developments 9
12

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, INVESTMENTS,ANDLONG-TERMGROWTH

The National Investment Bank 59 Reforming the social insurance system

short- to medium-term measures 62

61

Reforming the social insurance system - longer-term proposals The insurance industry 64 The capital market and its links with saving 66 Notes 67

Selected bibliography 69 Statistical annex Boxes

2.1 6.1 The dynamics of debt and the sustainability of fiscal deficit Methodology and assumptions 55 16

71

Tables
1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8
1.9

2.1 2.2 2.3 2.4 3.1 4.1 4.2 4.3 4.4 5.1 5.2 5.3 5A.1 5A.2 5A.3 5A.4 5A.5 6.1 6.2 6.3

Selected cconomic indicators, 1990/91-1995/96 1 Growth and employment 2 Per capita income growth performance, 1980-93 3 Average tariff rates in Egypt and selected East Asian economies5 Growth and policies in 86 countries, 1966-93 5 Egypt and Indonesia: comparative indicators 5 Growth and policies in Egypt and Indonesia,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), 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, 1996 47 Price of Suez Blend, 1992-95 47 Long-run marginal cost of gas exploration and production, 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, by government and private sector 55 Estimated increases in savings from reforming PEs: origin of the change

54

'I

6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12

Sensitivity analysis 56 Social insurance system indicators 57 Comparative public pension schemes and demographic indicators, 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, 1991-95 60 Action plan for social insurance system reform 68 Action plan for insurance industry reform 68

57

Figures
2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 .3.1 3.2 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5A.1 5A.2 6.1 6.2 6.3 6.4 6.5 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, change in reserves and capital inflows 14 Composition of capital inflows 15 Inflation, inventory, 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, 1995-2015-- high-case scenario 44 Egypt's projected oil and gas revenue over 20 years, 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, 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, 1987-93 52 Egyptian saving-investment gap and its sources of finance, 1987/88-93/94 Saving-investment gap of PEs in Egypt, 1987/88-93/94 53 53 Financial performance of public enterprises in Egypt, 1986/87-93/94 Proceeds from privatization of Law 203 companies in Egypt, 1994 to September 1996 53 61 Comparative performance of selected pension funds

46

52

vi

CHOICESFOR SAVINGS, INVESTMENTS,ANDLONG-TERM GROWTH EGYPTIN THE GLOBALECONOMY: STRATEGIC

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

Kemal Dervi Vice President, Middle East and North Africa Region The World Bank

vii

Acknowledgments
he Bank team wishes to acknowledge the guidance and support it has received from senior Government officials in carrying out this study. In particular, we wish to thank: H.E. Dr. Zafer El-Bishry (Minister of State for Planning and International Cooperation); H.E. Dr. Atef Ebeid (Minister of Public Enterprises); H.E. Dr. Ahmed Goueli (Minister of Trade and Supply); H.E. Dr. Youssef Boutros-Ghali(Minister of Economy); Mr. Ismail Hassan (Governor, Central Bank of Egypt); Dr. Ibrahim Fawzi (Chairman, Investment Authority); Mr. Abdel Hamid Ibrahim (Chairman, Capital Market Authority); and General Ehab Elwy (President, CAPMAS). We would also like to extend our gratitude to numerous other Government officials, private sector representatives, and scholars, who have guided and assisted the Bank team, including Mr. Ismail Badawi (Advisor to the Ministry of Planning and National Investment Bank); Dr. Faika El-Refaie (Sub-Governor, Central Bank of Egypt); Mr. Momtaz Said (Director General for the Budget, Ministry of Finance); Dr. Taher Helmy (Partner, Helmy & Hamza, Baker & McKenzie); Mr. Omar Mohanna (Managing Director, Egypt ArabAfrican Bank); Mrs. Fatma Ishac (First Undersecretary for Planning, Social Insurance Organization); and Mrs. Ragaa Mansy (Consultant to the Minister of Social Insurance).

The Bank team consisted of Chang-Po Yang (Team Leader); Daniela Gressani (Macro-economics); David Dollar (Savings, Investment and Growth); Sweder van Wijnbergen (Macro-economics); Ahmed Galal, Sahar Nasr (Privatization and Savings); Albert Martinez (Private Savings and Pension Reforms); Linda van Gelder (Export Development); Robert Crawford (Investment Promotion); Bjorn Larsen (Natural Resources and Savings), Anqing Shi (Demographic Implications for Long-term Saving), and John Wetter, Alaa El-Shazly (Modelling and Statistics). The editorial production team included Patricia Zord, Jenepher Moseley, Georgette Munir, Rosario Bartolome and Alexandra Sperling. Messrs. John Page (Chief Economist, MENA Region, World Bank), Khalid Ikram (World Bank Country Director in Egypt) and Jayanta Roy (Lead Economist, MENA Region) provided overall direction. Special thanks to Dr. Heba Handoussa (Director, Economic Research Forum) for her helpful comments and suggestions. The analysis on export issues also benefited from the following USAID-funded studies: "Quality Control to Quality Assurance in Egypt: A Program for Change"; "Egypt's Trade Policy Reform Plan"; "Stanford Research Institute Study on a Strategy for Egyptian Exports."

viii

Abbreviations, acronyms, 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, insurance, 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

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. Defined benefit pension plan: Pensions are determined by an actuarial computation that incorporates salary and years of service. Defined contribution pension plan: Pensions are solely determined by the accumulated contributions to an individual account and on the investment performance of the fund. Pay-as-you-go pension plan: Benefits received by current retirees are equal, on average to contributions by current active workers. Open door policy: Introduced by Law 43 or 1974 (and its amendment Law 32 of 1977) to encourage foreign investment, as a gradual shift towards a private based economy through granting investors privileges including tax exemption, immunity fronm sequestration and unrestricted repatriation of profits. 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.g., wheat). Saving: Rate of wealth accumulation. Savings: Stock of financial assets. Sterilization: Sale of government securities by the monetary authority to absorb excess liquidity in the economy.

Currency and exchange rates

Currency Unit: Egyptian Pound (LE) LE per US$ Period averages 1988=2.230 1989=2.389 1990=2.708 Fiscal Year July 1-June 30 Weights and measures Metric system

1991=3.296 1992=3.323 1993=3.334 1994=3.373 1995=3.394 1996=3.395

xi

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.

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.
xiv

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

education. Against this backdrop, Egypt faces continued uncertainty in its revenue sources, in particular the likely decline in long-term external assistance. Furthermore, as mentioned above, the scope for further expenditure cuts is limited, as obvious expenditure cuts have already been taken. Thus, reducing internal debt should be pursued as a central policy objective in maintaining the fiscal stance. Accelerated privatization is one way to help strengthen the fiscal stance. 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. This would allow interest rates to be lowered and so reduce the incentives for short-term capital inflows.

domestic inflation. Increased foreign savings could sustain the recovery but would also increase Egypt's vulnerability to external shocks. Therefore, a critical longer term issue is the recovery of domestic saving. The composition of private investment is also a cause for concern. The current recovery has been led for the most part by private investment in nontradable goods (see table 2.2). 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 2.4). This poses another threat to the current recovery. If there is a property market crash, or major realignment of relative prices, the resulting losses would have to be absorbed, not only by investors using their own

Accelerating recovery the

Although growth has resumed, the pace and composition of investment and saving have not kept in step with each other (see table 2.1). Declining public sector investment has been accompanied by rising public sector saving; and while private sector investment is rising, private sector saving, having remained at around 11 percent of gross national income since 1994, has not yet shown signs of recovery. 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. 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. 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. However, the recovery of private investment appears to be financed largely by retained earnings, so it is likely that the behavior of households may be responsible for the stagnant performance of private saving). The timing of the response in private saving is a cause for concern. A significant lag would necessarily be accompanied by a widening of the current account deficit, and upward pressure on
xvi

funds, but also by banks using funds from the

depositors. This threat reinforces the need for supporting policies to encourage production of tradables, to maintain vigilance against excessive bank exposure to the real estate markets, and to adopt aggressive provisioning against nonperforming assets in banks' portfolios. Another cause for concern is the delay of a major export recovery. The rise of capital good imports in the current recovery needs to be balanced by growth of export earnings, thus the speed of export recovery is critical. The successful export experiences demonstrate that a soind relative price incentive regime is necessary, but not sufficient. Strong and responsive supporting policies are also needed to ensure quick and timely export supply response. In case of a slowdown Should export response turn out to be slow, private savings remain insufficient, and concentration of investment in nontradables continue, the current growth recovery may very well slow down. If it slides into a recession, a real exchange rate depreciation would be required at some stage. Appreciation can be justified by strong income growth but without such growth, appreciation can threaten a recovery that is just beginning. Before that happens, introducing an element of flexibility through the adoption of a crawling band, should be considered seriously.

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

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.First, Egypt the payoffs (see table 3.1). would maintain sound macroeconomic policies strengthened by vigorous structural reforms in The base casescenario(the "basecase") trade, capital and labor markets, privatization, and deregulation and would strengthen incentives to As in the high case, sound macroeconomic raise productivity growth. A rapid and large-scale conditions are assumed to be present. Fiscal privatization program would provide sales stringency will be maintained, and external debt to proceeds toward reducing domestic debt. This GDP ratio will continue to decline, thus increasing would be complemented by rapid growth of headroom for managing hiternal debt and adopting private investment. Second, fiscal stringency would expansionary policies if needed in the future. give rise to increased public sector 'saving and Growth of aggregate expenditures will be slow, therefore rapid increases in domestic saving. with the current account in balance. Growth of Private saving would be boosted subsequently by 'oroad money will be kept below growth of nominal the other structural policy reforms-rapid trade GDP. Inflation will be comparable to that of liberalization ar.d privatizatiorn-and by rapid per Organization of Economic Cooperation and capita income growth. However, the increased Development (OECD) countries. By choosing to domestic saving would not be large enough to maintain its current levels of intermationalreserves finance all the investnent requirements; a (at more than 17 months of imports), 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. foreign borrowing. Lhis scenario is distinguished by two main 77Tis scenarioindicates gross nationalproduct that features. First, such structural reforms as there are (GNP.)in realtermswould eai:h rowth trajectory a, of move slowly imd the fundamental problems about6-7 percentby aroundtheyear2000,andnominal impeding growth of saving and investment remain. exportearnings(of nonoilmerchandise) would grow at Divestiture of public sector interest is limited, and morethan;15 percenta yearduring much of 1996-2002. the current recovery of private investment does not While the debt stock would grow with increased accclerate. Second, Egypt would choose to limit foreign borrowing, the growth of GNP would be foreign borrowing (on a commitment basis) to the much faster, thereby keeping the growth of debt range of US$1.0-1.5billion 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. As under the first foreign and domestic borrowing. This means that scenario, the debt problem would be well contained the debt stock will decline in real terms, and (Egypt would remain "moderately indebted.") The relative to output as well. The outcome of this decline in foreign exchanige reserves (to no less than scenario is significant. Growth will continue-but nine months of imports) would be moderate, at a slow pace of 4.5 percent a year. Per capita assuming the enlarged current account deficits are income growth will be constrained. The rapid financed by using a range of financing instruments growth of the labor force, along with constrained such as foreign direct investment (FDI), portfolio growth of private sector investment, will result in investment, and commercial borrowing. The rising unemployment (as shown in table 3.1) and viability of this scenario, as with the base case, probable increases in the spread of poverty. depends on the level of domestic saving. Should Furthermore, 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, despite investment, foreign savings would have to be relied the large foreign exchange reserves that it holds upon, and inflationary pressure would emerge, against external shocks. increasing Egypt's vulnerability to external shocks.
STRATEGIC OVERVIEW xvii

The 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, and nominal export earnings (of non-oil merchandise) would grow at more than 15 percent a year. More specifically, the benefits of rapid growth through the high growth scenario include: * Reduction in unemployment to 6.4 percent by 2002 as compared with a rise to 14 percent in the base case. * A rise in the level of trade integration (export plus import) to 33.1 percent of GDP by 2002 (compared with 25.2 percent in the base case). * Reduced vulnerability to external shocks as a result of decreases in exogenous resources as a share of GNP, from 12.6 percent to 8.8 percent in 2002 (compared with 9.4 percent in the base case). * Increased per capita income to reach $ 1,650 a year by 2002 (compared with $ 1,465 in the base case). If rapid growth is to be sustained through increased exports and domestic savings, the necessary sound macroeconomic conditions must be maintained. To put the high case in hand, Egypt will need to look at the following questions: how to expand export production and sales rapidly, how to replenish income generating assets through sound pricing and management of nonrenewable natural resources, how to mobilise domestic saving; what sort of instruments and institutions are needed to ensure efficient intermediation between savings and investment.

achieve growth of exports at 35 percent a year for

five years to just to regain the 0.27 percent share of global export trade that it achieved in 1970. A key issue is to determine what policies and institutions can help to expand exports, and enable Egypt to catch up with the growing trend in globalization. Account must be taken of the changing external environment. The global trend towards a free trade and investment environment has changed the 'rules of the game.' 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. An increasing number of these firms have in turn become multinationals, sourcing from all over the world. for markets, investment, and Competition technology has intensified. In this context, the ongoing process of partnership negotiations with the EU is of particular importance, and can be argued to have reduced the options confronting Egypt. The extension of large parts of the EU integration mechanisms to partnership countries, such as Morocco, Jordan, and Israel, 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. The trend toward adopting deeper regional and multilateral trade and investment integration, as well as trade disciplines, implies that firms located in the must become more partnership countries competitive on a global scale. As more market-

Export and sales push

Egypt s export growth has lagged behind that of global trade. Had Egypt maintained the same rate of export growth as the rest of the world during 1983-93, its exports should have reached$ 6.3 billion, rather than $3.1 billion. Constant market share analysis (CMSA) was used to estimate this cumulative $ 3.2 billion loss of export eamings and to attribute it to a combination of factors. Of these the most important has been Egypt's inability to adapt to changes in market demand (loss of $ 2.3 billion); of lesser importance has been her inability to maintain cost comsor in the expanding export shares . cmpretitivenssof09billion.. co aver wou markets (loss ofac 9 bllion ). Apte
xviii

friendly regulatory mechanisms are introduced and

tariffs are gradually eliminated in regional economies and worldwide, Egypt has little choice but to follow suit. The issue iS to what extent and over what time frame. 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. Removal of nontariff barriers and reduchon of overhead business costs would also become critical if the export sector is to compete internationally, becausetariff liberalization alone may only encourage more imports and production for domestic sales. Removal of nontariff barriers and reduction of overhead operating costs are prerequisitesfor a strong export push, which is key to

CHOICES SAVINGS, FOR INVESTMENTS, LONG-TERM AND GROWTH EGYPTINTHEGLOBALECONOMY:STRATEGIC

Egypt's success in achieving sustainable growth. Our recommendations for encouraging exports focus on relaxing practical constraints or creating incentives in the following areas: * Trade logistics and transportation; * Customs procedures; * Quality control and product standards; * Attracting FDI; * Forging buyer-se:ller links; and * Creating export nientality; See chapter 4 for specific recommendations.

physical capital (machinery and equipment, etc.) and natural resources (oil and gas, and so forth). For this reason, the concept of genuine saving has been developed (World Bank 1997). Genuine saving, simply defined, is gross national saving, less depreciation of capital stock, and less depletion of natural resources. Within this framework, rates of gross national saving will have to be much higher for economiesthat depend on extraction of natural resources. The need for higher saving rates is apparent from estimates of Egypt's genuine savings. 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 2.7 to 3.7 percentage points per year by adopting sound policies, several specific policy and institutional issues at the sector levels need to be addressed. The central rmessage is that Egypt must save a lot more to maintain its capital resource basethat is, to replace the depletion of income generating assets resultng from the extraction of oil and natural gas. Further, Egypt can save a lot more through prizatization and reforms of public enterrises, through strengthening jfinancial instruments and institutions for long-term saving, and through efficient intermediation between savings and investments. Implications of resource extraction for saving and capitalfornation. Egypt derives a large share of its national income front the extraction of nonrenewable natural resources, such as oil and natural gas. 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. The oil and gas reserves are national assets that generate income (rental) to Egypt.4 Because of the decline in international prices of oil during the past five years, the rent as a share of GDP declined from 14 percent in 1991 to 8 percent in 1995. However, the change in the international prices of oil from the income derived notwithstanding, extracting oil and gas is bound to decline as the reserves are being gradually depleted. 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. Therefore, 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. In other words, the genuine savings rate (as a percentage of GDP) is close to zero. Thus, for economic growth to be sustainable at a higher level, 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 1.9). Projections of oil and gas production indicate that Egypt's income from resource extraction could increase over the next several years, due to substantial growth of gas production, but would then gradually fall. Egypt could become a net energy importer by the year 2010, in light of increasing domestic energy demand. 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. Historically, a substantial share of the rent income has been distributed in the form of implicit subsidies to petroleum product and natural gas consumers. These are estimated to be 45 percent of resource income in 1991 and 24 percent in 1995. Since subsidies result in inefficient use of energy resources, the rate of return on the energy subsidies is estimated (based on cross-country data) to be negative at -5 to -7 percent. In contrast, returns to expenditure in education, and to infrastructure that facilitates private investment in productive assets, normally exceed 10 to 15 percent. The policy implication is clear. Egypt could maintain its income generating assets by directing resources toward human and infrastructure investment. To do this, Egypt can continue to reduce the implicit energy subsidies that result in more rapid depletion of energy resourcesand low resourceefficiency.

OVERVIEW STRATEGIC

xix

How much saving can comefrom privatization and reform of public enterprises? Privatization could increase savings, in part because the transfer of ownership to the private sector is associated with higher productivity. Higher productivity generates more resources that can be consumed or saved. Also, privatization may attract more savings from abroad, as happens when specialized multinational firms buy such enterprises as telecommunications. Beyond these effects, privatization could stimulate saving indirectly; if the proceeds from sales are used to retire public debt, this could lead to lower taxation with favorable effects on public saving. Another positive effect is improved competitiveness of other industries if privatization lowers the cost of producing intermediate goods and services. Finally, privatization can contribute to saving by boosting capital market development, which has been shown to contribute positively to growth. A sample of Egyptian public enterprises (PEs) analyzed indicated that assuming enterprise profits increase because of investment and productivity growth, privatization and commercialization of the sample would bring additional annual savings to Egypt of about 2.4 percent of GDP (see table 6.1). More significandy perhaps, since the sample of Egyptian PEs analyzed only represents about a third of the sector, the gains could be as high as 7 percent of GDP, which is about the amount Egypt needs to match the saving/investment ratio to GDP of the fast-growing economies. Moreover, the sample analysis indicates that the results are sensitive to variations in investmnent (see table 6.4). This not only suggests that the gains from investment in the course of privatization are significant, but also that care must be taken to ensure that investment will be forthcoming. The design of privatization transactions should commit the new owners to an investment program, where appropriate, to maximize the gains to society. What policy and institutional changes will

of saving in the next 15 years by about 24 percentage points, or roughly 1.6 percent a year. 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. The needfor these has been brought to the fore by the problems of the country's emerging financial markets. The problems, many of them common to the financial markets of other developing countries, include a concentration of investments in government securities, underdeveloped long-term savings instruments, and a lack of competition among contractual savings institutions. These problems have the effect of limiting private saving as evidenced in the underdevelopment of principal instruments of pensions funds and life insurance. By ending government intervention in portfolio allocations, Egypt has already undertaken the first of two actions required to bring private savings up to full potential. The second is to encourage the development of more flexible and competitive long-term saving instruments and institutions. The latter is essential fo: encouraging long-term private saving and for more efficient intermediation between investments and savings. 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; and the capital market. In the first instance, evidence from other countries shows that generous pay-as-you-go state pensions tend to depress household saving, and that a mandatory saving scheme is most likely to increase household saving contractual saving. Second, sound institutions, such as the life insurance industry, tend to favor the formation of long-term financial assets over fixed assets such as real estate, thereby enabling households and private corporations to borrow long term; this may indirectly contribute to increased private savings. Third, 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. 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, and the declining share of child dependency, will both contribute to increases
xx

the development of contractual saving institutions.

It could augment foreign savings. Social insurance The social insurance system (SIS) provides one of the most important sources of long-term saving in Egypt (with contributions at 3.5 percent of GDP domestic saving by attracting

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

in 1994/95-a very low level compared with many other countries). It effectively works as a pay-asyou-go system. It has been producing an operating surplus in the last 10 years due to the high ratio of contributors to pensioners (see table 6.5). This operating surplus has been invested, via the National Investment Bank (NIB), in government projects and, until recent years, in public enterprises as well. Social insurance funds (new and reinvested) accounted for 68 percent of the fund sources of NIB during the past five years (see table 6.9). NIB used to pay interest on the SIS funds at 5 to 6 percent per year, even though inflation was about three times higher. This represents significant erosion of the real purchasing power of the reserves at the SIS and a net subsidy to NIB. Starting July 1992, NIB raised the interest rate on incremental social security funds (including reinvested reserves) to 13 percent, providing a positive real rate of return over the average inflation during 1992-96 of about 10 percent. The contribution rates under the SIS are high (on the basic wage) relative to the pension benefits and the insurance it provides. The eligibility criteria .for retirement in Egypt: (age 60 for both men and women, under the major programs of Law 79/47) is lower than that of OECD countries (whose average retirement age is 64.4 years for men and 62.9 years for women), but comparable with many developing countries. 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), and by setting a minimum pension for those with a certain number of years' contribution. Pensions on basic wages are fully adjusted, while those on variable wages are not. Over the period 1987-96, the adijustments mandated by the legislature preserved the purchasing power of the basic pensions for most of the 10 years; however, pensions on variablewages are not automatically indexed or adjusted by the legislature,in line with inflation. Private pension plans provide a strong complement to the social insurance system. The number of voluntary private pension plans has been increasing significantly- as of June 30, 1995, there were 504 plans, compared with 330 in 1991. These plans are typically set up by employers on a defined benefit basis, with contributions made by
OVERVIEW STRATEGIC

both employers and employees. The number of employees covered more than doubled during the period 1990-95, to almost 0.5 million. About 48 percent of the assets of the private funds are in fixed bank deposits, while another 42 percent are invested in government bonds. Only about 7 percent are invested in equities and real estate. Lack of professional investment management capacity, the dearth of financial instruments, and the risk-averse nature of these funds have led to the concentration of investments in bank deposits and government paper. Refonning the social insurance system. The working age population will continue to grow, and SIS is likely to maintain its operating surplus. rhis provides a favorable environment in which reforms should be implemented without delay. In the short- to SHORT-TERM PROPOSALS: medium-term, the proposed reforms would aim to improve the efficiency and solvency of the existing system. There are three priorities. The first is to with which the improve the transparency government uses SIS resources; the second is to develop a portfolio and investment strategy that supports capital market development without compromising safety; and the third is to improve the efficiency and sustamiability of the SIS by correcting certain design deficiencies. See chapter 6 for specific proposals. LONG-TERM PROPOSALS: A country's social security system typically has three major objectives. The first is to enable the population to shift income from working years to old age (savings). The second is to protect those with low incomes by providing a basic income floor during old age (redistributive or poverty alleviation). The third is to insure against certain types of risks, such as disability, longevity, and inflation (insurance). In order to achieve all three objectives, it is recommended that a multipillar system be put in place consisting of: - A fully-funded mandatory defined benefit public pillar that insures workers' earnings up to a certain level. * A mandatory defined contribution private pillar that insures workers' wages above a certain level. * A purely voluntary scheme that could supplement the first two pillars. In addition, the development of a more competitive and stable
xxi

insurance industry should be encouraged to provide many accompanying services, such as life and disability insurance and annuity products. 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. The consumption tax principle should be applied fully to all contributions and benefits, depending on how they are distributed. See chapter 6 for details. Contractual savings-insurance The insurance industry in Egypt is still insurance premiums to GDP underdeveloped-life were an insignificant 0.2 percent in 1995compared with 6 percent for average OECD countries. Total assets to GDP of all insurance companies (life and nonlife) in Egypt were about 4 percent in 1995, while life insurance assets alone -were 38 percent of GDP for average OECD countries. There are 10 insurance companies in Egypt, of which eight transact all classes of insurance and business, and two transact only nonlife. The industry is highly concentrated and virtually under state control. The largest stateowned company coi itrols 50 percent of both life and aonlife business, and the largest three state-owned companies account for 93 percent of life and 89 percent of nonlife markets. In the past, direct foreign ownership was only allowed in those companies operating in Egypt's free trade (export processing) zones. Currently, regulations place a 49 percent limit on foreign ownership of direct insurance companies and no restrictions on foreign ownership of reinsurance companies. Total investment of the insurance industry as of June 30, 1995 was LE 5.4 billion, representing 2.6 percent of and instruments GDP. Lack of financial led to very conservative investment policies have high concentration of investment in bank deposits and government securities. A new law on insurance was passed in 1995, and in June 1996, a new set of regulations was issued by the Egyptian Insurance Supervisory Authority (EISA). Among other things, thelaw requires distinction and separation of the reserves from life insurance and nonlife insurance businesses in companies that operate in both markets. The new regulations also deregulated the pricing of most insurance products, replacing price
xxii

control with price reporting. The deregulation of most insurance products shifts the focus of The supervision to solvency monitoring. regulations are basically in line with international (especially EU) practices and definitions. However, solvency monitoring requires good information and technical capability on the part of the supervisor. Thereform proposals.Following these regulatory reforms and current efforts to strengthen supervisory capacity, the next generation of reform efforts should focus on the issues in competition and ownership structure. 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, to encourage competition. (This means that the 49 percent maximum ownership by foreign firms should be abolished).
* Providing level treatment for both stateowned and private insurance companies. requirements to the D Focusing on disclosure public on prices and commissions to complement prices and of product the liberalization commissions. See chapter 6 for other specific details.

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. Capital markets allow investors a wide range of instruments to finance investment, and savers have more alternatives than bank deposits, precious metals, or real estate. The development of capital markets in Egypt and is supported by the both supports development of contractual saving institutions. As discussed in the previous sections, the investments of private pension funds and insurance companies have been mainly in government securities and bank term deposits. Capital markets would allow greater diversification and perhaps higher yields for these investments, thereby improving the of contractual saving financial performance institutions; this should result in greater benefits to savers in the form of lower contribution rates to pensions schemes and lower premiums for insurance. At the same time, pools of funds from

AND LONG-TERM GROWTH EGYPT IN THE GLOBAL ECONOMY: STRATEGICCHOICESFOR SAVINGS, INVESTMENTS,

contractual saving institutions could be tapped through capital markets to finance investments. In addition, active capital markets provide an enabling environment for attracting foreign savings. The existence of liquid capital markets gives a foreign investor better exit options, thus encouraging more froreign direct investment. Foreign portfolio investors would focus on actively traded securities in the stock market. With private capital dominating the total capital flows to developing countries, and an increasing shift toward equity financing, the development of capital markets becomes essential in attracting private foreign savings. But the risks inherent in foreign savings would be kept to a minimum ifforeign savings augment, rather than replace,domestic saving. Finally, the development of capital markets and the process of privatization are mutually reinforcing. 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. The deepening of capital markets-as reflected in increased market capitalization .o GDP, greater liquidity (higher turnover to market capitalization), 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. Facing the twenty-first century Egypt is poised for accelerated growth into the twenty-first century. H-ler prospects are good, but global competition has intensified. Eastern European countries and states of the former Soviet Union are rapidly integrating in the world economy, and both China and India have been

emerging as major low-cost competition in the world market. With the technological revolution in information and communications, and the conclusion of major regional and global trade agreements, the barriers to exchange among nations are being rapidly reduced. 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. Notes

1. The vulnerability is economy wide, as externally-induced sudden changes in earnings from tourism, workers' remittances and exports of oil and natural gas affect the balance of payments. However, the largest volatility arises from official transfers impacting particularly strongly on govermnent financing. 2. The debt estimate includes *he net governmenit borrowing from the National Lnvestaent Bank. 3. Under these circumstances, debt dynamics are unstable. Suppose that the government tightens monetary policy by reducing its rate of printing money and increasing borrowing. The debt increases; 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. If the future deficits are to be held constant, the increased

printing of money in the future will mean more

inflation in future. Generally, the expectation of future inflation increases current inflation. 4. 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.

STRATEGICOVERVIEW

xxiii

Chapter 1

Employment and growth-an

overview

After suffering reversal in the latel980s, Egypt has successfully recaptured growth through macroeconomicstabilization. To boost employmentand integration with the global economy, she must sustain and acceleratethe current expansion. Her most promising route to rapid growth is to achieve a virtuous circle of growth, saving, and investment through higher public saving and structural reforms.
achieved unprecedented economic E~'gypt E growth during 1975-85 following the adoption of open door policies boosted by sizable increases in foreign assistance, workers' remittances, and foreign direct investment. This ended in 1986, 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. Egypt experienced a dramatic fall in growth and severe macroeconomic imbalances. In the early 1990s, per capita income grew by a modest 10 percent from its mid-1980s level. Both poverty and unemployment remain high. The Egyptian government responded by adopting adjustment policies to stabilize the economy and restore growth. The first phase of the stabilization policies has been highly successful. Fiscal deficits have been reduced, and the external current account deficit has been kept at low levels. At the same time, restrictions on capital movement and interest rate controls have been lifted. With the effective fiscal adjustment and management of sound monetary policies, inflation was brought
TABLE1.1

down to below 10 percent in 1995. Macroeconomic stabilization led to a strong recovery. GDP growth rose from the stagnation of the early 1990s, to 4.7 percent in 1995, and continued its upward momentum into 1996 (table 1.1). Notwithstanding these developments, Egypt's long-term challenges remain daunting. At present, official estimates of unemployment stand at about 10 percent. Over the next ten years, there will be yearly increases of more than one million in the working-age population. The numbers of those entering the labor force (assuming a constant participation rate) will expand at 2.8 percent a year. This will amount to, about 560,000 new job-seekers, more than one-fourth of whom will be of the 15-24 age group-a most politically vocal and active segment of society. Thus, it is essential for Egypt to create jobs and income opportunities to meet the rising expectations of the younger generation. Economic growth offers an effective response to this challenge. Our estimates show (table 1.2) that Egypt could reduce unemployment to 6.4 percent with GDP growth of 6.5 percent a year from now

Selectedeconomicindicators,1990191-1995196 (percentage of GDP, 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. Estimates.

1990191 3.6 14.7 85.9 23.3 13.4 16.0 -18.1 5.2 6.1 107.7

1991/92 1.9 21.1 83.0 18.2 8.5 17.0 -5.4 4.1 10.6 89.5

1992193 2.9 11.1 83.3 16.2 7.0 16.7 -3.5 5.1 14.9 69.2

1993/94 3.9 9.0 84.9 16.6 6.1 15.1 -2.1 0.2 17.0 58.0

1994/95 4.7 9.4 83.1 16.3 5.5 16.9 -1.2 0.6 17.9 55.7

1995/96' 5.0 7.2 86.0 16.7 5.5 13.9 -1.3 0.2 18.4 49.2

Source: dataprovided Ministry Planning, From by of Ministry Finance Central of and Bank Egypt of

until 2002. Otherwise, with GDP growth at the level of 2 percent a year, Egypt will have to contend with unemployment rising to 20 percent of the labor force by 2002.
TABLE 1.2

Growthandemployment
Rate )1995 (percentage Ratmployment (percentage) Unemployment
At2 percent GDP of growth of growth At4.5 percent GDP
of At 6.5 perr;ent GDPgrowth
-Not

1995
9.6
-

1997 1997 nl.a.

11.0
10.3

2002 2002

n.a.

20.0
14.0 6.4

-9.0

available. n.a. applicable not p.a.: force growth of 2.1percent labor rate Key population Note: assumptions: growth 2.8percent anda participation of 47.2 of pa.; rate percent. Source:Base year information 1995was provided CAPMAS; for by remainder staffprojections. from

therefore its demand for both tradable and nontradable goods. While prices of nontradable goods (such as land and labor) are not constrained by international market forces, and are relatively free to adjust in the domestic market, prices of tradable goods (such as food and vegetables) are constrained by those forces. Thus, transfers from abroad would give rise to higher prices of goods that cannot be traded internationally than of goods that can. Other things being equal, this sort of relative price regime would encourage production of nontradable goods at the expense of tradable goods, including goods that can be exported. This

would lead to a larger resource gap (that is, more imports of goods and services than exports), and
od n evcsta xot) n thus lower domestic saving. Furthermore, 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, and to substantially reduce poverty and unemployment over the medium term. Egypt has the opportunity and the potential to achieve the growth target set by the government. World trade is growing at a rapid rate, regional peace seems to be evolving, the EU is seeking closer cooperation with the region, and large amounts of international capital are available for financing productive investment.

or uncertainty and affect the level of domestic saving, because societies generally tend to smooth their consumption over time. Declines in their income, particularly if perceived as transitory, need not lead to a proportional cut in consumption; in most cases saving is likely to be compressed first. Thus, achieving long-term self-sustaining growth requires that Egypt tackle these structural problems, and adopt policies to encourage domestic saving and to accelerate growth of exports.

Egypt, as a force for peace in the region, and being

and growth-a virtuous Saving, investment,

circot close to key markets of the world, 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. This, however, would require One prerequisite for rapid growth is high levels of that two long-standing structural problems be investment (table 1.3) associated with high levels of effectively tackled. They are: domestic saving. But this is not sufficient, since a country's economic growth can exceed or fall below * Reliance on exogenous resources (remittance income, Suez Canal income, exports of oil and gas, the level predicated by its level of investment. The repancies, and foreign assistance) to finance domestic ectnthe as shown intlen1.3, disc expenditures, creating vulnerability to external other important factors influencing economic shocks. growth and these are indicated in the per capita and sh Lowlevelkofsdomestic.saving, income growth equation spelled out in the note. Low level of investment; thevresultant , , , Across countries and over time, higher growth consequent , . slow accumulation of production factors, both rates are associated with higher investment; higher human and physical, clouds Egypt's long-term investment with higher saving; and higher saving growth prospects. 1993a; ~~~with higher growth rates (World Bank sving growth prospects. a 1ghea (od es The lack of domestic saving has been associated v wit higher grtherat Edwards 1995). Furthermore, countries with higher with the relance on exogenous resources, that is, levels of per capita income tend to save and invest a larger fraction of their national income. While these private and official transfers from abroad. The e reasons are twofold. First, transfers from abroad empirical relationships are well established, there is Eypt' ncome and wouldincrase dometic little agreement among economists about how to
2 GROWTH AND INVESTMENTS, LONG-TERM FOR CHOICES SAVINGS, STRATEGIC ECONOMY: IN EGYPT THEGLOBAL

interpret them, in particular the exact interrelationships among saving, investment and growth, and directions of causality. Policy makers do not have to be preoccupied with the exact mechanisms affecting saving investment and growth; what matters is whether the same policies aimed at encouraging investment also encourage saving.
TABLE 1.3

Per capitaincome growthperformance, 1980-93

(percentage)
Percapita growth (percentage) 8.2 5.4 Actual relative toexpected growth (+++)41 (++)
(++)

there is good reason to expect that higher saving (=investment) leads to higher growth, and that increased saving provides more resources for capital investment, which accelerates growth at least temporarily, and perhaps permanently (Harrod 1959). While saving causes growth in this proximate sense, there is no agreement on what causes saving, or whether there is reverse causality from investment and growth on the one hand, to saving on the other. 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, as predicted by a variety of growth models. Saving responds passively to investment through mechanisms that are at present not well understood. A likely candidate is the saving behavior of firms or small entrepreneurs, who retain profits in order to finance investment. In any case, such saving is done, not by the mass of households, who

Singapore Thailand
Indonesia

5.8 6.5
4.1 3.7

(+)
(-)

44 40
28 33

Malaysia Chile
Pakistan

India SnLanka
eypat

3.4 3.2
3.2

() (.)

(+)
(+) (-)
()

26 21
24

2.5
2.3

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; GDPCAPUS is per capita GDP

Egypt 2.3

25 17 17

~~~~~~~accuinulation,a few relatively wellbut by

off people or by firms. 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;INVGDPis gross domesticinvestment GDP; OPEN is a dummy to
variable for openness as defined in Sachs and Warner (1995); labpop is growth

circle.
As

High
as

investment leads to rapid growth, which increases to continue, these agents save and invest a large fraction of their profits. In thlis way, saving, investment, and growth are mutually reinforcing. If one accepts the "mutual causality" argument, then the policies that promote growth and investment will also be ones that promote saving. It is easy to see how a virtuous circle can keep going once it has started, or alternatively, how a country can get stuck in a low saving-investmentgrowth trap. It is more difficult to see how a country can accelerate growth once it is entrenched in a low saving-investment-growth trap. This question has been addressed by examining factors and policies associated with the emergence and maintenance of a virtuous circle. Higher saving, investment and growth seem to depend on certain policies and country characteristics. First, macroeconomic instabilityevidenced by high inflation, large budget deficits, and overvalued exchange rates-was found to be
growth is anticipated 3 entrepreneurs. long

in laborforce relative growthin population; to PRENR70 primaryenrollment is rates in 1970; and SCENR70is secondaryenrollmentrates in 1970.The sampleis 35 low- and middle-income countnes Asia, MiddleEastand North in Africa, and Latin America, and is pooledfor the two periods 1970-80 and
1980-93.

(+), (.), (-) indicateactual growthwas higher,equal,or lowerthan expected

growth.

Source:WDR1995,andstaffestimates.

The answer appears to be strongly affirmative. Both theories and empirical evidence support the view that there is very little deviation of saving from investment rates (Feldstein and Horioka 1980). This holds for both developing and developed countries. Hence, the same factors (country characteristics and policies) that determine saving also influence investment in the same direction. In other words, the factors that create a good climate for investment also create a good climate for saving. Although it is difficult to sort out at the macro level the different determinants of saving and investment, 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. From this point of view,
EMPLOYMENT AND GROWTH-AN OVERVIEW

detrimental to both the quantity and the efficiency of investment (Fischer 1993). Second, 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, government saving). These are also countries with less nonproductive government consumption and less noninfrastructure public investment (that is, in state enterprises). After controlling for these variables, various tax measures had no significant association with growth or investment. 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). Third, there is a strong association between the degree of trade openness and rates of per capita growth.' Although openness is good for growth, many fear that there will be significant and immediate negative consequences in going from closed to open economies. The short-run national effects on aggregate output and employment of opening a cointry to external trade depend importantly on initial conditions. These include the macroeconomic situation and the relative competitiveness of existing industries. In the short run, 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, and experienced per capita GDP growth rates that averaged 2.5 percentage points higher than those of closed countries after controlling for determinants of growth such as education and investment (Sachs and Warner 1995). In short, good economic management is associated with the virtuous circle of higher saving, higher investment, and faster growth of GDP. Elements of good management include: low inflation, low fiscal deficit, public expenditures targeted to productive areas, and openness to external trade. The mechanism at work is probably that these good policies spur investment by making it more profitable, and also increase the growth impact of any given level of investment by making it more productive. Over the long term, it may be that saving responds passively in the way envisioned by Deaton above. Of course, some of the good policies spur saving directly. The most obvious example is government saving, which is a direct contribution to national saving, according to the experiences of many countries. But other policies, such as trade liberalization or reform of the regulatory regime, also have a direct effect on saving by increasing the returns to saving, property rights, or reducing strengthening transaction costs.

considerations. The production and investment decisions of enterprises that determine this are a
function of the flexibility of the labor market. The greater this flexibility, the more rapid the adjustment and the lower the net effect on employment. Hence the flexibility of labor markets is crucial for reaping the benefits of trade reforms. Empirical studies suggest that the output response to significant trade reform can be rapid, with per capita incomes rising in the period immediately following trade liberalization. 2 In the longer run, open economies tend to have more rapid capital accumulation, higher export growth rates and more rapid increases in real wages. Consequently, lower-income countries with open policy regimes tend to attain higher rates of per capita income growth. Openness to external trade is associated with both higher output growth per capita, and higher output growth per worker. 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, and to identify areas of policy reform that could put Egypt on a higher trajectory of long-term growth (Dollar 1992). The results of empirical growth analyses from two different sources (Dollar 1996, and Sachs 1996) show that Egypt could achieve 2.7 to 3.7 percent higher per capita GDP growth by emulating the economic policies adopted by same East Asian countries (table 1.4). Table 1.5 shows the regression results (Dollar 1996) derived from the growth performance of 86 countries over the period 1966-

EGYPTIN THE GLOBALECONOMY: STRATEGICCHOICESFOR SAVINGS, INVESTMENTS,ANDLONG-TERM GROWTH

93. The results confirm that a large fiscal deficit, high government consumption, and high inflation all have a negative relationship with growth. A black market premium (BMP) on the exchange rate as a proxy on inflation also has a negative relationship with growth.
TABLE 1.4

Average tariffrates Egypt selected in and East Asian economies

(percentage)Egp Country Indonesia Republic Korea of
Average rates tariff

1985-94, compared with 1.3 percent for Egypt. Indonesia is also far more involved in international trade, with commodity exports of 23 percent of GDP in 1994, and has an export base more diversified from exports of oil. The comparable figure for Egypt was only 6.4 percent. Finally, Egypt receives far more foreign aid: 6.4 percent to GDP in 1994, compared with 1.0 percent for Indonesia. Table 1.7 shows the extent to which Egypt could boost its economic performance by emulating the policies already adopted by Indonesia. The differences in macroeconomic policies and in trade openness account for an estimated 2.7 percentage perenag points in growth. The actual difference in growth was 5.2 percentage points. The impact of Egypt being less open to trade is estimated to be 2.0 percent lower real per capita GDP growth rate per year over the period of 1966-93. The impact of consumption,
measured

Malaysia
Thailand Egypt

6.0 4.0 9.3 30.0

Source: UNCTAD-Trade AnalysisandInformation System Data on CD-

TABLE 1.5

Growth and policies in 86 countries, 1966-93

Variable
Policy

other policies, the size of government saving,

(5)
0.06

(1)
0.06 (2.34)
4.06

(2)
..

(3)
0.08 (3.41)

(4)
0.08 (3.19) -0.05

(6)
0.08

and

macroeconomic
empirical

stability

as

by the BMP on the exchange

rate, is

variables
Budget (2.27) (2.99) -0.02

estimated to be 0.7 percent.

In an alternative period
initial (2.16) (3.29) -0.02 -0.01 35)-0.02 -2.350
(1.31)

analysis of a sample as a function

saving

surplus
Govemment

of 49 countries, per capita GDP growth over the

-0.09 -0.07

of 1992-95 is estimated
per capita income,

of

consumption (1.82) (2.38) (0.77)

-0.02

the national

rates,

Inflation

-0.01

and an overall index of market efficiency. The latter is based on the following indexes: openness of the economy to trade and financial flows, size of

BM(2.63-6 -3.426
(0.87) (0.67)

9
(2.41)

.47

(3.1)
(1.06)

government,
TABLE 1.6

and degree of labor market flexibility.

Openness
2

0.02
(7.00)

0.02
(7.29)

0.18
(6.69)

0.02
(7.21)

0.02
(7.05)

Egypt and Indonesia: comparative indicators

Indicator Population (millions) Per capita (1994 $)a GNP Intl. Gini coefficient Infant mortality (per 1,000, 1994) Primaty school enrollment 1993 Egypt 56.8 3,720 32 52 Indonesia 190.4 3,600 32 53

R 0.27 0.26 0.26 0.26 0.27 0.18 .. Not available. Note:Thepolicy variables dropped are one-by-oneorder assess in to the robustnesstheresults, of which appear berobust. to Dependent variable: growth of real rate capita GDP n=86 countries,time 7 period (four-year averages). Included observations =474. Source: Dollar (1996).

In analyzing growth performance, the East Asian economies are often taken as a reference point to which other countries' policies and growth performance are compared. In this report, Indonesia is taken as a relevant comparator for Egypt, since the two have similar country characteristics. Table 1.6 provides some basic descriptive data. Both are large countries with similar per capita
gross national product and social indicators, 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. They differ in that Indonesia has been growing much more

rapidly, with 6 percent per capita growth during

EMPLOYMENT GROWTH-AN AND OVERVIEW

FDI/GNP (percentage) 1994 2.3 4.2 ODA/GNP (percentage) 1994 6.4 1.0 Exporls/GNP 1994 8.1 22.9 (percentage) GNP capita intemational isconverted purchasing per in dollars at power
Source: Dollar(1996).

(percentage)

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

Chapter 2

Post-stabilization policy-managing

macroeconomic success

But the success of stabilizationbrings other problems that threaten the recoveryby boosting exchange rates and discouragingexports. Egypt shouldfocus in the short term on addressingthe adverse effects of capital inflows and protecting the soundness of the banking system.

If

a sound macroeconomic environment is a necessary condition for achieving higher longrun growth, has Egypt obtained this condition? If so, how can Egypt sustain it, and protect it from external shocks? Recentdevelopments Macroeconomic balances. Egypt has gone through major changes since the reform process was initiated in 1991.Inflation, which hovered between 20 and 30 percent in the late 1980s,is now around 7 percent and falling. Growth slowed in the first two years of the stabilization program, but it resumed by 1993/94. GDP growth for 1995/96 is estimated at around 5 percent. Thus, the stabilization effort brought inflation down to manageable levels without a major slowdown in output, and was followed by a relatively fast recovery. Egypt's growth performance resembles those of other economies that carried out successful stabilization (figure 2.1).
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. Fiscal stringency was achieved through both expenditure restraint and revenue measures, and was further facilitated by important concessions that the Paris Club made on Egypt's external debt. The first phase of the stabilization program can now be considered as successfullv concluded. Investor confidence in the economic policies followed by the government seems strong on all indicators. One such indicator is the stronig international interest in Egypt's capital markets. Over the past year, foreign activity has grown to almost 30 percent of the turnover on the Cairo stock exchange. Several Egypt funds have been established and a large number of investment funds have shown interest in individual stocks. Well over 100funds are currently active in the Egyptian stock market. Portfolio flows alone in the first half of 1996 amounted to about $ 500 million. Another indicator can be derived from the term structure of interest rates in Egypt (figure 2.2). In
general, interest rates on the Egyptian pound

6.21
3.5 2 2 .8 9 4007

___________._________ -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.

remain above U.S. dollar levels, notwithstanding the firmly fixed exchange rate. But long-term rates now lie below short-term rates. Such an inverted yield curve signals expectations of future interest rate declines and thus confidence in continued low inflation. Although inflation came down relatively fast, it not do so instantaneously, and the nominal exchange rate has been remarkably stable since Egypt switched to effective current account convertibility and unified the exchange rate system.
9

As a consequence, the real exchange rate has appreciated significantly over the past five years (figure 2.3). This appreciation came after a significant real depreciation prior to the reform process. The exchange rate has not returned to its peak of the mid-1980s.
FIGURE 2.2

private enterprises.) As the recovery progresses, however, spare capacity will progressively be eliminated. Thus it can be expected that, without a robust recovery of investment, growth cannot be sustained. In turn, a robust recovery of investment will require robust savings.

Table 2.1 reveals that aggregate gross domestic

investment as a share of gross national income (GNY) has been growing moderately, 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 1996.1

1s99

15 r

It also shows that the increase in private investment

131
9

1- - - - - - - - _

has been accompanied by rising public saving and

-~ P

14
-_ -

1i9

a modest current account deficit. Private saving

-'*-

~.(excluding
99<1

Law 203 enterprises, which since 1994

have experienced an increase in net operating profits and thus savings) is not yet showing signs of recovery, having remained at around 11 percent of

m_nth 36-month 12-month

5-year

Source: Estimates based on data collected by the World Bank mission in

GNY since 1994.

The increase in public saving is particularly encouraging and indicative of the strength of stabilization. This increase has resulted mostly from the reduction of budgetary subsidies and current transfers and from a decline in interest costs; improved financial performance by Law 203 enterprises, which recorded aggregate profits in 1994-96. has also played a part. If these trends are sustained and consolidated,. public saving should continue to grow, though only up to a limit. Significant further increase in public saving is
FIGURE 2.3

Cairo.

The process of liberalization has now continued to the point where Egypt's exchange rate is fully even on the capital accounts. convertible International and domestic investors have clearly interpreted the opening up as a sign of confidence, and have responded strongly to the continued interest rate differential in favour of LE securities. Capital intlows have been strong over the whole reform period, putting strong upward pressure on the exchange rate. Attempts to both maintain monetary restraint and avoid nominal appreciation could only be reconciled through a strong sterilisation effort. 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. In effect, the counterpart of Egypt's high reserve position is a substantial increase in its domestic debt. Saving and investment balances.Although growth has resumed, investmnent (as a share of GDP) has not returned to its pre-1990 levels (table 2.1). This points to the existence of large spare capacity at the beginning of the recovery and, perhaps, increased factor productivity, thanks to reforms in the agriculture sector and the establishment of financial autonomy for Law 203 public enterprises. (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- I00)

140 120

10K 90
6
.D

2.

0
1985
19S6 19S7

o~

19SS

1989

1991

1991

1992

1993

1994

1995

Source: From data provided by Central Bank of Egypt.

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

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. The decrease of public investment is also encouraging, as it resulted mostly from a reduction of public involvement in the commercial sphere. 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 percent during the last three years). It is now unlikely that these trends in withdrawal of state involvement will continue, as further significant reduction in public investment cannot take place without jeopardizing the government's ability to provide basic services and infrastructure. Data are not available to determine the extent to which the lower private saving is due to weak household or corporate saving. However, it is likely that corporate saving has been increasing, since the recovery of private investment appears to be
TABLE 2.1

financed largely by retained earnings. 2 It is thus likely that the stagnant performance of private saving is to be ascribed to the behavior of households, an issue to be addressed in chapter 6. Data are available, however, on the composition of private investment (table 2.2) that sheds some light on the determinants of its recovery and future prospects. Abstracting from developments in the petroleum sector-which are dominated by external factors-private investment has been increasingly concentrated in nontradable sectors. Although the data display significant year-to-year variation, this trend appears to hold generally for all nontradable sectors. Among possible causes underlying the increased concentrationi of private investment in nontradable sectors, relative price changes have played an important role. As shown in table 2.3 and table 2.4, relative prices between tradables and nontradables - measured by consumer price indexes for tradables (TCPI) and nontradables (NTCPI) respectively-have shifted in favor of nontradables since 1991, 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 26.1 19.9 6.2 23.4 15.5 8.8 17.8 -0.7 18.5 5.5 89.6 35.9 31.8 4.1 31.9 20.7 11.3 28.3 -2.9 31.1 3.6 89.0 32.6 27.4 5.2 29.3 13.6 15.7 24.6 -0.8 25.4 4.7 90.0 1989/90 29.1 24.9 4.3 26.7 13.6 13.0 22.7 -0.2 22.9 3.9 91.5 1990/91 1991/92 1992/93 1993/94 21.9 20.7 1.1 20.1 12.5 7.6 19.1 -1.3 20.3 1.1 92.1 18.2 24.7 -6.5 17.0 10.0 7.1 23.1 3.1 20.0 -6.1 93.6 16.2 23.0 -6.8 14.8 8.2 6.6 20.9 2.5 18.4 -6.2 91.2 16.6 15.4 1.2 15.8 7.5 8.3 14.7 3.3 11.4 1.1 95.5 1994/95 1995/96a 16.3 15.9 0.5 15.5 6.6 8.9 15.1 3.7 11.4 0.5 95.1 16.6 15.5 1.1 16.0 6.5 9.4 14.9 3.7 11.2 1.1 96.1

Private Private

Gross national savingb Public

Foreign saving Memo: GDP/GNY a. Estimates. b.Thepublic sector includes central local and government, public and enterpneses. Source: Estimates ondataprovided theMinistry Planning, based by of Central Bank, Public and Enterprise Office. TABLE 2.2 Distribution of private investment Investment 1986/87 1987/88 1988/89

1989/90 1990/91 1991/92

1992/93 1993/94 1994/95 14.0 50.7 35.3 18.5 21,051

Petroleum petroleum and products 20.0 19.7 20.8 22.6 26.5 25.5 19.1 20.1 Nonoil tradablesa 39.4 46.4 40.9 41.0 36.8 35.6 32.5 31.7 Nontradablesb 40.7 33.9 38.4 36.3 36.7 39.0 48.4 48.2 o/w housing 25.3 21.0 26.5 23.3 23.7 25.3 26.8 27.9 Total private investment(LE million)c 5,699 7,569 9,508 9,705 10,758 11,666 11,547 12,895 a. Includes agriculture, irrigation land and reclamation; manufacturing mining; and transportation, communications, andSuez tourism Canal. b. Includes electricity energy; and construction; finance insurance; social trade, and and services. c.Total doesnotexactly match figures national from Income accounts. Source: Estimates ondataprovided theMinistry Planning, based by of Central Bank, Public and Enterprise Office.
POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS

11

exchange rate appreciation. However, the relative price shifts are negligible when comparison is made between 1987 and 1995. In any case, caution should be used in interpreting these price data. It is in fact likely that the consumer price indexes (CPIs) underestimate the rate of inflation of nontradable prices, owing to the dominance of administered prices, such as for food, housing and public utilities, which are not relevant for private investment decisions.
TABLE 2.3

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, textiles, food processing, and construction materials, where state enterprises account for more than 40 percent of total outputmay discourage private firms from entering, because they expect collusive behavior on the part of the stateowned enterprises. Third, high and probably increasing "sunk costs" of producing for export markets may make these activities substantially less profitable than nontradable activities. These sunk costs would be attributable not only to quality and marketing prerequisites for breaking into foreign markets, but also to administrative compliance, customs, and shipping. Fourth, 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. These would iclude among other things, repatriation of savings accumulated abroad by migrant workers since the devaluation of 1991 and

0.25 74 31 42 74 0.20 73 38 48 79 0.14 69 42 50 84 0.13 62 43 51 84 1989 0.12 69 58 64 90 1990 0.11 100 100 100 100 1991 0.10 121 145 136 107 1992 0.14 113 149 144 103 1993 0.14 98 136 137 99 1994 0.17 95 137 143 96 1995 0.16 94 142 148 96 a. Realeffective exchange rate;decrease realappreciation. is b. Export-weighted nominal effective exchange rate. c. Import-weighted nominal effective exchange rate,adjusted importduty. for Source:Fromdataprovided CentralBankof Egypt;IMF(1996). by TABLE2.4

1985 1986 1987 1988

the Gulf War, and government incentives to develop

"new cities."

Managingsuccess:in capital inflowproblem

Havig acheved stablization and icreases in private investment, Egypt now seems well placed for a takeoff to sustained growth. However, as other successful reform-cum-stabilization countries have experienced, success presents its own challenges. Post-stabilization macroeconomic
is surprisingly difficult, as Mexico and several other Latin American countries recently policy
*

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. Success breeds investor confidence and the capital inflows noted above that such confidence generates. These inflows are at the root of the difficulties in managing the macroeconomics of success; most of this chapter will analyse poststabilization macroeconomic problems. In addition, concentration of private investment in nontradables, and lower levels of private saving may restrain the extent of recovery. Unless private

1993
1994 1995

255 277
308

259 285
300

99
97
103

a.GDP, tradable sectors.

b. GDP,nontradable sectors. Source:From data provided the Ministryof Planning CAPMAS. by and

saving rapidly catches up with the growth of investment, and investnent shifts toward tradable
and exportable activities, Egypt's present recovery may go under. 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. First, the current private investment recovery may be dominated by the establishment of new, small, labor-intensive enterprises. 3 Second, 12

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

rate, but the real appreciation that results may abort the recovery newly underway. If renewed optimism, justified or not, pushes the exchange rate up, while lingering downward wage and price rigidity prevents the fall in wages and prices that could offset the appreciation's impact on product markets, a slide back into recession becomes inevitable. This in turn may threaten the hard-won success of stabilization; a recession undermines fiscal stringency as tax revenues fall, and slower growth magnifies the imapactof any given deficit on

Such exposure may be hidden. The banks may achieve what seems like a balanced position in foreign exchange by sharing the spread with firms. 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. The exchange risk persists but in the guise of commercial risk, as the firms, who now carry the risk, are more likely than not to default if things go wrong and a devaluation occurs.

the

debt-output

ratio,

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. Tight monetary policy and a reliable nominal anchor based on a stable exchange rate send clear signals of a government's resolve. Once that signal has been convincingly conveyed, however, 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, in seemingly inconsistent directions. The choice is between letting the nominal rate appreciate or letting money growth exceed its targets. 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. Egypt's recent experience clearly demonstrates the issue. The fiscal and monetary stringencies adopted in 1990/91 have restored current account balances (figure 2.4) and entailed a substantial rise in capital inflows, particularly private capital inflows (other capital in figure 2.5). In addition, removal of restrictions on the capital account and liberalization of interest rates encouraged a major shift in favor of holding LE-based assets, and dollarization declined from 51.8 percent to 29.4 percent in 1995. Capital inflows may be an embarrassment of riches, but ignoring the issue may well cause serious problems later on. 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. However, short-term private capital inflows have a minus side too, as

creditworthiness A key question is whether upward pressure on the exchange rate is niecessary to accommodate a booming economy, or whether it results simply from anticipation of future wealth, with a corresponding impact on capital inflows. Strong spending on home goods, by foreigners or domestic residents, will make a real appreciation unavoidable. If the nominal exchange rate does not accommodate such pressure, high inflation will bring it about anyway. If, however, the appreciation is purely the result of a portfolio shift into the country, downward pressure on inflation will result, as the rising real exchange rate makes home goods uncompetitive; output will go unsold as exports slow down and domestic expenditure switches to cheaper imports. Inflationary pressure and inventory levels thus provide key signals. If inflation continues its downward path, and inventories start rising in relation to sales, indications are that asset markets are the driving force an,d that the appreciation thus needs to be resisted. 'If inflation is reigning and capacity fully used, with inventories falling, tight fiscal policy and an accommodation of the appreciation is needed. 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, domestic interest rates will remain high compared with foreign rates plus ex post nominal devaluation. Thus it becomes highly profitable for banks to borrow in dollars and lend in local currency. Of course, if a devaluation does happen, banks talce a capital loss and may in fact become insolvent, as happened both in Chile in 1982 and in Mexico in 1994.

POLICY-MANAGING SUCCESS MACROECONOMIC POST STABILIZATION

13

Mexico found: if the confidence declines, rapid reversals can take place and lead to severe crises.
2.4 FIGURE

account balance,change in reserves and Current capitalinflows

credibility, with inflation set to go into single digits for 1994. What this suggests is that several years into a successful stabilization program, the policy challenges change. Early on, the key objective is to convince investors of the consistency and sustainability of the reform program, and to demonstrate the government's resolve. Hence the importance of fiscal restraint, tight money, and a rigid adherence to a nominal anchor strategy (for example, through a fixed exchange rate). Once this program is widely believed, the priorities change. While fiscal stringency remains confidence, important to provide long-term flexibility and robustness against external shocks may become more of a challenge. 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,

1994 195

but flexibility to insure the program's ability to survive unforeseen setbacks takes on additional
'

ECurre.tAccrntDeficit

MChangeinNetinternationalReserves

ECapital

importance. This is especiallyso for Egypt, given its

heavy reliance on exogenous resources.

______
Bankof Egypt. 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. 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, left it no other choice. But Egypt is in a much stronger position; it has avoided many of Mexico's errors and can take the necessary precautions.
FIGURE2 5,

Egypt's current situation is different from Mexico's in 1994 in several important aspects; in particular, Mexico's crisis was due to a sustained effort by its government to mask the impact of political uncertainty on investor confidence, and to offset reserve outflows through a rapid issue of dollar-denominated debt in an effort to offset reserve outflows. When a huge refinancing requirement of nearly $30 billion approached, anticipation of refinancing difficulties brought the exchange rate down in late 1994. Egypt has an external debt comparable to

Mexico's at that time. But as a result of Paris Club

negotiations, Egypt has a remarkably smooth debtservice schedule. Unlike Mexico, Egypt faces no refinancing peak in any year between now and far into the next century, thus Egypt's dollar liabilities signal no future crisis. Moreover, the fiscal position seems more firmly based than Mexico's was. Social and health expenditure has been largely exempted from the retrenchment. 4 Tax reform may bring further consolidation, and, importantly, the pension system in Egypt is actually generating surpluses
(see Chapter 6).

p u 000
7000

500-L
4000 3000

t__
990

2000

_
1991
992
________

_
1993
E3

1994

199S

For all the differences, Mexico's experiencedoes

contain some lessons. Mexico was in no way insolvent in 1994; its public debt was less than half of what it was prior to the debt crisis. Moreover, its effort had gained considerable stabilization
14

(see Chapter 6).

_-W-~~~~~~~~~~~~~~~Prvate -Investm-ent (net-) OtficialCapitalGrantos

Net Foreign Lending -OtherCapitalFlows

Source:Fromdataprovided Central by Bankof Egypt.

CHOICESFOR SAVINGS, INVESTMENTS,ANDLONG-TERMGROWTH EGYPTIN THE GLOBALECONOMY: STRATEGIC

There are strong arguments against increased flexibility in the exchange rate at this time. In the presence of asset market uncertainty or, as in Egypt now, clear shifts in investor confidence, nominal flexibility will lead to spurious real volatility. This problem is made more acute by the privatization drive, which apparenily is attracting substantial foreign interest. SuchL capital inflows may be difficult to manage, given Egypt's relatively underdeveloped capital markets, with upward pressure on the nominal exchange rate thus becoming ever harder to resist. Sterilization, with Egypt's domestic currency debt already high, will be difficult, and in fact increasingly expensive, as interest rate differentials persist. However, if the exchange rate pressure is real that is, 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. But the boom in goods markets is unlikely to be the explanation. Inflation, although on the high side, has shown no sign of increasing, and some indicators point towards rising inventories. All this evidence points to an asset market explanation for the upward pressure on the exchange rate, justifying the government's determination to resist further appreciation and to accommodate any down-ward pressure that might develop (figure 2.6). Fiscal policy is severely constrained by the need to maintain confidence in the stabilization program's continued success, and by Egypt's high level of internal debt. Ultimately, the credibility of restrictive monetary and exchange rate policies is determined by the fiscal backing they receive. 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, monetization becomes the likely alternative to debt finance, with all the consequences for capital flight that were seen in Mexico in 1994. Thus, maintaining a fiscal deficit that will lead to a gradual decline in debt-output ratios is imperative, whatever the exchange rate system. Implicit in the above discussion is a second issue-the level of Egypt's debt. Clearly Egypt is not insolvent. Its external debt, at a face value of about 47 percent of GDP, is actually around 30 ino percent once its concessional nature is taken into
POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS

account.5 More worrisome is the internal debt; a large share is short term and at high real interest rates. Currently the debt stands at around 50 percent of GDP. 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). For comparison, the Maastricht criteria call for a 60 percent debt ratio. Of course, such numbers are arbitrary; 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. At current growth and interest rates, the debt-output ratio will decline: the nominal interest rate, at around 11 percent, is roughly equal to the nominal growth rate of GDP (in fact, currently slightly lower, since the latter is projected at 12 percent for 1996/97). Concerns arise nevertheless, for two reasons. One, the high debt level restricts the government's ability to engage in more sterilization efforts on a large scale. The sterilization effort of 1992-94 led to an increase in marketed government debt equal to 12.7 percentage points of GDP by 1995; repeating that experience would, given the difference between the cost of internal debt and the return on foreign assets, start to seriously undermine fiscal stringency.
FIGURE 2.6

Inflation, inventory,and exports

Percent
30 I

25 20 4 15 10 Inflation netory/sales

~
-----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. in

Potential liabilities that are not explicitly counted as government debt must be taken into consideration. Currently, it is not known how many such liabilities exist. Claims on state enterprises by such paries may ultim ate enterpie external parties may ultimately become the government's liabilities; promises to make up for
15

high purchase and low selling prices for cotton to denominated securities. In consequence, Egypt's LE trading companies have not yet been met; liabilities debt shot up (figure 2.7) as reserves accumulated. of public enterprises to the utilities, and the size of Holding such a high level of internal debt, at nonperforming assets in bank portfolios are, for the interest rates substantially in excess of the return on time being, unknown. Equity and real estate are the equally high foreign reserves, is obviously undervalued in bank portfolios, but loan losses undesirable from a fiscal point of view. A may not be adequately provisioned for. Treatment reasonable estimate of the return on dollar assets of government guarantees in loan loss provision would be at most 5 percent, the short term U.S. Tcalculations are another concern. bill rate. But internal debt now goes at more than 10 A further issue involving debt concerns a state's percent while the exchange rate is stable against the vulnerability to downturn. In Egypt, a slowdown in dollar. If we double the reserves for imports from a economic growth is not likely, but not impossible safe level of three months coverage to six months, either. Further turmoil in the Middle East might this would still be only about one third of what undermine tourism revenues even if, as is likely, Egypt is currently holding, indicating that the Egypt stays out of direct confrontations. If growth Central Bank of Egypt (CBE) has excess reserves of slows down, the comparison between interest rates around $ 11 billion, or about 16 percent of GDP. At and nominal growth rates of GDP would turn a 5-percentage point interest differential, that distinctly unfavourable. At zero growth, there is a makes for an annual loss of about 1 percent of GDP. 5-percentage-point difference opening up at short If the return on assets is lower, the loss is maturities. At current debt levels, that requires a correspondingly larger, 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 2.1). If growth slows down, at all. A cautious strategy to reduce reserves would problems could arise from this surplus. thus be called for, rather than further debt-financed Slow growth will lead to less private saving, reserve accumulation, as will happen if traditional less tax revenue, and pressure for more sterilization strategies are followed. expenditure. All this will lead to larger external BOX 2.1 deficits and larger fiscal deficits, thus making debt The dynamics of debt and the sustainability of fiscal a more serious problem. For this reason, an active 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; this would make the government less + (real interest - growth x d rate rate) vulnerable to a crisis from external shocks. Risk in the immediate future The discussion so far suggests that with stabilization and resumption of growth, policy focus should shift toward raising national saving,
and protecting the success of stabilization. Higher national saving would provide a solid foundation for Egypt to cope with long-term external shocks. In the immediate future, however, two specific risks
require attention. This equation, which is the key to understanding debt dynamics, has a simpleintuitiveexplanation. The noninterest deficit has to be financedwith new debt to the extent that this deficit exceeds the amountof moneycreationby the centralbank. In addition, nominal interest expenditureshave to be refinancedwith new debt. But sincethe denominatorof the debt ratiois nominal GNP,the debt ratio will decline either with inflationor with real GNP growth the absence newborrowing. in of GN .rwhi heasneo e borwn. The dynamics of debt and the sustainability of deficits are particularlyaffected by the differencebetween the real interest rate and the growth rate of GNP. Assume first that the real interest rate on debt exceeds the growth rate. Then debt dynamics are unstable, and it becomes impossibleto run a permanentprimarydeficit that exceeds the amount of revenue the governmentcan obtain throughseignorage. The conclusion deservesemphasis:if the governmentis runninga primarydeficit largerthan the amountof seignorage can obtain,and if the real it interest rate exceeds the economy's growth rate, the debt to GNP ratio will continuerisingwithout limit. At some point it will be impossible thegovemment sell itsdebt, andtheprocess for to willhaveto be broughtto an end by cuttingthe budgetdeficit.
Source:FischerandEasteriy 990);Anandand vanWijnbergen (1 (1989).

Sterilization problems
The large inflows in 1993 and 1994 were sterilized in classical fashion. 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, INVESTMENTS,ANDLONG-TERMGROWTH

A dangerous alternative would be to reduce reserves by encouraging a larger current account (CA) deficit through, for example, import tariff reduction that is not offset by other equivalent revenue-raising measures. While running a larger CA deficit might slow down the reserve accumulation, it would significantly increase Egypt's vulnerability to a crisis. The resulting pattern could be very much like Mexico's in the period leading up to its crisis, where high but volatile capital inflows were funding a large CA deficit. The inflows may easily be, reversed, but the CA deficit is much harder to efil..,nate. Over time, reserve accumulation should be stopped by eliminating undue incentives for capital inflows, and, for example, by widening the pension system's ability to invest abroad i(chapter 4). One key incentive' that unduly encourages capital inflows is asymmetric treatment between bank loans funded from foreign sources and loans funded from domestic sources. Domestic deposits face a 15 percent reserve requirement over which no interest is paid. Since domestic interest rates are over 10 percent, this greatly raises the cost of funding loans from domestic deposits. On the other hand, while reserve requirements against foreign exchange deposits are also high at 15 percent, they are remunerated at London interbank offered rate (LIBOR). This makes for a differential cost of almost 1 percentage point, or a large fraction of the banks' profits per pound lent.6 Through this asymmetry, banks are encouraged to borrow in dollars; because of the persistent interest differential in the face of a stable exchange
FIGURE 2.7

rate, they have a strong incentive to lend in local currency. Thus, this asymmetry not only encourages capital inflows, but also puts the capital of the banks at risk by providing undue incentives to increase foreign exchange exposure. (This is discussed below in the section on "Issues in banking".) A strong policy recommendation is either to start paying interest on reserves against domestic deposits, or to stop paying interest on reserves against foreign deposits. Before the Palestine switch out of Jordanian dollars (JDs) triggered Jordan's current reserve problems, Jordanian banks receiving foreign exchange deposits were required to hold an equivalent sum in assets abroad. This forced banks to match capital inflows with oufflows of equal size. A third policy measure (that should be considered for other reasons, but that will have an impact on reducing net capital inflows) is to allow the pension system to invest in high-grade foreign assets, such as U.S. government paper or blue chip equity. This will allow the funds to spread risks better, and has the added advantage of encouraging capital oufflows when inflows are too high from a macroeconomic point of view. Issues in banking Banks, whether state-owned or private, are the Achilles heel of many reform programs. A recession in the early phases of a stabilization program will lead to a deterioration in the quality of loan portfolios, as firms, in distress because of the recession, stop servicing their debts. In the upturn that follows, the real exchange rate typically appreciates, and long periods persist when nominal rates on domestic currency stay above foreign rates plus the ex post rate of devaluation. As noted above, such interest differentials, in turn, make it attractive for banks to borrow in U.S. dollars and lend in local currency (figure 2.8). As long as the exchange rate stays fixed, profitability will stay high, but, of course, foreign exchange exposure opens up, and the banks become extremely vulnerable to a devaluation. Even if dollar deposits are matched with dollar loans, the problem remains. Although the banks will then be matched in foreign exchange, typically the borrowing firms are not, 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

X23_l

'

1993

1994

1995

Source: From data provided by Central Bank of Egypt.

bank loans after a devaluation, wiping out the

17

POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS

banks' capital. In this case, exchange risk remains, but is transformed into foreign exchange-related commercial risk. This happened during the banking crisis in Chile in 1982, during the big Mexican crisis in 1982, and again in 1994. Thus, careful bank supervision and aggressive provisioning against bad loans are absolutely crucial in the post-stabilization period, so as to strengthen the banks, or at least make the extent of their distress clear to managers and regulators alike. The central bank needs to be extraordinarily vigilant in preventing excessive foreign exchange exposure in banks. Simply matching dollar assets with dollar liabilities and such is not enough; the quality and foreign exchange exposure of the borrowing firms will have to be considered explicitly. This issue is becoming acute, as pressure

problems were back in less than a year. A pure recapitalization merely gives bank management more taxpayer money to squander.
FIGURE 2.8

Domesticvs foreign interestrate

Percent 25 20

/Domestic
15
.

interest rate

/
5

/
xchange-rite adjustedLIBOR
-

1990

1991

1992

1993

1994

1995

by bank clients to give U.S. dollar loans is

apparently mounting, the risk of devaluation notwithstanding. The extent to which these two problems exist is not altogether clear in Egypt. The four main state banks (with 70 percent of the loan portfolio) are clearly exposed to a substantial number of bad loans., since they are the lenders to state enterprises. On the other hand, they seem to have made substantial profits during the sterilization period of 1992-94, most of which were used for provisioning. Their true capitalisation cannot really be assessed on published data alone; a careful audit based on international auditing standards (IAS) is very urgent to bring out their true capitalisation. This in turn will indicate whether cost cutting and improved loan approval and credit quality control procedures are enough, or whether more drastic measures are required. 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). A recapitalization without further reform signals to the bank that the behaviour that led to the problems is rewarded with subsidies; the behaviour will thus continue, and all problems will reappear with a vengeance within, as experience tells us, one year. Hungary is a good example. The state banks were recapitalized in 1992, 1993 (twice) and 1994, each time for $ 1 billion, for a cumulative total equal to 10 percent of Hungarian GDP. After each recapitalization, banks continued their poor loan quality control, and the
18

Source: From data provided by Central Bank of Egypt.

If recapitalization is needed, the preceding audit should be a hard-nosed one done by an experienced foreign audit company. Egyptian audit companies may be competent, but may also be concerned about future business with the bank in question or its clients. A foreign auditor without an office in Egypt faces no such incentive problem. The audit should assess the adequacy of loan loss provisions (LLP) and thus report on the accuracy of the current value of capital. This is a crucial question: almost all major banking crises in the West and the East involved banks that seemed adequately capitalised (Continental Illinois, Credit Lyonnais, and Banesto all had capital adequacy ratios in excess of the Basle norm of 8 percent on the day of their collapse). What was wrong was the grossly inadequate provisioning for specific loan losses. This may also be a problem in Egypt, although modem loan classification schemes and provisioning rules were introduced in 1993, and are apparently enforced-at least for the private banks. First of all, it is not clear how stringently these rules are being enforced for the state banks; second, LLP must come out of current profits. 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. A final issue concerns the tax treatment of LLP. LLP is not deductible under corporate tax; presumably losses can only be taken when loans are actually

EGYPTIN THE GLOBALECONOMY: STRATEGIC CHOICESFOR SAVINGS, INVESTMENTS, AND LONG-TERMGROWTH

written down. Allowing at least a partial tax 2. 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. loan losses. 3. This is consistent with data on business registration, which show a large increase in the A second issue concerns the criteria used to number of new enterprises, and with the data on classify a loan. If part of the amortisation payments posted job vacancies, which show no significant are not met, the entire loan has to be downgraded, payent Butlicn not~~~~~~~~~~~juste the missedesamotistio not just the missed amortisation payment. But change; new small businesses are in fact less likely missed interest payments that are simply rolled to post vacancies to recruit, relying usually on family members or business relations. over are apparently no reason for downgrading, and this is a major issue. This rolling over of 4. Total government expenditures as share of GDP interest presents auditors with a difficult problem, declined from 45.3 percent in 1991 to 28.4 percent in one that is currently ignored in Egyptian audits. Is 1995 while government expenditures on health and rolling over simply a matter of maintaining credit educationincreasedfrom3.8percentto4percentof relations with a creditworthy client, or an early warning sign of borrower distress? Is the risk of the GDP loan portfolio as a whole adequately assessed? All 5. By convention, the present value of contractual loans to the construction sector are now probably debt service-which takes into account the good, but if they all withdraw tomorrow, this concessional nature of external debt-has been outlook will change. 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. The ratio of present value downgrade a loan? Finally, foreign exchange to face value of debt stock was 64 percent for 1995. 6. Fifteen percent at zero rate adds 176 basis exposure, both of banks themselves and of their points to the cost of a loan (10 percent of 15 percent major U.S. dollar borrowers, needs to be carefully over 1 minus 15 percent). Foreign funding, as long monitored and kept wit-hin manageable bounds. Notes 1. It should be noted ithat the definition of private investment used here excludes Law 203 enterprises, whose investment has contracted modestly in real terms during the last three years. as the exchange rate remains stable, costs only 88 basis points per pound lent (5 percentage points interest differential over a 15 percent reserve requirement, scaled up by (1 minus 15 percent). The cost difference between foreign and domestic sources of funds is thus a full 88 basis points (0.88 percentage points) per unit lent!

SUCCESS POSTSTABILIZATION MACROECONOMIC POLICY-MANAGING

19

Chapter 3

Long-termy policy challenges

Whateverhappensto growth,Egyptneedsto reduceinternaldebtto maintainherfreedomof action.She coulddo this in part by applying revenues from pnvatizationof publicenterpnses,therebyalso boosingpublic saving. If the expansionslows,flexibilityin the exchangeregimeshouldbe considered.

Solving immediate problems outlined above the

would reduce Egypt's vulnerability to crises, but much more needs to be done. The existing favorable circumstances present three long-term challenges of which the first two concern, in particular, the current expansion of private investment. 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), it may be determined that the exchange rate requires a downward adjustment. If so, 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. Assuming expansion continues or if it accelerates, the second challenge is to define policies to support it, in the absence of a strong recovery in private saving and given the concentration of private investment in nontradable sectors (chapter 2). Conversely, the third challenge is to determine a response to a slowdown in investment or any other important expenditure category. The achievement of long-term consistency centers around fiscal balance and external financing. The other two goals each center around one of two key questions that cannot be ignored. For growth to nudge further up as envisaged in a proposed scenario for high growth considered below, 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. They will illustrate the magnitude of the investment and saving efforts needed to support either moderate growth or high growth. 'ihey will also demonstrate the scale on which the divergent payoffs of moderate growth or high growth will affect employment and income growth. Macroeconomic consistencies are assumed to underlie both scenarios. Only the high-case scenario, however, will be assumed to be underpinned by substantial efforts at structural reform (see section below on "Long-term consistency issues"). The respective outcomes of the two scenarios are summarized in table 3.1.

paragraph). If this happens, the real exchange rate

may be sustainable, since strong continued expenditure will support its appreciation. However, external balance is likely to deteriorate, and a Mexican situation may develop, with private capital inflows financing a large current account deficit. While this may be sustainable for a long time, the Mexican experience amply demonstrates that high growth with a deteriorating external balance is a vulnerable situation, and it probably cannot continue indefinitely. Conversely, if the investment expansion does not accelerate, 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. Fiscal stringency will be maintained and the external debt to GDP ratio will continue to decline, thus increasing headroom for managing internal debt and expansionary policies if needed in the future. Growth of broad money will be kept below growth of nominal GDP. Inflation will be comparable to that in OECD countries. Real GDP
21

growth will be at around 4.5 percent, and extemal financing requirements will be minimal. By choosing to maintain its current levels of international reserves (at more than 12 months of imports), Egypt would be able to cope with external shocks with relative ease. This scenario is characterized by two features. First, while the macroeconomic policies will continue to be internally consistent, structural reforms will move slowly; thus the fundamental

will lead to limited growth in job and income opportunities, and therefore to further increases in unemployment. Moreover, slow growth of nonoil merchandise exports (at 5 percent) will limit the scope for Egypt to reduce its reliance on exogenous resources, despite the large foreign exchange reserves that it holds against external shocks. The large fiscal costs arising from holding reserves limit the headroom for expansionary policies.

problems impeding

growth

of saving and

Thehigh growthscenario
The high growth scenario is based on the vision that Egypt should and must grow faster, and that the benefits of rapid growth outweigh the potential risks. This scenario is characterized by the following features. First, Egypt would maintain internally consistent macroeconomic policies strengthened by vigorous structural reforms in trade, capital and labor markets, privatization, and deregulation, as well as by strengthened incentives to raise productivity growth. In particular, a rapid

investment will remain. Divestiture of public sector interest will be limited in scope, and the current recovery of private investment will not accelerate. Second, Egypt would choose to limit foreign borrowing (on a commitment basis) to the range of $ 1.0-1.5 billion a year during 1996-2002. This means that the debt stock will decline in real terms, and relative to output as well. Egypt would find itself denied an opportunity to attract private and foreign investment through rapid structural reforms. The constrained private sector investment
TABLE 3.1

Outcome thetwoscenarios Egypt of in

(percentage) Indicator Base-case scenario GDP market real at price, grwthrate Inflation, deflator GDP GNP, growth real rate Gross national disposable income, growth real rate GDP capita, 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, rate M2growth rate High-growth scenario GDP market real at price, growth rate Inflation, deflator GDP GNP, growth real rate Gross national disposable income, growth real rate GDP capita, growth per real rate Unemployment, percentage of labor force ConsumptionlGNP Gross investmentlGNP Grossdomesticsaving/GNP Gross national saving/GNP Overall budget deficit/GDP CurrentaccountbalancelGDP Non-oil merchandise growth exports, rate M2 growth rate Source: WordBank estimates. staff 1995/96 1996/97 4.9 7.4 5.0 4.5 2.7 9.7 84.2 20.7 17.0 20.8 -1.3 0.1 5.0 13.0 4.9 7.4 5.0 4.5 2.7 9.7 84.2 20.7 17.0 20.8 -1.3 0.1 5.0 13.0 4.4 5.3 4.6 4.2 2.2 10.3 84.3 20.0 16.7 20.2 -0.9 0.1 5.0 10.0 5.7 7.0 5.9 5.4 3.5 9.2 85.5 21.2 15.6 19.0 -0.9 -2.1 15.0 13.2 1997/98 4.4 5.0 4.5 4.2 2.2 11.1 84.5 19.6 16.4 19.7 -1.3 0.1 5.1 9.7 6.0 6.7 6.2 5.7 3.8 8.6 84.0 21.6 16.9 20.0 -0.6 -1.7 16.0 13.2 1998/99 4.5 4.8 4.5 4.6 2.4 12.0 84.9 19.5 16.0 19.4 -0.3 -0.1 5.1 9.6 6.3 6.5 6.3 6.4 4.1 7.9 83.0 23.8 18.1 21.2 1.4 -2.6 16.0 13.3 1999/2000 4.5 4.7 4.6 4.4 2.4 12.9 85.0 19.1 15.9 19.1 0.0 0.0 5.1 9.5 6.5 6.4 6.5 6.3 4.4 7.2 81.5 24.5 19.6 22.3 2.3 -2.2 16.0 13.4 2000/02 4.6 4.5 4.6 4.4 2.5 14.0 85.2 18.5 15.7 18.7 0.3 0.1 5.2 9.3 7.0 6.0 7.0 6.8 4.8 6.4 80.0 25.6 22.0 24.5 3.0 -1.7 17.0 13.5 2003/05 4.6 4.4 4.7 4.5 2.6 17.0 85.3 17.6 15.4 18.0 0.6 0.4 5.2 9.2 7.5 5.5 7.5 7.3 5.4 6.0 75.0 26.0 28.0 29.0 4.0 2.2 17.0 13.5

22

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

and large-scale privatization program would be complemented by rapid growth of private investment. Second, fiscal stringency would give rise to increased public sector saving, which would contribute to rapid increases in domestic saving. Private saving would be boosted subsequently by rapid per capita income growth and other structural policy reforms. However, the increased domestic saving would not be large enough to finance all the investment requirements; a significant gap would still have to be filled with portfolio and foreign direct investment and foreign borrowing. The simulation indicates that, in this scenario, GNP in real terms would reach a growth trajectory of about 7 percent, and nominal export earnings (of nonoil merchandise) would grow at more than 15 percent a year. It also shows that while the debt stock would grow with increased foreign borrowing, the growth of GNP would be much faster, therefore keeping the growth of debt stock well behind the increases in Egypt's capacity to carry and service debt. As under the first scenario, the debt problem would be well contained (Egypt remains "moderately indebted"). The decline in foreign exchange reserves (to no less than 9 months of imports) would be mnoderate, as the enlarged current account deficits are expected to be financed increases in foreign borrowing. also by Nonetheless, the viability of this scenario depends on the level of domestic saving. To the extent that saving did not rise sufficiently and quickly to support the growth of private investment, foreign

government spending is prioritized to provide basic social services (including a social safety net) and public infrastructure. Real exports of agricultural and manufactured goods would grow at about 10-15 percent in the high growth scenario, compared with 5-7 percent in the base case. Export earnings from sources vulnerable to external shocks and depletion of natural resources, such as tourism, the Suez Canal, and petroleum, are expected to grow at similar rates in both scenarios. More specifically, the high-case scenario would offer the following improved outcomes over the base case: * Addition to national income on the magnitude of $ 37.3 billion over the next six years. * Addition of about 5.9 million jobs. * A rise in the level of trade integration (export plus import) to 33.1 percent of GDP by 2002 (compared with 25.2 percent in the base case). * Reduced vulnerability to external shocks. This would result from decreases in exogenous resources as a share of GNP from 12.6 percent in 1996 to 8.7 percent in 2002 (compared with 9.4 percent in the base case). * Increased per capita income to $ 1,650 a year by 2002 (compared wvith$ 1,465 in the base case). Rapid growth, as envisaged in the high case scenario, requires, of course, maintaining macro policy conisistency, as well as adopting the policies necessary to sustain growth firmly supported by domestic savings. The following increased discussion is based on the assumption that Egypt should pursue the high growth scenario.

savings would have to be relied upon, and

inflationary pressure would emerge, leading to heightened concern about vulnerability. Benefits of rapid growl:h Overall, the high growth scenario would imply an investment/GNP ratio of 22-25 percent and an incremental capital output ratio (ICOR) of 3.8, in contrast to 18-20 percent and 4.4 respectively in the base case. 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. The fiscal deficits as shares of GDP are estimated to turn to su,rplus by the turn of the century in both cases. However, better budgetary results are expected earlier in the high growth case, as the privatization process gathers pace and
LONG-TERM POLICY CHALLENGES

Long-termyi consistencyissues
The current fiscal stance of the government appears internally consistent. The deficit is small, 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). An issue that will come up, however, is the likely decline in longterm external assistance. The current level of $2 billion per annum will obviously not continue indefinitely. If Egypt's reform process continues, private inflows will doubtless take the place of diminished external official flows. But an open question is whether such a structural dependence on volatile private inflows is in fact desirable. A case can be made that it is not. This reinforces the
23

case for measures to increase saving, and such measures are considered below. 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. Although Egypt is not insolvent, the high level of internal debt restricts the government's ability to use expansionary fiscal policy in a slowdown. Its sustainability could come into question if, for whatever reason, growth does slow down. Thus a strict fiscal policy, aimed at significantly reducing the level of internal debt with respect to GDP, is recommended. Applying privatisation revenues to debt reduction should be considered as it will also stimulate public saving. However, it is unlikely to be enough. In fact, 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 3.1). This practice should be avoided. Propping up those enterprises postpones their adjustment to new realities and wastes taxpayer money; once the privatisation comes to an end, the hard measures will have to be taken, and the proceeds of privatisation will have been wasted. A strict policy of applying tirivatisation revenues to debt reduction, rather than to finding state enterprise deficits, is thus strongly recommended.

further reduction is limited. The government has now initiated a program to carry out civil service reforms in the medium term. Although a successful reform could reduce the dead weight on the economy, one has to be cautious with regard to the size of fiscal saving that could be generated in the short term. In the meantime, Egypt may have to cope with uncertainty in its key revenue sources. Figure 3.2 demonstrates high volatility of key revenues derived from foreign aid, the Suez Canal, and oil exports. This highlights the need for Egypt to reduce internal debt so as to increase the headroom for coping with external shocks.

FIGURE 3.2

Volatility Egypt'skey revenuesources of ta o

0.180.17

0.16,
0.14 012 010 001 0.08 0.06
.07

005.35

0.04 0.02-* oi OilanldGas Suez Canal

--Tourism Worker OfficialGrants Rernittanoes

Much has been done in the last few years to

reduce public expenditure, and the scope for

source Calculated dataprovidedbyCentral from BankoFEgypt

FIGURE3.1

What should be done while the investment

Distribution sales proceeds fromprivatization of

expansion lasts?
If investment remains strong, or accelerates to levels necessary to achieve the 6 to 7 percent GDP growth rate required to absorb new entrants to the labour force, increasing external deficits can be anticipated on the current account. Once again, private capital inflows are most likely to be available to fund such deficits, but such a configuration will make Egypt highly vulnerable to reversals of investors' confidence. Thus, measures to increase saving to levels closer to East Asian ones are strongly recommended. Most savings come from one of three sources, and government measures can be classified accordingly. First, theory notwithstanding, 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.

24

EGYPTIN THE GLOBALECONOMY: STRATEGIC CHOICESFORSAVINGS, INVESTMENTS, ANDLONG-TERM GROWTH

some but not all government saving. Thus, further measures to increase fiscal surpluses and reduce deficits will certainly help. This is, however, not the first~~~~~ measures are required, first area where araweemau'saerqie,snes since so much hs bee done n thisfield alredy mche hsalreandy been donrce thvisg in fied. rp The second main source oftaing i ate

Whatshould be done ff investmentexpansion

does not accelerate? thereenldb causes are fo Despite this optimistic outlook, a ocr.Snetercvr for concern. Since the recovery has been led by private investment in nontradable activities, there is a danger that the recovery may be held back by

saoving. th most ountrieoffuds, ore inved mearnig the size of the domestic market.' In addition, to the exprviethre. 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. The c i first group makes private investent more radable sectors, the productivity of attractive and therefore funding for it more private investment will suffer, thus limiting further valuable. Privatisation, improving the regulatory growth. and competitive environment, simplifying the The concentration of investment in government's still complex administrative nontradables, in particular real estate assets, is a . . for procedures, and using ex licit tax .measures >afll all ~~~cause concern. The enterprises working in casfocner.Tentpieswkngn pontrocedures,andusingexplicit tax measuresewill.all tradables face the need to upgrade their capabilities contribute to this end. Second, explicit tax measures to promote and to compete more successfully. Yet they are Secoined expicitr at measuresd toi promot attracting far fewer resources than the real estate retained thearnin, shoru a leas eonsder. mnexat d sector. The shift in relative prices (tables 2.3 and againstcthem,hou bsfheonsidere on eamleow 2.4) 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. not . for retained earnings. Since ~~This t, . . Dmay bring about another problem. To the statutory capital is fixed, 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. One alternative would be to extend the privilege to retained The real estate boom is expected to end as soon as earnings. Another alternative would be to allow the demand is satisfied and market euphoria is investment credits that are explicitly limited to over. If there is a crash or a drastic realignment of in is as relative prices, the resulting losses would have to investmdnen fina frome countrietsoained earnings, 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. The third source of national saving is private depositors. Another cause for concern is the speed of a saving. Much has already been done to encourage Ajor expor recov. e above senario major export recovery. The above scenario saving by those with considerable surpluses: envisages increases in capital good imports, and a Egypt's capital markets now offer a wider choice rise in private investment in tradables in response and higher returns than ever before, with improved to the improvement of price regimes and transparency and investor protection. The recent supporting policies. The rise of capital good rise of private inivestment also offers further imports needs to be balanced by growth of export optimism. If, as argued in chapter 1, an earnings; thus the speed of export recovery is environment good for iivestment is also good for critical. The successful export experiences saving, 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. Strong and private saving as well. 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. In stance, but * the case of Egypt, two types of investment could be in commercial activities (see paragraph on "Forging considered: first, investment of a long gestation, buyer-seller links" in chapter 4), and by further characterized by relative high capital and skill development of the capital market. intensity or, second, investment with short capital, but
. '-

gestation and quick payoff and with relatively high

LONG-TERMPOLICYCHALLENGIES

25

labor and low capital intensity. The supporting policies indicated in this report are aimed at generating investment with quick export payoff. A further cause for concern is the timing of the response of private saving. 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, but there is a limit; Egypt's overall exposure to external shocks is already very high-owing to the large contribution of oil exports, workers remittances and foreign grants to the current account-and would be increased by higher reliance on foreign savings. Should export response turn out to be slow, private saving remain insufficient, and concentration of investment in nontradables

continue, the current growth recovery may very slow down. 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. Such a slowdown would require a real exchange rate depreciation at some stage. But achieving a real depreciation while maintaining the fixed exchange rate is exceedingly difficult; it requires sustained inflation rates below the main trading partners' inflation. To forestall these possibilities, introducing an element of flexibility in the exchange rate, for example through the adoption of a crawling band, should be considered seriously, before the fixed rate is perceived as a matter of prestige. A crawling band sets rates of change to both an upper and lower bound within which the exchange rate can move freely. Note 1. Egypt's national income of about $ 60 billion, is equivalent to that of a metropolitan area in Europe.

26

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

Chapter 4

Promoting outward orientation through exports

If domestic investment accelerates,current account imbalancesmay occur. Egypt should encourageexports to balance the current account and to hasten her integration into world markets. The import/exportprocess imposesprohibitive costs, and needs to be madefar less cumbersomethan at present.

Three have emerged as central to getting issues

on a path of hig]her growth: first, fiscal stringency is needed to maintain internal consistency, and to increase the headroom for managing short-term risks (through reducing internal debt); second, supporting policies must be adopted to substantially increase allocation of resources to production of tradables and exportables, therefore reducing the current account imbalances that are likely to emerge if the current investment expansion accelerates; and third, longterm domestic savings must be mobilized to cope with the volatility of external inflows, and to support domestic investment. The first issue has been discussed in chapter 3. The second issue is the topic of this chapter. Chapter 5 and chapter 6 will tackle the mobilization of savings. Addressing these three issues is the starting point for establishing the basis for long-term growth. The environment Egypt needs an internationally competitive economy that produces world-class goods. Her comparative advantage may lie in the export of high value-added, lightweight products such as software, electronics, or highly perishable horticulture items. Focus on exports is critical to achieving competitiveness, 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. To be competitive in world markets, 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. In other words, producers must have accessto world class inputs at world prices. In recent decades, Egypt has been essentially an import oriented economy, where foreign exchange necessary for imports is being earned primarily through services and other activities. The existence of other sources of foreign exchange (Suez Canal, worker remittances, tourismn, has been both an oil) advantage and a disadvantage. While these resources created a bigger domestic market, this large domestic market absorbs supply that otherwise would be exported-especially since the domestic market is protected (profitable) in potentially exportable sectors. Using CMSA, one calculates that if Egypt's exports grew at world rates during the period 1983-93, then exports should have reached $ 6.3 billion rather than $ 3.1 billion. Egypt's "underperformance" amounted to an annual loss of $ 3.2 billion in 1993.The causes of this lag are the failure to change to export markets that were growing rapidly (loss of $ 0.7 billion) and not adapting the composition of commodity exports to changes in world demand (loss of $2.3 billion); the residual measures the loss in international competitiveness ($ 0.2 billion). While it is encouraging that Egypt has not suffered a major loss in competitiveness, 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 $ 10,000 million by the year 2000 (often cited as a government target), merchandise exports would need to grow at an estimated annual rate of 35 percent. At such a growth rate, it is estimated that 27

Egypt would capture 0.25 percent of world merchandise exports within five years (almost catching up to it's share in 1970, which was 0.27 percent, and approximating the share of Thailand in 1970). Sustaining that rate for 10 years, Egypt would be a world player-capturing 1 percent of world merchandise exports (the level of Brazil in 1972; Korea in 1978; and Thailand today). This clearly requires a quantum leap-making export development high on the government 's agenda. 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 government has done a great deal to reduce the magnitude of, import restrictions, enhance the transparency of applicable trade policies, and eliminate export disincentives. The foreign exchange system was decontrolled and unified, and the foreign exchange quota system for public enterprises eliminated. The number of imports requiring prior government approval was reduced to zero, as compared to 55 before 1989. All suspensions of letters of credit for imports were lifted. Legislative efforts have been undertaken to eliminate the discriminatory treatment of foreign trading companies, allowing them to operate on an equal footing with domestic competitors as far as exports are concerned. 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. The tariff level was reduced, and the tariff structure rationalized. Greater transparency was achieved through the adoption of the international Harmonized Commodity Classification and Coding System (HS). The government's most recent economic program, supported by the International Monetary Fund (IMF), shows a continued commitment to tariff reduction and to using the exchange rate as a policy tool. The pace may be slower than the IMF would recommend but the government feels comfortable with as being sustainable. At the same time, 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. This stance is likely to continue in order to prevent the erosion of Egypt's export competitiveness. The agenda for action A key matter is to determine what policies and institutions can help to expand exports, and thus help to achieve the government's objectives of raising GDP growth and employment. Account must be taken of the changing external environment in designing the trade policy component of this growth strategy. 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 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. An increasing number of these enterprises have in turn become miultinationals, sourcing from all over the world. Competition for markets, investment, and technologies has intensified. Egypt's ongoing process of integration with Europe is of particular importance (World Bank 1996b), and may have reduced her available options. The extension of large parts of the integration mechanisms to countries such as Morocco, Tunisia, Jordan, Turkey, 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. 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 more market-friendly regulatory mechanisms are introduced and tariffs are gradually eliminated in the regional economies and worldwide, Egypt has little choice but to follow suit. The issue is to what extent and over what time frame. Despite the reform program pursued by the government, investment and production decisions continue to confront a distorted incentive structure. Levels of tariff and nontariff protection remain high. For many producers and traders the protected

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

domestic market remains much more profitable than exporting. Perhaps more importantly, the regulatory burden that affects the private business sector in Egypt-wwhether import-competing, export-oriented, or nontradable -is high. Trade and tax policies and their administration, the monopoly provision of port services, cumbersome and complex import and export administrative procedures, and uncertainty regarding the objectives and planned policies of the government are important disincentives to investment and export-oriented production. Reducing the burden of regulatory oversight, improving the predictability and transparency of customs administration, and allowing more competition in the service sector are key to accelerating export growth. A more efficient service sector is a necessary conldition for firms to be able to compete in international markets. Interviews with private sector firms suggest that export development has been constrained by the low quality and high cost of support services; the absence of adequate information on foreign markets; an inability to satisfy foreign technical specifications or standards; and inadequately ;rained or skilled work force and management. 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. The threat of foreign competitionwhile very powerful-is rarely sufficient to ensure that internal marke!ts will become more competitive. Supporting actions are required. Experience in numerous countries suggests that such actions include privatization, the introduction of hard budget constraints for public enterprises, and demonopolization of 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, which are, unfortunately, both lacking in their current operation. Egypt has been dubbed a "high cost" economy. Domestic prices can be even higher than world market prices. As a result, 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. All these features seem rather unusual for a developing country like Egypt which possesses superior natural resources (high-valued agricultural products, sufficient oil and gas reserves); abundant cheap labor (Egypt's labor rate at a minimum of $ 0.55 per hour is only one-third of that in Cyprus at $ 1.88 or Turkey at $ 1.72 per hour, and one-tenth of that in Israel or Tunisia); and convenient geographical location (Suez Canal and Mediterranean ports). Egypt does not occupy a clear competitive niche on the world market, yet similar economies with even less favorable endowments, like Singapore and Indonesia, have already achieved rapid export-led growth. A cursory study of Egypt's economy reveals, not surprisingly, that the twin effects of import substitution and domestic monopolization have been the major culprits behind this "high cost" character. Import substitution prevents foreign competition from accessing Egypt's market, while domestic monopolization stifles internal competition. As lack of competition breeds lack of competitiveness, Egyptian products command high prices but deliver low 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. Should this asymmetry prevail in its current form, the domestic market will remain more profitable, entrepreneurs and firms will continue to orient inwardly, and the strategy of export development will fail. Worse still, without reducing transaction costs, Egyptian industries may go under in the face of increased import competition brought about by trade liberalization. Identifying the sources of high transaction costs is a first step toward understanding their role and importance. Doing this would go a long way toward the design of optimal policies to remove these obstacles, fulfilling Egypt's economic growth potentials, stimulating entrepreneurs to face competition, and ultimately building a strong and vigorous economy. The following two sections cover: import transaction costs and export transaction costs. The former contributes to high domestic prices and the weak incentive to export, the latter to the lack of export competitiveness. These two areas are interrelated, because when imports are used as
29

intermediate inputs into the production of exports, the added import costs translate into the extra costs of exports, further elevating prices and downgrading competitiveness. The section on import transaction costs is divided into four parts: tariffs and taxes, port handling services and freight rates, import clearances, and quality control. All these costs are only part of many existing forms of transaction costs, such as marketing, information, management skills, finances, and so forth. There are also immense production costs on top of transaction costs. However, as transaction costs are more regulatory and bureaucratic, they are more tangible and therefore more accessible for immediate policy actions. Import transaction costs

Considerable effort has been taken by the Egyptian government to reduce the magnitude of its high levels of import restrictions. It has reduced tariff rates and reformed the tariff structures, and it has enhanced the transparency of import policies by adopting the HS. Tariffs and taxes. However, the average tariff rate still remains at a high level of 16 percent, with the import-weighted tariff at 31 percent and the manufacturing-wide effective protection rate at 70 percent. In addition, tariff differentials between different product groups and within each group are quite large, 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. Also, there are stiff tariffs on fertilizers (30 percent), trucks (70 percent) and agricultural machinery (50 percent), in addition to import bans on seeds, poultry, textiles, and clothing. There is a sales tax of 10 percent applied to all commodities, even to inputs for export goods. All these duties, tariffs, bans, and taxes inevitably increase the cost of imports, contributing to the high cost of production, consumption, and export from Egypt (table 4.1). cumbersome drawback and rebate schemes. To ensure that exporters can circumvent these trade barriers and have access to imported inputs at world market prices, schemes such as temporary admissions, duty drawback, and tax rebate have been developed by the Egyptian government.
30

Temporary admission allows exporters to import commodities free of border taxes, whereas duty drawback and tax rebate reimburse tariffs and taxes to exporters should they use imported goods in the production of exports. However, these schemes involve cumbersome procedures and excessive paperwork. An exporter has to go through each of the following eight steps to obtain a refund or a permit: (1) customs form 22, (2) letter of guarantee or insurance letter, (3) release permit, (4) a form to industrial surveillance authority, (5) production reviewing process by industrial control authority, (6) customs form 13, (7) export form, and (8) determination of refund by a committee (SRI International 1995). These procedures are inevitably costly in time, money, effort, and attention. Besides, step-by-step documentation of each transaction for refund is difficult, nonsale indirect tax cannot be rebated, and e'ligibility .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. In other words, these export-promoting schemes have become another form of transaction cost. They only partially alleviate the h-igh import duties and remain insurmountable for small enterprises and emerging exporters. Port handling services nnd freight rates. The four maritime transport services, Darmietta, Port Said, Dekheila, and Alexandria, and other smaller ports are essentially state-owned monopolies. A multitude of problems at the ports, such as high service charges, low service quality, delays, and deterioration of port installations and equipment, has grown to the point where the ports could well become a major impediment to the growth of export (table 4.2). In general, Egypt's seaport service charges for imports triple that of competitors (Hoekman and
TABLE 4.1

Tariffsandtaxes affectingEgyptian exports

Barier/impediment High rate taiff Overall rate tariff Average imported-weighted tariff Average manufacturing-wide effectve protection rate Bansonimports seeds,poultry, of textiles, clothing and High tax sales Net effect 16percent 31percent 70percent Infinitely increasing level protection the of forthedomestcindustres. 10percent sales is applied, on tax even inputs exported for goods.

Souse: WorldBankstaff estimates.

EGYPTIN THEGLOBAL ECONOMY:STRATEGIC CHOICES FORSAVINGS, INVESTMENTS, LONG-TERM AND GROWTH

Bernard 1996), which raise cost, insurance, and freight (CIF) charges for imports to Egypt by over 10 percent-a significant number. Freight plus port
costs are as much as 40 percent of the CIF price for

TABLE4.2

Effectsof expensiveEgyptian
Barier/impediment

port services

services Seaport
Container rate freight

Neteffect Overall charges triple that of

some perishable goods requiring refrigerated containers. Port costs for containerized cargo represent 9-14 percent of the CIF price (Nathan
Associates, Inc. 1996). Container freight rates to Alexandria are

competitors.
15-20 percent higher than other

C cost Container handing

Terminal handling charges

Mediterranean ports. 2-3 times that of nearby ports

Doublethat of nearbyports.

generally 15 to 20 percent higher than to other Mediterranean destinations. The freight charge on a
20-foot dry container from Northern Europe to

transportrest to (stevedorng, transport)

Housekeeping and Nonexistent, resulting in poor

maintenance Vessel lost tme

Alexandria is between $ 280 and $ 500 higher than to Piraeus, and $ 650 to $ 1,000 higher for a 40-foot
container. In Alexandria, container handling costs

of condition the port and poor quality service. of

physical

Nearly 10 percent of

chargeable time, due to delay in

total

are about $ 225 per 20-foot container; in nearby foreign ports, they are only $ 120 to $ 180. Terminal handling charges (stevedoring, transport to the first point of rest, 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. Air-freight is twiceas much rate as ($1.0-1.41kg) other MiddleEast countries (e.g., Israel $0.450.50/kg). Generalremarks:It wasestimated theseaport that chargesraiseCIFcostfor imports Egyptby over percent-a to 10 relatively cost. high

Airport services

$ 183 to $ 225 for a 20-foot dry $ 367 to $ 441 for a 40-foot unit,

double the costs in Antwerp at $ 109 and $ 117 and in Zeebrugge at $ 100 (20 or 40). Housekeeping and maintenance are practically nonexistent. The physical condition of the infrastructure is mostly fair to poor, and particularly bad in Alexandria. Vessel time lost in port appears excessive. As an example, a 43,500 deadweight (DWT) bulk carrier was charged with wheat at Alexandria. 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, total chargeable time was 196.70 hours, of which nearly 10 percent was dead-time. Assuming $12,000 per day for excess waiting time or demurrage ($ 500 per hour), the vessel lost nearly $ 10,000. Air-freight rates are considerably higher than those of other Middle East countries, largely because EgyptAir flights tend to travel loaded only one way so the charges have to assume the costs of an empty return flight. The average cost of air freight from/to Egypt on EgyptAir to/from northern European cities ranges from $1.00 to $ 1.40 per kilogram, double that of, say, Israel at an average of only $ 0.45-$ 0.50 per kilogram. Import clearances. These are still cumbersome. Even though the import/export paperwork process has been greatly simplified compared with the past, excessive bureaucracy still remains one of the main
THROUGH EXPORTS ORIENTATION PROMOTING OUTWARD

Source:SRI Intemational (1995).

impediments to trade. rhe administrative process for complying with customs regulations and the resulting red tape are still considered a major stumbling block. In particular, foreigners still find doing business in Egypt extremely difficult, due to nontransparent procedures and regulations, as well as inefficient bureaucratic practices. Egyptian customs procedures are particularly complicated and rigid, as shown in table 4.3. Clearance of imported foodstuffs is a particular problem that involves five agencies in authorizing entry: the atomic energy agency, the food control agency of the Ministry of Health, the agricultural quarantine body, the animal quarantine body and the Government Organization for Export and Import Control (GOEIC). Imports of the same product in consecutive time periods are subject to repeated sampling. There are multiple steps, licenses, inspections, and charges. The cumbersome import procedures add another 15 percent to the costs of imports. For Egypt as a whole, if imported intermediate goods account for 60 percent of production cost, then a 5 percent increase in import costs of intermediate goods would contribute to a 3 percent increase to the cost of export production,

31

and a 15 percent increase would add to a 9 percent increase in the cost of export production.

included in quality control list while toys and hand tools, which can be dangerous items too, are not TABLE 4.3 (see table 4.4 for details). Effectsof cumbersomeEgyptianimportclearances The current quality control system has two main deficiencies. 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. This in turn leads to an in entry-the atomic energy agency, food the control increase in cost due to multiple inspection fees,
Multiple procedures and licenses Multple inspections and charges agency theMinistry Health, agrcultural of of the quarantine theanimal body, quarantine and body theGOEIC. Permit delivery, of FormNo.11 if imports are financed throughbank, procedure etc. a a form, Inspections the Atomic from Energy Authority, control department for determination of preliminary custom duties sales specific and tax, customs control inspection, manager for tarff for

delays, product loss in the clearing process, and higher facilitation and overhead costs. Testing of

industrial products sometimes takes a long time,

especially

available. Importers that regularly buy the same goods from the same foreign suppliers remain

if the

required

equipment

is not

prcing, calculation ofcustoms sales duties, tax,

servicecharges, customs gate for another

Delays, storage extra charges, the and lost

time efforts and

inspection. Total amounts days there a delay tothree and is storage bome importers. charge by

to inspection on a shipment by shipment basis. Fees charged for inspection activities are subject

based on either the weight of a consignment or the number of units it contains. Fees range from 0.5 piasters per kilogram to a maximum of LE 10,000 per consignment. As is the case for tariff rates, fees
for

General remarks: costs These amount a tarffequivalent percent to of 15 (a conservative If imported figure). intermediate represent percent goods 60 of
producers thena further percent cost, 5 increase producers would in cost

contribute3percent toa increase cost exports. 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. The system for this is restrictive. The GOEIC inspects a sample of every consignment of goods enterinig Egypt that is on a list of products subject to quality control. Some 1,550 tariff lines or 25 percent of the tariff schedule is subject to quality control, of which about half are foodstuffs. Once applicable duties have been paid on goods subjected to inspection requirements, at least 1 percent of each consignment must be sampled and inspected for compliance with the relevant Egyptian standards. The pervasive application Of quality control reflects a fundamental confusion between quality standard and safety standard In theory, quality controls are mandatory for a number of imported products, primarily for health and safety reasons, and sometimes to protect Egyptian consumers from low quality produce. In practice, however, quality control has become a means to protect local industry. Certain imported products removed from the list of banned imports were put on the quality control list, effectively retaining the import restrictions through long delays in approval. In fact, it is even questionable that all the mandatory quality control regulations are based on health, safety, and quality grounds. It
is surprising, for example, that spare parts for cars

applied if the good is not prepared for retail sale.' Final release of imports requires the approval of the GOEIC, as well as of one or more of the otlher bodies mentioned earlier for certain goods. Clearance of foodstuffs is particularly time consuming, as all the bodies involved (GOEIC, health, agriculture, atomic energy agency) sample consignments. According to one recent study, for some products such as meat it takes at least two weeks before releases are issued and another ten days to complete the paperwork. In manufacturing, GOEIC has been responsible, but many times others have to be involved as well; for pharmaceuticals and medical devices, the Ministry of Health is also involved. The second deficiency is the lack of transparency and due process in the system. Transparency covers the ability to know clearly what regulations apply to a product. Due process is -the process by which laws, decrees, standards, technical specifications or any other official designation are implemented. Adequate information, giving all affected parties advance knowledge of proposed changes, for example, can provide input into exporters' decisionmaking. The GOEIC, however, reportedly ignores internationally
recommended methods of testing and certification,

are subject to quality control, while imported cars are not, and that imported playing cards are
32

and does not recognize internationally known and

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

TABLE 4.4 Effects of restrictive Egypitian quality control system Barrierlimpediment Standardcontrolset by Ministryof Health: Food and healthrelatedgoods EgyptianOrganization Standards for (part of Ministryof Industry) Industrialproductsand services. Enforcement: Variousqualitycontrolministries Contentstandard Shelf-lifestandard Qualitycontrolsharedby 5 ministries agriculture, health,economy, industry, and supply Extensive mandatory inspectionitems Neteffect

on Restrictive standards size, shape,color,andtexture and,for food,on fat andsugar content.For example,amountof ink in a ballpointpen andthe lengthof matchesare, among items. others, mandatory

For Extensive,but manyare inconsistent. exarnple,granulatedsugar has a shelf life of 24 monthswhile powdered sugar has 12 months.

Some 1,550 tariff lines or 25 percentof the tariff scheduleor 116of imports is subject to quality control, of which about half are foodstuffs. In Europe, only 112069imported commodities 1991, 111in 1992,159in 1993was underqualitycontrol. in Wth little coordinationbetweenthese ministries, over half or more of Egypt's regulatory Overlapping duplicative and centersof authority, multipletest requirements analyticalcapacityis devoted qualitytesting. to Lackof transparency due process and Inducestransaction uncertainty, reducesimportsandinvestment. Highcompliance costs Excessivesampling testing,extended and port charges due to delays, unnecessarily rejected products. Fees Each agency that undertakesinspection charges a fee, based on weight or unit-0.5 pilastersper kilo to a maximumLE 10,000perconsignment. Timeandeffort consumed Clearance takes 2 to 3 times as longas other Mediterranean ports. Lowefficiency Customsclearance rate is valuedat $ 600,000of productper officialper year,compared with _$ 666,000,000 Singapore. in General remarks: It is estimated that the qualitycontrol system increasescosts to affectedproducersand traders by 5-90 percent.The of highestcosts are for food procluctsand importedfinal consumergoods. Exportvalues decrease, as a consequence increasedimport costs,by an estimated9 percent 12 percent,GDP losesby morethan 1 percent. to Source: Intemational SRI (1995).

accepted quality and certification marks (such as that of the European IUnion or the International Standards Organization (ISO). 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, and thus exports. They impose large welfare losses in the aggregate, and make it more difficult and costly for firms to obtain inputs that are required for export production. For example, 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. Manufactured components and intermediate inputs are often key elements of export-oriented production in the industrial sector. Exporters need to have timely access to the imported inputs that are required to satisfy export orders. Delays in clearing customs or passing inspection can be extremely costly. Producers may find themselves having to rent
THROUGH ExPoRTs PROMOTING OUTWARD ORIENTATION

substitute machinery at' high cost, or halt temporarily. Executives may be production required to spend valuable time dealing with administrative red tape problems, time that could be much more productively used managing their business. 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, according to industry. The highest of these added costs are for food products and imported final consumer goods. Exports decrease by at least an estimated 9 percent to 12 percent as a result of these costs, and GDP By discouraging loses by more than 1 percent trading activity, the system also reduces access to the regionally important Euro-Mediterranean market, decreases foreign and domestic investment, reduces product variety and availability, and wastes government resources on duplicative and unnecessary activities.
33

Exporttransactioncosts
In general, export transaction costs are not as prohibitive as those of imports, thanks to government intervention aimed at encouraging exports. Government measures have included regulating seaport charges with the aim of making them internationally competitive for exports; the government has also eliminated almost all quality restrictions on exports. Nevertheless, firms are still administrative cumbersome with burdened procedures that again involve multiple inspections, certificates, and charges. 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; (2) exporters have been exempted from fees for safety-security procedures; (3) many of the port service fees charged to exporters have been reduced; (4) the shipment cost of containers carried by the Egyptian Navigation Company were reduced by 50 percent; (5) transport of containers within the port is now free; piloting fees and dock storage charges were lowered by 20 to 75 percent; (6) handling and security chargesfor export goods and the electricity cost of refrigerated containers were reduced by 50 percent; (7) regulations relating to overtime incurred in applying export-related administrative requirements were eliminated for exports; and (8) a 1989 decree imposing afee on refrigeratedgoods that were not held in public sector storagefacilitieswas abolished. recent government actions have been substantial, many of these efforts can be perhaps best characterized as alleviating symptoms. More fundamental reforms are necessary for export-led growth to take place. The costs of doing business in Egypt must be reduced if Egyptian industries are to compete more successfully in world markets . Only through competition will Egyptian industries become stronger and will service suppliers be given the incentives to expand the diversity of services quality, ad price services upgrade th ofe offered, upgrade their quality, chapter focuses on competitively. 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. These are some of the ways to unblock bottlenecks to the growth of exports.

export costs LE 1,052per consignment. Procedures

agriculture for forms of Custfoms Formcul13 quarantine purchase ofCustomsForAlthough completing certificate of origin, customs certificate, bank export form and statement of accounts; inspections from customs, export and import control authority; fees for inspection, sealing, tmeefof inspecthreedeaysi(R sotrorag andtlosity completing include compu qncluarantine; International 1995). IneAltional 1995or Although seaport services are not signicanyin expensive for exports, the air-freight rate remains lofty. As noted above, the same distance costs double the price in Egypt ($ 1.0-$ 1.4 per kilogram)compared with, say, Israel ($ 0.45-$ 0.50 wit, sy, sral (S0.4-S .50 kiloramcomare per kilogram), because of the empty back hauls of EgyptAir. As a result, an outrageous air-freight rate adds 40) percent to the cost of grape exports, to nadd 40e percmlen name one example. Overall, exporters report that the serious constraints on increasing sales abroad include: high and uneven import tariffs; low-quality domestic inputs; cumbersome duty drawback and temporary admission regimes; excessive paperwork, fees, and delays for customs and various inspections during import and export; workers poorly prepared for the jobs available; insufficient incentives to export; and ack nfomatin f acessto o foeignmaretS lack of access to information on foreign markets and product standards.

Infrastructure
Outdated infrastructure can pile up bottlenecks. Seaports. Charges and quality of port handling i .. . services should be iternationally competitive. This can be achieved by permitting private national and foreign companies to engage freely in port service operations, 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. Port services, transportation, handling, and so forth are not natural monopolies. 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. Many initiatives have been taken by the government to address these concerns. These
34

EGYPT IN THE GLOBAL ECONOMY: STRATEGICCHOICES FOR SAVINGS, INVESTMENTS,AND LONG-TERM GROWTH

greater competition in this area. Deregulation and privatization of port services had a major impact in Mexico. Entry into the relevant service activities was made free, service market segmentation was eliminated, and firms were allowed to subcontract freely and set prices according to market forces. The results were immediate. In one year the cost of services in the port of Veracruz declined by some 30 percent, while container turnover went up by almost 50 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). By reducing the costs of shipping by almost 50 percent, small and medium sized firms that would otherwise be marginal have been able to expand their export activities (World Bank 1993b). Thus, the Egyptian government may wish to consider the following reform actions. * Start legislative p:rocess to terminate the legal and regulatory status of state monopolies in port services. 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. . Eliminate interlocking directorships and shareholdings between port authorities and operating companies or among port operating companies, since they inhibit competition and impede effective supervision by the port authority of companies with port policies. Airports. Since Egypt's comparative advantage may lie in exporting high value-added, lightweight products such as software, electronics, or highly perishable horticulture items, developing adequate capacity in cost-effective air shipping services is vital to export developrnent. Currently, 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. 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. * Reducing costs by permitting tourist charter flights to accept air freight on the backhaul or return flight. As noted above, 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, exporters must pay for both the fully loaded "headhaul" and for the empty back haul when the aircraft returns. Customs reforms In today's increasingly competitive global marketplace, 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 ability to deliver competitively-priced products fast and on time is considered a prerequisite of effective linkages with key markets. It is imperative that Egypt improve customs administration to reduce transaction costs of imports so as to encourage exports and modernize industry. Temporary admission and duty drawback schemes. Actions can be taken to further improve the temporary admission and drawback systems. Procedures for obtaining duty drawback or using the temporary admission mechanism cal be simplified and made more transparent and efficient. Establishing a set of standard inputoutput coefficients for broad categories of goods could help in expanding the use of these mechanisms. Extending access to agricultural producers should also be pursued. Customs clearance procedures should be greatly simplified, become more automated and move towards a paperless environment. Import inspection and valuation. Under the World Trade Organization (WTO), all members, including developing countries, must abide by the requirements of the agreement on customs valuation. This requires that, in principle, the basis for valuation is the invoice presented by the importer. In Egypt the introduction of these multilateral rules may require a change in current procedures. 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. Often these reference prices are imposed by customs, and may be higher than what was actually paid for the goods. However, 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

after the date of entry into the WTO. 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, subject to the terms and conditions required by the other WTO members. Although there is a fair amount of slack built into the agreement, in the medium term Egypt will have to alter its customs valuation procedures. This will require training, as well as upgrading of the information base on product prices available to customs officials. Egyptian enterprises producing for export must then be able to source quality imports at world market prices, free of taxes and duties, if they are not to operate at a cost disadvantage. Although temporary admission and duty drawback systems exist, as noted above, they are generally seen as only partially alleviating the high import duties that are applicable to many imports of intermediate inputs. Moreover, the transaction costs associated with obtaining relief under these schemes are often prohibitive for small enterprises. 2 Furthermore, customs officials in Egypt appear to be unwilling or unable to take responsibility for such nonroutine decisions, unlike officials in other countries, who can handle cases, claims, and disputes. Cases involving drawbacks in Egypt are generally passed on to higher levels of authority, greatly increasing the average time involved in obtaining decisions. 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. There would be no inspection of merchandise, but a provision for random ex-port factory audit should exist, and any violation would be subject to penalties. Repeat violators would be removed from the list of exporters eligible to use the green channel. * Adopting a principle of voluntary preshipment inspection. Importers would be able to obtain documentation classifying and valuing consignments from a small number of accredited international inspection firms selected by the government. Examples include Societe Generale de Surveillance (SGS) or Bureau Veritas. These firms would inspect and seal containers. The associated
36

costs would be borne directly by the importers. Duties would be paid on the basis of value and classification determined by the preshipment inspection body. Customs officers would be obliged to allow sealed containers to pass through customs without inspection and harassment upon payment of duties. * Developing a comprehensive plan for customs reform that would minimize face-to-face contacts between importers and customs officials. It would reduce required signatures, consolidate required inspections, 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.

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. Furthermore, substantial efforts to improve quality will also be necessary in order to raise the international reputation of Egyptian products. Efforts could be made to stimulate the awareness of quality control and the importance of satisfying foreign standards (whether they be mandatory, health an-d safety related, or technically in conformity with specifications required by foreign buyers). Such efforts could also help firms in improving quality control and management systems, and aid them in obtaining internationally recognized "quality" certification. The relevant international standards for this are the ISO 9000 series of standards. 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.3 The Egyptian government may wish to consider the following actions. * Revamping the inspection process by establishing a single authority for inspection and testing. * Focusing testing on safety concerns rather than quality standards. 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, INVESTMENTS,AND LONG-TERM GROWTH EGYPT IN THE GLOBAL ECONOMY: STRATEGIC

are necessary, and, if so, whether they are compatible with international ones. If not, international norms should be adopted where possible. Such controls should be motivated only by the health and safety of consumers, animals, and plants. * Recognizing international standards certification for nonfood imports; foreign test results of-and certification by-internationally recognized bodies should be accepted. * Reducing inspection levels to minimum spot checks that use compliance history as the basis for the frequency of sampling and testing of imported products. * Introducing cost-based fees for inspection services rather than the currently used specific fees. * Supporting standardization of laboratory quality through certification by the National Institute of Standards. Results from any certified laboratory should be acceptable, thereby eliminating multiple testing and increasingtransparency by assuring quality of laboratory results. 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. * Increasing transparency and due process by giving advance notice of any proposed new rules, providing an opportunitv for public comment, establishing known implementation dates, and providing a clear appeal process. * Establishing a "certification fund" that can provide matching funds for ISO-9000 certification and for the services of consultants to audit companies.

given the size of the internal market, its strategic location, and its vast labor pool. Increasing the level will require marketing as well as continued efforts to ensure not only the absence of overt discrimination against foreign companies, but also the availability of an adequately skilled and productive work force, an infrastructure that meets minimum standards of quality, the protection of intellectual property, and the availability of efficient service suppliers. Egypt needs a honed inward investment promotion agency4 with a highly targeted approach based on current best practice. 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). 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. The new agency would not have a control function, but rather would focus exclusively on sales and marketing, aftercare and sector development. The body could have a supervisory board made up of both foreign investors-those already in Egypt, and local companies-and of officials and ministers. 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. * 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. If this approach were adopted, it would require close monitoring to ensure that performance targets were achieved. It might also make sense to place within it Egyptians who would become the corps of a new investment body in due course. 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. 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.
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. Attracting inward foreign direct investment-both equity and nonequity-is particularly important in fostering exports. 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. Egypt's level of FDI is well below its potential
PROMOTINGOUTWARD ORIENTATION THROUGHEXPORTS

* A focus on aftercare could be developed by appointing a key official with responsibility for regularly contacting existing businesses investing in Egypt. In the context of letting them know that their investments are highly valued, these visits would be an opportunity to find out if companies use domestic sources and if not why not; if something could be done to facilitate integration with the local suppliers; and if the businesses could be encouraged to invest more in the country. This inquiry should be done with care to avoid the appearance being a high-pressure tactic. * An environment friendly to FDI could be created by attending to the details that affect first impressions: for example, visa requirements, airport customs, and orderliness of taxi queues. * Similarly, the potential of export processing zones to attract investments could be enhanced by providing "one-stop shopping," ensuring no bureaucratic obstacles such as with customs and quality control. Forgingbuyer-seller links As in many of the 'tiger' economies, the government has created support agencies for exporting firms. In the tiger economies, these bodies are compatible with and facilitate the efforts of firms and are especially important for those small- and medium-sized enterprises with limited, if any, export experience. Of course, they cannot and should not do the work of these companies, but the services they do provide can make a critical difference to exporters, and there are many outstanding examples of this happening. 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. Their functions and activities are constrained, inter alia, by limited resources, lack of staff training and motivation, low public-sector pay scales, insufficient permanent dialogue and interaction with the beneficiary enterprises, and absence of financial and other inputs from the latter. 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. But this is not the case.

To export, it is necessary to be able to produce a good or service that meets the requirements of foreign buyers -that is, it must meet their product specifications and deadlines, and the supply must be reliable). It is also necessary to be able to identify potential clients and obtain a contract. 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; access to labor inputs, raw materials, components, and capital equipment; and mechanisms to ensure that quality standards are met. Many Egyptian firms are weak in all these areas. Two deficiencies in this respect are mentioned most often as being particularly pressing. They are weaknesses in marketing and establishing a presence in overseas markets by Egyptian firms, and the lack of attention given to meeting quality standards required by foreign buyers. Relatively little use is made of outside, independent certification bodies like SGS or Bureau Veritas. Such firms are established in Egypt. but their services are usually mandated by foreign buyers and not demanded by local producers. Very few intermediaries exist that can supply information services. Weaknesses in this regard reflect historical circumstances: a relatively closed economy, with much of its manufactured exports occurring in the context of trade based on negotiated protocols with former centrally planned economies. Marketing and associated skills were not required in such an environment. Large foreign retailers and other specialized buyers and trading houses are generally absent in Egypt as buyers of products. * To meet this situation, the Egyptian government could create a single, one-stop-shop export promotion center. This would require the centralization of Trade-Point, the Egyptian Export Promotion Corporation (EEPC), and the GOEIC into one agency to boost their effectiveness. Such an approach would liberate economies of scale thereby releasing both financial and manpower resources, enhance coordination, and boost productivity; it should also lead to simplified customer service and access. 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, INVESTMENTS,AND LONG-TERM GROWTH

Association (EBA), the Federation of Egyptian business is done is required. Industries (FEI), possibly someone from a major Second, it could follow up with specific actions foreign exporter, say a Japanese trading house, and to help stimulate an export mentality and to both Egyptian small microenterprise (SME) and educate the public. The following are types of large company representatives. Possible outcomes action that have been used in some countries: could include: The prime minister could hold a monthly TV press* A publicly fundedL agency with a private conference where export statistics are announced. sector-dominated board.. The board would give This can create an excitement and awareness about direction to the management of the agency, and in exports. 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. availability of information. Retention of the existing bodies but with much * Annual national contests could be held that greater coordination, for example, by the Ministry reward entrepreneurs who open up new markets or of Trade and Supplies. The disadvantage of this introduce new products. The president could model is that it is unlikely to gain a vote of present awards, and there could be substantial confidence from the private sector, which is likely press coverage of the winners' activities. to continue to pursue its own interests. It also * A media campaign could be used to explain misses the opportunity to achieve a radical break the importance of exports. with past practices that have not worked. * Egyptian industrialists overseas could be * Entire responsibility for exports to be lodged encouraged to return to Egypt for 1 to 3 months to with a private body funded on a "performance work with sister companies. Or UNDPs TOKTEN bounty" basis. 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. selected by the body for targeting. For a qualitative In Egypt this program has so far been used only for measure, client companies could be asked for an academic and cultural exchanges. But in countries opinion on the new body's performance. such as Vietnam and China, it has been used * Enhanced information management systems, successfull, for industrial exchanges. and a data base containing information from Notes reports/studies such as area of reform, recommended action, iniplementation status, and reference document. ~~~~~~~1. one of the more extreme examples of To give document. fee 'escalation" animal lard, fats, and margarine

Creating exportmentality an
Current producers are content to service a large, protected domestic market. They are comfortable in the current protected environment. To create an export mentality, the government needs to set ambihious export goals, create an environment in which goals can be met, and engage in public relations policy campaigns. The government could do this in several ways. First, it could set an ambitious export target and strive to meet it. For Egypt's nontraditional exports to reach $ 10,000 million by the year 2000 (an oftencited government targel), exports would need to grow at an estimated amnual rate of 35 percent. 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; as opposed to LE 500 per ton if packaged for retail sale. 2 For example, the department of Customs 2. . . res onsible for admiisterin the temporar vp g ry admission and drawback systems is located in Cairo, not in the ports. 3. The rationale is that small and medium sized firms may be financially constrained and/or unaware of the need for ISO-9000 certification. Creating such a fund on the basis of matching with firm's contribution should help accelerate ISO-9000 certification, an important step toward integration with international standards. 4 As currently constituted, the General Authority for Investient (GAFI) is basically a control agency and does not act to market Egypt, support investors already in the country, and target new investors.
39

Chapter 5

Natural resource depletion and savings

Wel beforeoil and gas resourcesrun out in twentyyears time, Egypt must developother incomeproducingassetsto maintainthe requiredrate of savings and growth.She may considerapplyingoil and gas revenues,now used to subsidizeinefficientconsumption,to developinghuman capitaland infrastructure. So
far we have addressed the general conclusion that Egypt could achieve additional GDP per capita growth of 2.7to 3.7 percentage points per year by adopting sound policies that lead to a virtuous circle of higher growth and higher rates of saving
and investment. 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. These consist of oil and natural gas, which contributed about 10 percent of Egypt's GDP during the 1990s(figure 5.1).The crude oil and petroleum
product exports have been close to $ 2 billion during

and institutional issues at sector levels need to be addressed, and we will do so in this and the following chapters. The central question is how much more does Egypt need to save in order to maintain its capital resource base - that is, to replace the depletion of income generating assets resulting from extractionof oil and natural gas. 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. 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
FIGURE5.1

the 1990s,and accounted for roughly 50 percent of total merchandiseexport (figure5.2).' Oil production increased almost four-fold during 1975-84,from slightly more than 10 million tons to more than 40 million tons, and has been relatively stable at about 44-46 million tons since 1988 (figure 5.3). Marketable natural gas production also grew during 1975-84,and continued its increase from less than 4 million tons of oil equivalent in 1985to more
FIGURE 5.2

Shareof oil and gassectorin GDP

(at constant prces; percent) in
Percentage 1 8~~~~~~.0. .......... . . ..... 16.0 l -..... .................... .... ----...... ... _.. ---

Share of petroleum exports

Percentage
00

14.0
12.0$
-__

~~~~~~~~~~~~~~~80
60
-

8.0~~~~~~~~~~~~~~~~6 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.

by From Source: data provided the CentralBankof Egypt.

41

FIGURE 5.3

Oil and gasproduction (million tons)

tonnage 5000 3000t

^~~t
wz

Oil

~
Gas

2000-

75 76 77 78 79 80 81 82 83 8485 86 87 88 89 90 91 92 93

being depleted, other forms of capital will have to be created to replace the income generated from oil and gas. Based on estimates of the cost, normal return on capital, and economic value of oil and gas resources, the resource rent (see annex to this chapter) has been in the order of $ 4-4.5 billion a year during 199195.2. The oil rent fluctuated between $ 3 and $ 4 billion but was generally decreasing; the gas rent increased from $ 0.5 to $ 1 billion (figure 5.4). The fluctuations in the oil and gas rent are due to fluctuations in intemational crude and fuel oil prices. 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 5.5).
FIGURE 5.5 rentIGDP ~~~~~~~~~~~Resource

Source: Fromdatap;ovidedby theCentral Bankof Egypt

tham 10 million in 1994. While a substantial share of oil is exported, natural gas is mostly consumed at home. home. 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. 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. The resource
rent-the difference between the economic value of oil and gas, and cost of production and return on

(current inpercent) prices;

Percentage

20
18

16-_ 10 6-.

--

--

- - . .

.
-

12 '------=--=

. __1
. .. .

capitalaccrues to Egypt.
The issue of the resource rent has a significant

2 = _.

0
1991
1992 1993 1994 1995

macroeconomic dimension. Oil and gas reserves, are income generating assets, like productive capital in the manufacturing, service, and agricultural sectors.

Source: staffestimates Bank basedon official statistics.

As oil and gas reserves are finite, the reserves will

only generate income over a confined time period. Thus, as the nonrenewable reserves of oil and gas are
FIGURE 5.4

Projected and gas rent oil

Projection of future oil and gas rent depends on the magnitude of new oil and gas discoveries,world
prices of crude oil, production costs, and rate of oil

Estimated andgasrent oil

US millon, $ current
60005000
4000 -----.--------

and gas extraction. Two scenarios are developed for the 20 years from 1995 for which assumptions are
presented in table 5.1. The difference between the

~
__
__.

_______

Oil
_ '

3000 _ _ _ 7t _
2000_
--

_ __
_
_-

_
__

__/_

two scenarios is a slower decline in oil production and higher real oil prices in the "high" scenario. Current gas reserves are at least 23 trillion cubic feet, or close to 60 years of current production levels. 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. Thus, no distinction in gas productionrate is made between the two scenarios.
Proven oil reserves stand at about 3.4 billion

Source., Bank estimates. Wodd staff

barrels, or 10 to 11 years of current productionlevels.

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

Thus, the magnitude of additional discoveries has a bearing on production levels over the next 20 years as can be seen in table 5.1. Projections of future oil prices entail substantial uncertainty.

TABLE 5.1

Scenarioassumptionsfor nonrenewableresources (oil andgas), 1996-2015 Reserve High case Low case
Proven reserves oil (billion bbis) Additional discoveries oil (billion bbis)
Gas production increase (percentage/yea,)

In the high case, real oil prices increase at an annual rate of 1.5percent, while they are constant in
the low scenario. The oil rent is 70 percent of crude oil prices in both scenarios (the same as in the 1990s). The gas rent is fuel oil price minus long-run marginal cost of production (see annex to this

3.4 1.7 8.0

0.0

3.4 0.6 8.0

0.0

Year 1-15

Year16-20

chapter).
The projected oil and gas rent for the 20 years r rss . . . . s . from 1995 in the high case scenario is presented m figure 5.6. It shows an increase in rent for the first 7 years, peaking at $ 800 million higher than the level of rent in 1995. The projected oil and gas rent does not fall below 1995 levels until after year 18. The projected rent in the low case scenario is presented m figure 5.7. In this case, the oil and gas rent peaks at about $ 400 million higher than the 1995 level after 6 years. The rent falls below the 1995 level after 8 years and by $ 2,600 million in year 20. The low scenario may be the reality of the future,
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 -5.0 1.5

0. -7.5 0.0

~~~~~~~~~~~~Source: World staff Bank estimates.

Corporation (EGPC). EGPC exports and sells domestically Egypt's oil production share, whether crude or refined products. EGPC also manages oil product imports and sale of natural gas. Most of central government revenues from the oil and gas sector are from taxation of and profit transfer from EGPC. Given production sharing con*acts with interational partners and a policy by EGPC of retaining after-tax profit, the maiin factors that affect the level of goverment revenues are magnitude of oil and gas production, international oil prices, and domestic petroleum product prices. Thus, keeping domestic petroleum product prices below economic value implies a loss of goverunment
r '

(percentage/year)

the next few years. The decline in oil and gas rent
coiild have negative inmpacts on future income could The n vpact on future income s

Egypt. The impact on future iode

on the use of the oil and gas rent today.

revenues and is a way of distributing the resource

rent among the general population.

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; second, public investment
that does increase the productive capacity, either threuss: obiou irs, pbhcconumpion

Consumption Historically, a substantial share of the rent has

been distributed to the population, although
FIGURE 5.6

Egypt's projected oil and gas revenueover 20 years,

through investment in physical income generating capital or investment in ]human resources; and third, investment in income generating financial assetsthat is, an oil and gas fund. It can be argued that Egypt's policy has been and is a combination of the three. Some aspects of the possible use of the oil and
gas rent are discussed below.

1995-2015-high-case scenario

am_
--

The public sector has the dominant role in allocating the oil and gas rent. Most of the rent is made available to the central government budget;
the rest is used to cross-subsidize operations of

4
.

.0
=-=-=------

public sector companies or invested by these companies in gas transmission and distribution infrastructure. 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.

Source: WorldBankstaffestimates. 43

FIGURE 5.7

Egypt's projected andgasrevenue oil over20 years, 1995-2015-low-case scenario caistt US

150-.
-000

gasoline price in Egypt remains substantially below the price prevailing in, for instance, Tunisia, Morocco, and most Eastern European countries (and all Western European countries). Implicit subsidies, in total dollar terms, to diesel

__

.____

__

and

kerosene

declined

substantially

from

1991

to

1995, while subsidies to fuel oil only declined by 13 percent. In terms of combined subsidies to the four
o____
___

E_____E _

products : in 1991 and 1995, about s ] N reduction can be attributed

65 percent

of the retail or

-1200D-

to nominal

-1500-2

Plower

_ -25D - -234507891011121314151 =7181~

delivery price increases in Egypt, 27 percent to a decline in international spot prices, 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. to Source: World Bank estimates. staff

rate. Increased gas consumption, which occurred despite an increase in bulk gas prices of more than 60
percent, had the effect of significantly increasing the

ueecconsumption implicit subsidies to gas between 1991 to 1995. unevenly, in the form of indirect consumption Although the estimated subsidies are indirect or subsidies (prices lower than opportunity cost). Not implicit in the sense that they are not budgetary but only did this benefit larger consumers more, that is, prevail as a consequence of price regulation, the relatively wealthier, but it has also resulted m nevertheless, the subsidies repTesent a large budexcessive consumption, waste, and inefficient getary revenue loss. The subsidies are estimated at economic allocation of investment resources. 45 percent and 24 percent of the estimated oil rent in Moreover, these subsidies can be considered a tax on 1991 and 1995,respectively. the future generation as the oil and gas reserves that would be available are being diminished. 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, although they have in real terms deteriorated significandy since 1993. Estimated subsidies for major petroleum products and gas are presented in table 5.2, and amounted to $2,000 million in 1991 and $ 1,050 million in 1995. For petroleum products, the estimates are based on petroleum product prices and consumption in Egypt, and international spot prices plus allowances for distribution cost (see annex to this chapter). Distribution cost from refinery to retail outlet or delivery used in the estimate is one-half the costs in the United Kingdom and Germany. For gas, the estimate is based on bulk prices and consumption of gas, and internationalfuel oil prices (FOB) as a proxy for the economic value of gas. The only major product with an implicit tax (in negatives) is gasoline, and the implicit tax has increased substantially as a result of domestic price increases. However, if the gasoline retail price were to reflect the cost of road infrastructure and social cost of traffic accidents and pollution, it should be significantly higher than the current level. 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. 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.

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 1,050

520
2,000 a4 2e000

atual
Total tl( Soutre:lWored Bankstaff estimates.

EGYPTIN THE GLOBALEcoNoMy: STRATEGIC CHOICESFOR SAVINGS, INVESTMENTS, AND LONG-TERMGROWTH

To illustrate the possible scope of such losses, a range of rates of return for alternative uses of government revenues-resource rent is presented in table 5.3. Returns to energy subsidies are estimates for Egypt in 1995. They are based on estimated subsidies and their efficiency costs in leading to higher energy consumption. Returns to education are cross-country estimates; returns to infrastructure are averages for World Bank projects during 197492. These rates of return can only serve as indicative for Egypt. Return to education clearly depends on
more than education expenditure, and can be greatly affected by variables in quality of education and by

TABLE 5.3

rates of returnon publicsubsidies Illustrative (percentage) Rate return of Subsidy -5.5 -7.1 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.Education: for Source:Energy: regions of across averages anddifferences for reflectsestimated (the range World Bank projects (1974-82 and countres); Infrastructure: developing to in Report 1994(retums transport 1983-92)presented WorldDevelopment highways, ports,andrailroads). are for projects averages airports,

labor market policies. Similarly, return to infrastructure would depend on factors such as the level and quality of current infrastructure. An eventual decline i,n oil and gas rents could be for by higher private sector compensated investment, as envisage(d in the low case scenario presented in figure 5.8. Incremental annual investment would start in year 6 to meet rent decline from year 9. 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.

Oil and gas fund

An alternative, or supplementary, use of the oil and gas rent, already adopted by Egypt, is to invest the rent, or part of it, in financial assets to compensate for the depletion of income generating oil and gas. Many oil and gas producing countries have established such funds. In doing so, Egypt has taken a step in the right direction, but still has further to go. Egypt's fund from oil and gas revenues stood at about LE 5.1 billion ($ 1.5 billion) in fiscal year 1995/96. The fund increased from LE 0.8 billion in 1989/90 to LE 3.8 billion in 1990/91 and has increased modestly in each succeeding year. The of bonds, is raised through the issuance fund
primarily held by EGPC. The fund serves as an oil

cushion a decline in future oil and gas rent. Still to be resolved, however, 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, and how much should be placed in the fund each year? The latter depends largely on three parameters, that is, the annual oil and gas production to the year of depletion, the future price of oil and value of gas, and the rate ot return on the financial assets. A substantial degree of uncertainty is associated with the first two parameters. The low case scenario is used to estimate the annual contribution to the fund. This assumes new oil discoveries of 20 percent above known reserves to be added to current reserves, and constant real prices of crude oil and fuel oil. The real rate of return on the financial assets of the fund is assumed to be 4 percent. Annual contributions to the fund are
FIGURE 5.8

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. The purpose of the fund is
also investmnent and development of altemative

____ 500 0 *-ll- a*

__ |

i 1 2 3 4 s 6 7 8 9 1011 121314151617181920

energies to reduce domestic dependence on consumption of fossil fuels. Indirectly, the fund also serves as a transfer of oil rent from the present to the future. As such it could
DEPLETION SAVINGS AND NATURAL RESOURcE

Years

estimates. World Bankstaff source: 45

presented in figure 5.9, and amount to two-thirds of the projected annual oil and gas rent in the period before depletion begins. A contribution at that level would obviously have significant negative impact on current income. Fostering private sector investment and investing in priority infrastructure, quality education, and health improvements seem like viable alternatives to the anticipated future decline of oil and gas rent. AnnURE5. contributionsto Egyptianoilrevenuesince Annual contributions Egyptian revenue to oil stabilization from1995 fund, (low-case scenario)
FIGURE 5.9

production of 7.5 percent a year from year 2002. In this case, 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. Although declines in oil and gas rent may be avoided during the next 6 years, alternative uses for oil and gas revenues during this period deserve serious consideration. Petroleum product and natural gas prices have been raised significantly 1990, but have declined in real terms since 1993. Estimated implicit subsidies to petroleum products and gas stood at more than $ 1 billion in 1995, or 24 percent of the resource rent. 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 -5.5 percent to -7.1 percent. In contrast, well spent investments in education and priority basic infrastructure could yield a return on the order of 15-20 percent. Fostering private investment already forms part of Egypt's growth strategy. Incremental private sector investments, rising to $2 billion a year (above current levels) by the year 2014, would compensate for the anticipated decline in resource rent from oil and gas.

Constant $m US
4000 3500

3000
2000
-

--

-_

1000 500 0>--

_
----4 S 6 7 ----!-- i 1-

__
___

X-

-4---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 policy implication is clear. 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, and oil and petroleum product exports at about 50 percent of total merchandise exports. The resource rent-that is, value of oil and gas less production cost and normal return on investment-is estimated at about $4.4 billion, or 8 percent of GDP. The level of future oil and gas production and consumption could have significant bearings on future output growth. Two scenarios of projected oil and gas rent have been envisaged. The "low" scenario could become the reality-a decline in oil

resources toward

human

and

infrastructure

investment. This can be achieved by reducing the implicit energy product subsidies that result in more rapid depletion of nonrenewable resources and low resource efficiency. Notes 1. Petroleum exports (crude and products) and merchandise export figures do not include exports by international oil production partners. 2. The economic value of oil is the price of Egypt's crude oil, while the value of gas is approximated by the price of heavy fuel oil (FOB), heavy fuel and gas being close substitutes.

46

EGYPT IN THE GLOBALECONOMY: STRATEGIC CHOICESFOR SAVINGS, INVESTMENTS,AND LONG-TERMGROWTH

nnex
"

TABLE5A.1

Pricesof Egyptian crudes,1996

(average differentials relative to Dated Brent: $/bbl) Crude Firstquarter -1.33 -0.95 -1.00 Second quarter -1.63 -1.03 -1.08 July-August -2.45 -1.60 -1.65

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; of these Dated Brent was the most important (see figure 5A.1 for historic annual average price of Dated Brent). The formula was simplified in January 1996 with export crude prices set relative to the Dated Brent. The average differentials of major Egyptian crudes to the Dated Brent are presented in table 5A.1. The differentials are reviewed monthly.
FIGURE 5A.1

SuezBlend Rasal-Bihar ZeitBay Belayim

-2.03 -2.18

-2.36 -2.54 -3.44.18

-3.13 -3.33

RasBudran Ras Ghab

Source: Calculations basedonmonthly differentials published Arab Oiland in

-3.03

Gas (various issues). 1996

Economicvalueof naturalgas
Natural gas produced in Egypt is consumed domestically and there are so far no pipelnes for export. An export parity price is therefore not available. Natural gas consumed domestically is largely replacing the use of petroleum products in power plants and industry. The petroleum product replaced is predominantly heavy fuel oil. The price of heavy fuel can therefore serve as a reasonable

Priceof Dated Brent MOWb,

-35 __ _ ,_ =

30

_
_ _

25_-

J
_

2__
10

proxy for the economic value of natural gas. In fact, 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. 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.2. heavy

Calculation of oil and gas rent

Source: Energy PricesandTaxes; OECD.

In the pricing formula prior to 1996, the Suez Blend served as a reference crude, and the price was tied through price diffe:rentials to the Dated Brent and the Iranian Heavy crude by a weighting formula. The other Egyptian crudes were tied to the Suez Blend. The Suez Blend pricing formula with differentials during 1992-95 are presented in table 5A.2. The price differentials of the other Egyptian crudes relative to the Suez Blend during 1992-95 were in the range of -3.85 (in $ per barrel, i.e. cheaper
by

The annual realized oil and gas rent is the economic value of annual oil and gas production, less costs of production and normal return on capital. The economic value of the oil is the Egyptian crude oil prices multiplied by the quantity of the respective crude production volumes. 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.2

Priceof Suez Blend,1992-95

(differentials relative crudes weighting to in formula: $/bbl)
Weiht

$ 3.85) to + 0.65 (more expensive).

Production of Suez Blend crude was about 32 percent of total production in 1993 (against about
32 percent in 1992), Ras Gharib about 20 percent

(22.5 percent), Ras Budran about 19 percent (12 percent), Ras al-Bihar about 14 percent (11.5 percent), and Belayim about 13.5 percent (19 percent).

(percent) 1992 1993 1994 1995 Dated Brent 60 -2.4 -3.2 -2.8 -3.2 -1.2to-1.7 -0.6 -1.9 to to to Iranian Heavy 20 -0.5 -0.5 -0.5 0.0to-0.5 Suez Blend 20 parnty panty parnty parity
Crude Source: Oiland Gas Arab (various issues 1992-95).

47

Figures for the cost and normal return on capital in use for oil production are not readily available. However, since most of Egyptian oil production is under production sharing contracts with international oil companies, the oil companies'

FIGURE 5A.2

Heavyfuel oil price

VW 30

production shares serve as a good proxy for the cost and return on capital. The aggregate annual production share has been in the neighborhood of
30-33 percent in the five-year period between 1990 and 94. Thus, the oil rent is estimated at 67-70 percent of the economic value of crude production. 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; less emphasis has therefore been placed on an accurate calculation of the rent in the earlier period of the 1970s and 1980s. Thus, the rent calculation has been based on 70 percent of the crude oil value, although this may understate the rent in periods of high oil prices and overstate the rent in the 1970s. To obtain figures for natural gas, British Gas calculated long-run marginal costs for EGPC m 1994. Thecosts are summarized in table 5A.3. The long, The coss are smmarize in tabe A.3 Th long run marginal cost of existing fields have been applied to calculate the gas rent of current and historic gas production. For historic years, the costs have been deflated.

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; and OECD

since the mid-lo 80si while Petrobel's output has been inceteid-i The companies have recently intensified increasing. ThescowhileePetaober'seoutputnhassbeen efforts to increase recovery rates from existing fields . . lft and water injection) and by developing new extensions to their fields. These measures contribute .signi to sustain es toal annual productle However, 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 3.4 billion barrels as of January 1, 1995, equivalent to about 10 to 11 years worth of production at current annual production levels of about 45 million tons. Proven reserves have been relatively constant for several years, implying that recent discoveries have replaced annual production. However, output from existing fields is projected to decline over the coming years. Thus, substantial discoveries will have to be made to sustain annual production at about 44 to 46 million tons. Of 23 principal oil fields in Egypt, SIX were discovered in the 1980s. Seven fields account for about 80 percent of total oil production. Gupco, Petrobel, and Suco are the three largest operators in Egypt, accounting for slightly more than 80 percent

production capacity of 35,000 barrels per day, or

about 3.9 percent of total annual production from all productionfields. Natural gas reserves were estimated at about 21 trillion cubic feet in 1995, or almost 600 billion cubic meters. In contrast, annual production in 1995 was a little more than 10 million tons. Gas production has increased at an annual rate of 8 to 9 percent in the 1990s, and Egypt's policy is to continue gas production at or about this rate of increase. If annual production is increased at an annual rate of 8 percent until it reaches about 30 billion cubic meters, and then levels off at around 33 billion cubic meters, the reserves of almost 600 billion cubic meters will last
TABLE 53

marginal cost of gas explorationand Long-run production, 1993/94 ($per1000 meters) cubic
Gasfields Existing fields Existng discoveries Basecase 11.1 38.3 Mostlikelycase 11.1 37.7

of total oil production. In 1993,Gupco's annual oil

production stood at somewhat more than 20 million

tons, Petrobel'sproduction at a little over 12 million

tons, and Suco's production at almost 4.5 millon tons.
48

Unproven reserves

40.5

40.3

Source:Calculations EGPC/Brtish by Gas.

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

for at least 20 more years, and it is unlikely that no more discoveries are madle.

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.4. All prices were substantially increased from 1990 to 1993, but have not been adjusted since 1993. Although budgetary subsidies to petroleum products are almost nil, price regulations have kept retail prices below economic value or opportunity cost for all major products except gasoline, implying that implicit subsidies prevail. where Qe is energy consumption (tons) in the absence of subsidy, Qsis energy consumption (tons) in the presence of subsidy, ps is the subsidized energy price (LE/ton), pe is the price at economic value of energy (LE/ton), and e (<0) is the price elasticity of energy demand. DWL= (pp)(Qs - Qe)/2

(2)

Efficiencycostof energysubsidies
Historic energy subsidies in developing countries have been substantial for many reasons. Policy makers' arguments have included protection of the poor and of infant industries. However, subsidized energy prices (direct budgetary transfers and price regulations) provide reduced incentive to use nerg effcietly,resutin in xcesive use eergyeffiienty, reultig inexcesive consumption compared with the level that would prevail if prices reflected the opportunity cost of energy. A methodology often used to assess the annual efficiency cost of subsidies is the estimation of deadweight loss. The deadweight loss can be seen to represent the resource waste in the economy. When a subsidy is removed, 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. Thus, the difference between the economic value (opportunity cost) of energy saved, and the cost of saving energy, is the deadweight loss (or resource waste) in the presence of a subsidy.
TABLE5A.4

with a linear approximation of the energy demand fucto inter.vnpierne Based on the consumption of major petroleum ducts one kosene, of diesel, ue oil) and natural gas, domestic prices, and estimated economc value of the products and gas, estimates of edeadwe os in 1995 are prestinatable the deadweight loss in 1995 are presented in table 5A.5 for vanious assumption of the price elasticity of d femand.

TABLE 5A.5

Estimated annualdeadweightloss in Egypt (1995)

Elasticity Deadweight loss ofdemand (US$ million) -0.3 58 -0.4 75 0.5 92 Source: Bank estimates. World staff Deadweight loss (percent estmated of subsidy) 5.5 7.1 8.7

The DWL as a percentage of estimated subsidies can be seen as the (negative) economic rate of return to providing energy subsidies.

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 0.55 0.50 0.10 0.10 0.15 0.09 50 46.7 1990 September 0.60 0.55 0.10 0.10 0.15 0.09 50 46.7 1991 May 0.80 0.70 0.20 0.20 0.25 0.18 80 75 1992 January 0.80 0.70 0.30 0.30 0.25 0.27 80 75 1992 June 1.00 0.90 0.30 0.30 0.35 0.27 100 94 1992 December 1.00 0.90 0.30 0.30 0.35 0.27 130 122.5 1993 July 1.00 0.90 0.40 0.40 0.45 0.36 130 122.5

Source: As published various in ministerial decrees.

NATURAL RESOURCE DEPLETION SAVINGS AND

49

II

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, thereby triggeringpublic and corporatesaving. As financial sector reforms increase household saving, privatization in life insurance and pension reform together couldpromote private saving through developmentof the capitalmarket.

limited, and fiscal revenues remain volatile (chapter 3). How, and by how much, could Egypt increase public sector savings? Furthermore, given the favorable demographic trend in Egypt-that is, a stable elderly population, 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, inefficient PE sectors. 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. The fact that the gains from reforms, especially in terms of savings, can be substantial suggests that some countries have a real opportunity to break the vicious circle, and begin a process of catching up with the fast-growing economies. Egypt is one of those countries. Privatization could increase savings, in part because the transfer of ownership to the private sector is associated with higher productivity (Galal and others 1994; World Bank 1995). Higher productivity, in turn, generates more resources, which can either be consumed or saved. In addition, privatization could attract savings from abroad, which may not occur without privatization. This typically happens when specialized multinational firms buy such enterprises as power and telecommunications. Beyond these first-round

effects, privatization could stimulate saving indirectly. For example, if the proceeds from sales are used to retire public debt, this could lead to a reduction in the size of government through lower taxation, with favorable effects on public saving (Sachs 1996).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, power, telecommunications, services). Finally, privatization could contribute to saving indirectly by boosting capital market development, which has been shown to contribute positively to growth (ILevine Renelt 1993). 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. To such countries, privatization, along with other reforms (for example, of pension funds), can help jump-start the growth process, thereby creating a virtuous circle of saving, investment, and growth. An important question in this context is: how is it possible to raise saving from reform of PEs, 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. Because the potential gains in saving depend on the initial conditions of the PE sector (including its level of efficiencyand size),we start by measuring the past performance of the PE sector,and exploringthe roots of the problem. 51

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. 3 These enterprises operate in almost all branches of the industrial sector, but the few missing PEs, known as the "economic authorities" in Egypt, are relatively important ones, and include such large entities as the Suez Canal, telecommunications, power, and the railway. The bias in the sample favors PEs, given that previous analysis has shown that the economic authorities tend to perform less well than other PEs on average (World Bank 1987). The PE saving-investment (S-I) gap is defined as the difference between the PEs' current surplus, before transfers to or from the government, and their fixed capital formation. Current surplus is defined as operating revenues minus operating expenditures, plus net nonoperating income before taxes and dividends. For the sample analyzed, the gap for the PE sector in Egypt averaged -2 percent of GDP over the period 1987/88 to 1993/94.4 This _ gap is notably higher than the average of 0.4 percent for 46 developing countries (figure 6.1), but the Egyptian PEs did better over time. The S-I gap reversed from -7.3 percent of GDP in 1987/88 to a surplus during 1991/92-1993/94. Since then, the PEs in Egypt have 'oeen self-sufficient, generating most of tie resources they needed for operation and expansion.
FIGURE 6.1

Of

course, whatever

gap

Egypt's

PEs

accumulated in the past had to come from elsewhere in the economy: the government budget, domestic saving, foreign borrowing, or a mix of all three. As can be seen from figure 6.2, the government clearly carried the bulk of the burden, although the budget's contribution fell dramatically in recent years. The banks were the second major contributor to PEs, and this contribution increased in recent years to partially offset the reduction in budgetary transfers dictated by tighter fiscal policies. The shift of financing from the government budget to the banking sector could pose problems, given that banks are also publicly owned; this means that commercial criteria may not have been followed in allocating these funds.
FIGURE 6.2

Egyptiansaving-investment and its sources of gap finance,1987188-93194 MVi.. of LE ___ _ . "

-000

1
2000

1
--

>

i
000

_
-

Source: Calculated fromCAPMAS data (varousissues).

-0-ou _ _

_-_

_.

Saving-investment gap as a percentage of GDP in Egypt and 46 developingcountries, 1987-93

Perce-tof GDP
2

1
46 devloping Cowits ,

1-

,, -, ,'

-- -.1 -

--R-----3g -i-* *

' a; 1

.31.
-3

Egypt

"

v^

8 #deteriorated

'

.5

,'

_____________

j__-~

Source: Developing countries: World Bank (1995); Egypt: computed from CAPMAS data (various issues).

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, the way this gap is reduced matters. Unfortunately, the improvement in the S-I gap of the PE sector in Egypt came primarily from a reduction in capital expenditures, rather than from an increase in saving (figure 6.3). Capital expenditures were cut sharply twice (in 1988/89 and 1991/92), and never recovered since. At the same time, saving as a percentage of GDP has between the beginning and the end of the period. The reasons for the deterioration in saving are low rates of return on capital and low productivity. Egyptian PEs were not net losers on average, but they made only modest rates of return on capital (figure 6.4).5 Between 1986/87 and 1993/94, their ope surplu ree to apd was operating surplus relahve to capia employed was

52

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

FIGURE 6.3

1987188-93194 Saving-investment of PEsin Egypt, gap

P.,.nt GOP

r0

_
-

_ lPEs

average performer. Moreover, the performance of the sector lags significantly behind those of such successful reformers as Korea, Chile, and Mexico. 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. * Managers of PEs face little incentive to behave efficiently or to respond to consumer tastes

e
4

N_ _
!: _

~
E

->

r----- *2
-47 ,"
__

~and-------- -ja.5.;,p
rD

,-St

To be sure, the government has attempted to

address the two causes of the problem of PEs in Egypt. With respect to privatization, a process was initiated a few years ago, and picked up more

marketconditions.

"','

Source: Calculated from CAPMAS data (various issues).

steam in 1996.Not only did the proceeds from sales

increase in the first nine months of 1996, but the nature of privatization changed in favor of the sale of majority stake, in some cases to anchor investors. So far, the government has sold stakes in 39 companies (figure 6.5); 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). In addition, the government sold a majority of the shares in 11 comparnles to employees, along with the partial sale of 21 enterprises on the stock market. The total proceeds from sales to date are ,ust below$ 1 billion. As for commercialization. the government has also made substantial progress. It incorporated PEs under Law 203 and provided a framework in wvhich a legal distinction has been rnade between
FIGURE 6.5

11.9 percent, which is relatively low given that the surplus represents the returns to owners as well as lenders. Profit-, net of taxes and subsidies to net worth reflect an average return below the deposit rate over the last few years. Finally, the rates of return on revalued capital only averaged close to 5.5 percent during the period. Productivity is difficult to measure for the entire PE sector, in part because no meaningful composite price indices exist for outputs and inputs. However, 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 6.4

in Financialperformance publicenterprises Egypt, of 1986187-93194 Percat

14_xd _

of in Proceeds from privatization Law203companies 1996 to Egypt,1994 September

_, LE

Notweiafing

l~~~amo

11 SpliS 40+0

E ~

6j

~ -0

--

_._

Cl

1200

data issues) from Source:Calculated CAPMAS (various SAVINGS BUILDTHEBASISFORGROWTH TO INCREASING LONG-TERM

Oflice. by Enterprise Source: From dataprovided Public

53

TABLE 6.1 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, how much additional savings will of (millions LE) of1995 Type reform of such reforms bring about? 50percent In answering this question, the emphasis is 89,879 priatization 50 percent epai 2.1 centered on the addition to savings as a result of 42,216 commercialization132,095 privatization, rather than on the budgetary impact 50percent
50ppercent commercialization 140,032
50,153 issues). data from Source:Calculated CAPMAS (various 2.4

of privatization. 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.6 As argued at the outset, these additional savings could come from behavioral changes at the firm level, such as improved productivity and increased investment. The next section elaborates the methodology followed to estimate the addition to savings. Simulation results. Based on the assumptions (box 6.1), privatization and commercialization of the sample of PEs analyzed are expected to bring about additional savings to Egypt to a magnitude of 2.4 percent of GDP (table 6.1). For reasons explained above, the gains from privatization (2.1 percent of GDP) are much more substantial than from commercialization (0.4 per-cent of GDP). More significanty perhaps, given that the FE sample analyzed only represents about a third of the PE sector in Egypt, the addition to savings could be much more. Indeed, unless returns on the gains in savings diminish unexpectedly, they could be as high as 7 percent of GDP. 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. The gains in savings from privatization and commercialization would be made by both the government and the private sector. Table 6.2 shows the distribution of these gains between the two of

ownership and management responsibilities. In this context, budget transfers to PEs have been reduced, and the banking sector is being encouraged to lend to PEs on commercial grounds. Competition has been enhanced by opening up the economy and allowing the private sector to participate in many sectors previously reserved for PEs. Finally, 17 holding companies were formed with a view to in autonomy more managers giving decisionmaking. Notwithstanding the progress on privatization and commercialization, 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. On the commercialization front, some PEs still receive constraintwas imposed subsidies.Theihardbudget by cutting investment, with limited progress on measures to improve saving. Banks have not been prudent in lending to PEs. The holding companies are proving to be less than keen on privatization, as it diminishes their power. In short, despite the improvement in the PE S-I gap in recent years, 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.
6.2 TABLE

Estimated increases in savings from reforming PEs, 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

-17,751 7,937 -9,814

59,967 0 59,967

45,216 7,937 50,153

-0.9 0.4 -0.5

Private sector 2.9 0.0 2.9

Total 2.1 0.4 2.4

issues). data (various from Source:Calculated CAPMAS

54

AND LONG-TERMGROWTH EGYPTIN THE GLOBALECONOMY: STRATEGICCHOICESFOR SAVINGS, INVESTMENTS,

them, 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. The

BOX6.1

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, scenario). three scenarios first constructed. are The No-Reform scenario,in which the currentperformanceof the sector is projectedinto the future by extrapolatingthe sector's revenues, costs and investment according to their historicaltrends. The projectionsare madefor all items in the incomestatementand balancesheet. Profits beforetaxes are then discounted at 10 percentto obtainthe NPV underthe NoThe Privatization scenario, in which the performanceof the sector is also projected into the future, but under the assumption that productivity will improve annually by 1.5 percent, and investmentwill increaseannually 20 percent by relative fixedoperating to assets.The sameprocedure with respect to discounting is then applied as in the No-Reform
scenario. The result is another NPV of the sector, representing

effect on saving is positive (2.4percent of GDP). Finally, table 6.3 shows the gains in savimgs

from privatization and commercialization by

origin. The gains are split almost evenly between origin, investment and productivity. More interestingly, however, the gains to the country are greater when both behavioral differerncesare present because of synergies, or the interaction between productivity and investment. When both are present, a larger stock of resources is used more efficiently, and
there is a compounded effect on performance, and

Reform scenario.

thus on savings.
Sensihivity analysis. Given that the results depend on the assumptions made, it is useful not only to separate the effect of each assumption from the effect of the other, but also to explore the
sensitivity of the results to these assumptions. The

separation of the impact of each assumption has already been done, and can be used by the reader to
accept or reject anv of the assumptions and still

obtain useful results. The remaining issue is to

explore the sensitivitv of the results to the key assumptions. This is done here, and presented in table 6.4. The table shows the results under two extreme scenarios: full privatization of the sample of PEs analyzed, and full commercialization. For each of these scenarios, the results are shown for various discount rates (8, 10, and 12 percent), various productivity diffierentials (1.0, 1.5, and 2.0 percent for privatization) and various investment possibilities (15, 20 and 25 percent of net fixed assets). Two broad conclusions can be drawn from table 6.4. First, reforms of the sample of PEs investigated here can produce gains in savings of 1.2 percent of GDP at a minimum, and as high as 4.3 percent of GDP. Second, the results are least sensitive to variations in the discount rate. They are
TABLE6.3

extreme counterfactualscenario (100 percent scenario, in whichthe performanceof The Commercialization the sector is projected into the . future, assuming that commercialization leadto an improvement productivity will in of by 1 percent per annum, accompanied no change in The result is an NPV of the sector, investmentbehavior. representing another extreme counterfactual.;cenario (100 one commercializaticn). From the threeNPVs additin tosaving theserealistic assumption the making
that the governmentwill sell the only half the sector and commercialize operationof the rest. In all instances, NPVsare calculated discounting the by the streani of benefits antdhe ofer the reus tofthembuyers osum

estimateby

the usedto generate andsellers. costsarethe resources The benefits,including costs of labor, capital, and intermediate the

ip
Source: Galal(1996).

moderately sensitive to variations in productivity, and most sensitive to variations in investment. This not only suggests that the gains from investment in the course of privatization are significant, but also that care must be taken to ensure that investment will be forthcoming. 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 11,966 23,300 6,950 42,216 7,937 0 0 7,937 6,950 50,153 19,903 23,300 Annual increasesavings in (percentage of 1995 GDP) Productvity Additional improvementinvestment Synergies 0.6 1.1 0.3 0.0 0.0 0.4 1.1 0.3 1.0

Type reform of 50percentprivabzabon 50percent commercializaton 50percentprivatzabonand 50percent commerdalization Calculated CAPMAS (various from data issues). Source:

Total 2.1 0.4 2.4

THEBASIS GROWTH FOR LONG-TERM SAVINGS BUILD TO INCREASING

55

investment program, where maximize the gains to society.

appropriate,

to

conditions, attract private foreign savings. Finally, tax policies that are biased in favor of investment and against consumption could encourage saving by both households and the corporate sector, though the empirical evidence still appears unsettled.

Financial sector reforms to increase private saving Saving is affected in various ways by different

financial policies and institutions. 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, restructuring the insurance industry, and developing capital markets. There is increasing evidence that generous payas-you-go state pensions tend to depress household saving. Econometric work for this report shows a negative correlation between private saving and government spending on social security as shares of GDP. It also shows that a mandatory saving scheme is most likely to increase household saving. Furthermore, the contractual saving institutions, such as the life insurance industry, have a clear impact on the composition of savings, by favoring long-term financial assets (invested by financial institutions), over fixed assets such as real estate, precious metals, and land (invested by individuals), even though it is not clear whether sound contractual saving institutions lead to higher aggregate saving. With well-developed contractual saving institutions, households and private scorporations are able to borrow long term (Poterba 1994). The insurance industry also supports pension reform by providing specialized products and services such as annuities and life-disability insurance. To the extent that pension reform and privatization programs increase household and corporate saving respectively, capital market development has an impact on the level of private saving. In addition. capital markets, under certain
TABLE 6.4

Thesocial insurance system

The Egyptian social insurance system (SIS) has an important impact on several macroeconomic and welfare issues, such as saving, redistribution, capital market development, social protection and public finance. In 1994/95, contributions bv employers and employees to the pension fund amounted to 3.5 percent of GDP, equivalent to about 21 percent of gross domestic saving. Benefit payments and fiscal transfers (wage taxes and investment income) to the pension fund were 2.5 percent and 1.5 percent, respectively (table 6.5). SIS inflows (including investment income) less outflows was 5.3 percent of GDP in 1994/95, and accumulated reserves were 33 percent of GDP in mid-1995. By way of comparison, combined market capitalization in both stock exchanges was about 13 percent of GDP at end-1995. The surplus from the SIS is invested via the National Investment Bank (NIB) -a governmentowned instituticn that finances primarily government projects. Thus, the SIS effectively works as a pay-as-you-go system. The national reserves of the SIS at the NIB represent public debt due in the future when the SIS starts incurring a deficit. Access to cheap funds appears tc increase the propensity of governments to spend, and crowds out the private sector-during the period 1970-94, the public investment share of total investment in Egypt averaged about 68 percent.

Sensitivity analysis
(annual increase savings percentage GDP)a in as of Investmentb Typeof refomm
100 percent privatization

Productvivtf 25 7.7 1 3.5 1.5 4.1 2 4.7 8 4.4

Discount rate 10 4.1 12 3.9

15 1.7

20 4.1

100percent commercialization

0.8

0.8

0.8

0.4

0.8

1.2
3.0

0.8
2.6

0.8
2.4

0.8
2.3

and 1.2 2.4 4.3 1.9 2.4 50percent pnivatzabon 50percent commercializabon a. Increasessavings in include interaction changes productivity changes investment. the of in and in
respectively.

b. Percentage net fixedassets. of c. Annual growthrates of productivty under privatization. The corresponding rates under commercialization 0.5 percent, 1 percent and 1.5 percent, are Source: Calculated fromCAPMAS data (various issues).

56

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

TABLE 6.5

Social insurance systemindicators (percentage ofGDP) Year 1985/86 1986/87 1987/88 1988/89 1989/90
1990/91

Contributrion 5.1 4.4 4.3 4.0 3.6

3.5

Benefits 2.5 2.3 2.3 2.2 2.0

2.1

Transfers from Treasury 1.2 1.0 0.9 1.0 0.9

1.0

Annual surplus 5.8 5.1 5.6 4.8 4.6

4.5

Accumulated surplus 38.2 36.6 36.2 33.9 31.7

31.9

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

3.1 3.3 3.5 3.5

2.1 2.2 2.5 2.5

1.1 1.3 1.5 1.5

3.6 4.5 5.4 5.3

29.0 30.2 32.5 33.1

Sofurce: Staffcalculations ondatafrorm based Ministry SocialInsurance. of

The saving effect of a mandatory scheme is therefore offset by increased government spending. On the other hand, 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, government borrowing becomes a transparent process. 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. SIS provides penision benefits and insurance against disability, death, and loss of earnings due to unemployment or illness. The SIS covers a high proportion of the work force, 7 about 83 percent in 1994.8 There are more pensioners than persons over the age of 60- a ratio of 146 percent - which is out of line compared with other regions, including the OECD; this indicates a system that is quite generous or lax in its eligibility requirements. The ratio of pensioners to contributors (the system dependency ratio) is high relative to other developing countries, and to the ratio of population over 60 to that aged 20-59 years (demographic dependency ratio). Table 6.6 gives some

comparative public pension scheme and demographic indicators. Contributions. The SIS reaches very high contribution rates on (basic) taxable wages relative to benefits. - Social security contributions must be paid on workers' basic and variable wages, with a maximum taxable amount for each category of wages (LE 450 per month for basic and LE 500 per month for variable). 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, far below the maximum taxable amounts. In 1994/95, basic wage was 42 percent of total taxable wage for civil service employees and 46 percent for noncivil service employees. For those covered under the main program (Law 79/47), total contribution rates 9 on basic wages are 41 percent for private sector employees, 39 percent for public enterprise employees, and 36 percent for government workers. Workers contribute 14 percent, the Treasury 1 percent, and the employer pays the remainder. The contribution rates on variable wages are lower, since no contribution is assessed on job exit indemnity. Nonetheless, the contribution rates are too high in

TABLE 6.6

Comparative publicpensionschemesand demographic indicators, using mostrecentdata (population inpercentage) ratios Region OECD Latin America MiddleEastandNorthAfrca Asia Afrca Egypt (1995) Contributors to work force 93.9 38.3 41.3 23.5 6.4 83.1 Pensioners tocontributors 39.2 21.0 27.5 11.4 8.5 37.7 Pensioners to population 60 over 84.1 30.8 57.5 22.3 24.0 146.3 Population 60 over to population 20-59 34.0 18.0 13.5 13.5 12.5 14.4

Source:Staffcalculations based data provided Ministryof SocialAffairs; on by OECD(1994); World Bankstaff estimates. INCREASING LONG-TERMSAVINGS BUILD THE BASIS FOR GROWTH TO

57

relation to the benefits. Table 6.7 provides the contribution rates for both basic and variable wages for different types of workers covered under Law 79/47 Eligibility criteria. The eligibility criteria for retirement constitute a major variable in determining the financial viability of any defined benefit plan. The normal retirement age for Egypt (age 60 for both men and women, under the major programs of Law 79/47) is lower than that of OECD countries (whose average retirement age is 64.4years for men and 62.9years for women), but is in line with many developing countries. Given increasingly productive life spans, many countries are improving the financial viability of their pension systems by raising the retirement age. Redistribution occurs in two main areas. First, pensioners from the agricultural sector-about 45 percent of total pensioners in 1995-are provided the equivalent of minimum wages (LE 45 per month). Given the very low flat contributions by agricultural workers and farmers (currently LE 1 per month), the benefits are higher than would be afforded by the contributions. Second, within Law 79/47, which covers civil service employees and the formal sector, the pension formula sets a minimum
TABLE 6.7

pension for those with a certain number of years' contribution. Benefits. Pensions on basic wages are fully adjusted, while those on variable wages are not. 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, 102 percent for civil service employees and 147 percent for noncivil service employees in 1995. In 1986, the replacement rates were 89 percent and 103 percent respectively. Inflation adjustments on pensions have been greater than the growth of average wages of contributors, with the differential greater for noncivil service workers. The determination of the pension amount at retirement depends critically on the treatment of wage and price inflation. For variable wages, the method of computing for the pensionable amount is particularly sensitive to the inflation rate, since the basis used is the average wage during the covered period adjusted by an annual inflation factor of 2 percent. At a 10 percent annual inflation rate, the pensionable variable wage for a 30-year contribution period would only be 55 percent of real wages.

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.
TABLE6.8

Total 41 39 36

Worker 11 11 11

(up LE to 500/month) Employer Govemment 24 1 22 1 19 f

Variab,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 9.2 9.1 Latin America 2.0 2.4 ECA 8.0 7.9 Middle East and North Africa 2.8 4.4 Africa 0.5 0.7 Asia 1,9 5.2 Egypt1995 2.5 7.7 Note:Regional numbers simple are averages sample of country data. Source: OECD 1994andestimates WordBank by staff. Wage taxes 57.4 63.8 68.6 63.1 77.8 61.3 45.3 Investment income 11.0 23.0 0.2 17.5 20.3 24.2 35.6 General revenues 35.1 13.0 16.3 19.4 1.5 14.1 19.1

58

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

In addition, there is rno automatic indexation of benefit payments during retirement to protect the value of benefits from inflation. Prior to 1987, the purchasing power of pensions declined significantly, because the government did not raise basic pensions regularly. However, over the past 10 years, annual basic pension adjustments were made to prevent the decline of basic pension benefits in real terms. Over the period 1987-96, the legislaturemandated adjustments preserved the purchasing power of the basic pensions for all but three of the past 10 years. However, pensions on variable wages are not automatically indiexedor adjusted by the legislature. Thus, in addition to the adverse impact of inflation on the computation of the pensionable variable wage on which the initial pension benefits are based, the resulting variable wage pensions are not protected from inflation during retirement. Financial conditions.During the period 1985-95, the SIS has been producing operating surplus (contributions less outlays) due to the high ratio of contributors to pensioners. Because the inflation adjustments on basic pensions approved by Parliament are financed from general revenues, total receipts by the SIS come from three sources: wage taxes, investment income (fiscal transfers), and general revenues. Table 6.8 shows the shares of the different sources of financing for the SIS. Among other things, Egypt also has the biggest differential between public pension spending to GDP and public pension receipts to GDP. As noted above, operating surpluses of the insurance funds are invested by the SIS in the National Investment Bank. During the period 198090, NIB paid interest to SIS on the funds at 5 to 6 percent per year. This amounted to a negative real rate of return since the C:PIwas increasing by about 18 percent per year during the same period. Had the insurance reserves been earning even a zero real
TABLE 6.9

retum, they would have increased to a figure 60 percent higher than the sum they reached in 1995. 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. This represents a significant erosion in the real purchasing power of the reserves and a net subsidy to NIB. In July 1992, NIB raised the interest rate on incremental social security funds (including reinvested reserves) to 13 percent, 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). Average inflation during the period 1992-96 was about 10 percent, providing a positive real return on incremental and reinvested funds.

NIB is responsible for evaluating and financing the government investment program. Funds are disbursed to various public sector entities, including central and local governments, service agencies such as hospitals and universities, and economic agencies such as the public utilities. In the past, NIB also financed the PEs, but since the adoption of Law 203, NIB's exposure to the PEs has gone down to almost zero. NIB is the effect of using pension funds to provides long-term financing to public investment* projects approved by the parliament, and charges interest to recover operating costs. In the 1980s, interest rates charged to government projects and PEs were negative in real terms, because funds available through the SIS were cheap. However, with the increase in interest rates on social insurance funds to positive real rates since 1992, the NIB has also increased interest rates on its lending, thus raising the hurdle rates for investment projects. Currently, interest rates paid

NIBfunding sources percentage total as of

(LEmillion, 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 8,203.3 1992/93 67 2 23 1 7 1 9,555.4 1993/94 53 3 33 7 4 1 14,365.3 1994195 45 3 29 17 4 2 20,548.2 Total 56 3 23 12 5 1 59,149.6

Total 6,477.4 Source: From data provided National by Investment Bank.

INCREASING LONG-TERM SAVINGS BUILD THE BASISFOR GROWTH TO

59

by NIB for social insurance funds and postal savings funds are 13 percent and 13.25 percent, respectively. The SIS is the main source of funds for NIB. As of June 1995, SIS reserves in NIB were LE 67 billion, about 33 percent of GDP. Social insurance funds (new and reinvested) accounted for 68 percent of the fund sources of NIB during the past five years. Investment certificates (10 years with 6-month coupons) issued to the public made up another 29 percent of funding sources, while deposits of postal savings funds contributed 3 percent (table 6.9). Over the past 10 years, SIS funds available for lending averaged 4.1 percent of GDP a year, making SIS a major financier of public investment. With a policy objective increasing the share of private sector in total investment, the role of the NIB and the utilization of SIS funds need to be reviewed. 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. 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. In many countries, 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. Privatelymanaged funds, however, tend to achieve higher real rates of return. Figure 6.6 shows comparative returns for selected pension funds during the 1986. Private pension plans. To complement the social insurance system, voluntary pension plans have emerged in Egypt. These plans are typically set up by employers on a defined benefit basis, with contributions made by both employers and employees. Private pension plans in Egypt are
TABLE 6.10

governed by Act No. 54 (1975) and Executive Regulations Decree 78 (1977), and are under the supervision of the Egyptian Insurance Supervision Authority (EISA). Efforts are under way to update the law and introduce appropriate regulatory and supervisory arrangements. The number of private pension plans has been increasing significantly-as of June 30, 1995, there were 504 plans, compared with 330 in 1991. The reserves held by these funds (LE 3.3 billion as of June 30, 1995), while representing only 1.6 percent of GDP, have been growing by about 30 percent per year over a five-year period. The number of employees covered more than doubled during the period 1990-95, to almost 0.5 million. Contributions to the funds in 1994/95 were LE 600 million, less than 1 percent of GDP, but with an annual growth rate of more than 30 percent over a five-year period. Table 6.10 provides data on the growth of private funds. A majority of these funds were established by public sector organizations, although a recent decree forbids contributions by government organizations to these funds. Less than 10 percent were set up by private sector companies. Nearly all of the private pension plans operate on a defined benefit principle, where the majority of the plans provide salary-related benefits in return for salaryrelated contributions. About 48 percent of the assets of the private funds are in fixed bank deposits, while another 42 percent are invested in government bonds. Only about 7 percent are invested in equities and real estate. Lack of professional investment management capacity, the dearth of financial instruments, 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. Private funds are covered by Law 54 (1975) and regulated by Decree No 78 (1977). Private pension

Growthof privatefunds,1991-95
1990/91 1991/92 1992/93 1993/94 1994/95

Number Contributions 000) (LE Reservefund (LE 000) Coverage

330 256,662 1,379,768 203,201

376 369,511 1,717,928 216,885

408 380,310 2,129,265 292,403

471 585,333 2,727,855 408,421

504 602,063 3,300,921 496,386

Souse: Egyptian Insurance Supervision Authority annual reports.

60

EGYPTIN THE GLOBALECONOMY: STRATEGIC CHOICESFOR SAVINGS, INVESTMENTS, AND LONG-TERMGROWTH

funds must be registered with the EISA, which requires that each fund submit annually a financial statement audited by an extemal auditor, and every five years a financial statement prepared by an actuary registered with the EISA, which may request an external actuary to review the submissions. Investment regulations prescribe

auditors, and actuaries. Prudential guidelines on investment should be developed, consistent with the development of capital markets and financial infrastructure. The regulations should deal with pricing (fee structure), portability, and marketing issues. Also, a decision on guarantee arrangements would be necessary.

minimum and maximum investments in different

types of investment vehicles.

Reforming the social insurance systemshort- to medium-term measures There are several reform initiatives that could be undertaken in the short- to medium-terms to improve the efficiency and solvency of the current system. These reforms focus on: (1) improving the transparency of govermunent uti(ization of SIS resources to ensure a neutral impact on government spending decisions; (2) developing a portfolio and investment strategy that supports capital market development, without

To deal with the rapid growth of private

pension funds, and their likely changes in investment strategies in response to developments in the capital market, the legal and regulatory framework would have to be revised, and the supervisory capacity of EISA developed. In particular, thenewlawnd regulations should deal with the emergence of defined contribution plans, individualized accounts, professional fund managers, fund administrators, custodians,
FIGURE 6.6

Comparative performance selected of pension funds

pmum

EDw
Egm)t

'-__19ett

,~~~~~~~~~~~(9

da~ TK(alcey

2.
-~~~~~

6 41tt4

1344 136018)

Ni&m1aid(-Qonq~Wu)

Prvatdynuiaged

LLK (ocampdIaid)

Chle.(DIs) 40.0 J.I0 -30. -O -210 PvdtageraL -14.0 edrai Ow lrVtlMn 10.0 40 0.0 60 10i.0 160

Soure: WorldBankstaffestimates.

INCREASING LONG-TERMSAVINGS BUILD THE BASIS FOR GROWTH TO

61

compromising safety objectives; and (3) correcting certain design deficiencies to improve efficiency and financial sustainability of the SIS. This section focuses on these initiatives, while a following section gives the longer-term reform recommendations for the pension system. These short- to medium-term reforms would serve as a foundation for the longer-term reforms described below (Table 6.11). 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. This would entail the elimination of the special access of the NIB to SIS funds, and the establishment within SIS of an investment management capability. The SIS already has plans to develop portfolio management capability, and has requested technical assistance from the World Bank. In addition to the hiring and training of personnel, some of the tasks necessary to ensure proper management of the reserves include development of investment objectives, designing an investment strategy by targeting a certain portfolio mix, identifying investment vehicles and participating financial intermediaries, and putting in place a control system. NIB would have to strengthen its competition for the SIS funds by paying market rates (that is, rates paid by the NIB certificates of deposit). A transition plan would have to be put in place to reduce NIB's existing holdings of social security funds. 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. The SIS should pursue technical assistance in this area. Another area of reform is retirement provisions. First, the normal retirement age of 60 should be increased over time to 65. Given the present trend of improved mortality rates, the current retirement age implies an increasing dependency ratio, thus increasing costs to the system. Second, the early retirement provisions should be revised by raising the early retirement age to 60. Workers who elect to receive pensions between the ages of 60 and 64 should receive benefits that are actuarially fair, relative to the full benefit available at normal retirement age. A third area of reform is the treatment of inflation. The current method of using variable

wages during the worker's entire career, adjusted at 2 percent per year for inflation, results in a defective pensionable wage. On the other hand, using the average of the last two years' basic wage does not take inflation into account, and also introduces an incentive for manipulation (for example, raising wages sharply right before retirement). One solution to consider is a formula that uses the average career earnings adjusted for wage inflation, although this requires a better information system. Pension benefits should be adjusted for inflation automatically, using a formula that takes into account wage inflation, rather than awaiting legislative action. The amount of wages that would be subject to the contribution rates should also be automatically adjusted. Finally, the contribution rates should be reviewed. Improved returns on reserves and less generous retirement (eligibility) provisions should result in lower contribution rates, although the impact of revising the pensionable wage computation to better account for inflation would result in higher costs. the net impact of alI the above reforms on the contribution rates should be determined. The amount of government contributions to fund redistributioin programs should also be reviewed. Reforming the social insurance systemlonger-term proposals A country's social security system typically has three major objectives: first, to enable the population to shift some income from working years to old age (saving or wage replacement); second, to protect those with low incomes by providing a basic income floor during old age (redistributive or poverty alleviation); and third, to insure against certain types of risks, such as disability, longevity, and inflation (insurance). In order to achieve all three objectives, a combination of systems (the multipillar system) is recommended, since one system cannot efficiently achieve all objectives. 7he multipillar approach. The reform of the pension system in Egypt should move to establish three pillars to assure adequate retirement incomes: first, a fully-funded mandatory defined benefit (DB) public pillar that insures workers' earnings up to a certain level; second, a mandatory defined

62

EGYPTIN THE GLOBALECONOMY: STRATEGIC CHOICESFOR SAVINGS, INVESTMENTS,ANDLONG-TERMGROWTH

contribution (DC) private pillar that insures workers' wages above a certain level; and third, a purely voluntary scheme that could supplement the first two pillars. In addition, the development of a competitive and stable insurance industry would provide many accompanying services, such as life and disability insurance and annuity products. The public pillar would provide a minimum retirement income, while the compulsory and voluntary private systems would enable workers to supplement their public pensions. The three schemes should be portable across employers, and vesting should be immediate for the DC private pensions, while the ]DB public scheme would require a minimum number of years of contribution. The public pillar would achieve the objective of dealing with old-age poverty, which has elements of income redistribution. The private pillars have the advantage of closely linking benefits to contributions, thus minimizing the problems of evasion and manipulation. At the same time, as experienced in other countries, the private schemes should improve capital accumulation and financial market development. The public pillar. The public pillar is recommended to be a filly-funded DB scheme with a required contribution from employees and employers. In order to make a smooth transition to the new system, the current basic pension scheme could be modified to form the public pillar. Under this plan, the variable pension scheme would be replaced by the mandatory private pillar discussed below. Thus, the public pillar would be built on the current basic wage pension scheme, which would be modified by reviewing contribution rates, maximum taxable amounts, redistribution objectives, automatic adjustment for inflation, and the minimization of fiscal transfers. The SIS should seek technical assistance to review the current system and develop a short- and medium-term reform plan in the context of the longer-term design. The contribution rate for the public scheme would depend on the average replacement ratio (average pension payments to average covered wages), the dependency ratio (the ratio of pensioners to active workers), mortality rates, disability rates, the level of desired funding, and the rate of return on accumulated reserves. An actuarial review would be necessary.

Redistribution is achieved by introducing a minimum basic pension to those with low incomes. The current minimum is 50 percent of reference wage, assuming a minimum number of 20 years' contribution; the minimum pension would be correspondingly lower if the number of years of contribution is lower. It may be prudent to review whether this formula achieves the safety net objective. Mandatory private schemes. The second pillar would be a privately-managed defined contribution scheme, involving compulsory contributions from earnings in excess of the public pensionable wage but below some maximum. The mandatory private pillar effectively replaces the variable pension scheme of the social insurance system. The contribution rate should allow the attainment of a certain replacement target, say, 70 percent of pensionable wages. Under a DC scheme, the determination of such a contribution rate would largely depend on the real returns on the contributions. Disability and survivors' benefits could be purchased from insurance companies, and would have to be financed from alt additional contribution, (about 3 percent in many countries). The contribution rate in relation to the target replacement rate should be much lower than is currently the case for variable pensions. A contribution rate of 10 percent (plus 3 percent for disability and death insurance, and 1 to 2 percent for management) to a fund that earns 5 percent in real terms (that is, 4 percent over the real wage growth rate), would achieve a replacement rate of 70 percent of wages over the retirement period of 16 years (indexed to wage inflation), assuming that the pensioner contributed for 32 years. The contribution of the employers to the variable pension scheme could be merged as part of the compensation of the employees, and, to the extent that the required contributions by the employees are less in the new system, workers would effectively get a pay increase. Past contributions to the variable pension scheme of the SIS could be converted into a bond carrying a market interest rate, which would mature when the worker retires. Transition issues would have to be reviewed carefully. Under a private system, participating private pension funds and fund management companies would have to be licensed and regulated. Workers

INCREASING LONG-TERM SAVIINGS BUILDTHEBASISFOR TO GROWTH

63

could choose among the licensed funds managed by professional management companies, and mandatory contributions would be automatically withheld from wages by employers and placed in accounts. Workers could change individual any impact on past employers without contributions, thus improving labor mobility. Workers should also be able to move their accounts from one fund to another with minimal cost, thus ensuring competition among the funds. Because the system is susceptible to fraud and mismanagement, appropriate regulatory and supervisory systems should be in place, including good information flow to participants. As recommended above, given that that there is a growing number of private pension finds, EISA should recommend the replacement of the 1975 Law on Private Insurance Funds, and adopt appropriate prudential regulations to cover the development of individual accounts under DC schemes managed by licensed fund professionals. This would provide the foundation for the development of a mandatory private pension scheme managed by the private sector. Since the transition to a mandatory private system would probably take some time, the development and experience of current regulatory efforts and private fund management constitute a pilot from which lessons could be learned, allowing adjustments to be made before the mandatory private system is capital market put in place. Furthermore, development would have to advance, creating a more liquid and deeper financial market. Voluntary Private Funds. Under the third pillar, workers would be able to make voluntary contributions with a cap, in addition to the mandatory contributions. Upon retirement, workers would be able to combine their accumulated funds with their pension accounts, increasing the size of their pensions. This would allow firms to offer pension plans in excess of the mandatory ones, as they already do. These funds would be subject to the same regulatory framework as those in the mandatory schemes, and may in fact be one and the same fund. Tax treatment. The consumption tax principle should be fully applied to this as to all types of contractual savings. This would imply one of two things. Either contributions to contractual savings would be fully deductible and investment returns

would be tax exempt, while pensions would be taxed like any other source of income; or contributions would not be deductible, but both investment returns and pension benefits would be tax exempt. The latter approach provides cash flow advantages for the budget, since no tax income is lost up front, but provides weaker incentives to workers to participate in voluntary pension funds. A third alternative, currently used in the Czech Republic and Australia, would be to offer a (credit transfer) to government contribution pension members, instead of a tax credit or exemption. This alternative would be more redistributive than the other approaches, since it would also benefit nontaxpayers. In addition, it would offer a strong incentive to low- and middleincome workers, irrespective of whether they pay income tax, to save for their retirement. The credit transfer could be limited to active workers, 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. As the credit transfer would be added to the individual retirement saving account of each worker, this approach would generate a higher level of loigterm financial resources than a tax treatmrent based on deductibility. Currently, the Egyptian tax treatment provides for tax deductibility of contributions and tax exemption of pension-fund investment income and pension benefits. A review of the issues of tax treatment should be made.

ty

The insurance sector can play a very important part in the development of the private sector, the emergence of a private pension system, and the modernization of the securities markets. By covering certain economic and financial risks, it enables enterprises to better manage their financial affairs, and protects households from financial losses arising from accidents or injuries. In addition, the industry, especially the life insurance sector, 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. In most developed countries, the insurance industry is a significant component of the economy; life insurance companies' reserves to GDP range

64

EGYPTIN THE GLOBALECONOMY: STRATEGIC CHOICESFOR SAVINGS, INVESTMENTS,ANDLONG-TERMGROWTH

from 13 percent to 34 percent, and premiums to GDP range from 3.0 percent to 10.1 percent. Egypt's insurance industry. The insurance industry in Egypt is underdeveloped-life insurance premiums to GDP were an insignificant 0.2 percent in 1995, compared with 6 percent for a sample of developed economies. Total assets to GDP of all insurance companies (life and nonlife) in Egypt were about 4 percent in 1995, while life insurance assets alone were 38 percent of GDP for the developed economies sample. There are 10 insurance companies in Egypt, of which eight transact all classes of insurance and business, and two transact only nonlife. All are publicly quoted joint stock 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. The industry is highly concentrated. The largest company controls 50 percent of both life and nonlife business, and tIhree companies account for 93 percent of life and 89 percent of nonlife markets. The three largest insurance companies and the sole re-insurance company are state owned, thus making the sector virtuallyv under state control. The state owned insurance companies also own shares in five of the private insurance companies. In the past, direct foreign ownership was only allowed in those companies operating in the free zones (Egypt's free trade, or export processing, zones). The exception was granted under the Investment Law, which allowed for the creation of companies as joint ventures, to encourage companies to operate in the free zones. Currently, regulations place a 49 percent limit on foreign ownership of direct insurance companies and no restrictions on foreign ownership of reinsurance companies. Investment. Total investment of the insurance industry as of June 30, 1995 was LE 5.4 billion, representing 2.6 percent of GDP. Over the period 1990/91 to 1994/95, investment grew by 18 percent per year. The state owned insurance companies accounted for 91 percent of investment. The reserves of nonlife business accounted for 60 percent of total reserves in 1995, compared with 68 percent in 1991. The insurance companies invested the bulk of their funds in fixed-term bank deposits (39 percent of total) and governrment bonds (38 percent).

Another 18 percent was invested in corporate paper. The rest was used to purchase real estate and provide loans to policy holders. Conservative investment policies and lack of financial instruments have led to the concentration of investment in bank deposits and government paper. Legal and regulatory framework. In 1995, a new law on insurance was passed, and in June 1996, a new set of regulations was issued by the EISA. In addition to solvency requirements, the regulations impose certain guidelines on investment by insurance companies, making a distinction between reserves from the life insurance business and reserves front the nonlife segment. The law requires separation of the reserves between the two businesses in companies that operate in both markets. The new regulations also deregulated the pricing of most insurance products, replacing price control with price reporting. The only exceptions are in the fire and motor vehicle insurance lines, which will be deregulated in 1999. The deregulation of most inLsuranceproducts shifts the focus of supervision to solveincy monitoring. The regulations are basically in line with international (especially EU) practices and defirntions. However, solvency monitoring requires good information and technical capability on the part of the supervisor. Reform proposals. With the changes in the legal and regulatory framework and the ongoing institutional development of supervisory capacity, the next generation of reform efforts should focus on the issues of competition and ownership. As mentioned earlier, there is a high concentration level in the industry, which is indicative of problems of competition. To encourage competition, EISA should allow the entry of new firms-including foreign insurance companies-as long as they meet the licensing criteria. This means that the 49-percent maximum ownership by foreign firms should be abolished. EISA should also ensure a level treatment of both state owned and private insurance companies. Finally, the state owned insurance companies should be included in the current privatization program (Table 6.12). On the regulatory aspects, to complement liberalization of pricing of products and commissions, EISA should focus on disclosure requirements to the public of prices and commissions. The obligatory ceding requirements

INCREASING LONG-TERMSAVINGS BUILD THE BASIS FOR GROWTH TO

65

and price controls on reinsurance should be eliminated. Tight regulations on employment of foreigners should also be relaxed to enable insurance companies to acquire needed expertise quickly. Finally, to improve the transparency of the sector, financial statements of insurance companies should be available to the public, and these statements should be audited by qualified and independent auditors. Accounting standards and auditing guidelines for insurance companies should be provided by EISA.

when they do, liquid capital markets allow them to divest quickly and inexpensively. In several countries, 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), and the other is privatization of state owned enterprises. To the extent that pension reform and privatization programs increase household and business saving, respectively, 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. From the point of view of the investor, 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. As for the corporation issuing long-term securities, it has access to a larger pool of funds and has better information about the relative cost of different. ways of financing an investment. Thus, corporations have a wider range of instruments to finance investment, and savers have more alternatives than bank deposits; precious metals, or real estate. Many studies conclude that the impact of stock markets on the level or rate of domestic saving is ambiguous - savers may merely shift funds from one saving instrument (such as bank deposits) to securities. However, some studies have shown that there is a positive relationship between private saving as percent of GDP and financial sector development, which includes capital market development, although the channels through which this relationship is defined are numerous. For example, stock markets are seen to increase investment, thereby increasing national income, and thus increasing the level of domestic saving. But what is unambiguous is that the composition of saving is improved by the introduction of liquid capital markets. Savers purchase long-term securities, which offer higher expected returns and enable risk diversification. In the process, more financing opportunities become available to corporations to implement projects with long-term pay-offs. Long-term investors need not relinquish their saving for long periods, but

the level of private saving.

In the case of Egypt, the development of capital markets both supports and is supported by the development of contractual saving institutions. As discussed in the previous sections, investment by private pension funds and insurance companies has been mainly in government securities and bank term deposits. Capital markets would allow greater diversification, and perhaps higher yields, for these investments, therebv improving the financial performance of contractual saving institutions; this should result in greater benefits to savers in the form of lower contribution rates to pensions schemes and lower premiums for insurance. At the same time, the existence of pools of funds from contractual saving institutions could be tapped through capital markets to finance investments. In addition, active capital markets provide an enabling environment for attracting foreign savings. The existence of liquid capital markets gives a foreign investor better exit options, thus encouraging more foreign direct investment Foreign portfolio investors would focus on actively traded securities in the stock market. With private capital dominating the total capital flows to developing countries, and an increasing shift toward equity financing, the development of capital markets becomes essential in attracting private foreign capital. But the risks of foreign savings would be kept to a minimum if they augment, rather than replace, domestic savings. 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, but augmented domestic savings in East Asia. The positive experience of Asia is attributable

66

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

to macroeconomic policies and institutions that encouraged domestic saving and investment. Finally, the development of capital markets and the process of privatization are mutually reinforcing. Capital markets provide more options for divestiture, while privatization increases the supply of securities in the market, thus providing the securities market with more depth. The deepening of capital markets-as reflected in increased market capitalization to GDP, greater liquidity (higher turnover to market capitalization), 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, and mitigate against the extreme movements of asset prices. Notes 1. From a welfare perspective, it has been argued that $1 in the hands of government is worth less than $1 in the hands of the private sector, because raising $1 by government through taxation is distortionary. For further discussions of this point. see lones, Tandon, and Viogelsang (1990). 2. Privatization refers to the transfer of ownership and/or control to the private sector. Commercialization refers to a package of reforms: increased competition, hard budget constraints, regulation of monopolies, financial market reforms, and incentives to managers to perform efficiently. Details on methodology and key assumptions are provided in Galal (1996). 3. The number of PEs in the sample declined from 364 in 1991/92 to 356 in 1992/93, which Egypt's Central Authority for Public Mobilization and

Statistics (CAPMAS) attributes to liquidation and privatization. 4. Excluding 1992/93 because the reported data show a sharp drop in gross fixed assets. 5. Returns to capital are measured using three indicators: (1) the ratio of operating surplus to capital employed, which measures the retums to all contributors (the government as equity holder, recipient of taxes, and creditors), (2) the ratio of profit before taxes and other transfers to or from government to net worth, which reflects the retums to the government, as if it were a private owner, and (3) the ratio of current surplus before taxes to revalued capital employed, where capital is revalued using the perpetual inventory methodology. 6. WVherethe budgetary impact of privatization is the main concern, it is important that all flows to and from the treasury are taken into account. In particular, 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, minus the cost of privatizing), 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). 7. Work force includes Egyptians working abroad, which in 1995 numbered 2 7 million out of a total work force of 19.1 million. 8. Contributors to the social insurance svstem during 1994/95 to labor force in 1995. 9. Different contribution rates are assessed for different types of benefits, such as old age pensions, disability, death, unemployment, and end of service indemnity.

INCREASING LONG-TERM SAVINGS BUILDTHEBASISFORGROWTH TO

67

TABLE 6.11

Actionplan for social insurance systemreform

Area reform of
Improve retums on surplus Short- medium-term to actions * Develop portfolio management capability * Develop to placefundscurrently NIBunder plan with
*

Medium- long-term to actions manage SISfunds all

the management ofSIS * Developinvestment focusingthe an strategy, 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,supervisory legal, and framework forvoluntary pension private schemes, strengthening the insurance and industry, 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, custodians, auditors, and actuaries
* *

3djust regulabons asnecessary

Strengthen supervision capacity

implement institutional development ofEISA

TABLE6.12

Actionplan for insurance industryreform Area reform of Short- 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, 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

Selected bibliography
Anand, Ritu, and Sweder van Wijinbergen. 1989. "Inflation and the Financing of Government Expenditure: An Introductory Analysis with an Application to Turkey." World Bank Economic Review 3 (anuary): 17-38. CAPMAS (Central Authority for Public Mobilization and Statistics). Various issues. Financial and Economic Statistics of Public Companies. Cairo, Egypt. Deaton, Angus. 1995. "Growth and Saving: What Do We Need to Know, and What Might We Learn." Policy Research Department. World Bank, Washington, D.C. Unpublished. Dollar, David. 1992. "Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-85" EconomicDevelopment and Cultural Change40 (3): 523-44. 1996. "Growth and Savings in Egypt: Lessons from the Empirical Growth Literature." Working Paper. World Bank, Washington, D.C. Unpublished. Easterly, William R., and Sergio T. Rebelo. 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation." Journal of Monetary Economics (3): 417-58. 32 Edwards, Sebastian. 1995. "Why Are Saving Rates So Different Across Countries? An International Comparative Analysis." NBER Working Paper 5097. National Bureau of Economic Research, Cambridge, Mass. Feldstein, Martin, and Charles Horioka. 1980. "Domestic Saving and International Capital Flows." EconomicJournal90 (358): 314-29. Fischer, Stanley. 1993. "The Role of Macroeconomic Factors in Growth." Journal of Monetary Economics32 (3): 485-512. Fischer, Stanley, and Easterly, William. 1990. "The Economics of the Government Budget Constraint." The World Bank ResearchObserver 2: 127-42. Galal, Ahmed, Leroy Jones, Pankaj Tandon, and Ingo Vogelsang. 1994. Welfare Consequencesof Selling Public Enterprises: An Empirical Analysis. New York: Oxford University Press.
_

Galal, Ahmed. 1996. "Savings and Privatization." Working Paper No. 8. The Egyptian Center for Economic Studies, Cairo, Egypt. Harrod, R. F. 1959. "Domar and Dynamic Economics." EconomicJournal 69 (275): 451-64. Hoekman, Bernard. 1996. "Trade and Investment Liberalization: Issues and Options for Egypt." Working paper. World Bank, Washington, D.C. Unpublished. IMF (International Monetary Fund). 1996. Direction of Trade Statistics Yearbook.Washington, D.C. Levine, Ross and David Renelt. 1993. "A Sensitivity Analysis of Cross Country Growth Regressions." American Economic Review. September. Nathan Associates Inc. 1996a. "Egypt: Options for Increasing Market Competition in Maritime Port Services." Consultant study funded by USAID. Cairo, Egypt. 1996b. "The Quality Control System in Egypt." Consultant study funded by USAID. Cairo, Egypt. OECD (Organization for Economic Cooperation and Development). 1994. Taxation and Household Saving. Paris. . 1996. Energy Pricesand Taxes. Paris. Psacharopoulos, George. 1994. "Returns to Investment in Education: A Global Update." World Development22 (September): 1325-43. Poterba, James M. (ed.). 1994. Public Policies and Household Saving. NBER Project Report. Chicago: University of Chicago Press. Sachs, Jeffrey D., and Andrew Warner. 1995. "Economic Reform and the Process of Global Integration." Brookings Papers on Economic Activity No. 1:1-118. Sachs, Jeffrey D. 1996. "Achieving Rapid Growth: The Road Ahead for Egypt" The Egyptian Center for Economic Studies, Distinguished Lecture Series III. Shi, Anching, and Chang-Po Yang. 1996. "Egypt: Long-Term Demographic Trend, and its Implications for Savings and Education Expenditure." Working Paper. World Bank, Washington, D.C.. Unpublished. 69

SRI International. 1995. "Achieving Egyptian Export Growth." Consultant study funded by USAID. Cairo, Egypt. UNCTAD. 1987. "Trade Analysis and Information System Data." CD ROM. Geneva, Switzerland. World Bank. 1987. "Egypt: Review of the Finances of the Decentralized Public Sector." Report No. 6421. Middle East North Africa Region. Washington, D.C. . 1993a. The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford University Press. ___.1993b. Latin America and the Caribbean: A DecadeAfter the Debt Crisis. Washington, D.C. .1994. World Development Report: Infrastructure for Development. New York: Oxford University Press.
____

. 1995. World Development Report: Workers in an Integrating World. New York: Oxford University Press. . 1995. Bureaucrats in Business: The Economics and Politics of Government Ownership. New York: Oxford University Press. . 1996a. World Development Report: Economy in Transition. New York: Oxford University Press. . 1996b. "Maximizing the Benefits of Free Trade with the European Union-Challenges and Options for Egypt." Working paper. Washington, D.C. Unpublished. . 1997. "Expanding the Measure of Wealth: Sustainable Indicators of Environmentally Development." Environmentally Sustainable Development Studies and Monographs No. 17. Washington, D.C.

70

Statistical Appendix

TABLE1 Nationalaccounts (LE million)

1988
A. 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

61,600.0 2,970.0 58,630.0 11,116.0 16,909.0 14,320.0 30,605.0 (6,913.5) 15,067.5 21,981.0 68,513.5 48,063.5 8,437.6 39,625.9 20,450.0 11,022.0 9,128.0 20,150.0 300.0 13,536.5 (1,052.7) 5,955.7 18,439.6 60,547.3 66,503.0

76,800.0 3,630.0 73,170.0 14,395.0 20,474.0 18,091.0 38,301.0

96,100.0 4,525.0 91,575.0 17,735.0 26,255.0 22,349.0 47,585.0

111,200.0 139,100.0 157,300.0 175,000.0 2,460.0 8,043.0 11,140.0 10,608.0 108,740.0 131,057.0 146,160.0 164,392.0 19,110.0 21,680.0 24,427.0 27,500.0 36,150.0 43,693.0 48,340.0 53,360.0 25,151.0 30,685.0 34,441.0 39,981.0 53,480.0 65,684.0 73,393.0 83,512.0 (7,680.5) 37,386.2 45,066.7 (6,873.6) 40,414.0 47,287.6 (5,742.9) (9,798.8) 42,762.7 41,079.0 48,505.6 50,877.8

205,000.0 11,873.0 193,127.0 32,050.0 61,700.0 46,580.0 99,377.0 (9,423.4) 44,578.2 54,001.5 214,423.4 172,075.5 21,915.0 150,160.5 42,347.9 11,299.0 31,048.9 42,347.9 0.0 32,924.5 (2,683.4) 11,128.9 41,370.1 202,316.6 213,445.5

230,958.3 12,970.1 217,988.2 35,419.9 69,579.1 53,228.5 112,989.2 (8,328.5) 51,400.8 59,729.3 239,286.8 192,132.5 24,213.0 167,919.5 47,154.4 12,581.0 34,573.4 47,154.4 0.0 38,825.9 (2,783.4) 11,309.2 47,351.7 228,174.9 239,484.2

(7,269.8) (10,171.7) 18,317.9 27,239.4 25,587.6 37,411.2 84,069.8 60,069.8 9,690.2 50,379.6 24,000.0 11,480.0 11,620.0 23,100.0 900.0 16,730.2 (1,536.5) 6,852.5 22,046.2 75,263.5 82,116.0

106,271.7 118,880.5 145,973.6 163,042.9 184,798.8 77,971.7 92,230.5 118,473.6 137,542.9 147,853.3 11,178.0 12,769.0 14,645.0 17,719.0 19,826.0 66,793.7 79,461.5 103,828.6 119,623.9 128,027.3 28,300.0 26,650.0 27,500.0 25,500.0 36,945.5 14,251.0 10,178.0 12,346.0 10,987.0 10,659.0 12,249.0 17,672.0 16,354.0 14,513.0 26,286.5 26,500.0 27.850.0 28,700.0 25,500.0 36,945.5 1,800.0 (1,200.0) (1,200.0) 0.0 0.0 18,128.3 (3,501.1) 9,749.5 24,376.6 18,969.5 (3,309.0) 11,285.6 26.946.1 20,626.4 (2,408.5) 18,203.1 36,420.9 19,757.1 (9,968.1) 16,526.7 26,315.7 27,146.7 (3,202.8) 10,902.9 34,846.8

92,598.9 107,891.0 136,691.5 147,331.9 171,797.2 102,348.4 119,176.6 154,894.6 163,858.6 182,700.1

B. 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)

119,626.9 125,727.9 131,762.9 136,506.4 (13,232.9) (10,879.1) (13,823.2) 32,677.5 35,658.5 36,272.2 45,910.4 46,537.6 50,095.5 (9,934.9) 40,996.9 50,931.8

139,100.0 143,307.7 148,760.0 (6,922.1) 40,414.0 47,336.1 (4,550.1) 43,253.5 47,803.7 (7,462.0) 41,207.4 48,669.4

155,540.0 (7.496.0) 41,763.7 49,259.7 163,036.0 129,336.0 16,471.8 112,864.2 33,700.0 8,991.6 24,708.4
33,700.0 0.0 (1,099.9) 154,440.1 25,104.1

163,161.5 (6,174.3) 45,918.5 52,092.8 169,335.7 134,108.0 16,900.6 117,207.4 35,227.7 9,398.9 25,828.8
35,227.7 0.0 (1,089.4) 162,072.0 27,964.0

122,027.0 126,536.8 135,945.5 141,255.1 89,813.5 15,766.9 74,046.6 32,693.1 17,620.7 14,592.8
32,213.5 479.6 (1,206.8) 117,553.1 27,739.6

147,173.6 140,969.4 156,222.0

96,182.9 104,602.4 110,272.1 118,473.6 112,969.4 124,022.0 15,515.8 14,995.8 15,266.8 14,645.0 14,553.3 16,630.4 80,667.1 89,606.6 95,005.3 103,828.6 98,416.1 107,391.6 31,536.5 15,084.9 15,268.9
30,353.9 1,182.6 (2,342.8) 122,322.3 26,139.4

33,472.1 16,855.5 14,487.6

31,343.1 2,129.0 202.7 131,975.9 27,373.5

29,648.1 11,323.0 19,660.1

30,983.1 (1,335.0) 1,254.9 134,449.7 24,177.6

27,500.0 12,346.0 16,354.0

28,700.0 (1,200.0) 41.5 139,141.5 20,667.8

28,000.0 12,064.2 15,935.8

28,000.0 0.0 (1,109.7) 142,198.0 29,228.7

32,200.0 9,289.9 22,910.1

32,200.0 0.0 (1,911.4) 146,848.6 22,826.6

Source:Govemment Egypt. of

72

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

113,141.3 57,122.3 19,623.4 17,720.8 12,293.8 1,781.1 5,703.3 37,629.8 7,726.0 5,299.7 18,852.6 4,056.7 64.1 1,630.6 18,389.1 1,279.6 336.3 8,683.7 72.8 8,016.7

118,351.8 59,681.5 20,196.6 18,939.8 12,597.1 1,891.6 6,056.4 39,595.6 8,107.2 5,572.7 19,652.0 4,146.5 71.3 2,046.1 19,074.7 1,375.8 353.4 9,006.8 78.1 8,260.5

123,607.0 61,795.0 20,756.6 20,225.7 12,442.0 2,005.3 6,365.3 41,902.4 8,655.9 5,851.9 20,474.0 4,266.7 71.3 2,582.7 19,909.5 1,462.8 374.3 9,388.6 81.7 8,602.2

127,891.3 64,252.6 21,264.2 21,406.3 12,772.3 2,122.2 6,687.7 42,848.9 8,541.1 6,124.9 21,341.2 4,469.6 73.6 2,298.6 20,789.8 1,555.9 397.1 9,780.2 85.2 8,971.3

131,054.2 65,372.2 21,680.0 21,728.3 13,008.2 2,220.1 6,735.7 43,605.7 8,708.7 6,124.9 21,731.6 4,544.9 76.0 2,419.6 22,076.3 2,349.0 400.9 9,893.8 87.0 9,345.6

134,335.0 66,886.0 22,220.0 22,360.0 13,210.0 2,296.0 6,800.0 44,494.0 9,060.0 5,800.0 22,350.0 4,680.0 79.0 2,525.0 22,955.0 2,452.0 426.0 10,245.0 92.0 9,740.0

139,622.0 70,173.0 23,072.0 23,295.0 14,345.0 2,382.0 7,079.0 45,592.0 9,334.0 5,778.0 21,345.0 1,520.0 85.0 2,055.0 23,857.0 2,568.0 459.0 10,613.0 97.0 10,120.0

146,131.0 73,203.0 23,741.0 25,087.0 14,365.0 2,525.0 7,485.0 47,860.0 9,875.0 5,516.0 24,632.0 5,435.0 92.0 2,310.0 25,068.0 2,712.0 495.0 11,194.0 102.0 10,565.0

153,369.0 76,361.0 24,470.0 26,970.0 14,365.0 2,658.0 7,898.0 50,674.0 10,495.0 5,621.0 25,936.0 5,909.0 104.0 2,609.0 26,334.0 2,819.0 532.0 11,039.0 111.0 11,833.0

Source: Government of Egypt.

73

TABLE 3 Merchandise trade (US$ million)

Second five-year plan period: actual 1988 A. Valuein current prices(USSmil.) 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 4,572.5 3,359.7 2,861.5 354.2 144.0 1,212.8 504.4 708.4 3,988.6 885.9 1,268.7 9,891.7 1,826.9 1,322.8 209.4 4,319.2 2,213.4 2,597.5 3,875.5 2,657.9 2,244.8 298.6 114.5 1,217.6 446.1 771.5 5,566.7 900.6 1,306.7 10,360.6 2,601.5 1,340.2 266.8 4,102.5 2,049.6 2,828.9 4,374.2 2,865.2 2,458.0 220.0 187.2 1,509.0 635.1 873.9 6,082.4 1,071.8 1,471.8 11,441.1 2,516.4 868.9 406.1 4,743.1 2,906.6 2,920.2 5,709.7 4,019.6 3,793.6 83.2 142.8 1,690.1 528.9 1,161.2 6,715.1 930.7 1,661.9 11,424.5 2,074.7 850.6 594.9 4,868.9 3,035.4 3,552.8 4,790.8 3.065.9 2,808.4 35.4 222.1 1,724.9 575.4 1,149.5 7,371.1 1,727.2 1,950.2 10,039.5 2,206.2 547.2 584.6 4,085.0 2,631.1 4,190.9 1989 1990 1991 1992

Third plan period: actual 1993 1994 1995

EsUmab 1996

6,301.9 4,886.9 4,687.5 36.8 162.6 1,415.0 450.9 964.1 6,532.0 1,571.0 1,941.1 10,728.2 2,354.0 584.3 623.8 4,358.7 2,807.4 3,829.3

4,573.5 3,340.3 3,065.2 84.0 191.1 1,233.2 569.3 663.9 7,605.3 1,779.3 1,990.3 8,4884 1,982.0 371.1 393.7 3,392.2 2,349.4 6,595.4

4,854.0 2,652.0 2,036.5 306.4 309.1 2,202.0 1,077.3 1,124.7 8,280.4 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

5,438.0 2,696.1 1,998.9 327.5 389.7 2,741.9 1,335.1 1,406.8 9,679.5 3,202.0 2,160.0 12,454.0 3,044.6 516.5 800.9 4,687.8 3,404.3 5,113.0

B. Valuein constant 1992prices (USSmil.) Totalmerchandise exports Petroleum* Cotton Otheragriculture Textiles Othermanufactures Totalnon-factor servicereceipts of whichtourism of whichSuezCanal Totalmerchandiseimports Food Otherconsumer goods POLand otherenergy Intermediate goodsn.e.i. Capitalgoods Total non-factor servicepayments5,309.7 3,423.6 378.1 132.4 572.1 803.5 4,524.0 1,004.8 1,439.0 10,869.8 1,709.3 1,500.4 250.5 4,899.0 2,510.5 2,940.2 4,610.0 2,882.2 287.9 101.0 490.5 848.3 6,120.8 990.3 1,436.8 10,894.2 2,313.5 1,473.6 342.6 4,510.9 2,253.6 3,110.5 4,388.8 2,408.4 186.6 174.5 681.5 937.7 6,526.7 1,150.1 1,579.3 11,941.8 2,403.0 932.4 397.9 5,089.6 3,118.9 3,133.5 5,401.7 3,447.0 70.4 138.8 546.3 1,199.3 6,935.6 961.3 1,716.5 11,657.6 2,074.7 878.5 540.5 5,028.8 3,135.1 3,669.5 4,790.8 2,808.4 35.4 222.1 575.4 1,149.5 7,371.1 1,727.2 1,950.2 10,054.1 2,206.2 547.2 584.6 4,085.0 2,631.1 4,190.9 6,610.2 5,018.3 42.6 161.6 442.2 945.5 6,406.2 1,540.8 1,903.7 10,630.1 2,361.1 573.1 667.8 4,274.8 2,753.3 3,755.6 5,064.7 3,628.5 81.8 164.9 549.1 640.4 7,335.9 1,716.3 1,919.8 8,284.4 1,922.2 358.0 466.1 3,272.0 2,266.2 6,361.8 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 11,114.9 2,548.2 460.8 888.5 4,182.2 3,037.2 4,561.6

Memorandum items Exportvolume growthrate Importvolumegrowth rate 35.6% 20.5% -13.2% 0.2% -4.8% 9.6% 23.1% -2.4% -11.3% -13.8% 38.0% 5.7% -23.4% -22.1% -3.4% 27.1% 5.9% 5.5%

74

TABLE 3 (contd)

Merchandisetrade (US$million) Secondfive-year plan period: actual 1988 1989 1990 1991 1992
C. Priceindices (1992= 100) Merchandise exports Merchandiseimports Merchandise termsof trade 86.1 91.0 94.6 84.1 95.1 88.4 99.7 95.8 104.0 105.7 98.0 107.9 100.0 99.9 100.1 95.3 100.9 94.5 90.3 102.5 88.1 99.2 107.1 92.6 104.9 112.0 93.6

Third plan period: actual Estimate 1993 1994 199 | 1996

D. Non-factor serviceindices (1992 100) = Exports NFS- volume of index Exports NFS- priceindex of ImportsofNFS-volumeindex Imports NFS-priceindex of ' Includes foreign partnersshare. '' Includes payments return foreign in for partner's investment Source: Govemment Egypt. of 61.4 88.2 70.3 88.2 83.0 90.9 74.2 90.9 88.5 93.2 74.8 93.2 94.1 96.8 87.8 96.8 100.0 100.0 100.0 100.0 86.9 102.0 89.6 102.0 99.5 103.7 151.8 103.7 104.1 107.9 102.4 107.9 117.2 112.1 108.8 112.1

75

TABLE 4 Balance of payments (US$ million) Second five-year plan period: actual 1989 1990 1991 1992
9,442.2 3,875.5 5,566.7 13,189.5 10,360.6 2,828.9 (3,747.3) (792.0) 734.0 1,526.0 1,054.0 472.0 3,532.2 3,532.2 0.0 (1,179.9) 711.2 124.0 124.0 10,456.6 4,374.2 6,082.4 14,361.3 11,441.1 2,920.2 (3,904.7) (1,344.0) 776.9 2,120.9 1,805.8 315.1 3,742.6 3,742.6 0.0 (1,727.7) 1,093.7 136.4 136.4 12,424.8 5,709.7 6,715.1 14,977.3 11,424.5 3,552.8 (2,552.5) (1,099.7) 1,049.4 2,149.1 1,238.5 910.6 3,750.6 3,750.6 0.0 (113.7) 1,486.9 140.5 140.5 12,161.9 4,790.8 7,371.1 14,230.4 10,039.5 4,190.9 (2,068.5) (724.8) 1,080.2 1,805.0 940.1 864.9 5,477.9 5,477.9 0.0 2,697.9 1,039.3 358.7 358.7

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, n.e.i. Change, net intemational reserves [plus indicates increase in assets] Memorandumitems: Net international reserves (NIR) NIR, in months of imports Exchangerates Annual average (LE/US$) At end-year (LE/US$) Index real avg. X-rate (1990 = 100) (decreaseis real appreciation) Current account balance as % GDP Source: Government of Egypt.

Third plan period: actual 1993 1994 1995

12,833.9 6,301.9 6,532.0 14,557.5 10,728.2 3,829.3 (1,723.6) (2,991.6) 1,258.0 4,249.6 1,236.6 3,013.0 4,960.0 4,960.0 0.0 208.5 1,357.0 453.0 453.0 12,178.8 4,573.5 7,605.3 15,083.8 8,488.4 6,595.4 (2,905.1) (949.5) 853.5 1,803.0 1,211.8 591.2 3,232.4 3,232.4 0.0 (622.2) 813.6 1,287.4 1,284.9 2.5 13,134A4 4,854.0 8,280.4 15,910.9 11,279.9 4,631.0 (2,776.5) (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

Estimate 1996
15,117.5 5,438.0 9,679.5 17,567.0 12,454.0 5,113.0 (2,449.5) (818.6) 1,755.5 2,574.2 1,452.1 1,122.0 3,326.2 3,326.2 0.0 58.0 964.5 535.0 500.0 35.0 560.4 1,668.9 1,108.5 189.8 2,530.4

8,561.1 4,572.5 3,988.6 12,489.2 9,891.7 2,597.5 (3,928.1) (598.1) 624.1 1,222.2 741.4 480.8 3,383.9 3,383.9 0.0 (1,142.3) 697.6 124.0 124.0

1,452.3 2,347.9 895.5 597.2 1,728.8

1,366.9 2,621.0 1,254.1 (404.8) 617.4

1,189.7 3,186.9 1,997.2 (55.6) 636.5

(143.3) 1,999.0 2,142.4 5,618.9 6,989.3

75.1 1,730.3 1,655.2 971.0 5,142.0

220.9 1,405.4 1,184.5 1,433.9 3,673.3

75.0 1,018.5 943.5 992.8 2,544.1

6,975.7 6.3

7,593.1 6.3

8,229.6 6.6

15,218.9 12.8

20,360.9 16.8

24,034.2 19.1

26,578.2 20.0

28,128.6 19.2

30,659.1 19.9

1.8 2.3 92.3

1.9 2.6 89.3

2.6 2.7 102.4

3.0 3.3 106.0

3.3 3.3 99.9

3.3 3.3 92.4

3.4 3.4 88.9

3.4 3.4 83.2

3.4 3.4 81.0

-1.9%

-1.5%

-1.8%

-0.1%

1.9%

0.1%

-1.2%

-0.5%

0.1%

76

TABLE 5 External debt, 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. 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 1,945.7 412.5 22.9 140.6 671.7 861.5 0.0 245.0 2,190.7 157.2 2,347.9 2,441.0 233.7 18.0 98.8 1,028.8 1,178.6 0.0 180.0 2,621.0 0.0 2,621.0 3,044.9 416.3 11.1 94.8 1,333.5 1,295.1 0.0 142.0 3,186.9 0.0 3,186.9 1,825.7 238.6 4.1 101.2 911.7 675.4 0.0 90.0 1,915.7 83.3 1,999.0 1,590.4 266.0 3.3 137.6 745.4 579.0 0.0 20.0 1,610.4 119.9 1,730.3 1,385.4 743.7 17.4 214.5 435.3 206.4 0.0 20.0 1,405.4 0.0 1,405.4 958.5 481.9 28.8 154.7 321.6 155.0 0.0 60.0 1,018.5 0.0 1,018.5 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

B. 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 679.0 153.6 3.8 120.5 152.2 373.1 0.8 150.0 829.0 66.5 895.5 1,049.8 176.6 4.2 138.8 322.2 550.9 0.8 147.0 1,196.8 57.3 1,254.1 1,775.0 238.0 6.1 169.3 692.2 844.8 50.8 192.0 1,967.0 30.3 1,997.2 1,738.5 370.6 8.4 194.8 590.4 777.5 0.8 321.0 2,059.5 82.8 2,142.4 1,305.4 385.6 10.9 189.8 257.7 662.2 0.0 270.0 1,575.4 79.8 1,655.2 1,064.5 294.0 11.0 187.6 123.0 647.5 0.0 120.0 1,184.5 0.0 1,184.5 758.5 292.9 12.1 187.3 95.4 370.2 0.0 185.0 943.5 0.0 943.5 769.4 334.3 13.1 201.8 154.2 281.0 0.0 0.0 769.4 69.3 838.8 1,062.5 382.5 14.0 203.0 348.6 331.3 0.0 0.0 1,062.5 46.0 1,108.5

C. 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 1,266.7 258.9 19.1 20.2 519.4 488.3 -0.8 95.0 1,361.7 90.7 1,452.3 1,391.2 57.0 13.9 -40.0 706.6 627.6 -0.8 33.0 1,424.2 -57.3 1,366.9 1,269.9 178.3 4.9 -74.5 641.3 450.3 -50.8 -50.0 1,219.9 -30.3 1,189.7 87.2 -132.0 -4.3 -93.5 321.3 -102.1 -0.8 -231.0 -143.8 0.5 -143.3 285.0 -119.6 -7.6 -52.2 487.7 -83.2 0.0 -250.0 35.0 40.2 75.1 320.9 449.6 6.4 26.9 312.3 -441.1 0.0 -100.0 220.9 0.0 220.9 200.0 189.0 16.7 -32.6 226.2 -215.2 0.0 -125.0 75.0 0.0 75.0 364.5 303.6 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

77

TABLE 5 (cont'd) External debt, stocks and flows (US$ million)

Second five-year plan period: actual 1988

D. 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) 358.4 175.7 7.0 141.4 83.8 99.0 3.9 90.0 448.4 293.0 6.6 741.4 644.7 159.8 7.4 124.7 340.8 144.1 4.3 104.3 749.0 305.0 10.1 1,054.0 1,232.8 190.7 6.2 131.7 781.9 260.2 4.8 107.4 1,340.2 465.5 20.4 1,805.8 850.1 212.9 7.1 144.0 418.4 218.7 0.1 123.8 973.9 264.6 12.4 1,238.5 713.3 189.2 7.3 116.2 363.4 160.7 0.0 54.9 768.1 172.0 12.7 940.1

Third plan period: actual 1992 1993 1994 1995

Estimate 1996

1989

1990

1991

1,021.0 192.0 6.8 117.2 684.6 144.4 0.0 41.4 1,062.4 174.2 13.2 1,236.6

1,018.7 214.3 6.8 113.7 696.7 107.8 0.0 38.5 1,057.2 154.6 10.9 1,211.8

1,236.8 232.6 7.1 116.9 898.4 105.8 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

E. 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. Debt & debt burden indicators Total debt service (mil US$) Interest (LT+ST+IMF) Principal (LT+IMF) Total debt (DOD), total debt service (TDS): DOD/exports(GNFS+WR)rato DOD I GDP ratio MLT DOD (public+pub.guar.) / GDP ratio TDS Iexports (GNFS+WR)rabo

29,927.8 3,176.3 887.3 1,519.2 22,344.0 4,407.6 52.3 1,098.0 31,025.8 6,360.0 242.3 35,737.1

28,844.2 2,952.3 892.7 1,371.1 21,371.0 4,520.9 51.5 1,131.0 29,975.2 6,871.0 175.8 34,551.0

29,024.6 3,401.8 908.1 1,416.0 21,271.3 4,351.5 0.8 1,081.0 30,105.6 7,133.0 155.7 34,024.3

21,688.5 3,220.7 902.4 1,298.5 14,578.9 3,888.9 0.0 850.0 22,538.5 4,565.5 155.1 25,705.6

29,241.3 3,333.8 910.6 1,369.7 22,164.4 3,743.0 0.0 600.0 29,841.3 2,335.4 210.7 32,386.0

28,748.1 3,717.8 912.8 1,394.0 22,338.3 2,692.0 0.0 500.0 29,248.1 2,052.4 206.6 31,505.8

29,964.0 4,040.6 938.2 1,443.2 23,675.4 2,248.0 0.0 375.0 30,339.0 2,042.5 213.2 32,593.2

32,858.5 4,635.1 998.6 1,493.9 26,250.0 1,973.4 0.0 375.0 33,233.5 1,932.9 109.0 35,272.5

32,949.2 4,750.7 1,055.4 1,322.6 26,525.3 1,673.2 0.0 200.0 33,149.2 2,332.9 63.0 35,542.2

1,637.0 741.4 895.5

2,308.1 1,054.0 1,254.1

3,803.0 1,805.8 1,997.2

3,380.9 1,238.5 2,142.4

2,595.3 940.1 1,655.2

2,421.1 1,236.6 1,184.5

2,155.3 1,211.8 943.5

2,166.5 1,327.7 838.8

2,560.6 1,452.1 1,108.5

284.3% 102.1% 85.5% 13.0%

252.0% 87.3% 72.9% 16.8%

227.2% 92.2% 78.7% 25.4%

149.2% 69.6% 58.7% 19.6%

173.0% 77.4% 69.9% 13.9%

165.4% 66.7% 60.9% 12.7%

200.4% 62.8% 57.8% 13.3%

195.5% 58.4% 54.4% 12.0%

176.0% 52.3% 48.5% 12.7%

Source: Central Bank of Egypt and World Bank.

78

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

12,4117 2,805.5 5,337.4 2,959.7 2,377.7 4,268.8 15,819.9 377.9 1,926.4 674.3 2,036.3 2,367.4 8,437.6 4,5701 3,867.5 -3,408.2 3,571.4 11,012.5 -9.5 11,022.0 -10,849.3 10,849.3 2,499.0 3,713.0 3,687.0 950.3

14,791.9 3,414.6 6,461.8 3,613.9 2,847.9 4,915.5 18,588.7 539.1 2,471.9 1,002.3 2,053.4 2,831.8 9,690.2 5,224.9 4,465.3 -3,796.8 3,515.4 11,565.8 85.8 11,480.0 -11,847.2 11,847.2 2,963.0 4,984.0 3,771.0 129.2

17,047.0 4,247.0 7,496.0 4,579.0 2,917.0 5,304.0 22,446.0 687.0 2,969.0 1,985.0 2,656.0 2,971.0 11,178.0 6,064.0 5,114.0 -5,399.0 4,8290 13,947.0 -304.0 14,251.0 -14,517 0 14,517.0 3,248.0 7,696.0 3,527.0 46.0

25,608.0 6,408.0 9,095.0 5,828.0 3,267.0 10,105.0 29,679.0 2,870.0 4.1760 -1,735.0 4,964.0 6,635.0 12,769.0 7,118.0 5,651.0 -4,071.0 2,951.0 15,831.0 5,653.0 10,178.0 -16,951.0 16,951.0 13,512.0 1,635.0 3,956.0 -2,152.0

37.834.0 10,001.0 14,285.0 9,697.0 4,588.0 13,5480 36,1980 3,151.0 6,359.0 -650.0 6,451.0 6,242.0 14,645.0 8,029.0 6,616.0 1,636.0 3,572.0 11,365.0 -981.0 12,346.0 -6.157.0 6,157.0 1,783.0 -3,456.0 7,678.0 152.0

43,503.0 11,120.0 16,182.0 11,166.0 5,016.0 16,201.0 40,886.0 3,994.0 9,295.0 1,591.0 3,245.0 5,042.0 17,719.0 9,771.0 7,948.0 2,617.0 2,998.0 10,927.0 -80.0 10,987.0 -5,312.0 5,312.0 64.0 -3,202.0 8,450.0 0.0

49,418.0 12,015.0 19,358.0 13,238.0 6,120.0 18.0450 46,097.0 4,682.0 11,816.0 1,176.0 -153.0 8,750.0 19,826.0 11,096.0 8,730.0 3,3210 3,149.0 10,167.0 492.0 10,659.0 -3,697.0 3,697.0 464.6 -211.4 3,443.8 0.0

52,925.0 12,156.0 22,123.0 15,1060 7,017.0 18,6460 47,633.0 3,613.0 11,178.0 498.0 179.0 10,250.0 21,915.0 12,519.0 9,396.0 5,292.0 2,794.0 10,624.0 -675.0 11,299.0 -2,538.0 2.538.0 42.2 -1,053.2 3,548 9 0.0

57,708.0 13,731.0 24,518.0 16,607.0 7,911.0 19,459.0 51,967.0 3,796.0 12,231.0 -76.9 256.0 11,547 9 24,213 0 14,045.0 10,168.0 5,741.0 3,185.0 11,922.0 -659.0 12,581.0 -2,996.0 2,996.0 -385.5 4,336.0 3,653.0 0.0

Shares of GDP at current prices Currentrevenues Current expenditures Budgetary savings Capital revenues Capital expenditures Overall balance(minus = deficit) Foreignfinancing Monetarysystemcredit OtherdomesUcfinancing 20.1% 25.7% -5.5% 5.8% 17.9% -17.6% 4.1% 6.0% 6.0% 19.3% 24.2% 4.9% 4.6% 15.1% -15.4% 3.9% 6.5% 4.9% 17.7% 23.4% -5.6% 5.0% 14.5% -15.1% 3.4% 8.0% 3.7% 23.0% 26.7% -3.7% 2.7% 14.2% -15.2% 12.2% 1.5% 3.6% 27.2% 26.0% 1.2% 2.6% 8.2% 4.4% 1.3% -2.5% 5.5% 27.7% 26.0% 1.7% 1.9% 6.9% -3.4% 0.0% -2.0% 5.4% 28.2% 26.3% 1.9% 1.8% 5.8% -2.1% 0.3% -0.1% 2.0% 25.8% 23.2% 2.6% 1.4% 5.2% -1.2% 0.0% -0.5% 1.7% 25.0% 22.5% 2.5% 1.4% 5.2% -1.3% -0.2% 1.9% 1.6%

Govemmentdebt (DOD,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. taxes on domesticG&Sl GDP Indir. taxes dom G&S I pdv. consum. Taxes intl trade/merch. imports Source: Govemmentof Egypt 4.6% 4.8% 7.5% 13.7% 4.4% 4.7% 7.2% 14.2% 4.4% 4.8% 6.9% 9.8% 5.8% 5.2% 7.3% 9.5% 7.2% 7.0% 9.3% 13.8% 7.1% 7.1% 9.3% 14.0% 6.9% 7.6% 10.3% 21.4% 5.9% 7.4% 10.1% 18.3% 5.9% 7.2% 9.9% 18.7% 49,333.3 21,449.3 26,640.0 11,818.2 87,791.5 142.5% 52,394.8 20,229.7 31,925.0 15,589.2 99,909.0 130.1% 55,004.9 20,297.0 43,072.0 19,116.2 117,193.1 121.9% 47,228.7 14,454.1 53,723.0 23,072.2 124,023.9 111.5% 79,694.0 23,992.7 52,308.0 30,750.2 162,752.2 117.0% 79,665.8 23,805.7 47,765.0 39,200.2 166,631.0 105.9% 84,783.4 24,987.7 47,553.6 42,644.0 174,981.0 100.0% 92,664.3 27,294.3 46,500.4 46,192.9 185,357.6 90.4% 92,730.1 27,461.8 46,228.8 49,846.0 188,804.9 81.7%

79

TABLE7
Monetary survey

(LEmillion)

1988
A. 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

1,040.0 8,785.0 3,537.0 3,358.0 1,890.0 9,825.0 11,649.0 -1,824.0

-1,003.0 10,280.0 5,285.0 3,504.0 1,491.0 9,277.0 8,905.0 372.0

-4,487.0 17,662.0 11,147.0 3,675.0 2,540.0 13,175.0 11,841.0 1,334.0

11,265.0 18,328.0 10,651.0 4,605.0 3,072.0 29,593.0 19,740.0 9,853.0

14,475.0 1,488.0 -1,415.0 1,618.0 1,285.0 15,963.0 13,065.0 2,898.0

17,153.0 5,008.0 -4,543.0 7,194.0 2,357.0 22,161.0 17,174.0 4,987.0

8,276.0 12,054.6 -211.4 6,738.0 5,528.0 20,330.6 15,102.0 5,228.6

-846.9 15,707.8 -1,053.2 16,045.0 716.0 14,860.9 15,163.0 -302.1

13,886.5 18,611.8 4,336.0 18,076.7 806.7 32,498.3 19,793.4 12,704.9

B. End-of-year stock Netforeignassets Domesticcredit on Net claims govemment Creditto privatesector Creditto PE sector Totalassets= liabilities Moneyand quasimoney (net) Other liabilities 1,461.0 54,170.0 26,640.0 20,017.0 7,513.0 55,631.0 51,067.0 4,564.0 458.0 64,450.0 31.925.0 23,521.0 9,004.0 64,908.0 59,972.0 4,936.0 -4,029.0 7,236.0 21,711.0 38,864.0 47,140.0 46,293.1 60,179.6

82,112.0 100,440.0 101,928.0 106,936.0 118,990.6 134,698.4 153,310.2 43,072.0 53,723.0 52,308.0 47,765.0 47,553.6 46,500.4 46,228.8 27,196.0 31,801.0 33419.0 40,613.0 47,351.0 63,396.0 81,472.7 14,916.0 16,201.0 18,558.0 24,086.0 24,802.0 25,608.7 11,844.0 78,083.0 107,676.0 123,639.0 145,800.0 166,130.6 180,991.5 213,489.8 71,813.0 6,270.0 91,553.0 104,618.0 121,792.0 136,894.0 152,057.0 171,850.4 16,123.0 19,021.0 24,008.0 29,236.6 28,934.5 41.639.4

C. Factorsaccounting for monetary expansion % MOM) (as Netforeignassets Netcreditto govemment Credit privatesector to Credit PE sector to Other liabilities (net)(-) Totalmoneyand quasi-money 2.9% 52.2% 39.2% 14.7% 8.9% 100.0% 0.8% 53.2% 39.2% 15.0% 8.2% 100.0% -5.6% 60.0% 37.9% 16.5% 8.7% 100.0% 7.9% 58.7% 34.7% 16.3% 17.6% 100.0% 20.8% 50.0% 31.9% 15.5% 18.2% 100.0% 31.9% 39.2% 33.3% 15.2% 19.7% 100.0% 34.4% 34.7% 34.6% 17.6% 21.4% 100.0% 30.4% 30.6% 41.7% 16.3% 19.0% 100.0% 35.0% 26.9% 47.4% 14.9% 24.2% 100.0%

D. Memorandum items Netintl.reserves (US$mil.) Monetary system,flow Monetary system,stock in monthsofimports

1,728.8 6,975.7 6.3

617.4 7,593.1 6.3

636.5 8,229.6 6.6

6,989.3 15,218.9 12.8

5,142.0 20,360.9 16.8

3,673.3 24,034.2 19.1

2,544.1 26,578.2 20.0

1,550.4 28,128.6 19.2

2,530.4 30,659.1 19.9

E. Money, creditand prices M2 / GOP AnnualgrowthrateM2 Annualgrowth privatecredit GDPdeflator, growthrate Govemment Egypt. of 82.9% 29.6% 20.2% 13.4% 78.1% 17A% 17.5% 18.8% 74.7% 19.7% 15.6% 18.4% 82.3% 27.5% 16.9% 14.5% 75.2% 14.3% 5.1% 19.8% 77.4% 16.4% 21.5% 9.8% 78.2% 12.4% 16.6% 7.2% 74.2% 11.1% 33.9% 12.0% 74.4% 13.0% 28.5% 7.4%

80

TABLE 8 National accounts (LE million)

Actual 1996
A. 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

205,000.0 11,873.0 193,127.0 32,050.0 61,700.0 46,580.0 99,377.0 (9,423.4) 44,578.2 54,001.5 214,423.4 172,075.5 21,915.0 150,160.5 42,347.9 11,299.0 31,048.9 42,347.9 0.0 32,924.5 (2,683.4) 11.128.9 41,370.1 202,316.6 213,445.5

230,958.3 12,970.1 217,988.2 35,419.9 69,579.1 53,228.5 112,989.2 (8,328.5) 51,400.8 59,729.3 239,286.8 192,132.5 24,213.0 167,919.5 47,154.4 12,581.0 34,573.4 47,154.4 0.0 38,825.9 (2,783.4) 11,309.2 47,351.7 228,174.9 239,484.2

253,9040 13,779.8 240,124.2 38,370.3 76,913.0 60,787.4 124,841.0 (8,363.6) 53,762.4 62,126.0 262,267.6 211,884.4 25.736.7 186,147.8 50.383.2 14,021.0 36,362.2 50,383.2 0.0 42,019.6 (2,606.0) 11,320.9 50,734.5 251,298.0 262,619.0

278,331.6 14,033.8 264,297.8 41,477.2 84,837.5 68,896.1 137,983.2 (8,766.9) 57,745.0 66,511.8 287,098.5 233,069.2 27,358.2 205,711.1 54,029.3 15,447.4 38,581.9 54,029.3 0.0 45,262.4 (2,495.7) 11,650.8 54,417.4 275,835.9 287,486.7

304,818.2 15,607.6 289,210.6 44,718.5 93,334.0 75,411.7 151,158.2 (10,647.3) 68,037.4 78,684.7 315,465.5 256,432.7 29,083.8 227,346.9 59.032.8 16,8564 42,176.4 59,032.8 0.0 48,385.6 (2,761.7) 13,037.4 58,661.2 302,056.5 315,093.8

333,505.3 16,399.2 317,106.1 48,163.4 102,575.6 83,334.3 166,367.0 (10.795.6) 74,472.4 85,268.0 344,300.8 281,028.9 30,920.4 250,108.6 63,271.9 18,509.5 44,762.4 63,271.9 0.0 52,476.4 (2,880.1) 13,512.4 63.108.7 330,625.2 344,137.6

364,540.6 17,193.0 347,3476 51,833.9 112,645.8 92,087.0 182,867.9 (10,852.1) 81,430.2 92,282.3 375,392.7 307,639.9 32,875.2 274,764.8 67,752.8 20.487.2 47.265.6 67,752.8 0.0 56,900.7 (3,027.0) 13,994.9 67,868.6 361,513.6 375,508.6

398,078.4 17,972.0 380,106.3 55,691.5 123,499.0 101,651.7 200,915.8 (10,738.2) 88,879.7 99,617.9 408,816.5 336,391.6 34,955.9 301,435.7 72,424.9 22,610.9 49.814.1 72,424.9 0.0 61,686.8 (3,158.5) 14,473.6 73,001.8 394,919.8 409,393.4

Net current transfers (NCT)

National saving

Gross nabonal product Gross natonal disposableincome B. 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]

100.0 5.8% 15.6% 30.1% 22.7% 48.5% -4.6% 21.7% 26.3% 104.6% 10.7% 73.2% 5.5% 15.1% 16.1% 20.2%

100.0% 5.6% 15.3% 30.1% 23.0% 48.9% -3.6% 22.3% 25.9% 103.6% 10.5% 72.7% 5.4% 15.0% 16.8% 20.5%

100.0% 5.4% 15.1% 30.3% 23.9% 49.2% -3.3% 21.2% 24.5% 103.3% 10.1% 73.3% 5.5% 14.3% 16.5% 20.0%

100.0% 5.0% 14.9% 30.5% 24.8% 49.6% -3.1% 20.7% 23.9% 103.1% 9.8% 73.9% 5.6% 13.9% 16.3% 19.6%

100.0% 5.1% 14.7% 30.6% 24.7% 49.6% -3.5% 22.3% 25.8% 103.5% 9.5% 74.6% 5.5% 13.8% 15.9% 19.2%

100.0% 4.9% 14.4% 30.8% 25.0% 49.9% -3.2% 22.3% 25.6% 103.2% 9.3% 75.0% 5.6% 13.4% 15.7% 18.9%

100.0% 4.7% 14.2% 30.9% 25.3% 50.2% -3.0% 22.3% 25.3% 103.0% 9.0% 75.4% 5.6% 13.0% 15.6% 18.6%

100.0% 4.5% 14.0% 31.0% 25.5% 50.5% -2.7% 22.3% 25.0% 102.7% 8.8% 75.7% 5.7% 12.5% 15.5% 18.3%

12.0% 12.0% 60,400.7 3.4 940.0

7.4% 7.4% 67,927.2 3.4 1,050.0

5.3% 5.3% 75,717.6 3.4 1,170.0

5.1% 5.1% 81,862.2 3.4 1,270.0

4.8% 4.8% 81,319.2 3.7 1,320.0

4.7% 4.7% 87,132.2 3.8 1,350.0

4.6% 4.6% 93,335.9 3.9 1,390.0

4.4% 4.4% 100,030.6 4.0 1,470.0

81

TABLE 8 (cont' d) National accounts (LE million)

Actual 1995
C. In constant 1992 prices GOP at market prices Resource balance Exports (GNFS) Imports(GNFS) Total expenditures Consumpton expenditures Govemment Private 155.540.0 (7.496.0) 41,763.7 49,259.7 163,036.0 129,336.0 16,471.8 112,864.2 163,161.5 (6,174.3) 45,916.5 52,092.8 169,335.7 134,108.0 16,900.6 117,207.4 170,381.3 (6.077.0) 47,846.4 53,923.4 176,458,3 140,349,9 17,047.7 123,302.2 177,793.5 (6,461.9) 49,883.3 56,345.2 184,255.5 147,244.4 17,283.9 129,960.5 185,836.8 (7,187.4) 52,036.3 59,223.7 193,024.2 155,087.8 17,589.6 137,498.2 194,257.8 (7,003.2) 54,313.2 61,316.4 201,261.0 162,376.2 17,865.5 144,510.6 203,020.7 (6,727.4) 56,722.0 63,449.4 209.748.1 169,891.2 18,155.0 151,736.2 212,326.2 (6,325.9) 59,271.5 65,597.5 218,652.2 177,798.8 18,475.8 159,323.0

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. 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.

33,700.0 8,991.6 24,708.4 33,700.0 0.0 (1,099.9) 154,440.1 25,104.1

35,227.7 9,398.9 25,828.8 35,227.7 0.0 (1,089.4) 162,072.0 27,964.0

36,108.4 10,048.5 26,059.9 36,108.4 0.0 (1,182.3) 169,199.0 28,849.1

37,011.1 10,581.8 26,429.3 37,011.1 0.0 (964.9) 176,828.7 29,534.3

37,936.4 10,832.5 27,103.9 37,936.4 0.0 (826.5) 185,010.3 29,922.5

38,884.8 11,375.3 27,509.4 38,884.8 0.0 (759.9) 193,497.8 31,121.7

39,856.9 12,052.0 27,804.9 39,856.9 0.0 (734.0) 202,286.6 32,395.5

40,853.3 12,754.3 28,099.0 40,853.3 0.0 (745.0) 211,581.2 33,782.3

4.6% 1.3% 1.2% 4.4% 4.3% 4.7% 5.2% 10.0%

4.9% 9.9% 5.8% 3.9% 3.7% 4.5% 4.9% 11.4%

4.4% 4.2% 3.5% 4.2% 4.7% 2.5% 4.4% 3.2%

4.4% 4.3% 4.5% 4.4% 4.9% 2.5% 4.5% 2.5%

4.5% 4.3% 5.1% 4.8% 5.3% 2.5% 4.6% 1.1%

4.5% 4.4% 3.5% 4.3% 4.7% 2.5% 4.6% 4.0%

4.5% 4.4% 3.5% 4.2% 4.6% 2.5% 4.5% 4.1%

4.6% 4.5% 3.4% 4.2% 4.7% 2.5% 4.6% 4.3%

2.2% 2.0% 2.8%

2.7% 1.5% 1.7%

2.2% 2.5% 3.0%

2.2% 2.7% 3.2%

2.4% 3.2% 3.6%

2.4% 2.6% 3.0%

2.4% 2.5% 2.9%

2.5% 2.6% 2.9%

82

TABLE9 Merchandisetrade (USSmillion) Actual

1995
A. Value in current pnces (US$ mil.) 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-factorservicepayments4,854.0 2,652.0 2,036.5 306.4 309.1 2,202.0 1,0773 1,1247 8,280.4 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 5,438.0 2,696.1 1,998.9 327.5 369.7 2,741.9 1,3351 1,406.8 9,679.5 3,202.0 2,160.0 12,454.0 3,044.6 516.5 800.9 4,687.8 3,404.3 5,113.0 5,627 5 2,666 3 1,998.9 305.8 361.6 2,9613 1,441.9 1,519.4 10,405.1 3,557.0 2,243.9 13,134.5 3,109.5 558.9 819.9 5,008.8 3,637.4 5,3924 5,830.6 2,643.9 1,948.9 319.4 375.6 3,186.7 1,551.6 1,635.0 11,153.3 3,937.1 2,322.7 13,868.6 3,175.2 603.7 817.8 5,371.2 3,900.7 5,693.8 6,177.7 2,745.8 1,987.4 343.8 414.5 3,431.9 1,671.0 1,760.9 11,973.3 4,361.2 2,406.2 14,8817 3,241 5 655.1 854.6 5,868.6 4,261.9 6,109.7 6,597.0 2,902.0 2,089.6 3625 449.9 3,695.0 1,7991 1,895.9 12,859.8 4,829.7 2,492.0 15,793.3 3,308.5 706.0 920.8 6,290,1 4,567.9 6,484.0 7,035.5 3,059.6 2,188.0 382.3 489.3 3,975.8 1,935.9 2,040.0 13,813.7 5,345.3 2,579.2 16,750.7 3,378.1 759.7 987.9 6,735.5 4,891.4 6,877.0 7,493.8 3,218.3 2,282.0 403.3 533.1 4,275.4 2,081.8 2,193.7 14,840.2 5,912.3 2,667.9 17,746.5 3,444.4 816.9 1,056.5 7,200.0 5,228.7 7,285.8

Estimate
1996 1997

Projection: case base scenario

1998 1999 2000 2001 2002

B. Value in constant 1992 pnces (US5 mll.) 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.e.i. Capital goods Total non-factorservicepaymentsMemorandum tems Export volumegrowth rate Importvolume growth rate 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 11,114.9 2,848.2 460.8 886.5 4,182.2 3,037.2 4,561.6 5,373.5 2,257.0 252.1 295.9 1,250.6 1,317.9 9,025.1 3,085.2 1,946.3 11,550.2 2,640.3 484.7 925.8 4,344.4 3,155.0 4,677.1 5,572.4 2,302.1 259.7 313.6 1,313.2 1,383.8 9,439.1 3,332.0 1,965.8 12,137.4 2,813.6 510.9 966.0 4,545.7 3,301.2 4,818.7 5,779.9 2,348.2 267.5 332.4 1,378.8 1,452.9 9,879.6 3,598.6 1,985.4 12,781.0 2,871.7 #40.6 1.009.7 4,842.4 3,516.6 5,041.3 5,996.4 2,395.1 275.5 352.4 1,447.8 1.525.6 10,348.2 3,886.5 2,005.3 13.234.5 2,873.5 568.1 1,055.5 5,061.6 3,675.8 5,217.6 6,222.4 2,443.0 283.8 373.5 1,520.1 1,601.9 10,847.1 4,197.4 2,025.3 13,693.9 2,864.2 596.5 1,103.1 5,289.0 3,841.0 5,400.1 6,458.3 2,491.9 292.3 395.9 1,596.2 1,682.0 11,378.5 4,533.2 2,045.6 14,154.1 2,844.6 626.4 1,153.7 5,520.5 4,009.0 5,586.3

-3.4% 27.1%

5.9% 5.5%

3.7% 3.9%

3.7% 5.1%

3.7% 5.3%

3.7% 3.5%

3.8% 3.5%

3.8% 3.4%

C. Prce Indices(1992 = 100) Merchandiseexports Merchandiseimports Merchandise terms of trade D. Non-factorservice indices (1992 =100) ExportsofNFS-volurneindex ExportsofNFS-pnpceindex ImportsofNFS-volumeindex ImportsofNFS-priceindex Includesforeign partner'sshare. Includespaymentsin retum forforeign partner's invest ent Source: Woodd Bank.
-

99.2 107.1 92.6

104.9 112.0 93.6

104.7 113.7 92.1

104.6 114.3 91.6

106.9 116.4 91.8

110.0 119.3 92.2

113.1 122.3 92.4

116.0 125.4 92.5

104.1 107.9 102.4 107.9

117.2 112.1 108.8 112.1

122.4 115.3 111.6 115.3

128.1 118.2 115.0 118.2

134.0 121.2 120.3 121.2

140.4 124.3 124.5 124.3

147.2 127.3 128.9 127.3

154.4 130.4 133,3 130.4

83

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. n.e.i. Change, net intemational reserves [plus indicatesincrease in assets] Memorandumitems: Net intematonal reserves(NIR) NIR, in monthsof imports Exchange rates Annual average (LEIUSS) At end-year(LEAJSS) Index real avg. X-rate (1990 = 100) (decrease is real appreciabon) Currentaccountbalanceas%GDP Source:World Bank. -0.5% 3.4 3.4 83.2 28,128.6 19.2 13,134.4 4,854.0 8,280.4 15,910.9 11,279.9 4,631.0 (2,776.5) (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

Estimate 1996 15,117.5 5,438.0 9,679.5 1997 16,032.7 5,627.5 10,405.1 18,526.8 13,134.5 5,392.4 (2,494.1) (777.1) 1,896.0 2,673.1 1,502.1 1,171.0 3,376.1 3,376.1 0.0 104.8 945.2 1,697.0 1,497.0 200.0 719.3 1.807.8 1,088.5 221.0 3,487.3

Projection: base case scenario 1998 16,983.8 5,830.6 11,153.3 19,562.3 13,868.6 5,693.8 (2,578.5) (734.0) 2,047.7 2,781.7 1,5483 1,233.4 3,426.7 3,426.7 0.0 114.2 926.3 2.067.9 1,847.9 220.0 876.9 1,890.2 1,013.3 (680.4) 3,084.9 1999 18,151.0 6,177.7 11,973.3 20,991.5 14,881.7 6,109.7 (2,840.5) (736.8) 2,211.5 2.948.3 1,608.5 1,339.8 3,478.1 3,478.1 0.0 (99.1) 907.8 2,275.1 2,033.1 242.0 936.5 2,095.0 1,158.5 (856.3) 2.922.0 2000 2001 2002 22,334.0 7,493.8 14,840.2 25,032.3 17,746.5 7,285.8 (2,698.3) (793.7) 2,785.8 3,579.5 1,752.2 1,827.3 3,637.0 3.637.0 0.0 145.0 854.4 3,057.0 2,734.9 322.1 1,287.2 2,737.3 1,450.1 (565.7) 4,455.8

19,456.8 20,849.1
6,597.0 12,859.8 22,277.3 15,793.3 6,484.0 (2,820.5) (752.5) 2,388.4 3,140.8 1,649.0 1,491.8 3,530.3 3,530.3 0.0 (42.7) 889.7 2,514.2 2,248.0 266.2 1,027.3 2,308.7 1,281.4 (479.3) 3,643.0 7,035.5 13,813.7

17,567.0 12,454.0 5,113.0 (2,449.5) (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 4.6 660.4 1,668.9 1,108.5 189.8 2,530.4

23,627.7 16,750.7 6,877.0 (2,778.5) (775.0) 2,579.5 3,354.5 1,698.2 1,656.3 3,583.2 3,583.2 0.0 29.7 871.9 2,774.6 2,481.8 292.8 1.212.5 2,527.6 1,315.1 (521.9) 4,073.9

30,659.1 19.9

34,146.4 20.9

37,231.3 21.3

40,153.2 21.6

43,796.2 22.2

47,870.1 22.9

52,325.9 23.7

3.4 3.4 81.0

3.4 3.4 77.3

3.4 3.6 75.4

3.7 3.8 81.0

3.8 3.9 81.0

3.9 3.9 81.0

4.0 4.0 81.0

0.1%

0.1%

0.1%

-0.1%

0.0%

0.0%

0.1%

84

TABLE 11 External debt, stocks and flows (US$ million)

Actual 1995 A. 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 1,133.9 637.9 51.8 88.3 375.7 120.3 0.0 0.0 1,133.9 0.0 0.0 1,133.9 1,068.9 503.8 70.8 31.8 378.0 187.1 0.0 200.0 1,268.9 400.0 0.0 1,668.9 1,167.8 491.4 102.9 45.0 340.4 336.0 0.0 200.0 1,367.8 440.0 0.0 1,807.8 1,182.2 456.1 97.8 79.2 378.6 347.5 0.0 224.0 1,406.2 484.0 0.0 1,890.2 1,311.7 489.2 89.8 127.8 444.7 377.8 0.0 250.9 1,562.6 532.4 0.0 2,095.0 1,442.1 546.2 73.9 185.4 474.2 421.8 0.0 281.0 1,723.1 585.6 0.0 2,308.7 1,568.7 607.2 54.4 245.1 489.5 472.1 0.0 314.7 1,883.4 644.2 0.0 2,527.6 1.676.2 635.3 36.0 281.8 512.3 528.7 0.0 352.5 2,028.7 708.6 0.0 2,737.3 Estimate 1996 1997 1998 Projection: base case scenario 1999 2000 2001 2002

8. 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 769.4 334.3 13.1 201.8 154.2 281.0 0.0 0.0 769.4 69.3 838.8 1,062.5 382.5 14.0 203.0 348.6 331.3 00 0.0 1,062.5 46.0 1,108.5 1,034.0 421.2 15.0 215.8 348.1 264.8 0.0 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 1,150.0 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 1,450.1 0.0 1,450.1

C. 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 364.5 303.6 38.7 (113.5) 221.5 (160.7) 0.0 0.0 364.5 0.0 (69.3) 295.1 6.5 121.3 56.8 (171.2) 29.3 (144.2) 0.0 200.0 206.5 400.0 (46.0) 560.4 133.8 703 88.0 (170.7) (7.7) 71.2 0.0 200.0 333.8 40.0 (54.5) 719.3 168.9 65.1 81.6 (119.6) (16.4) 120.2 0.0 224.0 392.9 44.0 0.0 875.9 201.7 107.9 72.0 (45.7) (53.2) 147.0 0.0 210.9 412.6 48.4 (8.5) 936.5 240.7 175.5 54 0 38.9 (150.6) 215.8 0.0 201.0 441.7 53.2 0.0 1,027.3 378.4 266.3 31.3 121.6 (240.6) 352.7 0.0 189.9 568.3 58.6 0.0 1,212.5 401.1 293.4 4.0 165.5 (276.8) 384.5 0.0 177.5 578.6 64.4 0.0 1,2872

85

TABLE11 (cont'd) Extemal debt,stocks and flows (US$ million)

Actual 1995
D. 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) 1,236.8 232.6 7.1 116.9 898.4 105.8 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

Estimate 1996 1997

Projection:base case scenario 1998 1999 2000 2001 2002

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 0.0 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

E. 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 32,858.5 4,635.1 998.6 1,493.9 26,250.0 1,973.4 0.0 375.0 33,233.5 1,932.9 109.0 35,272.5 32,949.2 4,750.7 1,055.4 1,322.6 26,525.3 1,673.2 0.0 200.0 33,149.2 2,332.9 63.0 35,542.2 32,961.1 4,820.9 1,143.4 1,151.9 26,517.7 1,622.5 0.0 400.0 33,361.1 2,372.9 8.5 35,339.6 33,188.2 4,886.0 1,225.0 1,032.3 26,625.2 1,676.9 0.0 624.0 33,812.2 2,416.9 8.5 35,794.7 33,421.3 4,993.9 1,297.0 986.7 26,616.8 1,810.5 0.0 834.9 34,256.2 2,465.3 0.0 36,234.6 33,665.8 5,169.4 1,351.0 1,025.6 26,583.2 1,913.2 0.0 1,035.9 34,701.7 2,518.5 0.0 36,684.9 34,060.6 5,435.8 1,382.3 1,147.1 26,360.4 2,264.5 0.0 1,225.8 35,286.4 2,577.1 0.0 37,275.0

34,459.1 5,729.2 1,386.3 1,312.6 26,082.1 2,647.7 0.0 1,403.3 35,862.3 2,641.5 0.0 37,856.7

F. Debt & debt burden indicators Total debt service(mil USS) Interest(LT+ST+IMF) Principal(LT+IMF) Total debt (DOD),total debt service(TDS): DOD/exports (GNFS+WR)rabo DOD /GDP rato MLT DOD (public-pub. guar.)IGDP rato TDS/exports(GNFS+WR)rato Source: World Bank. 195.5% 58.4% 54.4% 12.0% 176.0% 52.3% 48.5% 12.7% 165.9% 46.7% 43.5% 12.2% 159.4% 43.7% 40.5% 11.4% 152.0% 44.6% 41.1% 11.6% 144.6% 42.1% 38.6% 11.5% 138.0% 39.9% 36.5% 11.2% 131.6% 37.8% 34.4% 11.1% 2,1665 1,327.7 838.8 2,560.6 1,452.1 1,108.5 2,590.6 1,502.1 1,086.5 2,561.6 1,548.3 1,013.3 2,767.0 1,608.5 1,158.5

2,930.5 1,649.0 1,281.4

3,013.2 1,698.2 1,315.1

3,202.3 1,752.2 1,450.1

86

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, 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.taxesondomestecG&S/GDP Indir.taxes dom G&S / priv. consum. Taxes intitradel merch. imports Source: World Bank. 5.9% 7.4% 10.1% 18.3% 5.9% 7.2% 9.9% 18.7% 5.8% 7.0% 9.6% 19.6% 5.7% 7.0% 9.5% 17.7% 5.8% 7.1% 9.5% 16.7% 5.8% 7.1% 9.4% 15.7% 5.8% 7.1% 9.4% 14.7% 5.7% 7.1% 9.4% 13.7% 92,664.3 92,730.1 92,046.2 97,334.0 27,294.3 27,461.8 27,259.6 27,232.3 46,500.4 46,228.8 45.280e7 45,353.1 46,192.9 49,846.0 53,599.9 57,449.1 185,357.6 188,804.9 190,926.7 200,136.1 90.4% 81.7% 75.2% 71.9% 103,057.8 27,206.4 42,760.3 61,385.7 207,203.9 68.0% 104,702.6 106,404.2 107,904.8 27,078.5 26,988.1 26.861.7 39,320.8 34,768.2 29,747.1 65,399.6 69,494.5 73,674.5 209,423.0 210,666.8 211,326.5 62.8% 57.8% 53.1% 25.8% 23.2% 2.6% 1.4% 5.2% -1.2% 0.0% -0.5% 1.7% 25.0% 22.5% 2.5% 1.4% 5.2% -1.3% -0.2% 1.9% 1.6% 24.3% 21.3% 3.0% 1.4% 5.3% -0.9% -0.2% 1.7% 1.5% 23.5% 20.9% 2.6% 1.4% 5.3% -1.3% -0.1% 0.4% 1.4% 23.8% 20.2% 3.6% 1.4% 5.3% -0.3% -0.1% -0.5% 1.3% 23.5% 19.6% 4.0% 1.4% 5.4% 0.0% -0.2% -0.7% 1.2% 23.2% 19.0% 4.3% 1.4% 5.4% 0.2% -0.1% -0.9% 1.1% 22.9% 18.5% 4.5% 1.4% 5.5% 0.3% -0.1% -0.9% 1.1% 52,925.0 12,156.0 22,123.0 15,106.0 7,017.0 18,646.0 47,633.0 3,613.0 11,178.0 498.0 179.0 10,250.0 21,915.0 12,519.0 9,396.0 5,292.0 2,794.0 10,624.0 (675.0) 11,299.0 (2,538.0) 2,538.0 42.2 (1,053.2) 3,548.9 0.0 57,708.0 13,731.0 24,518.0 16,607.0 7,911.0 19,459.0 51,967.0 3,796.0 12,231.0 (76.9) 256.0 11,547.9 24,213.0 14,045.0 10,168.0 5,741.0 3,185.0 11,922.0 (659.0) 12,581.0 (2.996.0) 2,996.0 (385.5) 4,336.0 3,653.0 0.0 61,689.0 14,760.0 26,475.0 17,845.0 8,630.0 20,454.0 54,181.7 3,963.0 12,354.0 (567.2) 0.0 12,695.2 25,736.7 15,028.2 10,708.5 7,507.3 3,634.0 13,417.0 (604.0) 14,021.0 (2,275.7) 2,275.7 (530.0) 4,257.0 3,753.9 0.0 65,477.7 15,800.0 27,950.4 19,604.3 8,346.1 21,727.3 58,128.7 4,045.1 13,715.4 (906.5) 0.0 13,916.6 27,358.2 16,080.1 11,278.0 7,349.0 3,952.3 14,835.1 (612.3) 15,447.4 (3,533.8) 3,533.8 (387.8) 1,063.5 3,849.2 0.0 72,612.3 17,655.1 30,848.5 21,532.8 9,315.7 24,108.7 61,721.7 4,522.3 14,297.9 (1,423.2) 0.0 15,240.9 29,083.8 17,205.7 11,878.0 10,890.6 4,292.6 16,246.8 (609.6) 16,856.4 (1,063.6) 1,063.6 (280.3) (1,501.5) 3,936.6 0.0 78,485.7 19,267.1 33,074.5 23,583.8 9,490.7 26,144.1 65,253.8 4,619.1 14,893.8 (1,854.6) 0.0 16,675.3 30,920.4 18,410.1 12,510.2 13,231.9 4,659.9 17,875.9 (633.7) 18,509.5 15.9 (15.9) (590.2) (2,238.1) 4,013.8 0.0 84,715.3 20,990.4 35,420.0 25,802.9 9,617.2 28,304.9 69,123.3 4,719.5 15,501.4 (2,199.9) 0.0 18,227.0 32,875.2 19,698.8 13,176.3 15,592.0 5,129.0 19,831.0 (656.2) 20,487.2 890.0 (890.0) (432.3) (3,229.9) 4,094.9 0.0 91,283.7 22,822.6 37,875.9 28,200.5 9,675.4 30,585.1 73,568.6 4,819.1 16,473.9 (2,584.2) 0.0 19,903,9 34,955.9 21,077.8 13,878.1 17,715.1 5,602.4 21,973.9 (636.9) 22,610.9 1,343.5 (1.343.5) (502.5) (3,564.7) 4,180.0 0.0

Estimate 1996

1997

1998

Projection: basecase scenario 1999 2000 2001

2002

87

TABLE13 MonetarySurvey (LEmillion)

Actual 1995 A. 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) (846.9) 15,707.8 (1,053.2) 16,045.0 716.0 14,860.9 15,163.0 (302.1) 13,886.5 18,611.8 4,336.0 18,076.7 806.7 32,498.3 19,793.4 12,704.9 10,302.1 19.811.3 4,257.0 19,872.6 886.8 30.113.4 17.241.9 12,871.5 16,041.4 22,829.1 1,063.5 21,784.5 972.1 38,870.5 18,382.7 20,487.8 17.126.3 22,329.5 (1.501.5) 23,857.6 1,064.6 39,455.8 19,938.5 19,517.4 15,329.4 23,828.2 (2,238.1) 26,102.9 1,164.8 39,157.6 21,591.5 17,586.1 17,415.6 25,252.6 (3,229.9) 28,532.0 1,273.2 42,668.2 23,355.1 19,313.0 19,431.2 27,526.2 (3,564.7) 31,156.9 1,390.4 46,957.4 25,234.1 21,723.4 Estimate 1996 1997 1998 Projection: base case scenario 2001 2000 1999

2002

B. 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) 46,293.1 134,698.4 46,500.4 63,396.0 24,802.0 180,991.5 152,057.0 28,934.5 60,179.6 153,310.2 46,228.8 81,472.7 25,608.7 213,489.8 171,850.4 41,639.4 70,481.7 173,121.5 45,280.7 101,345.3 26,495.5 243,603.2 189,092.2 54,510.9 86,523.1 195,950.6 45,353.1 123,129.9 27,467.6 282,473.6 207,474.9 74,998.7 103,649.4 218,280.1 42,760.3 146,987.5 28,532.2 321,929.5 227,413.4 94,516.1 118,978.8 242,108.3 39,320.8 173,090.4 29,697.1 361,087.1 249,004.9 112,082.2 136,394.4 267.360.9 34,768.2 201,622.4 30,970.3 403,755.2 272.360.0 131,395.3 155,825.6 294,887.1 29,747.1 232,779.3 32,360.6 450,712.6 297,594.0 153,118.6

C. 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 30.4% 30.6% 41.7% 16.3% 19.0% 100.0% 35.0% 26.9% 47.4% 14.9% 24.2% 100.0% 37.3% 23.9% 53.6% 14.0% 28.8% 100.0% 41.7% 21.9% 59.3% 13.2% 36.1% 100.0% 45.6% 18.8% 64.6% 12.5% 41.6% 100.0% 47.8% 15.8% 69.5% 11.9% 45.0% 100.0% 50.1% 12.8% 74.0% 11.4% 48.2% 100.0% 52.4% 10.0% 78.2% 10.9% 51.5% 100.0%

D. Memorandumitems Net intl. reserves(USSmil.) Monetarysystem, flow Monetarysystem, stock in months of imports

1,550.4 28,128.8 19.2

2,530.4 30,659.1 19.9

3,487.3 34,146.4 20.9

3,084.9 37,231.3 21.3

2,922.0 40,153.2 21.6

3.643.0 43.796.2 22.2

4,073.9 47,870.1 22.9

4,455.8 52,325.9 23.7

E. Money, credit and pnrces M2 I GOP Annual growth rate M2 credit Annual growth pnivate GDP Deflator, growthrate Source: Vorld Bank. 74.2% 11.1% 33.9% 12.0% 74.4% 13.0% 28.5% 7.4% 74.5% 10.0% 24.4% 5.3% 74.5% 9.7% 21.5% 5.1% 74.6% 9.6% 19.4% 4.8% 74.7% 9.5% 17.8% 4.7% 74.7% 9.4% 16.5% 4.6% 74.8% 9.3% 15.5% 4.4%

88

TABLE 14 National accounts (LE million)

Actual 1995 A. 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 . Net factor income(NFY) + Netcurrenttransfers(NCT) =National saving Grossnabonalproduct Grossnatonal disposable income 205,000.0 11,873.0 193,127.0 32,050.0 61,700.0 46,580.0 993770 -9423.4 44,578.2 54,001.5 230,958.3 261,211.6 295,433.4 334,457.8 378,994.2 429,458.8 12,970.1 13,414.4 15,157.0 18,113.7 19,630.1 21,162.0 217,988.2 247,797.1 280,276.4 316,344.1 359,3641 408,296.8 35,4199 69,579.1 53,228.5 1129892 38,996.3 78,167.9 42,7970 87,5371 46,899.2 51,329.7 88,942.7 198715.5 56,058.2 99,747.7 2304128 97,885.4 109,318.9 121,825.9 22,704.7 464,3875 61,116.8 135,529 9 111,734.5 267740.8 Estimate 1996 11997 Projection: high case scenario 1999 2000 2001

1998

2002

61,797.4 71,595.7 79,192.1 130633.0 149942.3 1715596

(8,328.5) (14,298.3) (13,711.1) (18.767.1) (18,602.3) (17,708.2) (15,8767) 51,400.8 58,105.1 65,548.0 85,997.7 102,144.9 121,196.0 143,729.5 59,729.3 72,403.4 79,259.1 104,764.8 120,747.2 138,904.2 159,606.3

214423.4 239286.8 275509.8 309144.5 353224.9 397596.5 447167.0 502968.9 172,0755 192,132.5 220,834.1 245,842.5 274,5955 305,662.1 339,912.0 378,058.6 21,915.0 150,160.5 42,347.9 11,299.0 31,048.9 42,347.9 0.0 32,924.5 -2683.4 11,128.9 41,370.1 202,316.6 213,445.5 24,213.0 25,907.9 27,203.3 28,5635 29,991.6 31,491.2 167.919.5 194,926.2 218,639.2 246,032.0 275,670.4 308,420.7 47,154.4 12,581.0 34,573.4 47,154.4 0.0 38,825.9 -2783.4 11,309.2 47,351.7 54,675.7 14,021.0 40,654.7 54,675.7 0.0 40,377.4 -2805.3 11,492.8 49,065.0 63,302.0 16,396.6 46,905 4 63,302.0 0.0 49,590.9 -2817.6 11,650.8 58,424.1 78,629.4 18,495.5 60,133.9 78,629.4 0.0 59,862.3 (3,4474) 13,598.2 70,013.1 91,934.5 107,255.0 21,034.2 24,1356 70,900.3 83,119.5 91,9345 107,255.0 0.0 00 33,0658 344,992.8 124,910.3 27,666.8 97,243.4 124,910.3 0.0

73,332.1 89,546.8 109,033.5 (3,907.6) (4,450.0) (5,0364) 14,309.4 15,029.2 15,764.1 83,733.9 100,126.0 119,761.3 482,055.7 497,819.9

228,174.9 258,406.3 292,615.8 331,010.4 375,086 6 425,008.8 239,484.2 269,899.1 304,266.6 344,608.6 389,396.0 440,038 0

B. 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$] 12.0% 12.0% 60,400.7 34 940.0 7.4% 7.4% 67,927.2 3.4 1,050.0 7.0% 7.0% 76,731.7 3.4 1,180.0 6.7% 6.7% 86,892.2 3.4 1,320.0 6.5% 6.5% 85,546.3 3.9 1,400.0 6.4% 6.4% 93,501.8 4.1 1,460.0 6.1% 6.1% 102,390.2 4.2 1,520.0 6.0% 6.0% 112,378.0 4.3 1,640.0 100.0% 5.8% 15.6% 0.3 22.7% 48.5% 4.6% 21.7% 26.3% 104.6% 10.7% 73.2% 5.5% 15.1% 16.1% 20.2% 100.0% 5.6% 15.3% 30.1% 23.0% 48.9% -3.6% 22.3% 25.9% 103.6% 10.5% 72.7% 5.4% 15.0% 16.8% 20.5% 100.0% 5.1% 14.9% 29.9% 23.7% 50.0% -5.5% 22.2% 27.7% 105.5% 9.9% 74.6% 5.4% 15.6% 15.5% 18.8% 100.0% 5.1% 14.5% 29.6% 24.2% 50.8% -4.6% 22.2% 26.8% 104.6% 9.2% 74.0% 5.6% 159% 16.8% 19.8% 1000% 5.4% 14.0% 29.3% 237% 51.3% -5.6% 25.7% 31 3% 105.6% 8.5% 73.6% 5.5% 18.0% 17.9% 20.9% 100.0% 5.2% 13.5% 28.8% 23.5% 52.4% -4.9% 27.0% 31.9% 104.9% 7.9% 72,7% 56% 18.7% 19.3% 22.1% 1000% 4.9% 13.1% 28.4% 23.2% 53.7% 4.1% 28.2% 32.3% 104.1% 7.3% 71.8% 5.6% 19.4% 20.9% 23.3% 100.0% 4.7% 12.5% 27.8% 22.9% 55.0% -3.3% 29.5% 32.8% 103.3% 68% 7.1% 5.7% 200% 22.4% 24.6%

89

TABLE 14 (con't) National accounts (LE million)

Projection: high case scenario 1997 1998 1999 2000 2001 2002

Actual 1995

Estimate 1996

C. In constant 1992 prces GDPatmarketpnces Resource balance Exports(GNFS) Imports (GNFS) 155,540.0 (7,496.0) 41,763.7 49,259.7 163,161.5 (6,174.3) 45,918.5 52,092.8 172,471.0 (10,923.6) 50,911.4 61,835.0 182,897.9 (10,363.7) 56,551.5 66,915.2 194,425.8 (12,256.3) 62,930.8 75,187.1 207,136.8 (11,318.9) 70,154.7 81,473.6 221,152.2 (9,963.1) 78,344.9 88,306.0 236,741.6 (8,128.3) 87,641.5 95,769.7

Total expenditures Consumptionexpenditures Govemment Pnvate Gross domesticinvestment Govemment Private Total fixed investment Total investmentin stocks Termsoftrade(TT)effect GrossdomesUcincome Domesticsaving(TT adjusted) D. 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.

163,036.0

169,335.7

183,394.6

193,261.6

206,682.1

218,455.6

231,115.2

244,869.8

129,336.0 16,471.8 112,864.2 33,700.0 8,991.6 24,708.4 33,700.0 0.0 (1,099.9) 154,440.1 25,104.1

134,108.0 16,900.6 117,207.4 35,227.7 9,398.9 25,828.8 35,227.7 0.0 (1,089.4) 162,072.0 27,964.0

143,939.6 16,886.8 127,052.8 39,455.0 10,117.8 29,337.2 39,455.0 0.0 (1,287.6) 171,183.4 27,243,8

149,861.1 16,582.6 133,278.4 43,400.5 11,241.7 32,158.9 43,400.5 0.0 (1,212.0) 181,685.9 31,824.8

157,639.5 16,397.7 141,241.8 49,042.6 11,536.0 37,506.6 49,042.6 0.0 (1,212.4) 193,213.4 35,573.9

164,508.8 16,141.6 148,367.1 53,946.9 12,342.8 41,604.1 53,946.9 0.0 (1,233.0) 205,903.8 41,395.0

171,773.7 15,914.0 155,859.7 59,341.5 13,353.6 45,987.9 59,341.5 0.0 (1,294.9) 219,857.3 48,083.6

179,594.1 15,707.7 163,886.5 65,275.7 14,458.2 50,817.5 65,275.7 0.0 (1,398.4) 235.343.2 55,749.1

4.6% 1.3% 1.2% 4.4% 4.3% 4.7% 5.2% 10.0%

4.9% 9.9% 5.8% 3.9% 3.7% 4.5% 4.9% 11.4%

5.7% 10.9% 18.7% 8.3% 7.3% 12.0% 5.6% -2.6%

6.0% 11.1% 8.2% 5.4% 4.1% 10.0% 6.1% 16.8%

6.3% 11.3% 12.4% 6.9% 5.2% 0.1 0.1 11.8%

6.5% 11.5% 8.4% 5.7% 4.4% 0.1 6.6% 16.4%

6.8% 11.7% 8.4%

7.0% 11.9% 8.4% 6.0% 4.6% 10.0% 7.0% 15.9%

5.8% 4.4% 0.1 6.8% 16.2%

2.2% 2.0% 2.8%

2.7% 1.5% 1.7%

3.5% 5.1% 6.1%

3.9% 2.0% 2.7%

4.1% 3.0% 3.8%

4.4% 2.2% 2.9%

46% 2.3% 2.9%

4.9% 2.5% 3.1%

90

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

TABLE 17 (cont'd) External Debt, Stocks and Flows (US$ million)

Actual _ E. 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. Debt & debt burden indicators Total debt service(mil USS) Interest (LTvST-IMF) Pnncipal (LT-IMF) Total debt (DOD),total debt service(TDS): DOD/exports(GNFS-VVR)ratio DOD/GDPratio MLT DOD (publicvpub.guar.)/ GDP ratio TDS/exports(GNFSvWR)ratio Source: World Bank. 195.5% 58.4% 54.4% 12.0% 2,166.5 1,327.7 838.8 1995

Estimate| 1996 1 1997 1998

Projection: high case scenario 1999 2000 2001 2002

32,858.5 4,6351 998.6 1,493.9 26,250.0 1,973.4 0.0 375.0 33,233.5

32,949.2 4,750.7 1,055.4 1,322.6 26,525.3 1,673.2 0.0

32,961.1 4,820.9 1,143.4 1,151.9 26,517.7 1,622.5 0.0

33,188.2 4,886.0 1,225.0 1,032.3 26,625.2 1,676.9 0.0

33,421.3 4,993.9 1,297.0 986.7 26,616.8 1,810.5 0.0

33,665.8 5,169.4 1,351.0 1,025.6 26,583.2 1,913.2 0.0

34,060.6 5,435.8 1,382.3 1,147.1 26,360.4 2.264.5 0.0

34,459.1 5,729.2 1,386.3 1,312.6 26,082.1 2,647.7 0.0

200.0 33,149.2

400.0 33,361.1

624.0 33,812.2

834.9 34256.2

1,035.9 34,701.7

1,225.8 35,286.4

1,403.3 35,862.3

1,932.9 109.0 35,272.5

2,332.9 63.0 35,542.2

2,372.9 8.5 35,339.6

2,416.9 8.5 35,794.7

2.465.3 0.0 36,234.6

2,518.5 0.0 36,684.9

2,577.1 0.0 37,275.0

2,641.5 0.0 37,856.7

2,560.6 1,452.1 1,108.5

2,590.6 1,502.1 1,088.5

2,561.6 1,548.3 1,0133

2,767.0 1,608.5 1,158.5

2,930.5 1,649.0 1,281.4

3,013.2 1,698.2 1,315.1

3,202.3 1,752.2 1,450.1

176.0% 52.3% 48.5% 12.7%

158.2% 46.1% 43.0% 11.6%

144.6% 41.2% 38.2% 10.3%

130.9% 42.4% 39.1% 10.0%

117.9% 39.2% 36.0% 9.4%

106.3% 36.4% 33.3% 8.6%

95.6% 33.7% 30.7% 8.1%

94

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

52,9250 12,156.0 22,123.0 15,106.0 7,017.0 18,646.0 47,633.0 3613.0 11,178.0 498.0 179.0 10250.0 21,915.0 12,519.0 9,396.0 5,292.0 2,794.0 10,624.0 (675.0) 11,299.0 (2,538 0) 2538.0 42.2 (1,053.2) 3,548.9 0.0

57,708.0 13,7310 24,5180 16,607.0 7,911.0 19,459.0 51,967.0 3,796.0 12,231.0 (76.9) 256.0 11547.9 24,213.0 14,045.0 10,168.0 5,741.0 3,185 0 11,922.0 (659.0) 12,5810 (2,996.0) 2996.0 (385.5) 4,336 0 3,653.0 0.0

61,689.0 14,760.0 26,475.0 17,845.0 8,630.0 20,4540 54,352.9 3,963.0 12,354.0 (9326) 0.0 13060.6 25,907.9 15,028.2 10,879.8 7,336.1 3,634.0 13,417.0 (604.0) 14,021.0 (2,446 9) 2446.9 (5381) 4,257.0 3,753.9 0.0

68,614.9 16,323.5 29,928.7 19,983.0 9,9457 22,362.8 58,731.5 4,045.1 13,715.4 (1,0040) 0.0 14771.7 27,203 3 15,779.6 11,423.7 9,883.4 4,150.7 15,7466 (650 0) 16,396.6 (1,712 5) 1712.5 (387.8) (775.9) 3849.2 0.0

80,451.4 19,364.9 34,836.5 22,433.1 12,403.5 26,250.0 62,673.4 4,7168 14,297.9 (1,627.8) 0.0 16722.9 28,563.5 16,568 5 11,994.9 17,778.1 4,636.4 17,826.6 (668.9) 18,495 5 4,587.9 (4,587.9) (292.3) (7,160.9) 3,936.6 0.0

90,5255 22.173.0 38,579.8 25,140.2 13,4397 29,772 7 66,526 3 4,891.5 14,893.8 (2,200.4) 0.0 18949.7 29,991.6 17,397.0 12,594.7 23,999.2 5,187.6 20,314.1 (720.1) 21,034 2 8,872.7 (8,8727) (6251) (11,082.0) 4,0138 0.0

101,726.0 25,3547 42,634.9 28,159.1 14,475.8 33,736 3 70,821.2 5,068.3 15,501.4 (2,712.7) 00 21472.9 31,4912 18,266.8 13,224.4 30,904.7 5,896 1 23,362.6 (773.0) 24,1356 13,437 2 (13,4372) (464.3) (15,769.3) 4,094.9 0.0

114,2567 28,979.0 47,0590 31,557.5 15,5018 38,2184 75,828 9 5,248.8 16,473.9 (3,314 2) 0.0 243546 33,065.8 19,180.2 13,885.6 38,427 8 6.661.6 26,887.5 (779.3) 27,666.8 18,201.9 (18,201.9) (547.3) (20,404.9) 4,180.0 0.0

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,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. taxes on domesticG&S I GDP Indir. taxes domG&S I prv. consum. Taxesint'ltradelnmerch.imports Source:WorldBank. 5.9% 7.4% 10.1% 18.3% 5.9% 7 2% 9.9% 18.7% 5 7% 6.8% 9.2% 168% 5 5% 6.8% 9.1% 17.7% 5.8% 6.7% 9.1% 16.7% 5.9% 6.6% 9.1% 15.7% 5.9% 6.6% 9.1% 14.7% 5.9% 6.5% 9.1% 13.7% 92,664.3 27,294.3 46,500.4 46,192.9 185,357.6 90.4% 108,322.5 111,667.3 92,740.2 99,529.6 27,078.5 27,259.6 27,232.3 27,206 4 27,481.8 35,4789 23,217.4 45,459.9 43,711.0 46,228.8 61,385.7 65,399.6 49,846.0 53,599.9 57,449 1 205,187.0 200,294.2 189,504.0 191,800.0 200,689.8 52.8% 67.9% 61.3% 82.1% 73.4% 93,429.2 115,087.5 28,988.1 6,1495 69,494.5 190,731.6 44.4% 118,322.1 26,861.7 (15,685.1) 73,674.5 176,311.5 36.2% 25.8% 23.2% 2.6% 1.4% 5.2% -1.2% 0.0% -0.5% 1.7% 25.0% 22.5% 2.5% 1.4% 5.2% -1.3% -0.2% 1.9% 1.6% 23.6% 208% 2.8% 1.4% 5.1% -0.9% -0.2% 1.6% 1.4% 232% 19.9% 3.3% 1.4% 5.3% -0 6% -0 1% -0 3% 13% 241% 187% 5.3% 14% 53% 1.4% -0.1% -2.1% 1.2% 23.9% 17.6% 6.3% 1.4% 5.4% 2.3% -0.2% -2.9% 1.1% 23 7% 16.5% 7.2% 1.4% 54% 3.1% -01% -3.7% 10% 23.5% 15.6% 7.9% 1.4% 5.5% 3.7% -0.1% -4.2% -0.9%

95

TABLE 19 Monetary Survey (LE million)

Actual 1995
A. 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) (846,9) 15,707.8 (1,053.2) 16,045.0 716.0 14,860.9 15,163.0 (302.1) 14,340.2 18,611.8 4,336.0 18,076.7 806.7 32,952.0 19,793.4 13,158.7 4,416.1 20.588.0 4,257.0 20,444.6 912.3 25,004.1 22,684.1 2,320.0 11,358.0 22,406.0 (775.9) 23,123.1 1,031.9 33,764.0 25,688.5 8,075.5 11,010.9 19,113.4 (7,160.9) 26,177.4 1,168.2 30,124.4 29,303.4 821.0 9,012.1 18,725.4 (11.082.0) 29,663.2 1,323.7 27,737.6 33,441.9 (5.704.3) 12,219.3 18,045.1 (15,769.3) 33,613.0 1,500.0 30,264.5 37,894.2 (7,629.7) 16,192.1 17,990.5 (20,404.9) 36,123.9 1,701.3 34,182.6 43,276.2 (9,093.6)

Estimate 1996

1997

1998

Projection: highCaseScenario 1999 2000 2001

2002

B. End-of-yearstock Net foreign assets Domestic credit Netclaims on govemment Credittoprivatesector Credit to PEsector Totel assets= liabilibes Moneyand quasimoney Otherliabilibes (net) 46,293.1 134,698.4 46,500.4 63,396.0 24802.0 180.991,5 152,057.0 28,934.5 60,633.3 153,310.2 46,228.8 81,472.7 25608.7 213,943.5 171,850.4 42,093.1 65,049.4 173,898.2 45,459.9 101,917.3 26521.0 238,947.6 194,534.4 44,413.2 76,407.4 196,304.2 43,711.0 125,040.4 27552.8 272,711.6 220,223.0 52,488.7 87,418.3 215,417.7 35.478.9 151,217.8 28,721.0 302,836.0 249,526.3 53,309.7 96,430.5 234.143.1 23,217.4 180,881.0 30,044.7 330,573.6 282,968.2 47,605.4 108,649.8 252,186.2 6,149.5 214,494.0 31,544.7 360,838.1 320,862.4 39,975.7 124,841.9 270,178.7 (15,685.1) 252,617.9 33,245.9 395,020.7 364,138.6 30,882.0

for C. Factors accounting

monetaryexpansion(as % MQM) Net foreign assets Net credit to govemment Creditto private sector CredittoPEsector Other liabilities (net)(-) Total moneyand quasi-money 30.4% 30.6% 41.7% 16.3% 19.0% 100.0% 35.3% 26.9% 47.4% 14.9% 24.5% 100.0% 33.4% 23.4% 52.4% 13.6% 22.8% 100.0% 34.7% 19.8% 56.8% 12.5% 23.8% 100.0% 35.0% 14.2% 60.6% 11.5% 21.4% 100.0% 34.1% 8.2% 63.9% 10.6% 16.8% 100.0% 33.9% 1.9% 66.8% 9.8% 12.5% 100.0% 34.3% -4.3% 69.4% 9.1% 8.5% 100.0%

D. Memorandumitems Net ing. reserves(USS mil.) Monetarysystem,flow Monetarysystem,stock inmonthsofimports E. Money, credit and pnces M2 I GOP Annual growthrate M2 Annual growth prvate credit GDP deflator, growthrate Source: Word Bank. 74.2% 11.1% 33.9% 12.0h 74.4% 13.0% 28.5% 7.4% 74.5% 13.2% 25.1% 7.0% 74.5% 13.2% 22.7% 6.7% 74.6% 13.3% 20.9% 6.5% 74.7% 13.4% 19.6% 6.4% 74.7% 13.4% 18.6% 6.1% 74.8% 13.5% 17.8% 6.0%

1,550.4 28,126.6 19.2

2,439.8 30,568.5 17.2

1,731.6 32,300.1 16.6

1,361.6 33,661.7 15.1

511.7 34,173.5 13.8

1.493.4 35,666.9 12.9

2,179.8 37.843.7 12.3

2,960.0 40,806.6 12.2

96

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