Swiss Economic Development Cooperation

Egypt: Country Strategy 20092012

07/2009

Contents
Abbreviations Introduction 1. Context Political situation Economic situation Bilateral economic relations 2. Development cooperation in Egypt Donor landscape and development policy Swiss economic development cooperation 3. Conclusions and challenges 4. Future SECO economic cooperation: Objectives 5. Future SECO economic cooperation: Measures and implementation 6. Local partners and programme management issues Annex: Country indicators 4 5 6 6 6 8 9 9 9 11 13 15 18 20

Data in this strategy is based on official financial and development statistics from the World Bank and other international bodies.

Abbreviations
CHF DPG EFTA ESDF EU FDI GDP IPR MoU NATO SDC SECO SIFEM SME TPES UN UNCTAD USA USD WE WEHU WEIF WEIN WEMU WTO Swiss francs Development Partners Group of the United Nations European Free Trade Association Egyptian-Swiss Development Fund European Union Foreign Direct Investment Gross Domestic Product Intellectual Property Rights Memorandum of Understanding North Atlantic Treaty Organisation Swiss Agency for Development and Cooperation Swiss State Secretariat for Economic Affairs Swiss Investment Fund for Emerging Markets Small and medium-sized enterprises Total Primary Energy Supply United Nations United Nations Conference on Trade and Development United States of America US dollars SECO Cooperation SECO Cooperation Trade Promotion SECO Cooperation Private Sector Development SECO Cooperation Infrastructure Financing SECO Cooperation Macroeconomic Support World Trade Organization

Introduction
In the framework of the Swiss development cooperation, the Economic Cooperation and Development Division of the Swiss State Secretariat for Economic Affairs (SECO) is responsible for economic and trade policy measures with partner countries. The main aims are to integrate partner countries into the global economy and to promote sustainable economic growth, thus contributing to poverty reduction. SECO focuses its support on themes where it can add most value. Depending on the partner countries needs and priorities, the interventions may include promoting stable economic conditions, strengthening competitiveness, supporting trade diversification, mobilising domestic and foreign investment as well as improving basic infrastructure. Particular emphasis is placed on economic governance and environmental issues. All measures are intended to trigger and complement efforts made by partner governments, regional entities and the private sector. SECO works globally through key multilateral partners as well as bilaterally with selected countries such as Egypt. Based on consultation with the Egyptian Government and other development partners, the present strategy sets out how SECO intends to translate its overall goal into concrete and sustainable results. This entails applying best practice methodologies, observing the principles of the Paris Declaration on Aid Effectiveness, thus using the most effective and efficient means of implementation. The present country strategy is based on the Swiss Development Assistance Act of 1976, on the Federal Councils development policy strategy of 2008 as well as on the Dispatch on the financing of economic and trade policy measures in the context of development cooperation and the related seventh framework credit, which was approved by the Swiss Parliament in December 2008.

1 Context
Political situation
With the Suez Canal under its control and its central location in the Arab world, Egypt holds a key role in African, Mediterranean, Middle Eastern and even global politics. It is the most populous Arab country with 75.5 million inhabitants and a growth rate of 1.7% p.a. Since the assassination of President Anwar as-Sadat in 1981, the former Deputy of the Minister of Defence and Vice-President Muhammad Husni Mubarak has been President and Leader of the National Democratic Party. The presidential elections in September 2005 confirmed President Mubarak in his position for a six-year term, whereas parliamentary elections in November 2005 brought substantial gains to the candidates of the Muslim Brotherhood and weakened the secular opposition parties. A cabinet reshuffle took place, suggesting further economic and political reforms in the years to come. The next presidential elections will take place in 2011. The Armed Forces of Egypt are the largest on the African continent and the 11th largest in the world. They support stability and moderation in the region and are a participant in NATOs Mediterranean Dialogue forum.

Economic situation
Egypt is a middle-income country with a large economic potential and an important emerging market. The country has made considerable progress in macroeconomic stabilisation and reform since embarking on a structural adjustment programme in 1991, aiming at deregulation, liberalisation of trade and promotion of private initiative and investment. In the late 1990s, however, economic performance weakened and the situation further deteriorated during the period 20002003, following the difficulties related to September 11 and the war in Iraq. During this period, real GDP growth reached levels as low as 3.2% in 2003. Since then, real GDP growth has risen steadily to peak at 7.2% in 2008, coming close to the objective of Egypts current Five-Year Plan that aims for annual real GDP growth of 8%. The Egyptian economy is relatively small (only the fourth economy in the Arab World after Saudi Arabia, the United Arab Emirates and Algeria). Nevertheless, the country remains an important economic hub connecting the African, European and Asian continents and its economy is well diversified. Services account for almost half of GDP. This includes the public sectors (administration and

Suez canal) contribution of about 33%. The industry sector contributes 38% to the overall GDP, with the textile industry being the most important branch. Although the contribution of agriculture to GDP has significantly diminished in recent years (from 20% in 1982 to 13.8% in 2007), this sector remains important. Egypt has been very successful at attracting foreign investment. According to UNCTADs World Investment Report 20081, Egypt is at the top of the list of African countries in terms of foreign direct investments (FDI). In 2007, Egypt received a total of USD 11.6 billion in FDI which corresponds to over the half of foreign direct investments in Northern Africa and to 22% in the whole of Africa. The Government of Egypt has been financing the deficit of the state budget through grants and borrowing on the local market. State debt reached 70% of GDP in 2007. The Governments overall external debt reached a moderate 24,2% of GDP (FY 2006/07), according to the IMF. Inflation remains a challenge peaking at 22% in the first seven months of 2008 and an estimated 9.1% in 2009. Unemployment is at about 10% (23% among women) according to official figures. In order to respond to unemployment, estimates show that Egypt needs to maintain a real GDP growth rate of 6% (almost 800 000 new jobs must be created every year in order to absorb new entrants to the market). According to a World Bank report2, about 20% of the population lives on less than USD 2 per day. This figure is much lower than the estimation of average daily wages in 2007 at USD 810, thereby reflecting the large disparities in the distribution of wealth within the population. Egypts economy is further confronted with a persistent high vulnerability to external shocks. In the wake of the international financial crisis and its impact on the large markets such as the EU and the USA, an international slowdown in economic growth is expected. Egyptian exports and the tourism industry will be affected. The Government has approved different measures to protect the Egyptian economy from a slowdown in GDP growth, such as the promotion of exports and suspension of the planned increase in very cheap energy prices for industrial use. Furthermore, the Governments current economic policy underlines the importance of maintaining a sound and prudent macroeconomic approach and promoting a more active role of the private sector in the development process. In addition, in reaction to the financial crisis the Government launched a EG 15 billion (1.7% of GDP) stimulus programme in December 2008 mainly to finance new infrastructure projects, especially in the transport sector, and also for tax relief purposes. A second stimulus programme of same magnitude was launched in March 2009 to support the economy.

1 UN Conference on Trade and Development, World Investment Report 2008 2 Arab Republic of Egypt Poverty Reduction in Egypt, World Bank, June 2002.

Bilateral economic relations

With exports valued at CHF 626 million in 2008, Egypt is the second largest African export market for Switzerland after South Africa (CHF 775 million). Switzerlands imports from Egypt, in turn, remain comparatively low with CHF 28.2 million. Egypt is an important emerging market with substantial potential for growing business relations with Switzerland. In order to support trade relations between Switzerland and Egypt, and taking into consideration the progress achieved so far under the EU Mediterranean Partnership, a Free Trade Agreement with the European Free Trade Association (EFTA) was signed in January 2007, which came into effect on 1 August 2007. The free trade agreement provides liberalisation of trade in industrial goods and fishery products and aims at improving the market access for agricultural products. The agreement also contains rules regarding intellectual property rights and competition as well as evolutionary clauses regarding services, investments and public procurement. This allows Egypt to improve its competitiveness and increase its attraction to investors from the EFTA states. Moreover, the provision of technical and financial assistance is included in the free trade agreement. Egyptian exports benefit from a contractual guarantee for preferential treatment in the EFTA markets.

3 EFTA member states are Norway, Iceland, Principality of Liechtenstein and Switzerland

2 Development cooperation in Egypt

Donor landscape and development policy
The current development objectives of the Government of Egypt, as expressed in the 6th Five-Year Plan (2007/8 2011/12) aim at reconciling the interests of past and future generations within a concept of sustainable development, developing a national economy able to face global competition and reduce poverty. Goals of the Government in this plan include: Realise higher rates of economic growth Achieve balance between development requirements and environmental preservation Achieve an efficient and competent economy (building a knowledge-based economy, developing Egyptian exports, promoting the role of the private sector) Eradicate poverty and unemployment Egypt receives significant development assistance aid. The role of donor coordination rests with the Ministry of International Cooperation. Furthermore, the international donor community meets regularly in the framework of the Development Partners Group of the United Nations (DPG), which is currently composed of 21 bilateral partners and 13 multilateral agencies. The DAG operates at two levels: plenary meetings and thematic sub-groups (Health and Population, Natural Renewable Resources, Environment and Energy and Micro, Small and Medium Enterprises). Switzerland participates in all these groups.

Swiss economic development cooperation

The Swiss economic development cooperation programme in Egypt has been developed over a period of 30 years. The financing of basic infrastructure through mixed financing lines amounting to a total of CHF 330 million since 1979 has been the main pillar of this cooperation. Over the past decade, priority has been given to projects in the health sector. The last mixed credit projects are expected to be completed by 2011. Smaller programmes in the domain of trade promotion have also been supported. In addition, a partial cancellation (CHF 150 million) of the bilateral debt was granted in 1995, leading to the establishment of the Egyptian-Swiss Development Fund (ESDF) endowed with local counterpart funds equivalent to CHF 90 million. After the Gulf War, additional bilateral assistance was provided including the rescheduling and reduction of the bilateral debt with a contribution of CHF 30 million to the establishment of a Social Fund and targeted technical assistance.

Parallel to the conclusion of the Free-Trade Agreement between Egypt and EFTA in 2007, a Memorandum of Understanding (MoU) for Strengthening Economic Development Cooperation between the Government of the Arab Republic of Egypt and the Government of the Swiss Confederation was signed, aimed at facilitating the implementation of the Free Trade Agreement and enabling Egypt to better benefit from trade liberalisation. This MoU laid the basis for future Swiss economic development cooperation in Egypt, the details of which are now being set out in the present strategy. The focus areas described in the MoU are as follows: i) infrastructure financing, ii) private investment promotion, iii) trade and clean technology cooperation and iv) social development and environment. Many commitments mentioned in the MoU have already been fulfilled, as activities were started before signature of the MoU. The main completed activities are: Measures aiming at increasing the competitiveness of Egyptian enterprises and adapting them to the quality and environmental standards prevailing in the export markets. The promotion of more eco-efficiency in industrial production and the adoption of international exports standards. Measures in the domains of social development and environment by ESDF, which will be closed by December 2009. It should be noted that the fund was already established in 1995 and is mentioned in the MoU mainly for the sake of completeness. Grants foreseen in the MoU for new infrastructure have not yet been allocated however and are integrated in this strategy. In 2008, a bilateral Steering Committee was constituted in order to monitor the implementation of the MoU and to consult on the future cooperation strategy of Switzerland in Egypt. This Steering Committee, composed of Egyptian (Ministry of International Cooperation) and Swiss officials (Swiss Embassy / SECO), meets twice a year.

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3 Conclusions and challenges

Egypt is a key political and economic player in Africa attracting successfully large investment and development assistance programmes from all over the world. However, Egypt is still confronted with serious environmental challenges and social disparities, and still receives foreign aid. With decades of successful trade and development relationships with Egypt, Switzerland can capitalize on a longstanding friendship and lessons learned from past experiences. Against this background, SECO will focus its assistance in the following fields of action: Maintaining a high economic growth rate in order to absorb new entrants to the labour market and keep unemployment and poverty under control: The efforts undertaken in the improvement of the business environment, strengthening of the financial sector and facilitation of trade, which have resulted in a 7% annual growth rate over the past three years need to be actively continued. These measures will also contribute to enhancing Egypts international competitiveness. Investments in adequate (environmental) infrastructure, resulting in an improved accessibility to services and enhanced environmental conditions, particularly in the densely settled areas of the Nile valley and the delta: The management of waste remains of paramount importance; particularly for toxic waste (industrial, medical, chemical), since there is a great shortfall of adequate treatment capacity. The Government of Egypt also wishes to make increasing use of the available renewable energy resources (wind, solar, biomass) in order to reduce its CO2 emissions and the high level air pollution. In spite of investments made, more needs to be done to prevent the further deterioration of the water quality, impacting health, agriculture and quality of life. There are water shortages due to the growing population, urbanisation, the expansion of agriculture to former desert areas, insufficiently treated industrial and domestic discharges, limited sanitation coverage in rural areas and heavily polluted drainage canals. The deterioration of the environment is a serious limitation for economic growth: the harm to the economy due to poor water quality alone is estimated at 1.8% of GDP. Despite notable improvements in the indicators of overall fiscal deficit and public debt, the Government of Egypt still faces a number of macroeconomic challenges such as large subsidies, inflation, large domestic debt with low average maturity and the reform of treasury management, which need to be addressed in order not to negatively affect the sustainability of the economic growth and Egypts ability to finance investment projects needed for development.

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The following principles shall be applied in the implementation of the strategy: SECO remains a committed partner for in-country implementation of the Paris Principles on Harmonisation and Alignment and will actively participate in the harmonized donor dialogue and seek co-financing opportunities to pool resources, develop a targeted policy dialogue with the Government and reduce the administrative burden for recipients Give high priority to the capacity building needs Favour a niche approach within the fields of SECOs core competencies, focusing on projects or activities with strong innovation and a high demonstration effect Wherever possible, create synergies between different SECO programmes Implement results-based project management and incorporate clearly defined performance indicators Reinforce and maintain the visibility of the SECO cooperation programme Achieve a better balance between the State and the private sector through the development of the private sector Financing of projects is demand driven and based on single project proposals of the Egyptian Government Given that SECO will carry out simultaneously global and bilateral programmes, it will closely monitor global and regional initiatives relevant to Egypt

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4 Future SECO economic cooperation: Objectives

SECO based the following strategic objectives to respond to Egypts challenges and priorities on the 6th Five-Year Plan of the Egyptian Government and on the MoU for Strengthening Economic Development Cooperation, but also on consultations with the Ministry of International Cooperation and on strategies of like-minded donors.

Overall SECO objective for Egypt To support Egypt in its objectives of achieving and maintaining a high and sustainable GDP growth and economy, of improving its international competitiveness and of reducing its poverty. Objectives* a. To contribute to the improvement of the basis for sustainable economic development and growth through the support for basic, in particular environmental, infrastructure Contribution to the expected overall outcome** Reliability and cost-effectiveness of services as well as the quality of infrastructure is improved Regulatory authorities are strengthened and lead over time to a better provision of basic infrastructure services Compliance with trade-related standards is improved as evidenced by trade policy reviews (e.g. WTO) Exports and imports of goods and services as % of GDP increase and export base is diversified Financial sector soundness is improved as evidenced by soundness indicators and sector wide assessments Debt is consolidated as a prerequisite for continued growth performance Public Financial Management systems are systematically improved

b. To promote international competitiveness and resilience to external shocks in view of Egypts increasing internationalisation

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Objectives* c. To promote employment by strengthening the private sector, in particular by promoting SMEs

Contribution to the expected overall outcome** Improving the business environment as evidenced by the World Bank Doing Business Ranking and the Global Competitiveness Index Financial markets gain in depth as evidenced by financial sector deepness indicators Unemployment and poverty are reduced

* **

SECOs efforts are guided by these main objectives. Additional activities are possible on a selective basis, as long as they are in line with the countrys needs and the economic and trade policy measures. These are generic objectives to which SECO programmes aim to contribute and which set guiding principles for programme activities. Achieving these depends on a variety of factors, not all of which can be directly influenced by SECO (e.g. decisions of partner governments, economic conditions, etc.). In order to measure our contribution, specific indicators for SECO programmes will be formulated in relation to these objectives.

SECOs transversal theme of economic governance will run through all dimensions, as well as strengthening corporate governance and corporate social responsibility. The second SECO transversal theme of climate change, energy and the environment is central to the infrastructure development, trade promotion and private-sector development programmes. Taking into account these themes is essential to achieve the Egyptian objectives of sustainable growth and the integration of the country into the world economy.

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5 Future SECO economic cooperation: Measures and implementation

The seventh framework credit (20082012) defines an amount of CHF 400 million for economic cooperation activities in the seven priority countries including Egypt. The allocation to individual countries, programmes and projects will depend on the identification of suitable transactions, the absorption capacity as well as the efficiency and effectiveness of the cooperation with the relevant partners in each priority country.

a. To contribute to improvement of the basis for sustainable economic development and growth through support for basic, in particular environmental infrastructure
Means: SECOs infrastructure programme follows three axes of intervention: i) the financing of investments for advanced environmental technology; ii) the provision of technical assistance for institutional and capacity building, incl. private sector participation; iii) the contribution to policy dialogue in order to improve the quality of public infrastructure and achieve ecological sustainability. Challenge: A key challenge for the SECO infrastructure programme in Egypt are other donors carrying out infrastructure projects in SECOs sectors of interest with substantially higher budgets. This requires a good coordination between the various donors and the relevant Egyptian authorities, as well as economic transparency in the projects. Proposed measures: Contribute with technology and know-how transfer to improvement of the infrastructure with effect on the environment and the climate. Possible sectors of activities: water supply, wastewater treatment, waste management (particularly solid and liquid toxic waste) and renewable energy. Contribute to a better corporate governance in the management of investment projects and the operation and maintenance of public infrastructure. Contribute to the policy dialogue on the provision of infrastructure jointly with other donors.

4 Colombia, Egypt, Ghana, Indonesia, Peru, South Africa, Vietnam

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b. To promote Egypts international competitiveness and resilience to external shocks in view of its increasing internationalisation
Means: SECO provides technical assistance to trade and support to export quality control and standards, as well as support to productivity, sustainability and energy efficiency programmes. SECO also contributes to the reduction and mitigation of macroeconomic and financial stability risks related to Egypts integration into the global economy and to strengthening the economys ability to withstand shocks. Challenges: Generally, the sustainability of capacity development programmes in Egypt, especially in the private sector, is challenging. SECO has also limited resources to implement bilateral projects and participate actively in the policy dialogue. In addition, there are also several existing programmes in Egypt already supporting export activities by SMEs. Proposed measures: Capacity building in the area of the protection of intellectual property rights (IPR) Reduction of trade barriers through support of customs reforms and quality control, standards and certification Contribute to clean technology, environmental and energy efficiency programmes Reduction of macroeconomic risks through capacity building in internal debt management, supporting public financial management and financial sector reforms.

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c. To promote employment by strengthening the private sector, in particular by promoting SMEs

Means: SECO provides technical assistance to facilitate access to finance and management support for private companies, while making more use of the private sector as a development agent, as well as achieving better leverage with regard to the role of the public sector in the economy. SECO also contributes to the improvement of a more business enabling environment. Challenges: SECO has no experience in providing support to micro-enterprises and should focus on the SME segment. Furthermore, credit lines for SMEs are already made available by other large donors such as the EU and the Egyptian Social Fund for Development and will thus not be part of SECOs programme.

Proposed measures: Support long-term financing of private equity funds that invest in private companies with assistance of the Swiss Investment Fund for Emerging Markets (SIFEM) Support corporate governance structures in the private sector Improvement of management skills within SMEs Support simplification of business start-up procedures Support facilitation of dispute resolution

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6 Local partners and programme management issues

In Berne the SECO cooperation (WE) sections directly involved in the implementation of the cooperation programme are: (i) Macroeconomic Support (WEMU); (ii) Private Sector Development (WEIF); (iii) Trade Promotion (WEHU) (iv) Infrastructure Financing (WEIN). General coordination is assumed by a country coordinator. (Contact: State Secretariat for Economic Affairs SECO, Economic Cooperation and Development, Country Coordinator Egypt, Effingerstrasse 1, 3003 Berne, Switzerland, Tel. +41 (0)31 324 09 10, info@seco-cooperation.ch, www.seco-cooperation.admin.ch.) The Swiss Embassy in Cairo is SECOs direct Swiss partner in Egypt. It ensures the local coordination and management of the economic cooperation and development programme. The Embassy also maintains regular contacts with the local authorities, the working partners and coordinates with the other donors in Egypt. Contact: 10, Abdel Khalek Sarwat Street, 11511 Cairo, Egypt, Tel. +20 (2) 257 58284, cai.vertretung@eda.admin.ch, www.eda.admin.ch/cairo. Monitoring at the programme level is supported by a bi-annual bilateral Steering Committee with representatives of the Ministry of International Cooperation and of the Swiss Embassy/SECO. Monitoring at the project level is followed by the Swiss Embassy and SECO with the support of Swiss consultants.

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Main international partners for SECO in Egypt WB IFC EU KfW GTZ AfDB PPIAF SIFEM UNIDO OSEC World Bank International Finance Corporation Delegation of the European Commission to Egypt KfW Entwicklungsbank Gesellschaft fr technische Zusammenarbeit African Development Bank Public-Private Infrastructure Advisory facility Swiss Investment Fund for Emerging Markets (Bern) UN Industrial Development Organisation Business Network Switzerland (Zurich) WE WEIF WE WEIN WEIN WE WEIN WEIF WEHU WEHU

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Annex: Country indicators

The following data from the respective years or most recent is based on statistics from the World Bank and other international bodies, including the World Economic Forum, the ILO and the UNDP.

Sustainable Growth GNI per capita, PPP (current international USD) Real GDP growth (annual %) Global Competitiveness Index (Rank) External Debt (in % GDP) Gross government debt (in % GDP) Gross capital expenditure (in % GDP) Inflation, GDP Deflator (annual %) Domestic credit provided by banking sector (in % GDP) Interest rate spread5

2008 5,400 7 77 23 29.2 21 13 18.7 5.7

2009

2010

81

Strengthened Integration into the World Economy Exports of goods and services (% of GDP) Imports of goods and services (% of GDP) FDI (net inflows, BoP, current USD)

2008 31 39 11.58 bn

2009

2010

5 Lending rate minus deposit rate (%).

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Reduction of Disparities Gini index6 Unemployment rate (%) Poverty headcount ratio at national poverty line (% of population) Improved water source, urban (% of population with access) Improved sanitation facilities, urban (% of population) Electrification rate (%)

2008 34.4 10.6 53 99 85 98

2009

2010

Improvement of Economic Governance Ease of doing Business (Rank) Trade Across Borders (Rank) Governance indicators of the World Bank A) Government Effectiveness (%) B) Regulatory Quality (%) C) Rule of Law (%) D) Control of Corruption (%)
7

2008 114 24

2009

2010

39 43 52 36

Improvement of Environmental Conditions CO2 emissions (metric tons/per Capita) Share of renewable energy of TPES (%) GDP per unit of energy use8

2008 2 4.2 4.9

2009

2010

6 A value of 0 represents absolute equality, and a value of 100 absolute inequality. 7 Percentile rank indicates the percentage of countries worldwide that rate below the selected country. Higher values indicate better governance ratings. 8 The ratio of GDP (in 2000 PPP USD) to commercial energy use, measured in kilograms of oil equivalent. This indicator provides a measure of energy efficiency by showing comparable and consistent estimates of real GDP across countries relative to physical inputs (units of energy use).

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Notes

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Contact State Secretariat for Economic Affairs SECO Economic Cooperation and Development Country Coordinator Egypt Effingerstrasse 1 CH-3003 Bern info@seco-cooperation.ch Phone + 41 (0)31 324 09 10 www.seco-cooperation.ch