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Country Profile 2007

Egypt This Country Profile is a reference work, analysing the country's history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit's Country Reports analyse current trends and provide a two-year forecast.

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ISSN 0269-5227

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Country Profile 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007

Comparative economic indicators, 2006

Gross domestic product(US$ bn)

Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product(% change, year on year)


Consumer prices(% change, year on year)


Gross domestic product per head(US$ '000)


0 50 100 150 200 250 300 350

Jordan

Bahrain

Yemen

Lebanon

Syria

Tunisia

Sudan

Oman

Iraq

Libya

Qatar

Morocco

Kuwait

Egypt

Algeria

Israel

United Arab Emirates

Iran

Saudi Arabia

0.0 5.0 10.0 15.0 20.0 25.0

Bahrain

Israel

Saudi Arabia

Algeria

Libya

Kuwait

Oman

Morocco

Lebanon

Tunisia

Jordan

Sudan

Egypt

Syria

Qatar

Iran


Yemen

Iraq

-4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0

Lebanon

Iraq

Yemen

Algeria

Syria

Saudi Arabia

Iran

Israel

Tunisia

Libya

Oman

Jordan

Egypt

Qatar

Bahrain


Sudan

Morocco

Kuwait

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0

Yemen

Sudan

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Iraq

Egypt

Morocco

Jordan

Iran

Tunisia

Algeria

Lebanon

Libya

Oman

Saudi Arabia

Israel

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53.2

61.9

Egypt 1

© The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

Contents

Egypt

3 Basic data

4 Politics 4 Political background 5 Recent political developments 7 Constitution, institutions and administration 9 Political forces 13 International relations and defence

17 Resources and infrastructure 17 Population 18 Education 19 Health 19 Natural resources and the environment 20 Transport, communications and the Internet 24 Energy provision

25 The economy 25 Economic structure 26 Economic policy 30 Economic performance 32 Regional trends

32 Economic sectors 32 Agriculture 34 Mining and semi-processing 36 Manufacturing 38 Construction 39 Financial services 42 Other services

43 The external sector 43 Trade in goods 45 Invisibles and the current account 45 Capital flows and foreign debt 47 Foreign reserves and the exchange rate

49 Regional overview 49 Membership of organisations

51 Appendices 51 Sources of information 53 Reference tables 53 Population 53 Population, labour force and unemployment 53 Suez Canal traffic 53 Electricity generation

2 Egypt


54 Nominal gross domestic product by expenditure 54 Gross domestic product by sector 55 Real gross domestic product by expenditure 55 Gross domestic product 55 Money supply 56 Interest rates 56 Prices and earnings 56 Industrial production 56 Hydrocarbons production 57 Principal stockmarket indicators 57 Tourist arrivals by region of origin 57 Major agricultural imports 58 Main composition of trade 58 Main trading partners 59 Balance of payments, IMF series 59 External debt, World Bank series 60 Foreign reserves 60 Exchange rates

Egypt 3


Egypt

Basic data

997,739 sq km, of which only 5% is inhabited and cultivated territory

71.35m (January 2007, excludes Egyptian residents abroad)

Population (December 2006 estimates)

Greater Cairo (capital; Cairo, Giza & Kalyoubia governorates) 18,296,214 Alexandria 4,110,015 Port Said 570,768 Suez 510,935

Hot and dry, with mild winter

Hottest month, July, 21-36°C (average daily maximum and minimum); coldest month, January, 8-18°C; driest months, July, August, 0 mm average rainfall; wettest month, December, 5 mm average rainfall

Arabic

Metric system. Local measures are also used, especially for land area: feddan=0.42 ha or 1.04 acres; cereal crops: ardeb=198 litres or 5.6 US bushels; 8 ardebs=1 dariba; cotton: Egyptian bale=720 lb (325.5 kg), qantar (metric)=50 kg (replacing the traditional qantar equivalent to 44.93 kg)

Egyptian pound (E£)=100 piastres. Average exchange rate in 2006: E£5.73:US$1. Exchange rate on August 21st 2007: E£5.68:US$1

2 hours ahead of GMT (summer time, 3 hours ahead)

July 23rd 2007 (Revolution Day); September 13th (Beginning of Ramadan); October 6th (Armed Forces Day); October 23rd (Suez Day); October 13th (Eid al-Fitr); December 23rd (Victory Day); December 20th (Eid al-Adha!Feast of the Sacrifice); January 1st 2008 (New Year"s Day); January 10th (Islamic New Year); March 20th (birthday of the Prophet Mohammed); April 8th (Shem al-Nessim); April 25th (Sinai Liberation Day); May 1st (Labour Day); June 18th (Liberation Day)

Land area

Population

Climate

Weather in Cairo (altitude 116 metres)

Measures

Currency

Time

Language

Public holidays 2007-08

Main towns

4 Egypt


Politics

Egypt is an Arab republic with limited democratic characteristics, headed by the president, Hosni Mubarak, who was elected to his fifth six-year term in the country"s first multi-candidate election in September 2005. The government, led by the prime minister, Ahmed Nazif, is supported in parliament by the National Democratic Party (NDP), which was returned with a reduced but still substantial majority in the November-December 2005 election.

Political background

Egypt"s present approximate borders were established over 5,000 years ago, with the emergence of the pharaonic civilisation in the Nile valley and delta. The country was later ruled in turn by the Assyrian, Persian, Greek, Roman and Byzantine empires. With the advance of Islam in the seventh century AD, Egypt was conquered by Arab armies, unopposed by the country"s Coptic Christians, and gradually became Arabic-speaking and largely Islamic. From the 16th century, Egypt was governed by the Ottoman empire, and three hundred years later, in the wake of the Napoleonic wars, an Albanian officer in the Ottoman army took power. This ruler, Mohammed Ali, is widely regarded as the founder of modern Egypt. In the late 19th century, however, his descendants submitted to increasing British influence, and the country became a protectorate of the British Empire in 1914. Nominal independence was secured in 1922, but Britain retained a substantial military presence in Egypt to defend the Suez Canal.

In July 1952, the king was overthrown in a military coup by a conspiracy of "Free Officers", and the country became a republic under the presidency of General Mohammed Naguib, who was replaced in 1954 by Colonel Gamal Abdel Nasser. Having negotiated a British withdrawal, Mr Nasser introduced an authoritarian and centralised system of government that transformed the country through policies of land redistribution, industrialisation and state ownership. His nationalisation of the Suez Canal Company in 1956 led to a war with Britain, France and Israel that cemented Egypt"s position as the leader of the Arab world. However, Mr Nasser"s increasingly radical Arab nationalist foreign policy culminated in a second war against Israel in June 1967, which resulted in Egypt losing the Gaza Strip and Sinai.

Mr Nasser was succeeded on his death in 1970 by his vice-president and fellow revolutionary, Anwar Sadat. Having failed to take back Sinai by force in the October 1973 war against Israel, Mr Sadat instead regained the territory by negotiating a US-brokered bilateral peace agreement with Israel, signed in 1979. As a result, Egypt was expelled from the Arab League. Despite Mr Sadat"s implementation of a more liberal political and economic regime, the peace also provoked substantial domestic discontent. Much of the unrest was inspired by the Islamic revival that had spread after the 1979 Iranian revolution. In October 1981 Mr Sadat was assassinated by members of an Egyptian radical Islamist group, Islamic Jihad. He was succeeded by his vice-president, a former air force officer, Mr Mubarak.

The July Revolution

State origins

The Sadat era

Egypt 5


Mr Mubarak made it a priority to cement ties with the US, the provider of almost US$2bn a year in military and civilian aid. Although he remained committed to the peace treaty with Israel, he also moved to end Egypt"s isolation within the Arab world. The country finally rejoined the Arab League in 1989, playing an important role in forging an Arab coalition to counter Iraq"s invasion of Kuwait in August 1990. However, these policies contributed to the growth of a violent campaign by domestic Islamic militant groups in the 1990s. Between March 1992 and March 1999 more than 1,200 people were killed as the government concentrated its energy on crushing this militancy. The insurgency did force the government to pay greater attention to some of the socioeconomic causes of discontent: poverty, unemployment, social injustice, and the rigid and underfunded education system. Equally, though, it led the government to pander to the conservative religious trend in its attempt to ward off the threat of militant Islam, raising concerns over the prospects for the traditionally tolerant and secular nature of Egyptian society. Ultimately the state remained determined to retain tight political control and was largely intolerant of meaningful public participation in political life.

Recent political developments

In the early part of this decade domestic and international pressures rose sharply. Living standards were severely damaged by a protracted economic slump, which was blamed on poor governance!particularly the authorities" inability to mitigate a 45% fall in the value of the Egyptian pound between the start of 2000 and mid-2003. The downturn served to focus attention on deep economic disparities among the Egyptian population. Popular protests against Israeli incursions into the West Bank in 2002, and then against the US-led war in Iraq in 2003, provided a forum for the manifestation of anger at domestic conditions, with some criticism levelled directly against the president and his family for the first time. Simultaneously, the attacks of September 11th 2001, in which Egyptian nationals played key roles, led to unaccustomed US scrutiny of the political situation in Egypt, resulting in a reconsideration of the existing policy of largely uncritical support for Mr Mubarak by the US administration. Buoyed by the early success of the military campaign in Iraq, US officials stepped up overt pressure on the Egyptian regime for political liberalisation. However, with the situation deteriorating in Iraq, the US government has become more cautious about pressing for rapid democratisation. Relations have not improved, however. In early 2006 the US halted trade negotiations in protest over the imprisonment of the leader of the al-Ghad (Tomorrow) party, Ayman Nour, who had finished second in the 2005 presidential election.

Important recent events

September 2002

The eighth congress of the ruling National Democratic Party (NDP) sees the first reform of the party hierarchy since its establishment, when the president"s younger son, Gamal Mubarak, becomes head of the influential Policies Committee.

Renewed authoritarianism under Mr Mubarak

Growing pressures for liberalisation

6 Egypt


March 2003

Criticism of the government and the president, Hosni Mubarak, during protests against the US-led invasion of Iraq breaks taboos.

July 2004

Mr Mubarak appoints a new prime minister, Ahmed Nazif, to head a cabinet led by economic liberals. Hopes are raised that the government may begin to address the country"s long-standing economic difficulties.

February 2005

Mr Mubarak announces Egypt"s first multi-candidate presidential elections and a wider process of political liberalisation.

September 2005

Mr Mubarak wins the presidential election with an overwhelming 89% of the vote, securing another six-year term in office. Independent observers said that malpractice inflated the scale of the victory, but did not dispute the outcome.

December 2005

The outlawed Muslim Brotherhood, permitted to campaign openly for the first time, wins an unprecedented 20% of seats in a parliamentary election marred by violence. Nevertheless, the NDP retains a substantial majority of around 70%.

April 2006

An alleged terrorist cell of Sinai Bedouin launches bomb attacks in the Red Sea resort of Dahab!the third such assault in 18 months on a tourism spot in the area.

March 2007

The largest change to the Egyptian constitution since its inception is made with the passage of 34 amendments. The amendments make permanent the emergency laws that have been in place since the assassination of Anwar Sadat in 1981, and remove references to Egypt being a "socialist" state. Human rights groups criticise the amendments for rolling back democracy.

In February 2005 the president announced that Egypt would switch to multi-candidate presidential elections and embrace wider political reform. Under the previous system, a presidential candidate stood alone in a popular referendum following his nomination by parliament, habitually controlled by the ruling NDP, in effect ensuring the re-election of the incumbent until his death. However, the shortcomings of the reform process soon became clear. The new rules governing candidacy for the presidential elections turned out to be highly prohibitive. As a result, many Egyptians saw the change as an attempt to ensure the succession of Gamal Mubarak, the president"s second son, by constitutionally correct means. In the September 2005 election, Mr Mubarak won 89% of the vote, a mandate that independent observers said had been inflated by malpractice!although none argued that irregularities had altered the outcome. The turnout of a mere 23% signalled a sense of powerlessness among the electorate over its ability to shape political developments.

The parliamentary election held in November-December 2005 saw a similar mixture of liberalisation and repression. Candidates had greater licence to

2005 elections shake up the political scene

Egypt 7


criticise the regime and even Mr Mubarak himself, and the outlawed Muslim Brotherhood (the only opposition movement with substantial popular support) was permitted to campaign openly for the first time under its controversial slogan "Islam is the solution". However, the election itself was marred by increasingly severe outbreaks of violence in and around polling stations in certain districts, as government supporters attempted to close them off in response to the Brotherhood"s better-than-expected performance in the early rounds. The final results showed that the NDP, with 311 seats, had retained an ample, albeit reduced, majority of over two-thirds (although only by bringing back into the fold candidates who had run as independents); the Brotherhood had multiplied its parliamentary seats by a factor of five, to 88; and the secular opposition had collapsed.

Since the elections, the Egyptian regime has stepped up pressure both on the Brotherhood and on critical civil society groups. Moreover, in March 2007 the public approved a series of 34 constitutional amendments in a referendum, which the government called at only one week"s notice, leaving the opposition little time to prepare a campaign. Among other things, the amendments made permanent the "temporary" emergency laws that have been in place since the assassination of Mr Sadat in 1981. They also removed judicial oversight of elections, substantially increasing the risk of election-rigging in the future. Importantly, the amendments clarify the rules that govern the selection of candidates for parliamentary and presidential elections, introducing the obligation to belong to a party. This means that independent candidates (for example, those belonging to the Muslim Brotherhood) will no longer be able to stand, as parties based on religion are banned. Following the passage of the amendments, the government stepped up its clampdown on dissidents. This was evident in the run-up to the election to the Majlis al-Shura (Consultative Council, or upper house of parliament) in June, in which the government restricted public demonstrations, suppressed dissenting voices such as bloggers and detained hundreds of Muslim Brothers.

Constitution, institutions and administration

The 1971 constitution (amended in 1980, 2005 and 2007) provides for the separation of powers between the executive, the legislature and the judiciary. Islamic law is officially the principal source of legislation, but the Napoleonic Code is a more significant progenitor. The president is head of state and supreme commander of the armed forces. His executive authority includes the right to veto legislation, and to appoint the prime minister, ministers, provincial governors, armed forces and security heads, major religious figures and high court judges. Following a constitutional amendment in 2005, the president was for the first time elected by universal suffrage in September 2005. The constitution was further amended in March 2007 and now specifies that the nomination of a presidential candidate must have the support of at least 65 members of the Majlis al-Shaab (People"s Assembly, or lower house), at least 25 members of the Consultative Council and at least ten members of municipal councils from at least 14 governorates. The candidate must also belong to a legal political party that has been in existence for a minimum of five years and that

The presidency

8 Egypt


holds at least 3% of the seats in parliament (the Consultative Council or the People"s Assembly). Following a May 2007 amendment to the constitution, to achieve legal status a political party must have contested an election and have won at least one seat in either the People"s Assembly or the Consultative Council. The amended constitution also prohibits political parties based on religion, gender or ethnicity. By specifying that political parties must be secular, the amended constitution in effect precludes members of the Muslim Brotherhood from running for president.

Legislative power is exercised by the People"s Assembly, which comprises 444 directly elected members and ten presidential appointees. Presidential decrees also have the force of law. The president may dissolve the Assembly only if he gains support for such a course in a referendum, and a minister can be required to resign if the Assembly passes a vote of no confidence in him. Should that happen against the president"s wishes, the matter no longer has to be put to a referendum, following the amendments in March 2007. Following the November-December 2005 parliamentary election, the ruling NDP retained its two-thirds majority, but only after members who had stood as independents rejoined the party. Combined with the increased number of Muslim Brotherhood members, this has caused the Assembly to become somewhat more outspoken and activist, although its ability to change the government or to amend legislation remains severely limited. There is also a 264-member Consultative Council, which has limited formal powers and is dominated by the NDP. Members sit for six years; one-third are appointed by the president, and half of those remaining face election every three years. The most recent election to the Consultative Council was held in July 2007, when the NDP won almost all of the seats.

Egypt"s judiciary is relatively independent. However, the government tends to circumvent rulings not to its liking, often by employing the emergency laws in force since Mr Sadat"s 1981 assassination, which give the police wide powers of search and arrest. These powers have been enshrined in the amended constitution, which explicitly permits the police to take any necessary measures to "prevent terror". Judicial procedures can be lengthy, and "fast-track" military courts are often used to try political dissidents, especially Islamists. Many judges are actively seeking greater independence from the executive, and their professional association, the Judges" Club, has been at the forefront of calls for political reform. Under the amended constitution, judges no longer act as election monitors, at a time when they have caused a stir by speaking out against election fraud.

Important decisions are made by the president, in consultation with ministers and advisers. The prime minister, although formally accountable to parliament, implements the president"s policies, through his cabinet and Egypt"s all-pervasive bureaucracy. The main ministries are defence, foreign affairs, information, economy and the interior. The military establishment maintains its historical importance as the founding power of the regime, although its overt political influence is much less than in the 1950s and 1060s.

The executive

The judiciary

The People's Assembly and Consultative Council

Egypt 9


Political forces

The NDP has been in power since it was established by Mr Sadat in 1978. It holds large majorities in both the People"s Assembly and the Consultative Council, and in effect controls local government, the mass media, organised labour and the massive public sector. Its historical dominance advantages the NDP in elections: its candidates tend to be supported by a powerful and some-times unscrupulous local party machinery, as well as by personal wealth and connections. They may also be seen by voters as the representatives best suited to support local interests within the central government. As a result, despite the failings of the NDP as a party, which sometimes cause it to be seen as remote and unrepresentative, voters have often been loyal to individual candidates.

Beset by allegations of cronyism and incompetence, the NDP has recently been overhauled by the president"s son, Gamal Mubarak, who in February 2006 became assistant secretary-general in addition to his influential role at the head of the party"s Policies Committee. The younger Mr Mubarak has attempted to introduce greater discipline and coherence, as well as bringing younger, more in-touch figures to prominence at a local level. A number of his economically liberal allies within the NDP currently hold key cabinet positions.

Election results

November 1995

Majlis al-Shaab (People"s Assembly, or lower house of parliament): National Democratic Party (NDP), 417 seats, including 99 NDP members who stood as independents; New Wafd Party, six seats; National Progressive Unionist Party (Tagammu), five seats; Democratic Arab Nasserist Party, two seats; Socialist Liberal Party, one seat; independents, 13 seats, including one Muslim Brother.

October 1999

Presidential referendum: Hosni Mubarak received 96.3% of the vote.

November 2000

People"s Assembly: NDP, 388 seats, including 213 who stood as independents; Wafd, seven seats; Tagammu, two seats; independents, 37 seats, including 17 Muslim Brothers; two disputed seats were later won by NDP candidates in by-elections.

September 2005

Presidential election: Mr Mubarak received 89% of the vote; Ayman Nour, leader of the al-Ghad (Tomorrow) party, was second with 7.6%; the Wafd leader, Noaman Gomaa, took 2.9%

November 2005

People"s Assembly: NDP, 311 seats, including 166 who stood as independents; Wafd, six seats; Tagammu, six seats; Nasserists, three seats; Liberal Party, one seat; independents, 112 seats, including 88 Muslim Brothers; 12 seats remain undecided.

The ruling party

10 Egypt


June 2007

Majlis al-Shura (Consultative Council, or upper house): NDP, 84 of the 88 elected seats, Tagammu, one seat; independents, three seats. Elections to the Consultative Council take place every three years.

The 21 official opposition parties pose little challenge to the NDP, and only three currently have parliamentary representation. The main legal opposition party, with six seats in the People"s Assembly, is the New Wafd, which has evolved into a party of professionals championing the advancement of the private sector and political liberalisation. Two seats are held by the left-wing National Progressive Unionist Party (Tagammu), which opposes rapprochement with Israel, advocates strengthening the public sector and has attacked privatisation. The Democratic Arab Nasserist Party, a more radical version of Tagammu, lost its only seat in the 2005 parliamentary election. The al-Ghad party, newly licensed in 2004 and largely made up of dissidents from Wafd, took one seat!widely seen as a disappointing result, given the fact that its then leader, Mr Nour, had come second to Mr Mubarak in the 2005 presidential election, winning 7.6% of the vote.

The results of the 2005 parliamentary election underlined the fact that the secular opposition has been largely ineffective in pressing for greater political plurality. Would-be parties must obtain licences (which are rarely granted) from the government"s highly conservative Political Parties Committee. The most recent party to obtain a licence was the Democratic Front Party, made up of former NDP members, which was established in late May 2007. Recent attempts by existing parties to co-ordinate their efforts more closely have failed. Following a poor performance in the 2005 parliamentary election, the legal opposition is now in deep disarray, paralysed by various leadership disputes. The informal opposition, particularly the kifaya (enough) protest movement, has been more successful in holding pro-reform demonstrations and widening the parameters of political debate. Even so, it remains far from presenting any fundamental challenge to the status quo and, as a movement, has in fact largely petered out since the 2005 parliamentary election.

The main challenge to the regime is therefore presented by the Muslim Brotherhood, which took 20% of seats in the 2005 parliamentary election, making it by far the most important opposition force, although it did not gain a single seat in the 2007 Consultative Council election. This was largely because of strict government control of the electoral process. The Brotherhood was founded by Hassan al-Banna in 1928, making it one of the region"s oldest Islamist movements. Its offshoots include the Hamas movement in the Palestinian territories and the powerful National Islamic Front in Sudan. The Muslim Brotherhood has been illegal since its dissolution by Mr Nasser in 1954, as the constitution bans political parties based on religion or race. Its strength is difficult to quantify but it is easily the best supported of the opposition movements, boasting a national reach.

The Brotherhood seeks to work within the existing political system to make Egypt a strict Islamic state based on sharia (Islamic law). The degree of tolerance accorded to the movement diminished in the 1990s, when the

Legal opposition groups

The Muslim Brotherhood

Egypt 11


government moved against it, accusing it of being, in effect, the political wing of militant Islamist groups. However, it was allowed to campaign relatively openly in the 2005 election, organising large demonstrations across the country and proclaiming its controversial slogan: "Islam is the solution." Following the Brotherhood"s remarkable success in the 2005 election to the People"s Assembly, the government increased its crackdown on the movement in 2006 and 2007, with a series of arrests of activists and leaders. Currently 40 senior members of the group are facing trial on financial fraud charges, a move that has been criticised by human rights activists and judges because the trial will be held in a military court, essentially guaranteeing an expeditious, guilty verdict. Despite the movement"s 88 vocal MPs in the People"s Assembly and its claim to have long since rejected violence, the Brotherhood is therefore unlikely to win the legal recognition that would ultimately enable it to put forward a presidential candidate.

Following the government"s crushing of a major insurgency in the 1990s aimed at overthrowing the regime and instituting an Islamic state, Egypt"s two major militant Islamist groups, Gamaat Islamiya and al-Jihad, announced a ceasefire at the turn of the millennium. Since then, several of the most influential members have been sent to prison by the Egyptian authorities, despite the fact that many of the leading figures of the movements have publicly renounced violence. Many militants have been forced into exile, including in Afghanistan, and many current members of al-Qaida are thought to be Egyptian. A seven-year lull in militant Islamist violence inside Egypt was broken in October 2004, when 34 people were killed in simultaneous bomb attacks on tourist resorts in North Sinai, most devastatingly at Taba. These were followed by attacks at nearby Sharm al-Sheikh in July 2005, which killed 64 people, and a third set of bombings in the Sinai resort of Dahab in April 2006, which resulted in around 20 deaths. The government has attributed these attacks to "terror cells" of disaffected local Bedouin from North Sinai, which have crossborder links to Palestinian groups in Gaza. In April 2007, 35 people accused of having connections to al-Qaida were arrested by the Egyptian authorities. The supposed head of al-Qaida in Egypt, Khaled Mahmoud Ahmed, escaped to Gaza.

Main political figures

Hosni Mubarak

Egypt"s president has been the most important figure in formulating domestic, foreign and economic policy since he came to power in 1981. By returning the country to the centre of Arab affairs, he has greatly boosted Egypt"s standing abroad. A cautious politician who advocates only incremental change, Mr Mubarak has maintained stability by keeping political participation narrow throughout his rule. Some uncertainty persists over the succession to the 78-year-old president, as it is unclear whether, in the event of Mr Mubarak"s death, key power brokers would accept the results of direct presidential elections, mandated by a recent con-stitutional change.

Gamal Mubarak

The president"s second son, a former banker, has played an increasingly central role in the formation of domestic policy in the economic, social and (to a lesser degree)

Militant Islam

12 Egypt


political spheres. This has raised strong speculation that he is being groomed to succeed his father, despite the president ruling out a "hereditary transfer of power". Gamal Mubarak is a key figure within the National Democratic Party (NDP), associated with a group of relatively young economic liberals now controlling the cabinet through his position at the head of the party"s Policies Committee. Since the 2005 election, the younger Mr Mubarak"s public profile has risen further, given his new role as NDP assistant secretary-general.

Ahmed Nazif

Prime minister since July 2004, Mr Nazif is strongly associated with Egypt"s recent moves in the direction of economic liberalisation. Widely seen as one of Gamal Mubarak"s coterie of reformers, his prominence has been increased by the country"s recent striking economic successes. When it comes to making the key political decisions, however, he, like other regime members, remains firmly subordinate to the president.

Fathi Sorour

Second in protocol terms to the president, under the constitution the speaker of the People"s Assembly (parliament) would assume temporary power if the president died or were incapacitated. A shrewd lawyer and former education minister, Mr Sorour exercises a close control over the People"s Assembly (parliament), keeping its debates broadly in line with government policy!although his task has been made more difficult since 2005 by the increased number of opposition deputies.

Omar Suleiman

The highly able chief of general intelligence is one of the most powerful figures in the country, and is often sent by the president to resolve foreign policy problems. His political profile has grown of late, and he is considered a strong contender to succeed Mr Mubarak as president, particularly if a major crisis were to arise.

Mohammed Hussein Tantawi

A Mubarak loyalist, the defence minister is in the background politically. Reportedly in ill-health, he is deemed unlikely to seek to succeed the president, but his strong base of support in the military might enable him to play the role of kingmaker.

Mohammed Mahdi Akef

The supreme leader of the Muslim Brotherhood, Egypt"s strongest opposition group, Mr Akef is vocal in his criticism of the current regime. He spent 20 years in prison between 1954 and 1974 for kidnapping a member of the Free Officers that deposed King Farouq. Although he worked for a while for the Ministry of Reconstruction and was elected as an MP for Cairo in the late 1980s, he was court-martialled in 1999 for his position as head of the Brotherhood. He has avoided prosecution since then, despite government crackdowns on the group. Ideologically Mr Akef is one of the most influential figures in the country. He is thought to be close to Hamas, a Palestinian Islamist movement, which is an off-shoot of the Brotherhood.

The armed forces, although less prominent in political life under Mr Mubarak than under his predecessors, are still the ultimate arbiters of power and guarantors of the state. They have shown strong backing for the regime, crushing a mutiny by some 20,000 conscripts of the Central Security Forces in February 1986. During the militant Islamist campaign of the 1990s, the military

The armed forces

Egypt 13


also showed its willingness to take any steps necessary to preserve the status quo. Mr Mubarak, a former air force officer, has always been careful to ensure that the armed forces have retained their privileged position.

International relations and defence

Since the signing of the Camp David accords in 1979, Egypt"s most important international relationship has been with the US. Relations strengthened in the 1990s, as Egypt became a key US partner in the Arab world over issues such as the first Iraq war and Arab-Israeli peace negotiations. In the early part of this decade, however, the relationship came under strain as the US"s global "war on terror" led to unprecedented scrutiny of the nature of Mr Mubarak"s rule. This pressure eased somewhat after 2005, as the US drew back from its initial ambitions of promoting democracy across the region. Remnants of the old pressure resurfaced during a recent visit to Egypt in March 2007 by the US secretary of state, Condoleezza Rice. More recently, US diplomatic missions have included meetings with Muslim Brotherhood MPs, much to the dismay of the Egyptian government, whose policy of suppressing the Muslim Brotherhood has hitherto enjoyed strong support from the US government. As a result of the passing of several amendments to the constitution that curtail civil rights, the US Congress voted in June 2007 to withhold some US$200m in military aid until Egypt improves it human rights conditions, stops interfering with the judicial system and clamps down on weapons smuggling across the Gaza border. The Egyptian government has responded by saying that it will not accept interference in domestic matters, although it is likely to step up its control of the border with Gaza. Nevertheless, Egypt is now seeking to improve its ties with the US, and may make some concessions in order to secure the resumption of military aid. As a result of the frostier relations with the US, ties with the EU, Egypt"s largest trading partner, are gaining higher priority. A wide-ranging Association Agreement with the EU!aiming to strengthen political, social and economic links!came into effect in June 2004, after years of negotiations, and Egypt belongs to the EU"s Neighbourhood Area, an extension of the Euro-Med framework. Relations with China are also assuming greater importance, and Egypt expects the value of its exports to China to surpass that of its exports to the US within the next ten years.

Egypt"s status as the most populous Arab country, its historically close ties with the US, and Mr Mubarak"s seniority among Arab statesmen have enabled it to carve out a firm position as a power broker in the Arab world. Egypt"s role in the 1990-91 Gulf crisis substantially strengthened its ties with Gulf states, particularly Saudi Arabia. Earlier tensions with neighbouring Sudan and Libya have receded in recent years, and Egypt"s participation in the Common Market for Eastern and Southern Africa (Comesa) serves to highlight its push to revive neglected trade ties with Africa. A major focus of foreign policy is to open up new export markets, but the emphasis on upgrading relations with Africa also has another dimension: the Nile runs through nine other states, and the government is likely to have to make water agreements with all of them. Further afield, Egypt also has improved relations with both Turkey and Iran.

Close neighbours

Global powers

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Egypt"s relations with Israel tend to rise and fall according to developments in the Israeli-Palestinian peace process. Egypt withdrew its ambassador to Tel Aviv in November 2000 as a protest against what it saw as Israel"s excessive use of force against the second Palestinian intifada (uprising), cutting "all contacts" except diplomatic ties in April 2002. However, relations warmed somewhat following the death of Yasser Arafat (the Palestinian leader with whom the Israelis refused to negotiate) in 2004. In February 2005, Egypt hosted a summit at Sharm al-Sheikh between the newly elected Palestinian president, Mahmoud Abbas, and the then-Israeli prime minister, Ariel Sharon, where a series of confidence-building measures were agreed. The following month, Egypt resumed ambassadorial representation in Israel. In June 2006, a month after Ehud Olmert was elected prime minister of Israel, Egypt hosted a meeting between Mr Olmert and Mr Abbas. The Israeli prime minister also visited Egypt in January 2007. Following the election victory of Hamas in the January 2006 Palestinian election and the ensuing conflict between Hamas and Fatah, the party of the president, Egypt made several attempts to mediate between the two rival factions. Once Hamas gained control of Gaza in mid-June, however, Egypt quickly moved its embassy from Gaza to the West Bank and denounced the Hamas leadership. That said, Egypt renewed some contacts with Hamas, mindful of the fact that it could lose its position as a trusted mediator. Apart from wishing to secure a sustainable peace between Israel and the Palestinians, Egypt is also concerned that conflict could spill over from the Palestinian Territories into North Sinai. In late June, Egypt again hosted a summit between the Israeli prime minister and the Palestinian president, hoping to forge an agreement between the two sides to speed up the peace process.

Economic ties between Egypt and Israel were also strengthened: in December 2004 Egypt, Israel and the US signed an agreement for the establishment of seven Qualifying Industrial Zones (QIZs) in Egypt, allowing goods manufactured with at least 11.7% Israeli inputs to be exported duty-free to the US. In mid-2005, after seven years of on-off negotiations, an agreement was finally concluded for the sale of Egyptian natural gas to Israel. Nevertheless, Egypt remains deeply suspicious of its eastern neighbour, at both governmental and citizen level, and bilateral links continue to be placed under some strain by the lack of progress on a negotiated solution with the Palestinians.

Security risk

Egypt is a stable and generally safe country for foreign companies and visitors. Despite the often repressive methods employed by its leaders to retain control, there have been no coups, and the country has been governed by the same elite since the 1952 Free Officers" Revolution. Even the assassination of the president, Anwar Sadat, in 1981 did not precipitate instability, with the vice-president, Hosni Mubarak, succeeding in an orderly fashion. Aside from occasional manifestations of popular anger, almost invariably over threats to living standards, Egypt has seen surprisingly little social unrest. Kidnappings and organised crime are unknown, and Egypt"s crime rate is one of the lowest in the world. The greatest threat to foreigners is to tourists, who have been subject to attack by militant Islamists who see targeting the sector as the best way to damage the economy and thereby undermine the standing

Relations with Israel

Egypt 15


of the government. After a seven-year lull, Egypt has witnessed a spate of attacks on tourists in the Red Sea resorts in Sinai since October 2004.

Armed conflict

War was once a major security risk, but since the 1979 peace treaty with Israel there has been little prospect of a return to hostilities, even if Israel is still perceived as the main external threat and relations are not warm. Egypt has close relations with other Arab and African nations and is a leading political power in the region. Attacks by militant Islamists were a major security problem during the 1990s, although even at its height in the first half of the decade the insurgency did not threaten political stability, and foreign businesses were not targeted. The main extremist group, Gamaat Islamiya, carried out frequent attacks against foreign tourists in a bid to weaken the regime by damaging the economy. A second militant Islamist group, al-Jihad, targeted senior government officials, but not ordinary citizens or tourists. However, both groups announced a ceasefire at the turn of the millennium and neither has shown any indication of a return to violence. Since October 2004, Egypt has witnessed a renewed series of attacks on tourists. The most devastating occurred in Sinai resorts, killing 34 people in simultaneous attacks at Taba in October 2004; about 65 at Sharm al-Sheikh in July 2005; and some 20 at Dahab in March 2006. A series of smaller attacks have also taken place in Cairo, resulting in death and injury. The government has blamed the Sinai incidents on disaffected Bedouin from North Sinai with cross-border links to Palestinian groups in Gaza, claiming that it has now eliminated the terror network. Domestic grievances aside, regional developments are likely to have acted as a recruiting agent. Public anger has been fed by perceptions of Israeli oppression of the Palestinians and by the US-led military campaign in Iraq, which is still popularly viewed as motivated by the desire to secure oil and to protect Israel. However, the regular recurrence of attacks since 2004 and the shadowy nature of the militants present ongoing cause for concern. In addition, the umbrella al-Qaida Islamist movement is known to include a number of Egyptians within its ranks. There remains a risk that the organisation might orchestrate a targeted attack against foreign (particularly US) interests, or indiscriminate attacks to cause mass fatalities and maximum chaos, which is the brand of al-Qaida.

Social unrest

Although around 40% of Egyptians live either on or below the poverty line, there is little social unrest, to some degree owing to ruthless and all-pervasive security forces that are rarely hampered by human rights considerations. This long-established style of policing is reinforced by emergency laws that have been in continuous force since 1981, and were recently made permanent by amendments to the constitution, giving the police almost unlimited powers of search and arrest, banning public gatherings and allowing military courts to try civilian cases. Order has also been secured by the government"s determination to maintain a social safety net that guarantees the availability of affordable foodstuffs, in particular bread, and other basic needs such as fuel and electricity. Recent discussions of subsidy reform have therefore moved slowly, as the regime is unwilling to risk inciting discontent.

16 Egypt


Mass demonstrations are uncommon and riots rarer still, but the upsurge in violence in the Palestinian Territories in 2002 led to regular protests. In March 2003, as news filtered through that a US-led attack on Iraq had begun, a large spontaneous mobilisation was only brought under control after several hours of rioting in central Cairo. Smaller-scale demonstrations, many organised by the kifaya (enough) grassroots movement in order to call for political reform, have become more frequent in 2005 and 2006. They usually take place on or around university campuses, or (when mobilised around a particular issue) outside the headquarters of Cairo"s professional associations, such as the Judges" Club and the Press Syndicate. Although the larger demonstrations are often prompted by external issues, they are fuelled by pent-up frustrations at internal problems such as chronic unemployment, poverty and the lack of public participation in political life. Demonstrations can include an anti-US element owing to that country"s support for Israel, but so far this has not translated into any threat to foreign personnel or property. Incidents of confessional violence between Egypt"s Muslim majority and Coptic Christian minority occur every few years, but they have no foreign element. The Unified Labour Law, passed in 2003, gives workers the right to bargain collectively and to strike for social or financial reasons, and although the process is highly complicated, there were widespread strikes and protests by thousands of factory and public-sector workers towards the end of 2006 and in early 2007 over low pay, poor health and safety measures, privatisation and corrupt management. In 2006, according to Al Masri Al Youm, an independent daily newspaper, there were 222 instances of labour unrest, including a week-long strike at the large spinning and weaving complex at Mahalla al-Kobra, north of Cairo, involving some 20,000 workers. Some of the strikes were resolved by granting workers bonuses.

Violent crime

Egypt has no tradition of kidnappings of foreign nationals for political or commercial objectives. What violent crime does takes place rarely involves foreigners, and often has to do with family "honour" codes. The government is highly committed to maintaining the safety of foreign visitors and foreign property in Cairo, and this policy of zero tolerance is understood by all citizens. Nevertheless, petty theft does occur, particularly in crowded tourist areas.

According to the London-based International Institute for Strategic Studies, in 2005, Egypt"s active armed forces numbered some 468,500 members, around two-thirds of whom were conscripts. Conscription is selective, and service ranges from one to three years. In 2005 the army had 340,000 soldiers in total, including 90,000-120,000 career soldiers. The navy numbered around 18,500, of whom 10,000 were conscripts; the air force 30,000; and the air defence command 80,000. Reservists totalled 479,000, mostly from the army, and active and reservist paramilitary forces included 325,000 in the Central Security Forces (again including conscripts) and 60,000 in the National Guard, as well as 14,000 in the border and coast guards.

The armed forces

Egypt 17


Military forces, 2007 Army 340,000

Navy 18,500Air force 30,000Air defence command 80,000

Total active forces 468,500Reservists 479,000

Paramilitary (active) 330,000

Source: International Institute for Strategic Studies, The Military Balance 2007.

Resources and infrastructure

Population

Egypt"s population stood at 71.35m in January 2007, according to the latest official estimates; and the Economist Intelligence Unit expects the population to exceed 81m in 2010. Reducing the domestic population growth rate, which slowed only slightly in 2005 to 1.91% (compared with 1.93% in 2004), presents a major challenge for the government. More than 30% of the population is under 14 years old, whereas only about 6% are over 60. With such a youthful population, the pressures on the labour market and social services are considerable. According to the Central Agency for Public Mobilisation and Statistics (CAPMAS, the national statistical agency), the labour force grew by 2.8% to 21.8m in 2006!compared with 2.6% the previous year. Of this total, some 19.65m are employed; and of this figure, some 4.8m work in the public sector.

According to CAPMAS estimates, the death rate fell to 5.11 per 1,000 in mid-2007, from 19 per 1,000 in 1965 and 6.4 at the end of 2005. The birth rate also dropped, from over 40 per 1,000 in the mid-1960s to 22.53 per 1,000 in 2007, 11.7% lower than 2005. Life expectancy at birth in mid-2007 was estimated at 74.22 years for women and 69.04 years for men. According to the 1986 census, some 6% of the population were then Coptic Christians, although more recent estimates suggest that Copts account for around 8-10% of the population. The vast majority of the remainder are Sunni Muslims. Some discrimination exists between the two communities, and Christians often have difficulties with government bureaucracies. Tensions between the two communities flare up periodically, as they have done in the past few years, with several major incidents having taken place, especially in and around Alexandria.

Remittances from expatriates are a major source of foreign-exchange receipts. They rose by 16% year on year in 2006, to over US$5bn, having climbed by 44% the previous year. In 2005, 784,912 Egyptians lived abroad as temporary migrants, compared with 2.2m in 1996 and 2.3m in 1986, reflecting the decline in job opportunities in Arab states. The latest available figures show that on January 1st 2001 there were 824,000 permanent emigrants. Including families and relations, a total 3.9m Egyptians lived abroad in 2006, according to CAPMAS.

Migration

Annual population growth rate remains at around 2%

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Education

The Egyptian government has been committed since the 1960s to providing free education for all. In 2003, according to the UN Development Programme (UNDP), the ratio of primary school enrolment in Egypt had risen to 91%, up from 84% in 1991, and secondary enrolment stood at 88%. In 2006, 884,776 children were excluded from the education system, the first time the government released this figure. Egypt has 12 state universities, 8,674 private universities (in 2003), the Islamic university of Al Azhar and 125 technical institutes. The number of private universities, particularly international institutions, has risen fast, from 1,541 in 2000. Ministry of Education figures show that the number of students in higher education (excluding Al Azhar) rose from 659,000 in 1991 to 1.4m in 2001 and to 1.76m in 2005!although some of this increase is accounted for by population growth.

High population growth places severe demands on the underfunded education system. Although spending on education increased to E£21bn (US$4.4bn) in fiscal year 2004/05 (July 1st-June 30th), from just E£14.7bn in 1999/2000, it was down on 2003/04, when it reached E£22.2bn. A major school building programme raised the total number of schools from 35,534 in 2000 to 42,012 in 2005 and 42,996 in 2006, according to the education ministry. Despite the building of new schools, the average number of students per class has remained relatively constant, at around 43, as a result of fast population growth!and the ratio can be far higher in densely populated and poor areas such as the governorate of Damietta, where the student/teacher ratio is 62.8. The government has announced plans to build 2,000 new schools between 2007 and 2012. A programme to invite private investors to build schools and lease them to the government was launched in January 2007, initially for the construction of 150 schools. The government"s bias towards high-cost urban and tertiary education has resulted in unequal access to education for different groups within the country, with women in Upper Egypt being the most deprived. As the state system is overloaded, some 70% of students take extra private lessons, despite laws that prohibit public school teachers from providing private tuition. Since the World Economic Forum took place in Sharm al-Sheikh in 2006, Suzanne Mubarak, the wife of the president, Hosni Mubarak, has spearheaded a new programme, the Egyptian Education Initiative, which forms public-private partnerships to set up teaching institutes in order to help ease the government"s burden of providing education. The programme not only teaches students, but also trains teachers.

The rigid education system, with its emphasis on rote learning over critical thinking and its ranks of poorly paid and trained teachers, is failing to supply the labour market with the necessary skills. Illiteracy has fallen gradually but is still high, with the adult literacy rate standing at 55.6% in 2003, according to the UNDP, up from 47.1% in 1990 Moreover, within the key 15-24 age group, the literacy rate was still only 73.2%. According to figures from CAPMAS, 16.8m people were categorised as illiterate at end-2006, implying a literacy rate of 76.5%.

Skills shortages

Enrolment success

Egypt 19


Health

Egyptian nationals have a constitutional right to free healthcare and all com-munities are served by some kind of health institution. The majority are state-run under the supervision of the Ministry of Health, and services are to a large extent still free or subject to nominal fees irrespective of income. However, rapid population growth has swallowed most of the country"s health resources, and the government has announced forthcoming reforms of the health insurance sector to offset growing costs.

Priority has been given to curative programmes and to the construction of large hospitals, especially in major cities. In July 2007 a new cancer hospital, the largest in the country, dedicated to treating children, was opened. The hospital was built using private donations, a common practice in Egypt as many wealthy Egyptians and businesses donate money to support the country"s hospitals. There were 2.4 hospital beds per 1,000 people in 2005/06, according to official figures, up from 2.1 in 2000/01. Some 30% of hospital beds are in Cairo, and outlying villages in Upper Egypt and the urban slums of Cairo and Alexandria remain poorly served. However, the number of beds in rural areas rose strongly between 1995 and 2005, from 114,824 to 152,432, although this is not enough to match population growth.

Child vaccination and anti-epidemic programmes have also been given prominence, with 98% of babies immunised against measles and Hepatitis B in 2005. Egypt has essentially eliminated polio, which was still prevalent in the 1990s. Although relatively few women receive regular prenatal care, 72% of births were attended by skilled health staff in 2004, up from 69% the previous year. In line with these statistics, the infant mortality rate is continuing to fall, according to the World Bank, from 33 per 1,000 live births in 2002 to 26 per 1,000 in 2004; government figures suggest that the rate is slightly higher, at 29.5 per 1000 in 2004. World Bank data also show that malnutrition among children under five rose to 9% in 2004 (up from 4% in 2000), but mortality in that age group nevertheless appears to be falling too, down to 26 from 34 per 1,000 people over the same period. Although progress is being made in terms of the principal development indicators, there is a marked lack of public confidence in the quality of the state healthcare service, with increasing numbers of those who can afford it turning to private provision.

Natural resources and the environment

Less than 5% of Egypt"s total 1m sq km land area is settled and cultivated. Most of the rest of the land is uninhabitable desert, so that more than 97% of the population lives in the narrow strip of the Nile Valley that runs the length of the country, and in the Nile Delta. Population density in non-desert areas is therefore high, at about 870/sq km. The governorates of Cairo, Giza and Kalyoubia, which make up Greater Cairo, contained 17.1m inhabitants in 2004. Cairo has a population density of about 31,700/sq km, and in some urban districts the density reaches more than 100,000/sq km. Government concerns about the destabilising social problems resulting from overcrowding were the

20 Egypt


main impetus behind the Southern Valley development project that aims to reclaim a large swathe of desert by pumping water from Lake Nasser.

Egypt has some petroleum reserves, although crude oil output is in decline. However, increasing quantities of offshore natural gas are currently being discovered and exploited. Other available mineral reserves include phosphates, manganese, limestone, gypsum, talc, asbestos, lead, zinc and iron ore. In 2006 a seam with an estimated 7.7m oz of gold was discovered in the Red Sea Hills by Centamin, an Australian mineral exploration company, which said that it could be worth up to US$10bn. However, most minerals are currently much less important than hydrocarbons to the Egyptian economy.

The government and the public are slowly becoming aware of the need for environmental protection, and the country"s first full-time minister for environmental affairs, Nadia Makram Obeid, was appointed in 1997. With little rainfall, the country relies on the Nile to meet nearly all of its water needs. Egypt is currently categorised by the World Bank as under "water stress" and heading towards water scarcity. Air pollution levels are very high. According to the World Bank, the air in Cairo has the world"s highest lead content, eight times the internationally accepted safety level. Egyptian industries are estimated to dump at least ten tonnes/minute of solid waste, 33% of which goes into uncontrolled landfills, canal banks and drains. The Egyptian Environmental Affairs Agency has a specific mandate to combat industrial pollution. However, limited resources, weak political power and official concern that jobs may be lost if regulations are too strictly enforced have reduced its effectiveness. The constitutional amendments that were passed in March 2007 included an article on environmental protection for the first time, which states that a law to protect the environment will be passed. So far, however, no new legislation has been proposed.

Transport, communications and the Internet

The national rail system is the oldest in the region, and the government has launched an investment programme to modernise both the track and the trains, with the aim of increasing the level of containerised transport from Egyptian ports to the rest of Africa and raising the 8% share of domestic freight currently moved by rail. The modernisation programme has been made more urgent by two train crashes in 2006, which exposed the degree of dilapidation of the rail network. The network carries some 438m passengers/year, or 1.2m passengers/day (excluding the estimated 10,000 passengers/day who ride on top of carriages without a ticket), and some 11m tonnes/year (t/y) of goods. Nevertheless, with cheap third-class trains serving more than 80% of passengers, revenue only covers around 60% of expenses. Egyptian National Railways receives some E£1.4bn (US$243m) a year in government subsidy, and is considered to be underfunded. By contrast, Cairo has an impressively modern metro system, currently consisting of two lines, each of which carries more than 1.9m passengers/day. A third, 33-km line is planned, which will run from the suburb of Imbaba to Cairo Airport. In January 2007 a French consortium (including Alcatel, Alstom, Vinci, Bouygues and Thales), in

Environmental protection

Natural resources

Railways

Egypt 21


partnership with Egypt"s Orascom Construction Industries (OCI), was awarded the contract to build the line following a successful bid of US$539m. The line is expected to open in 2010. There are also discussions of a possible rapid-transport system to link Cairo to satellite industrial conurbations such as 6th October City and Sadat City, as well as a 46-km metro rail system to be built in Alexandria, but these projects have yet to move beyond the planning stage because of a lack of funding.

Following an extensive modernisation and expansion programme that began in the 1980s, Egypt had 78,641 km of paved roads by 2005, according to the General Authority of Roads and the Directorates of Roads at governorate level, but many are in poor condition. Some 85% of domestic freight and 60% of passenger movements are by road, but road safety is a major concern. Egypt has one of the highest incidences of traffic fatalities in the world, with an official death toll of 8,000 people in 2002/03, and 32,000 injuries!increases of 25% and 14%, respectively, on the previous year. Thanks to a gradual improve-ment in the condition of the country"s roads, the Egyptian police estimate that the number of traffic deaths fell to 6,000 in 2006/07.

The state-owned carrier, EgyptAir, is by far the largest Egyptian airline, carrying some 4,974,808 passengers in 2005/06, up from 4,781,212 in 2004/05!although the 75-year-old airline"s ability to increase its share of tourist traffic has been hampered by a reputation for unreliability, although this has improved in recent years. It is undergoing a programme of modernisation in order to attract more customers and introduced online booking and electronic ticketing in 2007. It also launched a low-cost carrier, EgyptAir Express, in June 2007, which has six new Embraer ERJ170 aircraft and will serve regional and domestic routes, including to Rome, Oman, Jeddah, Marsa Alam (on the Red Sea Coast) and Luxor. Egypt has 22 airports, the vast majority of which are also owned by the government, but EgyptAir"s control of the main concessions (such as ground handling and catering) in the past led to costly and poor quality services.

However, EgyptAir"s dominant position is under threat as the government moves to liberalise the aviation industry in response to the demands of the increasingly powerful tourism lobby. A handful of local and regional charter companies have recently begun operations, and Cairo International Airport is undergoing substantial expansion and upgrading, largely financed by World Bank loans. A Turkish contractor, TAV, is building Cairo airport"s third terminal, which is scheduled to open in 2008. A US airline consortium, ARINC Managed Services, will run the operating system for ground handling. The terminal will be able to handle 11m passengers/year, twice as many as the current two terminals combined. Although EgyptAir"s domestic monopoly has been progressively curtailed, it is still protected by the fact that international airlines are prohibited from operating charter flights to Cairo airport. It plans to expand its fleet from 45 to 58 commercial planes by 2009, raising capital through a 20% initial public offering (IPO) on the stock exchange in late 2007!although the company has rejected consultants" recommendations to reduce its 24,000-strong workforce.

Roads

Air services

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Egypt"s navigable waterways total about 3,100 km, divided almost equally between the River Nile and canals, and carry about 4% of domestic freight. Although Egypt"s seaports process some 85-90% of Egypt"s international trade, they have long been criticised as slow, inefficient and costly. However, with several privately run ports having been built!at Ain Sokhna on the Red Sea and at East Port Said at the mouth of the Suez Canal!and a programme to expand and update Egypt"s existing ports having been implemented, the country"s total cargo handling capacity has increased from 56.4m tonnes in 1999/2000 to 126m tonnes in 2006. Whereas Ain Sokhna is intended for international trade and to serve a nearby industrial zone, the government aims to capitalise on East Port Said"s strategic location on the Asia-Europe route to make it the transshipment hub of the eastern Mediterranean. Private investment in Egypt"s ports took a further step forward in March 2005 with the announcement that Hutchison Port Holdings of Hong Kong had entered into an agreement with a consortium led by the Alexandria Port Authority to modernise, expand and manage the container terminals at Alexandria and Dekheila ports on a 25-year build-operate-transfer contract. The new port at Alexandria was opened in May 2007 and will receive both commercial and tourist vessels.

The Suez Canal is an important source of foreign exchange. According to the Central Bank of Egypt, revenue rose from US$2.85bn in 2004 to US$3.31bn in 2005 and US$3.56bn in 2006. The increase in 2005 and 2006 was due partly to a rise in transit dues in February 2005, but also to increased usage, based on the rapid increase in northern trade with China and the surge in world oil prices, which has made it more cost-effective for tankers to take the shorter route to Western markets via the canal than to sail around Africa. The number of vessels using the waterway rose to 18,664 in 2006, from 18,193 in 2005, and tonnage increased to 743m tonnes in 2006, from 672m the previous year. The Suez Canal increased its transit fees again on April 1st 2007, by a weighted average of 2.84%. According to the Suez Canal Authority, about 7.5% of world sea trade passes through the 190-km long canal. Traffic has also been bolstered by the US$450m expansion project to deepen the canal, which will allow ships with a draught of 72 ft to pass through the canal by 2012, and has already enabled bigger oil tankers to pass through. In addition, the Suez-Mediterranean (Sumed) pipeline carries the loads of tankers with draughts of up to 75 ft that are too deep to pass through the Suez Canal when loaded. The pipeline, with an operating capacity of around 2.5m barrels/day, is owned jointly by Egypt!which has a 50% share and also receives transit dues estimated at 27% of the crude transport costs!Abu Dhabi, Saudi Arabia, Kuwait and Qatar.

The expansion of telecommunications services and related infrastructure is a national development priority and the telecoms network has undergone extensive modernisation in recent years. Between 1981 and April 2007 the number of fixed lines!run by the state-owned landline monopoly, Telecom Egypt (TE)!increased from 510,000 to 10.9m (a penetration rate of around 15%) and the number of people on waiting lists declined to fewer than 45,000, a 40% fall compared with 2006, when there were 75,000 on the waiting list. The goal is to provide fixed-line access to 40% of the population, partly through

Telecommunications

The Suez Canal and Sumed pipeline

Waterways and ports

Egypt 23


liberalisation of the sector. In December 2005 the government sold 20% of TE through Egypt"s largest IPO so far, raising E£5.1bn. There was frenzied demand for the offering, despite the loss of TE"s monopoly over international calls (which represent more than 25% of its revenue) with the award of Voice over Internet Protocol (VoIP) licences in 2006. The Egyptian government has announced that it will offer a licence for a second fixed-line operator, but it is unclear how much the licence will cost and when it will offered to bidders.

Egypt also has three mobile networks. The most recent network, which is owned by the Emirates Telecommunications Corporation (Etisalat) of the UAE, in a consortium with three local partners (Egypt Post, the National Bank of Egypt and Commercial International Bank), was launched in May 2007. Etisalat paid E£16.7bn for the third licence in July 2006, 20% of which went to the regulator and E£2bn to the Treasury. Etisalat announced in July 2007 it would bid for the second fixed-line licence. The existing two networks are operated by Mobinil (majority-owned by a local firm, Orascom Telecom, and Orange Group SA of France) and Vodafone Egypt (a consortium in which the Vodafone Group of the UK has a 50.1% share and Telecom Egypt a 49.9% stake), and had a total subscriber base of 20.3m at end-March 2007 (a penetration rate of 27.9%). As Etisalat had been awarded a third-generation (3G) licence, both incumbent operators proceeded to buy 3G licences!Vodafone in early 2007 for E£3.34bn, and Mobinil in July for an undisclosed sum.

Internet use is constrained by cost, language, rates of literacy, inadequate infrastructure and skills shortages, while e-commerce, still in its infancy, is beset by legal and regulatory hurdles. However, with strong support from the government, which hopes to turn the country from an information and communications technology (ICT) laggard into an ICT hub, Egypt is witnessing something of an Internet boom. Internet access is extremely cheap, costing little more to the consumer than the price of a local phone call. The regulator lowered prices twice in July 2006 and again in July 2007, with the entry level package currently priced at E£45 (US$7.9) a month. Consequently, by May 2007 there were 6.78m Internet users (up from 535,000 in 2000), including over 260,000 ADSL (asymmetric digital subscriber line) subscribers. The government is also establishing a series of dedicated ICT parks or "smart villages". The first such village, on the Cairo-Alexandria desert road, opened in 2003 and now houses the Ministry of Communications and Information Technology (MCIT), as well as offices of various national and international IT companies. As well as training about 20,000 young people annually in basic IT skills, the MCIT has also enticed a number of large US firms to operate training and certification programmes in Egypt, including IBM, Microsoft, Cisco and Lucent Technologies. Many businesses, however, have yet to benefit commercially from the Internet, but a project by the Ministry of Trade and Industry!with funding from the EU!is sponsoring a venture into e-commerce of some 1,000 companies. With the vast distances in Egypt, the trade and industry ministry is exploring Wimax (worldwide interoperability for microwave access) and Wi-Fi (wireless fidelity) technology to connect the country to Internet. The first of such projects started in 2007 as tourist endeavours in Luxor and Sharm al-Sheikh, and several

Internet

24 Egypt


operators are anxious for the regulator to distribute commercial licences. All three mobile operators also own ADSL providers.

Although there are some constraints on freedom of expression, and journalists who criticise government figures have been imprisoned and fined, including a producer with al-Jazeera and the editor of an opposition newspaper, Al Dustour, the opposition press in Egypt is relatively outspoken. The press is regulated by the state-affiliated Higher Press Council, but the four main publishing houses, the Al Ahram Group, Dar al-Hilal, Dar Akhbar al-Yom and Dar al-Gomhouriya, also exert substantial influence. A semi-official daily, Al Akhbar, is Egypt"s best-selling newspaper, closely followed by the more establishment-oriented Al Ahram. The circulation of the opposition press is far lower, although an independent newspaper, Al Masri al-Yom, has seen its circulation climb since its launch in June 2004. Nonetheless, with illiteracy rates still high, newspaper penetration remains limited.

There are eight state-run radio networks, together with a number of private stations, but television is probably now the most influential mass medium in Egypt, with more than 89% of households owning a television in 2000!a percentage that is likely to have increased since. There are currently two national and six regional terrestrial channels in operation. In 1996 Egypt launched its first satellite, Nilesat, which offers 84 television channels and 400 radio stations. A second satellite was launched in 2000, and the first two private satellite stations, al-Mehwar and Dream, began transmission in 2001. International satellite news channels such as al-Jazeera and CNN are also readily available. A duty-free Media Production City has been established in 6th October City with government encouragement in order to challenge the dominance of satellite broadcasters based in the Gulf and elsewhere. In April 2007, Egypt"s first scientific research satellite, Egyptsat-1, was launched from Kazakhstan to help support construction and cultivation and fight desertification.

Energy provision

Demand for power has continued to rise rapidly as a result of demographic and economic growth. In 2005/06, installed power generation capacity stood at 20,452 mw, of which 75% was based on locally produced natural gas and most of the remainder was hydroelectric, mainly from the Aswan Dam. Egypt"s first build-own-operate-transfer (BOOT) power plant, at Sidi Kreir, began operation in January 2002, and two 680-mw BOOT plants at Ain Sokhna and East Port Said have since come on stream. However, the government has now reverted to conventional financing methods. The Ministry of Electricity and Energy is implementing plans to bring on stream 12,875 mw of new power generating capacity by 2012. Of this total, 4,500 mw will be added during the first phase (2002-07), which will be financed by development agencies, and 8,375 mw in the second phase (assuming annual demand growth of 6.6% from 2008), which is scheduled to finish in mid-2012. Some of the new capacity, around 220 mw, will be in the form of wind-power, mostly from the wind farm at Zafarana on the Gulf of Suez, which had an installed capacity of 230 mw in 2005/06.

Mass media

Egypt 25


In addition to conventional energy sources, Egypt has an Argentinean-built US$100m, 22-mw research nuclear reactor. There are also much-delayed plans to build a part-solar power plant at Kureimat (with 30 mw of solar capacity out of a total planned capacity of 150 mw) on a BOOT basis, a project that has the support of the World Bank.

The economy

Economic structure Main economic indicators, 2006 (Actual unless otherwise indicated)

Real GDP growth (%) (fiscal year) 6.8

Consumer price inflation (av; %) 7.7

Current-account balance (US$ m) 2,731.2

Exchange rate (av; E£:US$) 5.7

Population (m) 75.9a

External debt (year-end; US$ m) 30,878.6a

a Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

Egypt has the largest population in the Arab world, but only the fourth-largest economy after Saudi Arabia, the UAE and Algeria. About one-half of GDP is accounted for by services, including public administration, tourism and the Suez Canal. Although tourism is vulnerable to political events, it has become increasingly resilient, recovering strongly from the effects of the series of bombings in Egypt"s Sinai peninsula between 2004 and 2006. The Suez Canal has also performed well in recent years as high fuel prices have made the longer trip around Africa more expensive for ships travelling between Europe and Asia. Agriculture"s economic contribution is gradually diminishing, but it is still an important activity, accounting for 14% of GDP in fiscal year 2005/06 (July 1st-June 30th). Manufacturing industries (including oil refining), which are heavily concentrated in Cairo and the Nile Delta, are also a mainstay of the economy, making up around 17% of GDP in 2005/06. Mining (especially oil and gas extraction) is also significant, accounting for just under 15% of GDP in 2005/06. There is a large informal sector, which the Ministry of Finance estimates represents some 30% of total economic activity.

The public sector accounts for one-third of GDP (33.3% in 2005/06 according to the Ministry for Economic Development, a slightly higher proportion than in 2004/05). Consumption (both private and public) is the major expenditure component of GDP, making up 83.4% of the total in 2005/06, compared with 18.7% for gross fixed investment and 31.8% for exports of goods and services.

26 Egypt


Comparative economic indicators, 2006 Egypta Libyab Tunisia a Morocco b Algeriab

GDP (US$ bn) 107.9c 45.2 29.8 63.3 111.9

GDP per head (US$) 1,422a 7,595 2,924 b 1,980 3,356

GDP per head (US$ at PPP) 4,772a 14,548 8,515 b 5,114 6,156

Consumer price inflation (av; %) 7.7 2.7 4.5 3.4 a 2.6a

Current-account balance (US$ bn) 2.7 12.9 -0.7 0.2 29.0

Current-account balance (% of GDP) 2.3 28.5 -2.4 0.4 25.9

Exports of goods fob (US$ bn) 20.5 33.7 11.5 11.4 53.5

Imports of goods fob (US$ bn) -33.1 -12.3 -14.0 -21.0 -21.0

External debt (US$ bn) 30.9a 4.5 18.4 b 16.6 4.4

Debt-service ratio, paid (%) 10.0a 3.0 21.4 b 10.9 18.5

a Actual. b Economist Intelligence Unit estimates. c Fiscal year 2005/06.

Source: Economist Intelligence Unit, CountryData.

Economic policy

A series of comprehensive reform programmes agreed with the IMF from 1991 led to the successful stabilisation of the economy during the first half of the 1990s, although progress was halting on public-sector reform, privatisation and the liberalisation of trade and investment. A major disagreement over IMF demands for a 20-30% devaluation of the Egyptian pound was resolved in late 1995 when the Fund chose instead to emphasise accelerated structural adjust-ment. Egypt successfully completed its third IMF programme in 1998, albeit without privatising any banks or insurance companies, or removing energy subsidies. Owing to Egypt"s solid macroeconomic indicators, however, another formal IMF accord was not considered necessary.

The economy faced severe problems in the late 1990s, partly as a result of the more difficult external environment created by the 1997-98 Asian financial crisis. Imports rose sharply following a sharp decline in international com-modity prices, and exports fell as domestic producers were unable to compete with those Asian states whose currencies had depreciated rapidly. Egypt"s major sources of hard currency!oil, workers" remittances and tourism!were hit by the downturn in oil prices, the subsequent recession in Gulf economies and the fallout from the Islamist militant campaign, respectively. The robust portfolio inflows of 1996-97 were reversed and the current account fell sharply into deficit. Meanwhile, monetary policy was constrained by the government"s determination to maintain the value of the Egyptian pound against the US dollar at around E£3.40:US$1. As a result, although inflation was successfully controlled, interest rates rose and credit growth to the private sector stagnated, causing the local business sector to fall into recession.

In May 2000, alarmed by the rapid decline in foreign-exchange reserves, the continuing shortage of US dollars, weak Egyptian pound liquidity and the re-emergence of a parallel foreign-exchange market for the first time in a decade, the government abandoned the Egyptian pound"s peg to the US dollar, allowing the currency to depreciate by some 12% before a new managed peg exchange-rate regime was introduced in January 2001. However, the new system was not properly implemented and it was several months before the

Currency problems

Economic imbalances and early reform efforts

Egypt 27


government moved to resolve its exchange-rate difficulties by devaluing the currency by 6.4%, pushing the official exchange rate below the black-market rate for the first time since its re-emergence. The September 11th attacks in the US badly damaged Egypt"s main foreign-currency earners, especially tourism, and the black market persisted despite more incremental devaluations.

A sharp drop in imports resolved Egypt"s immediate balance-of-payments problems, but foreign-currency shortages persisted throughout 2002, ensuring continued high interest rates and further depressing private-sector activity. With the looming prospect of further damage to Egypt"s external position from a US-led attack on Iraq, in January 2003 the government announced the float of the Egyptian pound. However, after the pound fell by 14% on the first day of liberalisation, the authorities stepped in to reassert control by applying informal pressure on the banking sector. Consequently, the black market continued to operate. An effective peg was reintroduced in August 2003. By this time, a cumulative deflation of around 45% since the beginning of 2000 had severely undermined local purchasing power, and inflation emerged as the chief economic policy concern.

Lacking an effective monetary policy framework, and unwilling to raise interest rates for fear of worsening the private-sector slowdown, the government of Atef Obeid sought to address inflationary pressure by direct measures such as broadening price controls and state subsidies. However, this approach proved ineffective and popular disillusionment with the government"s economic management mounted. The turning-point came in 2004, when the newly appointed governor of the Central Bank of Egypt, Farouk al-Okdah, raised rates on key savings instruments and took steps to ensure the availability of hard currency, causing the differential between the official and the black-market rate to narrow steadily. His task was made easier by Egypt"s vastly improved external position, as tourism boomed and exports strengthened. In December 2004 the pound finally registered its first gain on the official market in five years.

Economic policymakers

Hosni Mubarak

The president has always exhibited concerns over the socioeconomic impact of reform, despite his appointment of an economically liberal cabinet in mid-2004. It remains to be seen what latitude Mr Mubarak will afford ministers to make politically unpopular choices, particularly as regards the reduction of subsidies.

Ahmed Nazif

The former telecommunications minister, with a doctorate in computer engineering, Mr Nazif was appointed prime minister in July 2004. His lack of political experience, pinpointed by domestic critics as a potential weakness, helped him to distance himself from past practices and restore confidence in the integrity of government as he launched major privatisation and reform initiatives.

Youssef Boutros-Ghali

Mr Boutros-Ghali, a noted liberal and the major architect of Egypt"s macroeconomic successes during the 1990s, became finance minister in July 2004. An experienced technocrat who had lacked a political support base, he is now an important figure in

28 Egypt


the ruling National Democratic Party and is the highest-ranking Coptic Christian in government.

Mahmoud Mohieddin

Formerly an outspoken critic of government economic policy, Mr Mohieddin was given the newly created investment portfolio in 2004, becoming the youngest cabinet member at 39. His role includes responsibility for the sale of public enterprises, the various regulatory authorities governing investment and the stockmarket.

Farouk al-Okdah

A former regional head of the Bank of New York, Mr Okdah became governor of the Central Bank in highly testing circumstances in 2003. Since his appointment, he has been reluctant to make public statements, preferring to build a behind-the-scenes consensus. He is considered sympathetic to the needs of business and has quietly overseen a considerable improvement in monetary conditions.

In mid-2004 there was a radical cabinet reshuffle. The president, Hosni Mubarak, appointed as prime minister the technocratic telecommunications and information technology minister, Ahmed Nazif, who in turn appointed a team of reformist ministers, who were joined by key business leaders in the wake of the 2005 elections. Despite Mr Mubarak"s long-documented caution over measures with a potentially divisive social impact, the cabinet has been bolder than was generally anticipated.

One of Mr Nazif"s first acts in office was to slash customs tariffs with immediate effect, bringing the weighted average tariff down from 14.6% to 9.1%. Import tariffs were reduced again in February 2006, to a weighted average of 6.9%. Focusing overwhelmingly on goods for use in production, the measures were intended to make importing capital goods less expensive and time-consuming. Sharp reductions in personal and corporate income taxes were also implemented in 2005. Corporation taxes (excluding those on oil companies) were lowered to a standard rate of 20% from a basic rate of 40%, and exemptions were abolished. Individual tax rates were also cut, and the qualifying tax brackets were raised considerably. In 2006 property tax was reduced from 47% to 10%, and its scope was expanded. These moves were designed to raise disposable income for consumption and investment while simultaneously broadening the tax base, reducing the necessity for one-off fiscal measures to generate revenue.

Personal income tax rates Old law (1993) New law (2005) Tax bracket Tax rate (%) Tax bracket Tax rate (%)Up to E£2,500 (US$434) 20 Up to E£5,000 0E£2,501 to E£7,000 27 E£5,001 to E£20,000 10E£7,001 to E£16,000 35 E£20,001 to E£40,000 15

Above E£16,000 40 Above E£40,000 20

Source: Economist Intelligence Unit.

The measures worked as intended, leading to a substantial broadening of the tax base: the number of income-tax declarations submitted in March 2006 doubled year on year to more than 2m, and revenue from individual taxpayers increased by over 224%. The measures were urgently needed in order to redress

Fiscal performance

Egypt 29


the public finances. The central government budget deficit (cash basis) was equivalent to 9.6% of GDP in 2004/05, little changed from 2003/04, as a result of the cost of subsidies.

The fiscal situation improved in 2005/06. The government began exploring ways to rationalise expenditure. Work began on a database covering all households eligible for subsidies with the hope that the government will eventually be able to switch from subsidies to directly targeted (and therefore more effective) income-support. Moreover, the government revised the categories of spending, along the lines set out in the IMF"s Government Finance Statistics Manual, with the aim of enhancing the accuracy and transparency of the budget.

Total budget revenue increased by 34.9% in 2005/06, to E£149.5bn (US$26bn), 14.9% higher than budgeted. Tax receipts accounted for 65.6% of total revenue, a rise of 29.4% year on year, partially thanks to the widening of the tax base and the pick-up in economic activity: 76% of the increase in tax receipts was revenue from taxes on incomes and profit. Total expenditure climbed by 26.5% year on year in 2005/06, to E£204.5bn, 8.9% above budget, mainly because wages and salaries of public employees rose strongly as a result of election promises to increase salaries in the public sector. Wages and salaries accounted for 22.5% of total expenditure, and subsidies for 33.6%. Interest payments on foreign and domestic debt represented 18% of total spending, a substantial share, as years of budget deficits have led to an increase of the public debt stock. Thanks to the larger than budgeted rise in tax receipts, however, the budget deficit (cash basis) narrowed in 2005/06, to 7.9% of GDP.

The government"s budget for 2006/07 projected total revenue of E£163.9bn, an ambitious increase of 25.9% compared with the budget for 2005/06. Much of the increase was expected to come from a large rise in tax revenue of almost 30% over the previous budget. Preliminary estimates indicate that the tax reforms have continued to widen the tax base, and that the high level of economic growth has also boosted the tax take. A strong increase in privatisation receipts in 2006/07 also mean that the budget deficit is likely to have narrowed.

In the longer term, the government will need to address the structure of public spending in order to put the fiscal accounts on a sustainable path. Although the regime has promised to rationalise subsidies, it is unlikely to risk taking steps that could undermine living standards. Its preferred solution of targeting those in greatest need will, however, require far more efficient record-keeping!a capability that will take time to develop. Meanwhile, subsidies remain the driving force behind substantial fiscal deficits. Even at 7.9% of GDP, the deficit in 2005/06 was substantial, and was largely financed by an ongoing increase in domestic borrowing. In the absence of deeper reforms, therefore, Egypt"s ability to manage its budget deficit will depend on the continuation of strong economic growth.

Privatisation has become a priority for Mr Nazif"s government. The authorities have shown greater flexibility in pricing, and have begun to introduce privatisation into sectors previously seen as off-limits, after the investment

Privatisation

30 Egypt


minister, Mahmoud Mohieddin, reiterated that there are no "strategic" enterprises. Thus, the Bank of Alexandria was privatised at the end of 2006, with an 80% stake sold to an Italian bank, Saopaolo. A further 15% will be floated on the stock exchange, and 5% has been reserved for the bank"s employees. The government is also planning to privatise Banque de Caire later in 2007 or in 2008, having first merged it with another state-owned bank, Banque Misr in late 2006. However, other high-profile privatisations, such as the remaining stake in Eastern Tobacco, have been quietly shelved.

Setbacks in the privatisation programme may be expected, as members of the Majlis al-Shaab (People"s Assembly, or lower house of parliament) are likely to protest if they believe that companies are being sold off too cheaply (as happened with the privatisation of a chain of department stores, Omar Effendi, which was postponed many times before finally being concluded in 2006), or that privatisation will lead to job losses. Responding to public concerns, Mr Nazif has confirmed that the government will not sell companies "at any price", and that workers" rights will be protected.

Economic performance

Real GDP growth reached a low of 3% in 2001/02, following sharp falls in private consumption and investment growth owing to a tightening of monetary policy. With rising interest rates and widening budget deficits, credit growth to the private sector declined sharply. The initial recovery was gradual!growth rose to just 3.2% in 2002/03 and 4.1% in 2003/04!led by exports of goods and services following the sharp decline of the pound, which raised Egypt"s export competitiveness. However, in 2004/05 real GDP growth accelerated to 4.5%, as the pound stabilised and business and consumer confidence recovered following the appointment of the reformist Nazif government. On the back of ongoing liberalisation and rising liquefied natural gas (LNG) exports, real GDP growth rose strongly in 2005/06, to 6.8%. With business confidence remaining high, the trend is expected to have persisted throughout 2006/07, with economic growth estimated at 7%.

Gross domestic product (% real change; fiscal years)

Annual average 2006 2002-06GDP 6.8 4.3

Sources: World Bank; Economist Intelligence Unit.

Performance across economic sectors has been uneven. Growth in tourism has fluctuated sharply depending on the political situation. The sector was set back by the attacks of September 11th 2001 in New York and Washington, the US-led war in Iraq and the succession of bombings in Sinai, but each time has recovered strongly. The services sector as a whole expanded by 5.7% in 2005/06. Agriculture has grown only modestly, at an annual average of 3.4% over the past five years, and Egypt therefore continues to be a large-scale food importer. Although growth in industry and mining were for many years constrained by the high public-sector debt, low productivity and weak demand, the sector has

Egypt 31


expanded rapidly over the past couple of years. The extraction industries grew by 40% in 2005/06, up from 11% the year before, largely on the back of higher LNG production, and manufacturing rose from 7.6% in 2004/05 to 9.7% in 2005/06. Sectors such as transport, communications and electricity have gradually been opened up to private investment.

The depreciation of the Egyptian pound after 2000, coupled with widening fiscal deficits that led to sharp rises in the money supply, pushed inflation up to 2.7% in 2002 and 4.5% in 2003. The rapid depreciation of the pound following the failed float of the currency in January 2003 further raised the cost of imports, and hard-currency shortages resulted in some goods becoming scarce, causing a spike in inflation in 2004 to an average of 11.3%. Official data were slow to reflect clear anecdotal evidence of rising prices in the first half of the decade, in part because about three-quarters of the consumer price index (CPI) basket was accounted for by subsidised goods and services whose prices rarely change. As such, the CPI was only of use in assessing the price rises faced by the poorest Egyptians. The weightings of the CPI basket have since been adjusted, leading to an immediate rise in official inflation rates. An improved monetary policy framework and a greater willingness to intervene to raise interest rates helped reduce inflation in 2005, to just 4.9%. However, bird flu, which hit Egypt hard in 2006, a cut in fuel subsidies from July 2006 and buoyant economic activity led to an increase in inflationary pressures, and price growth averaged 7.7% in 2006. Inflation continued to increase in the first quarter of 2007, reaching 12.8% in March, but price increases have since decelerated, with price growth falling to 8.5% in June. Even so, inflation averaged 11.3% over the first six months of 2007.

Inflation (% change)

Annual average 2006 2002-06Consumer prices (av) 7.7 6.2

Sources: IMF, International Financial Statistics; Economist Intelligence Unit.

Government estimates put the number of Egyptians employed within the country at 19.65m at end-2006. As around 600,000 people join the labour market every year, finding employment is a major problem. A long-standing government guarantee to provide work for all university graduates!although it has now been abandoned!has produced huge waiting lists for state jobs and a surfeit of underemployed, badly paid civil servants. Successive budgets have raised state wages and pensions, but only recently have these gone up by more than the rate of inflation. Private-sector jobs are better paid, but limited in number. Even the highest wages and salaries in Egypt are low by international standards. According to the World Bank, 17% of the population were living below the poverty line in 2004.

In particular, unemployment is an acute problem. Official numbers show a steady rise in joblessness in the first half of the decade, up from a low of 8.1% in 1999 to 11.2% at end-2005. Strong economic growth and rising employment led to a fall in the unemployment rate, to 10%, in 2006, according to govern-

Unemployment remains a problem

Inflationary pressures controlled

32 Egypt


ment figures. Although the trend is plausible, reflecting the country"s underlying demographics, most independent estimates put the rate much higher, at around 15-25%. Moreover, unemployment among graduates is considered to be even higher, at almost 40% for men and over 50% for women. Underemployment is estimated to affect between one-third and one-half of all workers.

Regional trends

The north of the country is more prosperous than the south. Home to roughly 15m people, the southern, mostly rural provinces of Upper Egypt, which stretch from Beni Suef, 120 km south of Cairo, to the Sudanese border, have trad-itionally been neglected by the politically dominant north, where the major cities are located and the majority of economic activity takes place. This encourages large-scale migration from the countryside. Concentrated govern-ment investment in a few urban centres perpetuates the imbalance not only between urban and rural regions, but also between different urban areas, and significant capital outflows and labour migration from rural governorates exacerbate both agricultural and industrial underdevelopment.

In theory, Egypt has a comprehensive system of local government, but in practice power is still in the hands of central government. The government, which came to power in 2004, is trying to decentralise many governmental functions, but progress has been slow to date. The country"s 26 governorates are divided into 133 districts, each of which contains one major town and between four and eight village councils representing a main village and several smaller satellites. Working parallel to the central government, every governorate, district and village council has an appointed executive officer; an appointed executive council, composed of ex officio advisers who control financing and administration; and a popular council of representatives elected by residents. Local communities depend on central financial subsidy, and the degree of local democracy hinges on individual governors. These officials, appointed and removed at the whim of the president, are responsible to the prime minister in his role as chairman of the Supreme Council for Local Administration. Governors of the most important provinces, notably Cairo, Giza and Alexandria, have ministerial rank.

Economic sectors

Agriculture

The contribution of agriculture to nominal GDP fell from just under 17% in fiscal year 1999/2000 (July 1st-June 30th) to 14% in 2005/06, but the sector remains the country"s largest employer. Some 95% of local production is con-sumed domestically, despite the increased emphasis on cash crops for export, notably horticultural produce, such as soft fruits and green beans. Nevertheless, population growth will ensure that Egypt remains a major food importer. The country is one of the world"s largest wheat purchasers, importing around US$888m worth in 2006, down from US$1,107m in 2005, owing to a better

Rural migration

Local government

Production patterns

Egypt 33


local harvest. Cotton is the country"s major agricultural export and was for many years the most extensively subsidised commodity. However, the sector has suffered from inconsistent state policy, inflexible export pricing and a government more interested in propping up the massively overstaffed and debt-ridden state-owned spinning and weaving industries through the provision of cheap cotton. Cotton production and exports have declined, and the proportion of cultivated land sown to cotton has consequently dropped sharply, from 924,000 ha in 1962 to 275,940 ha in 2006. Cotton production rose in 2005, to 785,000 tonnes, from 600,000 tonnes in 2004, but fell again, to 691,000 tonnes, in 2006, according to data from the Central Bank of Egypt.

An estimated 3.5m farmers cultivate holdings of an average size of 2 feddans (0.84 ha). Production is therefore intensive, and fertiliser use is among the highest in the world, at an annual 465 kg/feddan. Yields are also high, despite the irregular and insufficient supply of water for irrigation. Only 3% of the total land area is arable, of which about one-third is serviced by main and secondary drains, although many are in dire need of repair. Drainage has proved insufficient to counter waterlogging and high soil salinity, the unforeseen consequences of a rise in the water table following construction of the Aswan High Dam. In addition, only 2% of cultivated land is irrigated by modern methods. Agriculture is highly subsidised, with irrigation water provided free by the government. In response to the pressures on arable land, there are ongoing projects to reclaim desert land for agriculture. However, the area under cultivation has been more or less constant as agricultural land is lost to urban and industrial expansion.

Land use, 2003 '000 ha % of total landTotal area 100,145 100Land used for agriculture 3,424 3.4 Arable land 2,922 2.9 Permanent crops 502 0.5

Source: UN Food and Agriculture Organisation.

Although livestock production is dominated by small farmers, who account for about 80% of output, the number of modern dairy and beef farms has increased over the past few years. There are 4.5m cattle and 3.9m buffalo as well as 5.1m sheep and 3.9m goats. Cattle are mainly kept for dairy production, but 80% of domestic red meat consumption is produced locally. The scattered nature of the national herd is a major constraint on the development of the sector as most producers are small and lack information on modern farming methods, and the elimination of subsidised feed in 1990 and the gradual easing of import restrictions have discouraged farmers from raising livestock. Cattle farmers have also been accused of poor treatment of animals, and the Australian government banned live cattle exports to Egypt for most of 2006 after a video surfaced of ill treatment of livestock on an Egyptian ranch.

The poultry industry, in which the public sector has invested heavily, supported up to 3m Egyptians raising 95m chickens in 2005. It is greatly affected by international supplies and prices, since most of its inputs are imported. Sharp

Land use

Livestock and fisheries

34 Egypt


fluctuations in production and prices had put many producers out of business even before the sector was devastated by the arrival of bird flu in Egypt in early 2006. The Egyptian government"s response to the problem was to cull 1.5m birds, resulting in the closure of nearly 80% of poultry farms. The government also closed down all 870,000 shops selling live poultry, ordering them to trade in frozen products instead, although several small shops around the country continue to sell live birds. In mid-July 2007 Egypt banned imports of poultry from France and Germany after cases of the H5N1 strain of bird flu were found there. Recovery of the industry is likely to be slow. In January 2007 the Kuwait Fund for Arab Economic Development approved a KD26m (US$92m) loan to support development and restoration of Egypt"s poultry industry, but isolated cases of the virus are still being found.

The national fish catch was estimated at 393,494 tonnes in 2004, according to the UN. The government hopes to increase annual production to meet expected demand of 1.4m tonnes by 2012 by managing natural fish stocks and encouraging the use of the country"s inland lakes and waterways for intensive aquaculture, although the fish catch fell by 8.4% year on year in 2004.

Mining and semi-processing

Crude oil reserves are modest, at 3.7bn barrels at end-2006 according to BP"s Statistical Review of World Energy!which will last some 15 years at current extraction rates. According to the Ministry of Petroleum, crude oil reserves rose to 3.97bn barrels by end-June 2007 as a result of new discoveries. Apart from the mature fields in the Gulf of Suez, which produce about 80% of the country"s oil, exploration activity is focused on frontier areas such as the Western Desert near the Libyan border, the offshore Mediterranean and Sinai. Exploration is largely undertaken by foreign companies, especially BP of the UK and Eni of Italy, in partnership with the state-owned Egyptian General Petroleum Corporation (EGPC). Eni, which produces 500,000 barrels of oil equivalent per day in Egypt, of which 1.4bn cu ft/day is gas, has announced that it will invest US$6bn in the oil sector until 2010, with its partners providing another US$6bn. Eni is aiming to extract an extra 180m barrels of oil from its Belayim field, with an overall goal of maintaining current oil production. Two-thirds of oil output is refined domestically. Because of depletion in the ageing Gulf of Suez oilfields, crude oil production has declined significantly since 1996, when it reached a high of 922,000 barrels/day (b/d), to around 678,000 b/d in 2006 (including condensates and natural gas liquids), according to BP. Crude oil exports are constrained both by lower production and by rising demand resulting from the high population growth rate. As a result, petroleum exports (a key foreign-currency earner, with crude oil exports generating E£3,213.8m (US$561m), or 31.4% of total export earnings, in 2005/06) are set to decline, and Egypt"s days as a net oil exporter are numbered.

Proven natural gas reserves were estimated at 68.5trn cu ft at end-2006 by BP, accounting for just over 1% of the global total, and potential reserves are put at another 40trn-60trn cu ft. Thanks to new discoveries, the state news agency, MENA, announced in July 2007 that proven reserves of natural gas had risen to

Oil production

Natural gas

Egypt 35


72.3trn cu ft. The government is encouraging additional exploration, as a minimum total of 120trn cu ft would be necessary for the government to realise its ambitious plans for the sector, which include liquefied natural gas (LNG) projects, gas export pipelines, gas-to-liquids schemes, petrochemicals expansion and increased domestic consumption. In 2003 Egypt exported its first gas, pumping natural gas to Jordan through an undersea pipeline that runs across the Gulf of Aqaba, skirting Israeli waters. Egypt has signed a 30-year agreement with Jordan to supply 1.1bn cu metres/year of gas, rising to an estimated 2bn cu metres/y by 2008.

The second phase of the Arab Gas Pipeline, with a 10bn cu metres/y capacity, which runs across Jordan from Aqaba to the Syrian border, was completed in January 2006. The third phase, which is to stretch 324 km from the Jordanian border to the Deir Ali power station in Syria and then to Rayan, near Homs, is to be undertaken by Stroitransgaz of Russia. The aim is to complete this phase by 2007 and then extend the pipeline to Cyprus and Turkey, possibly ultimately linking it into the European gas grid. The government announced in April 2007 that it would supply Lebanon with natural gas through the pipeline, but both countries received a warning from the Turkish government in early 2007 after they signed a natural gas exploration deal with Cyprus. Egypt faces tough competition from Russia and other producers for the large Turkish market. In mid-2005, Egypt also concluded an agreement for the sale of gas to Israel, seven years after talks began. The accord provides for the supply of 1.7bn cu metres/y of gas over 15 years, and includes an option for a five-year extension.

Egypt has also rapidly expanded its LNG export capability. It has become the world"s sixth-largest gas producer and the third-largest in Africa, behind Algeria and Nigeria. BG Group of the UK is the biggest gas producer, providing some 2.6bn cu ft/d, about 43% of total output, and has committed to invest US$3bn until 2010 in further exploration. In January 2005 the 5m-tonnes/year (t/y) Damietta plant (in which Union Fenosa Gas of Spain has an 80% stake, with the remainder held by the Egyptian government) began shipping LNG to Spain. The gas is purchased from the national grid. In May 2005 sales began from Egypt"s second LNG plant at Idku, established by BG and Petronas of Malaysia and fed by the companies" large uncommitted gas reserves from the offshore West Delta Deep Marine tract. Gaz de France is committed to taking the total output of the 3.6m-t/y first train on a 20-year contract. Output from Idku"s second train, purchased by BG, began in September 2005, some nine months ahead of schedule. BG has said that it wants to build a third LNG train at the facility, to begin production by late 2009. BG has insufficient gas through its Egyptian concessions to commit to the project but is considering using gas from a variety of sources, including its licence offshore from Gaza, which it is developing in conjunction with the Palestinian Authority. The plant can support as many as six trains and will operate as a tolling facility, so that other gas producers can use the LNG facilities to get their gas to market. BP and Royal Dutch Shell (Netherlands/UK) have also contemplated potential LNG projects. In November 2006, a British firm, Petrofac, was awarded a contract for engineering, procurement and construction of a fourth gas processing train in the Salam area of Egypt"s Western Desert by Khalda Petroleum Company (KPC), a joint venture company between Apache Corporation of the US and Egyptian

36 Egypt


General Petroleum Corporation (EGPC). This is the second consecutive contract that KPC has awarded to Petrofac, and it increased the value of the Khalda contract from US$200m to US$375m.

Several concessions for natural gas and oil exploration were awarded in 2007, particularly along the Mediterranean coast and in the Nile Delta. In July 2007 alone, the government signed eight exploration deals worth US$660m with several companies, including BP, Austria"s OMV, Norway"s Statoil, Germany"s RWE and Algeria"s Sonatrach, committing to drill 28 wells.

Egypt"s coal reserves, located mainly in Sinai, are estimated at 50m tonnes. Other mining activities include the extraction of iron ore at the Baharia Oasis in the Western Desert, and limestone and phosphate mining near Bur Safaga and Quseir on the Red Sea. Egypt also possesses appreciable deposits of manganese, gold, zinc, tin, lead, copper, potash, sulphur and uranium, although the remote location of deposits and high costs of extraction and transport have limited exploitation. A large deposit of gold, of about 7.7m oz, was discovered in 2006 in the Red Sea Hills. With reserves estimated at 48m tonnes, Egypt"s deposits of tantalite are the fourth-largest in the world. An Australian mining company, Gippsland, signed a US$40m, 30-year agreement with the Geological Survey and Mining Authority in 2001 to form a joint venture to exploit tantalite deposits at Abu Dabbab in the Eastern Desert.

Manufacturing

Manufacturing (including oil refining) accounted for 18.9% of GDP in 2005/06. In recent years, industrial production in the once-dominant public sector has declined and private-sector production has increased sharply, in response to privatisation and liberalisation initiatives. According to the Central Bank, in 2005/06 the private sector contributed around 50% of the growth in manufacturing output. The vast majority of private industries are small units, and more than 90% of employment is in enterprises of 15 people or fewer. Egyptian industries produce a wide range of goods. The bulk of manufacturing value added comes from food processing and textiles, but the proportion accounted for by furniture, ceramics, pharmaceuticals, metallurgy and engineering has increased gradually, and in recent years the government has also been keen to promote the computer software industry.

Since the late 1970s the government has attempted to relieve urban congestion by encouraging industrial investment in new communities located on non-agricultural land such as 6th October City and 10th Ramadan City, and it no longer issues licences for new industrial projects in Alexandria and Greater Cairo. There are nine "free zones" that offer special incentives and are subject to minimal regulation, with two more under development. Two special economic zones in North West Suez and Eastern Port Said have also been established, with self-governing authorities and low 10% tax rates, as part of the government"s drive to increase exports and foreign investment.

Egypt is the largest producer of refined products in Africa after South Africa. Its nine refineries have a capacity of 726,250 b/d. The high-profile 100,000-b/d

Mining

Downstream oil and gas sector

Egypt 37


Middle East Oil Refinery (Midor) commenced operations in 2001. In order to take advantage of Egypt"s expanding natural gas feedstock, the government launched an ambitious petrochemicals plan in 2003. This plan, which relies heavily on foreign investment and financing from development agencies, envisages up to 14 plants requiring investment of US$10bn over 20 years to produce 15m t/y of petrochemicals worth around US$7bn at current world prices. These new projects are expected to create over 100,000 jobs, both direct and indirect, to displace petrochemicals imports of US$3bn a year and to generate export revenue of some US$4bn a year. India"s Essar Global announced in May 2007 that it will build a US$3.4bn oil refinery on the North coast by 2010 that will produce up to 300,000 b/d. Egypt"s petroleum minister, Sameh Fahmy, has announced plans to increase the country"s output to 800,000 b/d by 2008 through recent discoveries. In March 2007 a consortium of four local banks financed a US$450m petrochemical processing plant in Port Said with the Egyptian Propylene and Polypropylene Company (EPPC). The plant is expected to produce 350,000 t/y of propylene and polypropylene and will generate about 2,000 jobs. In April 2007 the Dow Chemical Company opened a polyurethane systems market development and prototyping laboratory in Egypt.

Until 1996, all domestic fertiliser production capacity was publicly owned. Since 1998, the government has gradually privatised a large part of the fertiliser sector, which, consequently, has grown rapidly in recent years, helped by the abundance of cheap raw materials. Output rose to 12.5m tonnes in 2006, up from 12m in 2005 and 11.8m in 2004, and the value of fertiliser exports almost trebled between 2002 and 2006, from US$48.4m to US$138.5m. The trend continued in 2007 with fertiliser export earnings rising sharply in the first quarter, by 278% year on year, from US$39.6m to US$149.7m, just exceeding the total value of exports in 2005.

Fertiliser exports (US$ m)

2002 2003 2004 2005 2006Export revenue 48.4 86.0 124.9 149.6 138.5

Source: Central Bank of Egypt.

The attractiveness of the sector was recently illustrated by the acquisition of the Egyptian Fertilisers Company (EFC) by Abraaj Capital, a Dubai-based private-equity firm, for US$1.41bn, twice as much as its vendors, a group of Egyptian and Gulf investors led by Citadel Capital, had paid for the company when it was privatised in 2005. The EFC was established in 1998 as a public-private partnership. It operates two ammonia/urea units (the second of which started up after Citadel acquired the firm) in a special industrial zone south of Suez, with total output of 1.3m t/y. At the end of June 2007, a group of Egyptian and international banks agreed to provide US$950m of financing for a new fertiliser venture in Egypt, in which Canada"s Agrium holds a 60% stake. This plant, to be located in Damietta, will produce 1.3m t/y of ammonia/urea, matching the output of the EFC"s two plants near Suez.

Fertilisers

38 Egypt


Fertiliser output ('000 tonnes)

2004 2005 2006Phosphate fertilisers Public 475 485 509Private 790 795 835Total 1,265 1,280 1,344Azotic fertilisers Public 3,095 3,200 3,328Private 7,450 7,480 7,779Total 10,545 10,680 11,107

Total output in industry 11,810 11,960 12,451

Source : Ministry of Economic Development.

Although Egypt is a leading cotton producer, textile output has been dogged by high costs arising from overstaffing, outdated technology, unproductive seeds, excessive pollution and a lack of quality control owing to the state monopoly on most spinning and weaving activity. The sector, which competes on its low costs, underwent upheaval in 2006 when several strikes broke out in response to a series of privatisations of several major textile firms. Workers demanded an increase to their wages, some of the lowest in the world, at around US$60 a month. By contrast, the ready-made garment industry, 90% of which is owned by the private sector, has boomed, and manufacturing for international franchises is on the rise. In 2004 Egypt signed an agreement with Israel and the US to establish seven Qualifying Industrial Zones in Egypt, from which goods can be exported duty-free to the US provided they contain a minimum proportion of Israeli input (11.7%). The agreement, which forms part of US efforts to deepen economic links between Israel and Arab states, applies to the production of any manufactured goods. The deal was an attempt to compensate for the expiry (at end-2004) of the Multi-Fibre Arrangement, which had acted to protect Egyptian textile exports to the US from competition from countries such as India and China.

Construction

The construction industry grew strongly in 2005/06, by 18%, up from 9% in 2004/05. Nearly all basic construction requirements are produced locally, but supply is erratic and costs have soared in recent years, mainly owing to the removal of subsidies and rising fuel costs. However, Egypt produced around 35.8m tonnes of cement in 2006, and has begun to export small quantities, although this has raised the local price by reducing supply. After 1998 there was something of a revolution in the cement industry as the state sold off majority stakes in four firms to foreign companies, plus a minority stake in one other, resulting in a sector where around 70% of capacity is partly or wholly owned by global firms. Some of the world"s biggest cement companies such as Lafarge (France), Holderbank (Switzerland) and Cemex (Mexico) were attracted by the booming housing industry and the state"s grand infrastructure ambitions.

Strong growth in the sector has come on the back of rising interest from Gulf investors who view Egypt as an attractive alternative to investments in the Gulf,

Textiles

Egypt 39


owing to lower costs and its relatively shielded position from potential instability in the Gulf region arising form the conflict in Iraq. Emaar Properties of the UAE claims to be the single largest foreign direct investor in Egypt"s real estate sector, having signed contracts worth around US$5.54bn for four large-scale projects: Uptown Cairo, a new residential resort in Mokattam; the Marassi Resort on the northern coast; a residential community project in New Cairo City; and Cairo Gate, another resort on the Cairo-Alexandria Desert Road.

Demand for construction has also arisen from state infrastructure projects. At E£6bn (US$1bn), the Greater Cairo Wastewater Project, which aims to modernise Cairo"s inadequate system with funding from the US and the UK, was one of the world"s largest such schemes. Other recent or ongoing construction projects include the ambitious Southern Valley development project; a third metro line for Cairo and a line for Alexandria; industrial projects in oil refining, fertiliser and petrochemicals; a US$350m Grand Egyptian Museum at Giza; a US$230m contract to construct a barrage at Nag Hammadi; the upgrading of the airports at Borg el-Arab on the northern coast and Marsa Alam and Sharm al-Sheikh on the Red Sea coast; and the addition of a third terminal at Cairo International Airport. Tourism has been a major contributor to construction growth, as has the expansion of the natural gas sector.

Rising land prices on the back of strong demand have had a negative impact on access to housing for those Egyptians in the lower-income brackets. In response, the government is drafting legislation that will provide subsidies for first-time buyers who will receive E£15,000 (US$2,640) for up to 60 sq metres of housing in the Cairo area. The government is also planning to tighten up the housing laws, which provide tax exemptions for property owners and for unfinished buildings, resulting in houses across the country without roofs.

Financial services

Under the Unified Banking Law ratified by parliament in June 2003, the Central Bank of Egypt (CBE) is responsible for the implementation of monetary policy, but responsibility for setting inflation targets lies with the Monetary Policy Committee established in the legislation. The Central Bank is also now answerable only to the president. This has put an end to the previous system, whereby policy was determined by a committee of senior ministers. The law also gives legal grounding for a range of monetary tools designed to allow more sophisticated monetary management and, eventually, the implementation of monetary policy exclusively through indirect means. Laws criminalising money-laundering were passed in 2003, resulting in Egypt"s removal in 2004 from the "blacklist" of non-co-operative countries compiled by the Paris-based Financial Action Task Force. The CBE has also changed the rules for foreign-exchange houses to allow them to buy foreign currency from banks when they are short of funds.

After the appointment, in late 2003, of Farouk al-Okdah as its governor, the CBE formed the Monetary Policy Committee, which now meets every six weeks to discuss policy, including the setting of interest rates. The committee has removed the nominal anchor for monetary policy and is gradually moving

The Central Bank

40 Egypt


towards the adoption of a formal inflation target for monetary policy. The CBE is working to improve the transparency of its decision-making to increase the credibility of its monetary policy framework. The CBE is gradually taking over the role of supervising the banking sector from the government authorities. To this effect it is working to deepen and develop the concept of risk-based supervision to assess the banks" ability to identify and manage risk. The CBE also examines capital adequacy procedures.

Under Mr Okdah, several steps have been taken to consolidate the banking sector. The restructuring and consolidation of the banking system is based on the strict enforcement of minimum capital requirements: from 2004, the minimum requirements for local banks was raised to E£500m (US$87m) from E£100m, and for foreign banks to US$50m from US$15m. Banks had one year to comply, and the stipulation succeeded in prompting frenetic mergers and acquisition activity in the banking sector, both in the public sector and among the weaker private banks. The government has also made considerable progress with the sales of its remaining stakes in joint ventures formed with foreign banks, in order to reduce its exposure to the banking sector and encourage private enterprise. By end-March 2007 there were 41 banks, down from 62 at end-March 2004. The Central Bank is targeting a reduction in the number of banks to just 37 by end-2007. Before the privatisation, in late 2006, of the state-owned Bank of Alexandria (BoA), four state-owned banks!National Bank of Egypt (NBE), Banque du Caire, Banque Misr and BoA!dominated the sector, accounting for around 57% of total assets. There are also three specialised state-owned banks!one industrial bank, one real estate bank and one agricultural bank.

The government finally sold off BoA in October 2006, to an Italian bank, Saopaolo, which acquired an 80% share for US$1.6bn. Later that year, the government merged the second- and third-largest state-owned banks, Banque Misr and Banque du Caire, to make Egypt"s largest bank in terms of assets. In April 2007 the government announced it would use US$1bn in loans from the World Bank and the African Development Bank to increase the capital of NBE and Banque Misr. More recently, in July 2007, the government announced the sale of 80% of Banque du Caire to a strategic investor. Another 15% will be floated on the stock exchange within a year of the sale. Although the BoA sale went smoothly, the sale of Banque du Caire is expected to be more difficult because of its stock of bad debts, most of which are owed to private businesses.

Banking practices remain broadly conservative and the services offered are often basic. State banks still suffer from overstaffing and stifling bureaucracy, as well as a high proportion of poorly performing loans made both to public enterprises and to well-connected individuals. The slowdown in the economy in 1999-2000, following a rapid growth of credit extension, increased banks" portfolios of non-performing loans, which still stood at one-quarter of total loans as late as mid-2006, according to the IMF. The sector, however, has experienced significant growth and investment from abroad since 2004. Several mergers and acquisitions have been completed recently, including the purchase of the Egyptian Commercial Bank by Greece"s Piraeus Bank; the acquisition of the Egyptian American Bank by France"s Crédit Agricole Group; the purchase of

Consolidation of the banking sector

Egypt 41


Misr International Bank by France"s Société Générale; the acquisition of the Misr Romania Bank by Lebanon"s Blom Bank; and the purchase of the NBE"s share in Commercial International Bank by a consortium including Ripplewood Holdings, Eton Park Capital Management and RHJ International. In June 2007 the CBE eased its restrictions on new branch openings and improved the application process. The Central Bank now says that it does not refuse any applications and that it has reduced the time it takes to apply to a few days.

Between early 2000 and late 2002, the benchmark Hermes Financial Index (HFI) on the Cairo and Alexandria Stock Exchange (CASE) fell to its lowest level in many years. However, the market rebounded extremely strongly in 2003, rising by 116%. The upturn was initially sparked in January by the announcement of the new foreign-exchange regime, and was rekindled when the war in Iraq started in March, as uncertainties over US intentions were dispelled. The bull market persisted in 2004 and 2005, with the HFI rising by 103% and 131%, respectively, to reach 55,360, fuelled by optimism over the prospects for the economy following the mid-2004 cabinet reshuffle and exceptional liquidity among Gulf Arab investors. Amid upheaval in regional stockmarkets, the HFI held up comparatively well, climbing by 9.9% year on year, based on the strong performance of firms in the construction and housing sector. In the first half of 2007, the HFI picked up strongly again, rising by 17.6%, on the back of positive economic indicators and strong foreign direct invest-ment into the real estate sectors, undoubtedly buoyed by the government"s plans to upgrade Egypt"s infrastructure.

In April 2006 the CASE launched a new blue-chip index, the Dow Jones CASE Egypt Titans 20 Index. The index measures the performance of the Egyptian exchange using the same methodology as the Dow Jones Global Titans 50 Index. This has contributed to improving the image of CASE and has made the market more attractive to foreign investors, especially from the Gulf. In 2006 the CASE also introduced short-selling, and issued four licences for online trading. Unlike some developed markets, online trading in Egypt is not occurring through websites in which the investor independently completes transactions, but is primarily a service for investors who are already customers of the brokerage houses.

In June 2007 market capitalisation stood at E£601.8bn (US$106bn), or around 90% of GDP, up from E£405bn a year earlier, and 543 companies were listed on the CASE. However, these figures overstate the significance of the stockmarket. The 30 most liquid companies account for the vast bulk of value traded and only about 150-200 stocks trade actively. Nevertheless, the government is determined that Egypt should become a regional financial hub and the authorities have made strenuous efforts to improve the bourse in terms of technology and legislation. In 2001 a new automated trading system was implemented, which brought greater speed and flexibility in trading. In an effort to raise equity trading volumes, the 5% daily limit on share price move-ments was lifted in 2002, although trading is halted if a stock moves by 20%. The Capital Markets Authority (CMA), which regulates the stock exchange, has wide regulatory powers, and the CASE became the first Arab bourse to become a full member of the World Federation of Stock Exchanges in 2006. At the end

The stockmarket

42 Egypt


of June 2007 the CMA"s new chairman, Ahmed Saad, announced that an independent bourse for small and medium-sized enterprises would be launched. The exchange, which is expected to be launched towards the end of 2007, will allow companies that do not meet the minimum paid-up capital of E£20m and possibly the minimum listing of 500,000 shares, to raise capital outside traditional lending institutions.

The Egyptian insurance sector consists of 21 companies, according to the Egyptian Insurance Supervisory Authority (EISA), including several major international insurers, such as Royal Sun Alliance (UK) and the American International Group (US). Insurance premiums have grown rapidly in recent years, as awareness has improved and as the growing participation of private companies has brought more sophisticated products, better service and more aggressive marketing. The EISA states that gross premiums amounted to E£4.85bn in mid-2006, a 7.3% rise on the previous year but still low in international terms, at the equivalent of just 0.8% of GDP. Only around 700,000 Egyptians had life insurance in 2006. The industry has been strongly constrained by public-sector dominance. In 2006 the General Authority for Health Insurance was converted to the Holding Company for Insurance to manage state insurance, possibly as a prelude to privatisation. Egypt also has one Islamic insurance company, the Egyptian Saudi Insurance House, and four more are expected to begin operations before the end of 2007.

Other services

Tourism is Egypt"s most important economic sector. Official data show that "hotels and restaurants" accounted for just 3.3% of GDP in 2005/06. However, this does not cover the whole sector!indeed, when spin-offs from tourism are counted, independent studies have estimated that tourism accounts for as much as 10% of GDP. The government said that the sector employed directly and indirectly 2.2m people at its last peak in 2000, a figure that has probably risen during the recent boom. In 2006 tourism revenue reached US$7.6bn, by far Egypt"s largest source of export earnings. Tourist arrivals rose by 5% to 9.1m, a third successive record. The most notable trend was the increased proportion of eastern European visitors, who have risen from 7% to almost 17% of arrivals over the past five years. Numbers of western European visitors have fallen recently, and the proportion of those from other Middle Eastern countries (a key targeted growth area) has remained relatively constant. There have been some suggestions that Egyptian tourism is moving downmarket overall, partly in reflection of the growing importance of the Red Sea resorts within the sector.

The strong performance of the tourism sector can in part be attributed to government efforts. Apart from long-standing tax holidays for investors in designated tourism areas, the government has become increasingly savvy in its support for the industry, marketing heavily in key European and Gulf countries and, crucially, offering financial incentives to foreign charter operators. Egypt has an additional advantage in its immense archaeological richness. Moving beyond the unique Nile Valley pharaonic sites, which can only accommodate limited visitor numbers, non-traditional tourism has taken

Tourism

Insurance

Egypt 43


off in recent years!including desert expeditions, golf holidays, health tourism and religious journeys.

However, beach and diving holidays in the Red Sea resorts are by far the largest growth area. As a result, the recent bombing campaign in the resorts of the Sinai peninsula must be a cause of some concern. The Egyptian tourism industry is vulnerable to sharp downturns in visitor numbers because of international concerns over domestic and regional security, and suffered to some extent in the first half of 2006 following the bombings in the Sinai resort of Dahab. The Egyptian tourism industry has long demonstrated a capacity for rebounding strongly from such incidents, but a sustained campaign would be far more difficult to shake off.

The external sector

Trade in goods Foreign trade, 2006 (% of total; fiscal year)

Major exports Major imports Fuel, mineral oils & products 56.5 Fuel, mineral oils & products 8.5

Finished commodities 28.0 Intermediate goods 27.6Cotton 0.8 Investment goods 25.9

Semi-finished commodities 6.4 Raw materials 17.0Raw materials 2.8 Consumer goods 11.6Other goods 5.4 Other goods 9.3


Egypt has a structural deficit on its trade balance because the country"s population has outstripped its productive capacity, particularly for food. The trade gap narrowed between 1998 and 2003, as imports were depressed by restrictive trade measures and close control of foreign-currency allocation. However, the trade deficit has since widened again as access to hard currency has improved, tariffs have been reduced and domestic demand has strengthened. The resultant expansion in imports more than offset the marked increase in merchandise exports facilitated by the fall of the Egyptian pound and the rise in exports of liquefied natural gas (LNG) since late 2005.

The composition of merchandise exports has changed markedly in the past few decades. Between 1965 and 2004 the share of agricultural commodities in total exports (including items derived from cotton) dropped from 71% to 9%, superseded by hydrocarbons, minerals, metals and manufactured goods, reflecting the process of industrialisation and the development of the petroleum industry. Fuels, mineral oils and related products accounted for 56.5% of total exports in fiscal year 2005/06 (July 1st-June 30th), whereas raw cotton accounted for less than 1%. A key thrust of economic reform has been to stimulate non-oil exports, although these continue to be constrained by poor marketing and unreliable transport!quite apart from the inefficiencies of the

The composition of exports and imports

44 Egypt


domestic industrial base, including low labour productivity, often outmoded technology and an obstructive bureaucracy.

Egypt lacks most raw materials and continues to import large quantities of capital goods and inputs as investment rises and economic activity expands. The reliance on aid to finance a large proportion of imports has meant that shifts in political alliances have been reflected in aid and trade patterns. In 2005/06 the EU accounted for 37.6% of Egypt"s imports and the US for 22.6%, according to data from the Central Bank of Egypt.

EU-Egypt Association Agreement

The EU-Egypt Association Agreement is a key component of Egypt"s efforts to diversify and strengthen its industrial base!taking advantage of its low wages, proximity to Europe and a large local market. The accord, which came into effect in June 2004 after eight years of negotiations, covers political, security, economic, social and cultural ties. The single most important aspect of the accord, however, was far-reaching trade liberalisation between Egypt and its biggest trading partner. The agreement gave Egyptian industrial goods immediate duty-free access to the EU market. It expanded the quotas for some Egyptian agricultural exports, added new quotas for others not enjoying preferential treatment, and extended the agricultural export calendar. In return, Egypt began gradually to phase out customs duties on EU industrial goods. The accord is a necessary precursor to Egypt"s entry into the planned Euro-Mediterranean Free-Trade Area in 2010. As well as raising exports, improving bilateral relations with the EU and encouraging European investment in Egypt, there are hopes that the accord will help to modernise the domestic industrial base, as the quality of Egyptian products will have to improve to compete successfully in the European market. In addition, the strengthening of ties is bringing substantial EU financial assistance, much of which goes towards the modernisation of Egyptian industry and offsetting the impact of economic liberalisation. The MEDA programme, the main instrument through which the EU implements the Euro-Mediterranean partnership, allocated a total of more than #1bn (US$1.3bn) from 1995 to 2005!making Egypt one of the largest recipients under the scheme. Significant loans were also made by the European Investment Bank. Nonetheless, concerns persist in Egypt about the ability of the ageing and inefficient industrial sector to compete with EU industrial goods without protection.

Egypt has been a member of the World Trade Organisation (WTO) since its inception in 1995, and around 90% of Egypt"s trade is with WTO member states. In the WTO"s 2005 trade policy review, it was noted that, despite the overhaul of Egyptian tariffs in 2004, the system remained complex, with many exemptions. Although the average applied most favoured nation tariff had fallen from 26.8% in 1998 to 20% in 2005, peaks of up to 3,000% applied to alcoholic beverages and spirits and fairly steep tariff escalation, together with mandatory quality controls on a large number of products, resulted in high levels of protection for most industries. Domestic intellectual property rights (IPR) legislation was passed in May 2002 to ensure compatibility with the WTO Trade-Related Aspects of Intellectual Property Rights agreement, despite fears that it would push up pharmaceutical prices. However, there have been serious problems with implementation.

Trading agreements and tariffs

Egypt 45


Originally, the passage of the 2002 legislation prompted Egypt"s upgrading from the US trade representative"s "priority watch list" to its "watch list" over the degree of IPR protection it affords. However, Egypt was returned to the "priority watch list" in 2004 as deficiencies persisted, and this status was confirmed in the Special 301 Report 2006, which complained of "continuing deficiencies in Egypt"s IPR enforcement regime", particularly in the areas of pharmaceuticals, book publishing, entertainment software, and business software, as well as problems with its judicial system. Serious discussions of a free-trade agreement between Egypt and the US were put also on indefinite hold in early 2006, largely due to US concerns about the limits to political reform.

Invisibles and the current account

Egypt tends to run large trade deficits that are offset by non-merchandise surpluses. Transfers surpluses, once the largest non-merchandise credit on the current account, have diminished in importance as aid inflows have eased and workers" remittances declined. Remittances began to recover in 2005, as inter-national oil prices rose and more money was returned from Egyptian ex-patriates in the Gulf states. Nevertheless, transfers are still dwarfed by services, which have grown in importance as Egypt"s tourism industry has strengthened and Suez Canal receipts have soared. The income account recorded a small deficit from 2002 to 2004, but posted a small surplus in 2005 and 2006.

Egypt"s current account has experienced some volatility, since transfers and, in particular, tourism receipts have proven vulnerable to domestic and regional political developments. The current account has been in surplus since 2001, initially because of a restrictive regulatory regime, which slowed import growth. Since 2004, however, rising export earnings and a widening surplus on the services account have maintained the current-account surplus, which stood at US$2.73bn (2.3% of GDP) in 2006, up from US$2.2bn (2.2% of GDP) in 2005.

Capital flows and foreign debt

Owing to a widening current-account surplus in 2003, Egypt registered its first narrow financing surplus (excluding short-term debt) in 2003, which it maintained in 2004 and 2005. Egypt is estimated to have registered a small financing requirement in 2006. Surpluses on the balance of payments have allowed Egypt to build up its foreign-exchange reserves, which stood at US$24.5bn at end-2006. The capital and financial account recorded a net inflow of US$3.5bn in 2005/06, broadly unchanged from US$3.4bn in 2004/05. As confidence in the Egyptian economy has grown, the stream of capital outflows recorded in the first half of the decade has ceased, allowing foreign reserves to reach US$28.6bn at the end of June 2007.

The policy on official borrowing agreed with multilateral donors in the early 1990s appears to have been strictly applied in Egypt, so that new borrowing, nearly all of which is concessional, has remained around the same level as debt repayments in any given year. Total external debt (public and private)

Current account moves into surplus from 2001

External debt

46 Egypt


stood at US$29.6bn (27.6% of GDP) at end-June 2006, according to the Central Bank, of which 95.2% (US$28.2bn) was public-sector debt, most of it medium- and long-term. Private medium- and long-term debt was negligible, and short-term debt!most of which was private!amounted to about US$1.6bn. The ratio of debt service to exports of goods and services fell from 26% in 1988/89 to 8.5% in 2005/06.

The economic turmoil between 2000 and 2003 led to Egyptian sovereign debt being downgraded to below investment grade by the main credit rating agencies in 2003. It was not until 2005 that there were two more major bond issues, following one in 2001. In August 2005 it was announced that the state-owned Egyptian General Petroleum Corporation had raised US$1.5bn through the sale of an international bond backed by export receivables for Egyptian heavy crude and naphtha. The sale was split into three tranches, two of which were AAA-rated on the basis of separate insurance wraps. The first was worth US$400m and carried a coupon of 4.623%; the second was for US$250m, with a coupon of 4.633%. They both mature in 2010. The third tranche, which matures in 2011, was BBB-rated and totalled US$903m, with a coupon of 5.265%. Following up on this success, in September 2005, Egypt raised US$1.25bn by selling a ten-year fixed income bond guaranteed by the US Agency for International Development. The guarantee was made in 2003 as part of a package to "compensate" Egypt for the impact of the US-led invasion of Iraq and was due to expire in September. The guarantee ensured an AAA rating from Standard & Poor"s and an Aaa rating from Moody"s Investors Service, and the bond had a coupon of 4.45%, offering a spread of only 31 basis points over US Treasuries. The sale was lead-managed by Morgan Stanley of the US and was almost twice-covered. US purchasers took 90% of the bond.

With a marked economic downturn affecting investor appetite for Egyptian stocks and bonds, net portfolio flows from 2001-03 were negative. As currency problems were overcome in 2004, inflows once more showed a modest positive result of US$339m. In 2005 and in 2006, net portfolio investment in Egypt was strong, at respectively US$3.5bn and US$1.8bn. The 2005 figure was boosted by the bond sale, but much of the portfolio investment in 2006 went to the Egyptian stock exchange.

Historically, the petroleum sector has received the bulk of foreign direct investment (FDI) in Egypt, although privatisation and liberalisation have drawn FDI into a range of industries, in particular cement, telecommunications and tourism. Nevertheless, until 2004 the level of foreign investment reported by the authorities fell far short of that in the most successful developing economies, as the petroleum sector was excluded from the figures. However, using data provided by the government investment authority, the General Authority for Investment, the IMF argued in the Selected Issues paper accompanying its 2005 Article IV consultations with the Egyptian government that inflows into the oil and gas sector averaged above US$2bn a year between 2000/01 and 2003/04!almost four times the average total inward direct investment flows reported by the Central Bank. In 2004/05 the authorities decided to include FDI into the oil sector in their foreign investment figures for the first time. As a result, they made major upward revisions to historical data

Foreign investment flows

Egypt 47


and reported net direct inward investment in the next fiscal year as surging to US$3.9bn. This trend was sustained in 2005/06 when FDI reached US$6.1bn on the back of the reinvigoration of the privatisation programme and strong growth in the real estate and construction sectors. With the privatisation of Bank of Alexandria in October 2006 and the award of several large-scale contracts to foreign investors, FDI is estimated to have reached nearly US$10bn in 2006/07.

Foreign reserves and the exchange rate

After years of growth, Egypt"s foreign-exchange reserves began to decline from 1998, as the Central Bank gradually addressed the lack of US dollar liquidity in the currency market. At end-2004 reserves were US$14.3bn, excluding gold, according to the IMF"s International Financial Statistics. Reserves began to rise strongly in 2005 as confidence in the Egyptian pound strengthened and the authorities purchased foreign currency to prevent a strong appreciation of the local currency, and this trend continued in 2006, taking foreign-exchange reserves to US$24.5bn by end-2006. According to the Central Bank, which usually puts reserves slightly higher than the IMF, net international reserves stood at US$28.6bn at the end of June 2007. Official reserves include foreign currency deposits by commercial banks at the Central Bank, in part in fulfilment of reserve requirements.

As a result of persistent exchange-rate difficulties, including perceptions that the Egyptian pound was overvalued, which resulted in a flourishing black market, the government announced a float of the currency in January 2003. However, following a 14% fall in the value of the pound on the first day, the authorities began to exert informal pressure on banks to slow the depreciation. Subsequently the pound was allowed to weaken in an apparent attempt to converge the official rate with the black-market rate, but the steady fall in the official rate was being matched by its constant depreciation on the black market. The gap proved difficult to bridge, and in August 2003 attempts to unify the two rates were abandoned and an effective peg of the Egyptian pound to the US dollar was reintroduced.

During 2004, as the external position strengthened and the new governor of the Central Bank, Farouk al-Okdah, made the provision of hard currency a priority, the differential between the official and black-market exchange rates narrowed steadily. In December, following the launch of an interbank foreign-exchange market, the Egyptian pound began to strengthen on the official market for the first time since early 2000. From a low of E£6.23:US$1 in late 2004, it appreciated to E£5.73:US$1 at end-2005 and to E£5.71:US$1 at end-2006. In the first half of 2007, the pound strengthened further, to E£5.65:US$1 on July 30th. The black market has disappeared and convertibility has been restored to the exchange rate. However, the lack of fluctuations in the exchange rate suggest that the currency remains closely controlled.

Egypt repealed exchange controls as part of economic reforms begun in the early 1990s. However, the Central Bank subsequently imposed some informal

US dollar liquidity problems are overcome

Exchange controls

48 Egypt


restrictions on import financing. In addition, in March 2003 the government introduced a surrender requirement on exports of goods and services, requiring that 75% of all foreign currency should be converted into Egyptian pounds at the commercial bank rate within seven days. However, the surrender requirement was removed in late 2004. In January 2005, Egypt agreed with the IMF not to impose restrictions on the making of payments and transfers for current international transactions, and to refrain from engaging in discriminatory currency arrangements (according to Article VIII of the IMF Articles of Agreement). As a result, there are now no restrictions on the capital account.

Egypt 49


Regional overview

Membership of organisations

The Arab Monetary Fund (AMF), based in Abu Dhabi, was established in 1977 by 20 Arab states. It was hoped that this would presage greater integration of Arab economies, and that AMF financing would generate greater inter-Arab trade flows. Its success has been limited, but the AMF serves as a provider of loans to members, especially for balance-of-payments support. Its original articles define other goals, such as encouraging the use of the Arab accounting dinar (AAD) as a unit of account akin to the IMF�s special drawing rights (SDRs), and working towards the establishment of a single Arab currency. Another aim is to promote development of Arab financial markets. AMF officials have floated the idea of establishing a debt ratings agency. Iraq, Somalia and Sudan remain suspended from the AMF for defaulting on debt repayments.

More commonly known as the Arab League, the organisation was formed in 1945 to strengthen relations between Arab states and co-ordinate policies for the good of the whole Arab nation. Its membership has stood at 22 since Comoros was admitted in 1993. Palestine is treated as a full member of the organisation. The League, which has observer status at the UN General Assembly, is based in Cairo. It has attempted to mediate in a number of regional conflicts, and was the overseer of the Arab boycott of Israel. It has been criticised as an ineffective talking-shop; one of its handicaps is a system whereby unanimous decisions of the Arab League Council are deemed binding on all members, but majority decisions are binding only on those states that voted for them.

The Arab world has become increasingly divided in recent years, further negating the effectiveness of the League. US and UK policy towards Iraq was a major cause of tension within the Arab world from the second half of the 1990s, with even some countries strategically allied with the West taking a signally different position from Kuwait�s staunch support for Iraq�s comprehensive containment. However, when, from 2002, the prospect of a US/UK ground invasion to overthrow the regime of the Iraqi president, Saddam Hussein, became increasingly likely, a common Arab stance opposing any military action against the Iraqi regime and in support of the lifting of UN sanctions was agreed at the April 2002 Arab League summit in Beirut. This was strongly criticised by Kuwait, given the implied criticism that was made of it in the resolution. The success of the US-led military campaign to overthrow the Iraqi regime helped to minimise the tensions that had been expected within the League. However, although this led to League recognition of the interim Iraqi administration, and subsequently of the Iraq government formed after the January 2005 elections, tensions have been caused by the apparent diminution of Sunni Arab interests in Iraq and the rise of Iranian influence there. Israel�s dispute with the Palestinians remains a central issue, which at times of relative progress can cause division between League members. The entire League signed up to a (originally Saudi-authored) Middle East peace plan known as the "Beirut Initiative", whereby they committed to recognise Israel subject to a peace

Arab Monetary Fund (AMF)

League of Arab States

50 Egypt


agreement between Israel and the Palestinians (the bare bones of which were sketched out but not detailed). This has largely been placed on the back burner given Israel"s lack of interest in the plan, although Jordan and Saudi Arabia attempted to revive interest in it following Israel"s offensive in Lebanon in 2006.

The Organisation of Arab Petroleum Exporting Countries (OAPEC) comprises ten Arab oil producers and includes three countries that are not members of OPEC: Bahrain, Egypt and Syria. It was established in 1968 with the aim of co-ordinating members� oil policies. OAPEC also conducts technical training, feasibility studies and market reviews, and provides information on member countries.

Based in Lusaka, Zambia, the Common Market for Eastern and Southern Africa (Comesa) is the successor organisation to the regional Preferential Trading Area (PTA), and came into force on December 8th 1994 with 12 members. Comesa now has 20 members: Angola, Burundi, Comoros, the Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. Comesa"s main focus is on the formation of a large economic and trading unit that is capable of overcoming some of the barriers that are faced by individual states. This aim is to be achieved through monetary union with a single currency and a common central bank; the creation of a Free Trade Area (FTA) on October 31st 2000 was to be a major step towards achieving these. By the end of 2006 13 of the 20 members had agreed to participate (Burundi, Comoros, Djibouti, Egypt, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Sudan, Zambia and Zimbabwe). The 13 FTA members have removed all barriers to trade between themselves, granted trade preferences to the Comesa members that are not part of the FTA and retain tariffs on imports from outside Comesa. The reluctance of most of the remaining seven member countries outside the FTA to join, coupled with intense disagreements over a Common External Tariff (CET), caused the organisation to miss its objective of a customs union by December 2004. The proposed move by Comesa from the FTA to a customs union has now been set for 2008, but further delays are likely. The target of full monetary union by 2025 remains, but seems similarly improbable.

Much of the intra-Comesa trade has been concentrated within a few of its members. Reasons for the low level of intra-Comesa trade include a lack of political commitment and political stability in member countries and weak balance-of-payments and foreign-reserves positions. In some cases there are hardly any official trade links between member states. A further constraint has been the strict and cumbersome rules of origin, which are open to conflicting interpretations, and there have been some instances of member countries refusing to honour the relevant certificate of origin presented with Comesa imports. In addition to these impediments, progress towards free trade is hampered by political tensions between member states. Moreover, attempts at promoting crossborder investment and monetary harmonisation have been superseded by initiatives introduced by the East African Community and the Southern African Development Community.

Organisation of Arab Petroleum Exporting Countries

(OAPEC)

Common Market for Eastern and Southern Africa (Comesa)

Egypt 51


Appendices

Sources of information

The reliability and timeliness of official economic data have improved significantly in recent years. The Ministry of Foreign Trade and the Central Bank of Egypt now publish monthly statistics on the Internet that cover most areas of the macroeconomy and the financial markets. The Central Bank also produces annual and quarterly reports and a Monthly Statistical Bulletin that provides details on money, banking and trade indicators, but little on sectoral production. The Central Agency for Public Mobilisation and Statistics (CAPMAS) provides an annual Statistical Yearbook and publishes a consumer price index. Several state agencies publish annual reports providing varying degrees of detail, including the Suez Canal Authority, the National Bank of Egypt and the Social Fund for Development. Aid-financed reports are sometimes produced by state entities such as the National Population Council and the Environmental Affairs Agency, which are usually of a high quality.

Independent sources include the US embassy in Cairo, which covers much of the economy, producing annual Economic Trends and Agricultural Situation reports, some of which are included in the annual Country Commercial Guide. The American Chamber of Commerce in Cairo publishes a journal, Business Monthly, and periodic sectoral reports. Leading local investment houses and brokerage firms such as EFG-Hermes and HC Securities produce daily market reports, economic, sectoral and corporate reports, and periodic guides to the capital markets. The Cairo and Alexandria stock exchanges produce a range of publications both in Arabic and English, including daily and monthly Arabic bulletins, a monthly English bulletin and an annual Factbook. The independent Egyptian Centre for Economic Studies publishes Industrial Barometer twice a year that aims to gauge economic trends, along with various working papers and conference proceedings.

Business Monthly, journal of the American Chamber of Commerce in Egypt, Cairo www.amcham.org.eg

Cabinet Information and Decision Support Centre, Main Economic Indicators (monthly), Cairo www.economic.idsc.gov.eg

Cairo and Alexandria Stock Exchanges, Factbook 2002, Cairo www.egyptse.com

Central Agency for Public Mobilisation and Statistics, Statistical Yearbook, Arab Republic of Egypt, Cairo

Central Bank of Egypt, Annual Report, Economic Review (quarterly) and Monthly Statistical Bulletin, Cairo www.cbe.org.eg

Institute of National Planning, Egypt Human Development Report, Cairo

Ministry of Communication and Information Technology, The National Plan for Communication and Information Technology, Cairo

Ministry of Economy, The Monthly Economic Digest, Cairo www.economy.gov.eg

National statistical sources

52 Egypt


Ministry of Economy, Investing in Egypt, 2001, Cairo

Social Fund for Development, Annual Reports and Bulletins, Cairo

Suez Canal Authority, Annual Reports, Cairo

IMF, International Financial Statistics

International Energy Agency, Monthly Oil Market Report

International Institute for Strategic Studies, The Military Balance, 2000/2001

OECD, Geographical Distribution of Financial Flows to Aid Recipients

UN Development Programme, Human Development Report (annual); Egypt Human Development Report

US embassy, Egypt: Economic Trends (annual), Cairo

World Bank, Global Development Finance; Trends in Developing Economies; World Development Report; Country Memorandum

Galal Amin, Whatever Happened to the Egyptians? American University in Cairo Press, Cairo, 2000

Albert Hourani, A History of the Arab Peoples, Faber & Faber, London, 1991

Anthony McDermott, Egypt from Nasser to Mubarak: a flawed revolution, Croom Helm, London, 1988

Max Rodenbeck, Cairo: the City Victorious, Picador, 1998

P J Vatikiotis, The History of Egypt, Weidenfeld and Nicolson, London, 1980

www.economy.gov.eg Ministry of Foreign Trade and Industry, with news as well as statistics

www.investment.gov.eg/MOI_Portal/ Ministry of Investment, containing a wealth of information on investing in Egypt and links to other sites

http://www.gafinet.org/ General Authority for Investment and Free Trade Zones, the "one stop shop"

www.ahram.org.eg/weekly News and views from the English-language newspaper Al Ahram Weekly with an excellent archive search facility

www.sis.gov.eg The State Information Service site, containing links to all official sites

http://www.idsc.gov.eg/ Egypt"s Information Portal, a single source for most statistical data

Select bibliography

Websites

International statistical sources

Egypt 53


www.amcham.org.eg American Chamber of Commerce in Egypt site, the best organised and most informative business grouping

www.eces.org.eg Egyptian Centre for Economic Studies site, an independent think-tank

Reference tables

Population (m; mid-year)

2002 2003 2004 2005 2006Total 69.00 70.27 71.55 72.85 74.17 % change, year on year 1.8 1.8 1.8 1.8 1.8

Source: IMF, International Financial Statistics.

Population, labour force and unemployment (m unless otherwise indicated)

2002 2003 2004 2005 2006

Population 65.99 67.31 68.65 70.00 71.32

Labour force 19.60 20.15 20.70 21.24 21.84

Employment 17.67 18.08 18.53 19.04 19.65

Unemployment 1.93 2.07 2.17 2.20 2.19

Labour force/population (%) 29.7 29.9 30.2 30.4 30.6

Unemployment rate (%) 9.8 10.3 10.5 10.4 10.0

Source: Central Agency for Public Mobilisation and Statistics, Ministry of Economic Development.

Suez Canal traffic 2002 2003 2004 2005 2006Vessels 13,447 15,667 16,850 18,193 18,664Net tonnage (m tonnes) 445 567 621 672 743

Receipts (US$ m) 1,820 2,236 2,848 3,307 3,559

Sources: Suez Canal Authority; Central Bank of Egypt.

Electricity generation ('000 of mwh; fiscal years)

2002 2003 2004 2005 2006Generated electricity 82,596 88,852 94,064 100,064 107,463

Utilised electricitya 69,743 74,281 78,692 85,718 92,814 Industrial 25,188 26,425 27,644 30,302 32,651 Commercial & household 27,333 29,318 31,641 33,366 36,187 Other 16,967 17,683 18,614 21,358 23,204

a Subcomponents do not sum in source.

Sources: Central Bank of Egypt; Egyptian Electricity Holding Company.

54 Egypt


Nominal gross domestic product by expenditure (E£ bn at current prices where series are indicated; otherwise % of total)

2002 2003 2004 2005 2006

Private consumption 279.5 304.9 347.8 385.3 441.2

73.8 73.0 71.7 71.6 71.4

Government consumption 47.7 52.9 61.9 68.6 75.9

12.6 12.7 12.8 12.7 12.3

Gross fixed investment 67.5 68.1 79.6 96.5 115.7

17.8 16.3 16.4 17.9 18.7

Stockbuilding 1.7 2.4 2.6 0.3 0.0

0.4 0.6 0.5 0.1 0.0

Exports of goods & services 69.4 91.0 137.0 163.4 193.2

18.3 21.8 28.2 30.3 31.3

Imports of goods & services 85.9 101.8 143.6 175.6 208.3

22.7 24.4 29.6 32.6 33.7

GDP 378.9 417.5 485.3 538.5 617.7

Source: IMF, International Financial Statistics; World Bank; Economist Intelligence Unit.

Gross domestic product by sector (E£ m; factor cost; current prices; fiscal years)

2004 2005 2006Agriculture, irrigation & fishing 68,790 75,291 81,766

Mining (oil, natural gas & others) 57,447 64,026 89,834Manufacturing (oil refining & others) 83,651 89,981 98,693Electricity 6,875 7,838 8,880

Water 1,787 1,941 2,158Construction 18,503 20,106 23,763

Transportation & communications 28,416 31,761 36,493Suez Canal 15,889 20,155 23,399Wholesale & retail trade 50,692 56,356 63,583

Financial intermediation 24,405 26,428 28,798Insurance & social services 10,691 11,455 12,497

Restaurants & hotels 12,662 16,713 18,798Real estate activities 16,036 17,580 19,056

General government 46,293 51,755 56,930Education, health & personal services 13,744 15,118 16,498Total GDP (incl others) 455,881 506,511 581,142

Source: Ministry of Economic Development.

Egypt 55


Real gross domestic product by expenditure (E£ bn at constant 2001/02 prices where series are indicated; otherwise % change year on year)

2002 2003 2004 2005 2006

Private consumption 279.5 286.0 292.0 306.1 325.8

2.6 2.3 2.1 4.8 6.4

Government consumption 47.7 49.0 50.0 51.4 53.0

7.4 2.7 2.0 2.8 3.1

Gross fixed investment 67.5 61.6 65.4 74.7 85.0

0.2 -8.7 6.2 14.2 13.8

Stockbuilding 1.7 2.4 2.6 0.3 0.0

-0.1a 0.2a 0.1 a -0.6a 0.0a

Exports of goods & services 69.4 79.0 99.0 119.0 144.3

-10.4 13.8 25.3 20.2 21.3

Imports of goods & services 85.9 87.0 102.0 126.3 153.8

-10.8 1.3 17.2 23.8 21.8

GDP 378.9 391.0 407.0 425.2 454.3

3.0 3.2 4.1 4.5 6.8

a Change as a percentage of GDP in the previous year.

Source: IMF, International Financial Statistics; World Bank; Economist Intelligence Unit.

Gross domestic product (market prices)

2002 2003 2004 2005 2006

Total (US$ bn) At current prices 84.2 71.5 78.3 93.2 107.9

Total (E£ bn) At current prices 378.9 417.5 485.3 538.5 617.7

At constant (2001/02) prices 378.9 391.0 407.0 425.2 454.3

% change, year on year 3.18 3.19 4.09 4.47 6.84

Per head (E£) At current prices 5,741 6,203 7,069 7,693 8,661

At constant (2001/02) prices 5,742 5,809 5,929 6,074 6,370


Sources: IMF, International Financial Statistics; World Bank; Economist Intelligence Unit.

Money supply (E£ bn unless otherwise indicated; end-period)

2002 2003 2004 2005 2006

Money (M1) incl others 75.8 97.5 84.0 101.1 118.8

% change, year on year 13.0 28.6 -13.8 20.4 17.5

Quasi-money 257.0 310.1 385.0 421.7 471.2

Money (M2) 332.8 407.6 469.0 522.9 590.1


Source: IMF.

56 Egypt


Interest rates (%; period averages)

2002 2003 2004 2005 2006

Lending interest rate (%) 13.8 13.5 13.4 13.1 12.6

Deposit interest rate (%) 9.3 8.2 7.7 7.2 6.0

Money market interest rate (%) 6.3 6.9 10.1 8.6 9.5

Source: IMF.

Prices and earnings (% change, year on year)

2002 2003 2004 2005 2006

Consumer prices (av) 2.7 4.5 11.3 4.9 7.7

Average nominal wages 5.8 6.0 5.8 5.7 5.8

Average real wages 3.0 1.4 -4.9 0.8 -1.7

Unit labour costs -5.7 -19.9 -1.1 10.2 4.4

Sources: IMF, International Financial Statistics; World Bank; Economist Intelligence Unit.

Industrial production ('000 tonnes unless otherwise indicated; fiscal years)

2002 2003 2004 2005 2006Cotton yarn 290 265 290 290 301.6

Ready-made garments (m) 271 277 292.7 303.2 306Cars (units) 57,933 60,902 61,500 63,393 35,930Buses (units) 5,241 5,524 5,740 5,923 6,160

Trucks (units) 20,365 21,482 21,650 22,355 23,250Washing machines ('000) 795 839 849.3 878.7 922.6

Refrigerators ('000) 570 800 862.5 886.8 922.3Aluminium 246 248 251.5 259.9 271.6Cement 26,583 26,750 29,737 30,470 35,799

Phosphate fertilisers 1,226 1,235 1,265 1,280 1,344Nitrogenous fertilisers 10,394 10,420 10,545 10,680 11,107.20

Cigarettes (bn) 69 71 72.3 75.7 79.5

Source: Ministry of Economic Development.

Hydrocarbons production 2002 2003 2004 2005 2006Oil output (barrels/day) 602,723 600,990 580,097 550,493 518,210

Gas output (bn cu ft/day) 3.218 3.624 3.925 5.071 6.599Gas sales (bn cu ft/day) 2.574 2.899 3.140 4.057 5.279Condensate output (barrels/day) 88,953 94,825 78,611 78,717 104,271

Liquid petroleum gas output (barrels/day) 34,831 35,647 33,051 37,172 35,551

Source: Egyptian General Petroleum Corporation.

Egypt 57


Principal stockmarket indicators (E£ m unless otherwise indicated; year-end)

2002 2003 2004 2005 2006No. of companies listed 1,151 978 795 744 595No. of companies traded 671 540 503 441 407

Total value of traded shares 34,167 27,764 42,375 160,635 287,090Value of listed shares & bonds 25,790 23,000 36,142 150,929 271,111Value of unlisted shares & bonds 8,377 4,764 6,233 9,711 15,979

Volume of traded shares (m) 834 1,422 2,433 5,310 9,087No. of transactions ('000) 833,704 1,229,377 1,743,564 4,210,092 6,824,920

Market capitalisation 120,200 171,922 233,896 456,300 533,986

Sources: Capital Markets Authority; Cairo and Alexandria Stock Exchange.

Tourist arrivals by region of origin ('000 unless otherwise indicated; fiscal years)

2002 2003 2004 2005 2006Western Europe 2,300 2,736 3,760 4,551 1,968 % of total 53.0 52.2 50.1 52.6 21.7Middle East 1,025 1,179 1,736 1,743 1,706 % of total 23.6 22.5 23.1 20.2 18.8Americas 184 168 237 276 340 % of total 4.2 3.2 3.2 3.2 3.7

Eastern Europe 469 733 1,205 1,432 1,999 % of total 10.8 14.0 16.0 16.6 22.0

Asia Pacific 217 253 349 386 470 % of total 5.0 4.8 4.6 4.5 5.2Africa 144 168 221 258 302 % of total 3.3 3.2 2.9 3.0 3.3Total incl others 4,341 5,239 7,512 8,650 9,082Average tourist stay (nights) 7 7 10 10 10

Sources: Central Bank of Egypt; Central Agency for Public Mobilisation and Statistics, Ministry of Economic Development.

Major agricultural imports (US$ m; fiscal years)

2002 2003 2004 2005 2006Wheat & flour 489 564 1,025 1,107 888

Maize 395 378 396 433 363Sugar 48 83 81 14 33

Vegetable & animal oils 373 398 517 591 532Dairy products & eggs 112 99 116 111 106


58 Egypt


Main composition of trade (US$ m; fob-cif)

2002 2003 2004 2005 2006

Exports fob Crude petroleum & petroleum

products (incl charcoal) 2,363 3,546 4,907 7,699 10,723

Finished goods (incl textiles) 2,987 3,495 4,660 5,267 6,288

Total exports incl others 6,862 8,506 12,843 16,073 20,546

Imports cif Semi-finished goods 3,810 4,576 6,284 7,818 8,733

Capital goods 3,078 2,817 4,687 5,747 8,676

Consumer goods 2,821 2,528 2,994 3,447 4,175

Total imports incl others 14,515 14,805 21,586 27,359 33,104

Source: IMF, Direction of Trade Statistics.

Main trading partners (% of total)

2002 2003 2004 2005 2006

Exports fob to: Italy 13.7 12.1 11.9 9.3 12.2

US 18.4 13.2 10.7 13.0 11.4

Spain 3.2 3.8 4.2 7.7 8.6

UK 8.4 7.8 7.0 4.0 5.6

Imports cif from: US 15.8 13.7 12.2 10.6 11.4

China 4.7 4.8 5.4 6.5 8.2

Germany 7.3 7.5 7.0 7.0 6.4

Italy 6.3 7.0 6.6 5.8 5.4

Source: IMF, Direction of Trade Statistics.

Egypt 59


Balance of payments, IMF series (US$ m)

2002 2003 2004 2005 2006

Goods: exports fob 7,250 8,987 12,274 16,073 20,546

Goods: imports fob -14,709 -15,156 -21,586 -27,200 -33,104

Trade balance -7,459 -6,169 -9,312 -11,127 -12,558

Services: credit 9,320 11,073 13,607 14,643 16,135

Services: debit -4,799 -4,610 -5,321 -7,126 -7,445

Income: credit 699 578 572 1,425 2,560

Income: debit -866 -747 -876 -1,356 -1,730

Current transfers: credit 3,995 3,706 4,615 5,794 5,845

Current transfers: debit -42 -109 -48 -82 -95

Current-account balance 849 3,723 3,237 2,207 2,731

Direct investment in Egypt 647 237 1,253 5,376 9,000

Direct investment abroad -28 -21 -159 -92 -150

Inward portfolio investment (incl bonds) -673 -18 15 3,528 2,456

Outward portfolio investment -6 -25 324 -60 -705

Other investment assets -2,943 -4,651 -5,888 -3,246 �

Other investment liabilities -334 -1,248 94 85 �

Financial balance -3,337 -5,726 -4,361 5,591 10,601

Net errors & omissions 2,142 1,575 -45 -2,427 �

Financing (� indicates inflow) Movement of reserves -399 -407 -770 -6,398 -4,193

Use of IMF credit & loans 0 0 0 0 0

Source: IMF.

External debt, World Bank series (US$ m unless otherwise indicated; debt stocks as at year-end)

2001 2002 2003 2004 2005

Public medium- & long-term 25,342 25,875 27,266 27,353 24,892

Private medium- & long-term 619 659 316 0 3,240

Total medium- & long-term debt 25,961 26,533 27,581 27,353 28,132

Official creditors 23,355 24,658 26,372 26,367 23,458

Bilateral 19,659 20,782 22,258 22,365 19,602

Multilateral 3,696 3,876 4,114 4,002 3,856

Private creditors 2,605 1,876 1,209 986 4,675

Short-term debt 3,372 3,468 3,801 2,939 5,982

Interest arrears 0 0 0 1 2

Use of IMF credit 0 0 0 0 0

Total external debt 29,333 30,001 31,383 30,292 34,114

Principal repayments 1,111 1,248 1,980 1,561 1,679

Interest payments 838 825 783 756 860

Short-term debt 150 97 145 135 178

Total debt service 1,949 2,073 2,763 2,317 2,539

Ratios (%) Total external debt/GDP 33.6 38.5 41.9 35.3 33.9

Debt-service ratio, paida 9.4 10.3 11.7 7.8 6.8

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank.

60 Egypt


Foreign reserves (US$ m; end-period)

2002 2003 2004 2005 2006

Total reserves incl gold 13,813 14,220 14,990 21,388 25,581

Total international reserves excl gold 13,242 13,589 14,273 20,609 24,462

Gold, national valuation 571 631 717 779 1,119


Exchange rates (E£ per unit of currency; annual averages)

2002 2003 2004 2005 2006

US$ 4.50 5.84 3.40 5.78 5.73

£ 6.7 9.5 6.2 10.5 10.5

� 4.25 6.60 4.23 7.20 7.19

SR 1.20 1.56 0.91 1.54 1.53

Rmb 0.544 0.705 0.411 0.705 0.718

¥ 0.036 0.050 0.031 0.052 0.049


Editors: Ania Thiemann (editor); David Butter (consulting editor) Editorial closing date: August 21st 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]

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