overview of egyptian economy by mof

8/8/2019 Overview of Egyptian Economy by MOF

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Overview

oftheEconomy

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I.1 .. EGYPTIAN ECONOMY WATCH

Table I.1: Selected Economic and Financial Indicators (2001/2002 - 2008/2009)*

Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09

GDP at Market Prices (LE Bil lions) 378.9 417.5 485.3 538.5 617.7 744.8 895.5 1,038.6

GNP (LE Billions) 393.2 432.1 502.8 563.3 649.4 787.4 949.2 1,081.7

Real GDP (% Growth Rate ) 3.2 3.2 4.1 4.5 6.8 7.1 7.2 4.7Real Per Capita GDP (% Growth Rate) 1.1 1.2 2.1 2.5 4.9 4.9 5.1 2.5

Average Per Capita Income (LE) 5,742.1 6,202.4 7,069.4 7,693.2 8,657.6 10,211.1 12,030.0 13,656.1

Share of Private Sector in GDP (%) 65.7 63.2 62.2 61.7 60.3 62.4 61.6 62.8

Overall Fiscal Balance (% GDP) (10.2) (10.4) (9.5) (9.6) (8.2) (7.3) (6.8) (6.9) 1

Net FDI in Egypt (%GDP) 0.5 0.9 0.5 4.4 5.7 8.5 8.1 4.3

Public Domestic Debt (% GDP)

Net Domestic Budget Sector Debt 64.8 67.5 67.4 72.5 72.0 64.2 53.5 54.1

Net Domestic General Government Debt 44.6 46.1 46.8 51.5 53.8 49.6 42.7 44.7

Net Domestic Public Debt 45.6 46.3 46.8 52.3 53.9 48.8 43.2 45.5

Ination Rates

CPI (% Growth Rate yoy) 2 2.4 3.2 10.3 11.4 4.2 11.0 11.7 16.2

WPI (% Growth Rate yoy) 3 2.1 11.6 17.3 9.9 4.1 11.8 - - --

PPI (% Growth Rate yoy) 4 -- -- -- -- 4.1 11.8 17.7 2.5

Exchange Rates

Ofcial Exchange Rate (LE / US$) 4.4 5.2 6.2 6.0 5.7 5.7 5.5 5.5

Parallel Exchange Rate (LE / US$) 5.1 6.2 6.3 -- -- -- -- --

Interest Rates

Interest Rate on T-Bills (91 days) 7.2 8.3 8.4 10.1 8.8 8.7 7.0 11.3

Broad Money (% Growth Rate yoy) 15.4 16.9 13.2 13.6 13.5 18.3 15.7 8.4 5

External Debt

External Debt (% GDP) 34.0 42.5 38.1 31.1 27.6 22.8 20.1 17.0

External Debt (% Exports of G&S) 171.2 157.6 127.5 100.3 82.4 70.4 59.9 64.4

Debt Service (% Current Receipts) 9.7 10.1 9.2 7.9 7.3 5.9 3.9 5.3

Debt Service (% Expor ts of G&S) 12.2 12.1 10.8 9.4 8.5 6.9 4.6 6.2

NIR in Months of Imports

(US$ Millions)11.6 12.0 9.7 9.6 9.0 8.9 7.9 7.5 6

Population (% Growth Rate ) 2.1 2.0 2.0 2.0 1.9 2.2 1.9 NA

Domestic Savings (LE Billions) 51.7 59.7 75.6 84.6 105.7 121.2 150.4 129.1National Savings (LE Billions) 66.0 74.3 93.1 109.4 137.4 163.8 204.1 172.2

Source: Ministry of Economic Development, Ministry of Finance, CAPMAS and Central Bank of Egypt.* Recent detailed data can be found in the Appendices. Historical data are available at www.mof.gov.eg** PreliminaryNote: June 2002 refers to the Fiscal Year July 2001 through June 2002.1TheRevisedBudget2008/09theOverallFiscalDecit(%GDP)was-8.0percentandtheOverallFiscalDecit(%GDP)2009/2010is8.4percent.2 In August 2009, the CPI reached 9 percent. Starting January 2005, Annual and Quarterly CPI (urban areas) data is based on weights derived from 2004/2005income and expenditure survey, and using January 2007 as a base month. Prior to this date, the basket and weights were derived from 1999/2000 income andexpenditure survey taking 1999/2000 as a base year.3 Starting September 2005, WPI data is based on the average weights derived from indices of Industrial and agricultural sectors for the 2 years period extendingfrom 1999/2000 to 2000/2001. Prior to this date, the basket and weights were derived from indices of Industrial and agricultural sectors for the period extend -ing from 1986/1987 to 1987/1988.4 InAugust2009,thePPIreached-8.4percent.ThenewseriesofProducerPriceIndex(PPI)wasissuedbyCAPMASstartingSeptember2007,using2004/2005pricesofgoodsandservicesasabaseperiod,andderivingsub-groupweightsfromaveragevaluesofagricultural,industrialandservicesproductionfortheyears 2002/2003 and 2003/2004. It is worth mentioning that Producer Price Index series before September 2007 are not available so far.

5 Value in monthly basis. In July 2009, the monthly Broad Money growth rate was 7.9 percent.6 InAugust2009,theNIRinMonthsofImports7.8US$millions,itisestimatedonthebasisofmerchandiseimportsduringthersthalfof2007/08.Note: At the end of August 2009, Net International Reserves (NIR) reached US$ 32.9 millions.


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The world economy has witnessed the worst

nancial crisis since the 1930s.

During the past century, the world economy haswitnessedanumberofnancialandbankingcrises.More recently, the past decade saw the growth ofmacroeconomicimbalancesthatgaveawedmacro-incentives in the housing market and the nancialsystem.A nancial innovation boom that benetedfrom these incentives created mortgaged backedsecurities and other complex nancial instrumentsthat offered high rewards and were believed to bespreading risk, not concentrating it. As the demand forcheaplynancedhousingincreased,theseinstruments

wereextendedtothesub-primehousingmarket,andagrowing asset price bubble emerged.

Telltales for the current crisis started as early as August2008 when it became obvious that the increasinghigh asset prices would not be sustainable in theface of the defaults that were spreading rapidly in thehousing/mortgage sub-prime market. In September2008, the housing/sub-prime mortgage problembrought down the world mortgage market and thebanks and organizations that had invested in thesepapers. The global nancial system was affected

as banks saw signicant write-downs that led to aworldwide credit freeze (to a lesser extent in emergingeconomies). Immediate liquidations of big Americanand European nancial institutions and increasingfears concerning the creditworthiness of many othersfurther compounded the crisis.

The resulting global nancial turmoil that unfoldedrapidly in the following months is considered to bethe worst since the Great Depression of the 1930s. Ithas highlighted the lack of regulatory oversight and theneedforchangeinmanyoftodaysadoptednancialrules and regulations.

The crisis has severely hit all world economies,

but in different ways and degrees:

Fromnanceandhousingtotherealeconomyin advanced countries

Thenancialcrisishassubstantialimplicationstotheworldnancialsystem.Thecrisisimmediatelyspreadto the real economy in all advanced economies. TheUnited States and Europe were affected directly bythe credit crunch which almost immediately frozeall consumption and investment nancing. Asbank

lending in these countriescameto a near-standstill,investment spending tumbled, industrial outputweakened, workers were laid off, households startedto save, and demand for goods from emerging markets

waned. As a result economic growth rates started to

slow down almost immediately, and turned negativein some countries in 2009.

Fromdevelopedmarketstoemergingones

No country was exempt from the crisis. Most emergingcountries however felt the impact of the crisis a fewweeks later, and their economies eventually sloweddown through their investment and trade links withthe advanced markets. As their cash dried up, foreigninvestors became nervous, and less foreign directinvestment owed from rich nations to emergingnations, putting infrastructure and real estate projects

at risk in these countries. External demand diminishedand exports of emerging markets declined.

Furthermore, it became more difcult for indebtedcountries to borrow as credit became rare. The risk ofdefault was increased even among advanced countries.However, the prices of oil and other raw materialspiraleddown, pullingdownination rates,helpingreal incomes of the poor who lost jobs or sufferedlowerincomesasthecrisisintensiedanditsimpactpassed through to the emerging countries. Average realwages are expected to increase by 0.6 percent during2009 compared to a negative one percent in 2008.

Global growth rate, therefore, is expected to

be zero or negative in some big economies.

World growth is projected to fall to only 1.3 percentin 2009 according to the April 2009 edition update ofthe IMFs World Economic Outlook (WEO), its lowestratesinceWorldWarII.Despitewide-rangingpolicyactions, nancial strains remain acute, negativelyimpacting the real economy in many countries. Theeconomicrecoverywillbepossiblewhencondenceisrestored,creditmarketsstartowingagain,restoringthefunctionalityoftheglobalnancialsector.

In the meantime, monetary and scal policies arebecoming more supportive of aggregate demand.China, for example, has already moved to increasesubsidies to exporters and has reduced interest rates toenhanceinvestment.TheUSscalstimulusplanwasdesigned to give tax rebates and promote investmentspending in selected areas. However the long-termscalsustainabilityofGovernmentspendingisnowamajor issue, especially in highly indebted countries.International cooperation will be critical in designingand implementing stimulus policies. Arbitrary

measures should be avoided as no one country cangain any advantage by itself but through the concertedefforts of the international community.

I.1.1 .. Recent Trends in the Egyptian Economy in Face of the GlobalFinancial Crisis


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Thenancialcrisishasalsoshowntheimperativeneedforreformingtheinternationalnancial architecture.The IMF anticipated the housing problem depressionand its consequences on world growth many monthsbefore the occurrence of the crisis, but its policywarnings were not focused or specic. For manyreasons, it was not able to prescribe the appropriatemeasures to deal with the expansionary and competing

monetary policies of the US and China, nor supervisethedevelopmentofthecomplexnancialinstrumentsthat took advantage of excessively cheap credit in theglobal system, spreading very risky and later toxicmortgagepapersthatbecamesignicantcomponentsof the investment portfolios of big companies andnancialinstitutionsallovertheworld.Asthesepaperslost value, these companies suffered such substantiallosses that they were either dissolved or bailed out.

Keynesian measures became necessary to

reverse the standstill in private consumption

and investment.

To cope with the rapid and wide ranging repercussionsof the nancial crisis, American and Europeannancialauthoritiestookemergencymeasuresaimedat stabilizing and reassuring markets. These measures

included pumping great amounts of liquidity inviable institutions, immediate interventions to settlethe positions of weak institutions, making depositinsurance available, and issuing legislation in the USpermitting the use of public funds in purchasing banksstumbled assets. The coming period, therefore, willwitness a strong return for the role of state to supportmarkets in most world countries.

On Sep 16, 2008: Federal Reserve Board, with full support of the Treasury Department, authorizes theFederal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG).

On Oct 3, 2008: Emergency Economic Stabilization Act of 2008 (TARP) signed, enabling Treasury topurchasetroubledassetsfromnancialinstitutions,withauthoritytomanagepurchasedtroubledassetsandtosellorenterintosecurities,loans,repurchasetransactions,orothernancialtransactionswithrespect to them, $700 billion was allocated for this plan.

On Oct 14, 2008: It was agreed to use 250 bn of TARP funds to take capital stakes through CapitalPurchaseProgramviaseniorpreferred,non-votingshares(TierI)inqualifyingnancialinstitution(QFI).Nine major US banks (Citigroup, Bank of America, Goldman Sachs, Wells Fargo, JP Morgan, MorganStanley, Merrill Lynch, State Street, Bank of New York Mellon) have signed up to date. On Oct 27,2008:Inadditionto9ofthetopbanksreceiving$125billionfromTARP.(rsttrancheof$250billioninfusion announced on October 14), 16 other banks have accepted $33 billion in the second phase ofthe infusion.

OnNov25,2008:TheFederalReserveBoardannouncedthecreationoftheTermAsset-BackedSecuritiesLoan Facility (TALF), a facility that will help market participants meet the credit needs of households andsmallbusinessesbysupportingtheissuanceofasset-backedsecurities(ABS)collateralizedbystudentloans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).UndertheTALF,theFederalReserveBankofNewYork(FRBNY)willlendupto$200billiononanon-

recoursebasistoholdersofcertainAAA-ratedABSbackedbynewlyandrecentlyoriginatedconsumerand small business loans. The FRBNY will lend an amount equal to the market value of the ABS less ahaircutandwillbesecuredatalltimesbytheABS.TheU.S.TreasuryDepartment--undertheTARPwillprovide $20 billion of credit protection to the FRBNY in connection with the TALF.The Federal Reserve also announced that it will initiate a program to purchase the direct obligations ofhousing-relatedGovernmentsponsoredenterprises(GSEs)--FannieMae,FreddieMac,andtheFederalHomeLoanBanksandmortgage-backedsecurities(MBS)backedbyFannieMae,FreddieMac,andGinnie Mae. Purchases of up to $100 billion in GSE direct obligations under the program will beconducted with the Federal Reserves primary dealers through a series of competitive auctions and willbegin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selectedviaacompetitiveprocesswithagoalofbeginningthesepurchasesbeforeyear-end

On Feb 10, 2009: A new Financial Stability Plan will replace the current program and there are three

mainmeasuresthatwereintroduced.TherstinitiativeistheFinancialStabilityTrust.Goingforward,allTreasurys investments in institutions which need capital will be placed in this new trust and institutionswill have to adhere to the following requirements. (i) All banking institutions have to go through acarefully designed comprehensive stress test and provide capital to banks who need it. (ii) Introduce

Box (I.1.1):MeasuresTakenbytheUSGovernmenttoLessenImpactoftheFinancialCrisis


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The US adopts the biggest bail-out plan

in history, and Japan seeks to get out of

its worst crisis.

The US House and Senate passed the AmericanRecovery and Reinvestment Act. It was signed byPresident Obama on February 2009 in order toprovide a US$787 billions as stimulus package. Theaim of this package is to create more than 3.5 millions

job opportunities over the next two years. Of the totalamount, 22 percent will be spent in 2009 and the restin 2010.

On the other hand, Japan, the second biggest worldeconomy, faces critical economic conditions. The

rise of the yen against the dollar and the euro was amajor factor in the deterioration of Japans externalcompetitiveness, a long cornerstone of its economicperformance.

As for the repercussions of the crisis on

the Egyptian economy, it is important

to differentiate between two categorical

impacts

Ingeneral, Egypthas been protected fromnancialshocks but exposed to real shocks in the economy.Egypts nancial system is less integrated into theworlds nancial system thanmany othercountries.Capital ows while increasing, they have beenrelatively limited. The amount of portfolio investmentshas also been fairly small, and the Egyptian banksare not very strongly integrated into the internationalsystem. Egypt, in that sense, has been fairly protected.However, it is not protected from the impact on the real

economy from external shocks that may come froma drop in tourism revenues, volatility in oil prices, orshifts in foreign direct investment (FDI). Thus althoughonnancialsectorsideEgyptwasnothighlyexposed,its real economy is likely to be vulnerable through theexternal sector channel.

new measures to improve disclosure. (iii) For those institutions that need additional capital, they will begiven access to a new funding mechanism that uses funds from the treasury as a bridge to private capital.ThesecondinitiativeisthecreationofaPublic-PrivateInvestmentFundwhichtargetsdistressedassetsofnancialinstitutions.Theprivatesectorwillbecalledonprovidingamarketmechanismforvaluingthe assets. This program which will initially rely on public funding will start off with $500billion withthe possibility of expanding it up to 1 trillion. The third initiative is Consumer and Business Lending

Program. The lending program will be built on the Federal Reserves Term Asset Backed Securities LoanFacility (TALF) that was announced last November. The expansion could increase the size of the TALFto as much as $1 trillion and could broaden the eligible collateral to encompass other types of newlyissuedAAA-ratedasset-backedsecurities,suchascommercialmortgage-backedsecurities,private-labelresidentialmortgage-backed securities, andotherasset-backedsecurities.Anexpansionof theTALFwould be supported by the provision by the Treasury of additional funds from the Troubled Asset ReliefProgram. The date that the TALF will commence operations will be announced later this month.

On Feb 18, 2008: The Government announced the Homeowner Affordability and Stability Plan. Themain measures of the plan are:

i. Renancing for up to 4 to 5 million responsible homeowners to make their mortgages moreaffordable.

ii. A$75billionHomeownerStabilityInitiativetoreachupto3to4millionat-riskhomeowners.Akeythrustofthisplanistoprovideloanmodicationssoastobringmonthlypaymentstosustainablelevels.

iii. SupportinglowmortgageratesbystrengtheningcondenceinFannieMaeandFreddieMac.

The $200 billion in funding commitments are being made under the Housing and Economic RecoveryAct and will not use any money from the Financial Stability Plan or Emergency Economic StabilizationAct/TARP.

On March 4, 2009, AIG has agreed to issue shares of convertible preferred stock where the Treasury willhave a 77.9 percent stake in AIG. The Treasury will also inject other $30 billion into AIG from the TARPFundbycreatinganewequitycapitalfacility,inexchangefornon-cumulativepreferredstock.The$60billion Revolving Credit Facility for AIG will be reduced from $60 billion to no less than $25 billion.

In exchange for New York Feds preferred stock interests, the Treasury will take a $26 billion stake inAmerican International Assurance (AIA) AIGs large Asian operations and American Life InsuranceCompany (ALICO), a global life insurance business. The New York Fed is authorized to make new loansto an aggregate amount of approximately $8.5 billion to special purpose vehicles (SPVs) established bydomestic life insurance subsidiaries of AIG.


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20 Some branches of Arab and foreign banks in

Egypt face some problems due to the lossesincurred by their headquarters, such as PiraeusBank-EgyptandBankAudi-Sal,AudiSaradarGroup.

The credit portfolios were seriously affected be-cause of the advances given to customers againstsecurities which witnessed great losses in their

prices.

ThentheCBEdecreasestheinterestrate:

It is well known that Egypt previously adopted arestrictivemonetarypolicyinordertokeepitsinationrate at its minimum. However, in the second week ofFebruary 2009, the CBE decreased the interest ratefor the rst time sinceApril 2006.The interest rateon deposits, therefore, decreased by a whole onepercentage to 10.5 percent as well as the lending ratewith the same percentage to 12.5 percent. This decisionis expected to encourage the Egyptian economy formany reasons:

AstheGOEispreparingtodecreasetheinationrate by June 2009, then the real interest rate inEgyptwillbepositiveforthersttimesincealongperiod, encouraging savers to deposit their moneyin banks.

Theglobalnancialcrisishasagraveimpactonthe world economy, which witnessed a severe re-cessionforthersttimesincedecades.TheEgyp-

tian economy, consequently, will be affected, es-pecially the sectors related to exports. The localinvestors then lose great opportunities in interna-tional markets. The GOE sought to compensatethis trend, so the CBE took this decision whichwould encourage producers to invest inward.

This decrease will not lead to dollarization, i.e.convert deposits in the Egyptian pound into theUS dollars. This expectation is considered to beright as the interest rate on all currencies, includ-ing the US dollar, witnessed continual decreasesduring the last period.

TheGOEhassetaplanwithvepillarstofacetheglobalnancialturmoilanditsrepercussionsontourism, exports, FDI, Suez Canal receipts and workers remittances. The GOE expects reductions in

returns from these sources during the current crisis. In dealing with the crisis, the GOE concentrates ondeveloping the domestic economy to overcome the negative effects. In the coming period, the GOE willdepend more on the local market, will increase Government spending on investments in infrastructureandservices,andwillutilizethenationalsavingsinnancingSMEs.

Therstpillar:Tomakeupfortheexpectedslowdownintherealeconomy,theMinisterofFinancehaspreparedascalstimuluspackagefor2008/2009.TheMinistryofFinanceannouncedarecoverypackage whereby it will pump LE 15 billion in infrastructure projects. The projects are expected toemploy more labor and materials, thus enhancing demand and making up for the shortfall in privateinvestment. LE 15 billion will be pumped into infrastructure projects as a preemptive measure, offeringnew work opportunities and boosting domestic demand.

The second pillar concerned with facing the crisis repercussions on unemployment. This includes settinga social program to encourage companies to keep their labor. This also includes adopting a program toattract about LE 66 billion in agricultural and industrial investments to establish 474 foodstuff factory and785 logistic centers. The projects will be extended on 1.3 million acre and are expected to provide 750thousand new job opportunities.

The third pillar is the best utilization of national savings. This includes the best utilization of liquidityavailableatpublicbanksandotherlocalnancesources.Giventhatthelendingratioisstillonly54percentofdepositratioatthesesources,whichprovidesaexiblespacetoincreaseamoreefcientutilization.

Developing domestic trade is the core of the fourth pillar. The GOE is reviewing 12 legislations concerningdomestic trade regulations, domestic trade infrastructure improvement, and building an integrated and

modern information base for domestic trade.

The last pillar is concerned with attracting Arab oil surplus money to pump investments in Egypt. Thisaims to execute projects that are worth $10 billion.

Box (I.1.2):GOESetsaFivePillared-PlantoFacetheGlobalFinancialCrisis


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The decrease in interest ratesmightourishtheEgyptian Stock Market after its losses since lastOctober. The interest decrease will make saverssearchformoreprotableopportunitiesfortheirmoney. The Stock Exchange will be a secure resortfor this purpose.

The decrease in interest rate has its fruitful effectson decreasing the burden of Government indebt-

edness to the banking system. It also will offer asuitable opportunity for the GOE if it needs to bor-rowfromthebankingsystemtonalizeitsLE15billions stimulus plan to be spent on infrastructureprojects.

The continued growth gained during the period2004/2005 2007/2008 had its positive effect ongrowth and employment. A growth rate of 4.7 percentshould still absorb the growth in the labor force. Thestrength of the domestic economy of the past years willgive the Egyptian economy the resilience it needs toweathertheconsequencesofthenancialcrisisonthe

realeconomy.Thescalstimuluspackageproposedby the Ministry of Finance and passed recentlyby Parliament should help pre-empt the expectedslowdown and support employment generation.Accelerating public infrastructure spending wouldstrengthen the infrastructure base and help raisepotential output.

0

1

2

3

4

5

6

7

8

9

10

11

12

Unemployment Rate (%)

Real GDP (% Growth Rate)

2008

/09

2007

/08

2006

/07

2005

/06

2004

/05

2003

/04

2002

/03

2001

/02

2000

/01

1999

/00

Real GDP and Unemployment Growth Rates(1999/2000 - 2008/2009)

%G

rowthRates

FIG. I.Ia Source: MOED

2006/2007

2007/2008

2008/2009

Quarterly GDP Growth Rate(2006/2007 - 2008/2009)

0 1 2 3 4 5 6 7 8

Apr-Jun

Jan-Mar

Oct-Dec

Jul-Sep

Apr-Jun

Jan-Mar

Oct-Dec

Jul-Sep

Apr-Jun

Jan-Mar

Oct-Dec

Jul-Sep

7.6

7.4

6.8

6.5

6.7

7.6

7.4

5.7

4.3

4.5

4.1

7.0

%

FIG. I.Ib Source: MOED

Supportedbytheeconomicsuccessesinscalyears2007/2008, and 2006/2007, the economy reinstatedits resilience inthe nancialcrisis and grewby4.7alongthescalyear2008/2009(FigureI.1.a).

Despite the slowdown of the economic growth rateit is still considered one of the strongest growth rates,given that the IMFs 2009 WEO update has lowered the

growth projections of all world economies to betweennegative and zero. Egypt is expected to gain the thirdstrongest growth rate in MENA region; after Qatar withits huge oil exports, and Iraq which is implementing amajor reconstruction process.

Contribution of Domestic

Demand to GDP Growth

-4 -2 0 2 4 6 8 10 12

Contribution of Net Exports

to GDP Growth

2008/09

2007/08

2006/07

2005/06

2004/05

2003/04

2002/03

Annual Percent Contribution of Domestic Demand &

Net Exports to GDP Growth (2002/2003 - 2008/2009)

%

FIG. I.2 Source: MOED

External demand has played a crucial role in

bolstering the economy,

It contributed 2.07 percent, 4.18 percent and3.93 percent for the years 2002/2003, 2003/2004,2004/2005 respectively. The external demand impulse,sustainedsince2002/2003,hadaspill-overeffectondomestic demand over these years. The GOE realizingthe negative impact of the recent developments in theglobal economy on the external demand, It is set tocounter effect this impact by the increased spendingon the public side (Figure I.2.). A reduction in realimports due to decrease in real GDP has led to abalance in contribution of Net Exports and DomesticDemand to growth.

-4 -2 0 2 4 6 8 10

Final Consumption Demand

2008/09

2007/08

2006/07

2005/06

2004/05

2003/04

2002/03

2001/02

2000/01

1999/00

1998/99

%

Annual Percent Contribution of Investment Demand &

Final Consumption to the Growth in Domestic Demand(1998/1999 - 2008/2009)

Investment Demand



8/24

22Growth since 2004/2005 has been driven by

revived domestic demand.

It is expected that this trend will remain to persist andthe domestic demand driven by the newly approvedpublic spending and public investment, and will helpsmooth the external shock effect (Figure I.3).

The Government implemented a number of importantscal measures that helped strengthen domesticdemand. September 2004 saw signicant tariffreductions that were followed by a second roundof cuts in December 2004. Other measures includeongoing customs reforms and a new tax code that waspassed in June 2005. The new law reduced personaland corporate taxes by 50 percent. These cuts that tookeffect in July 2005 not only served to raise disposableincome since 2005/2006, but also reinstated marketcondence in the economy, which helped boostinvestment demand. As a result, domestic economysaw a healthy expansion, as private consumption

andinvestmentsincreasedsignicantly.Inscalyear2008/2009, Domestic Demand contributed 2 percentto growth of real GDP.

The Egyptian economys growth rate peaked to 7.1percent in 2007/2008. Trade and tax reforms, led toan average rate of growth of 6.7 percent over the pastfourscalyears(2004/20052007/2008).However,growth is expected to slowdown in the face of theglobal recessionary pressures brought about by theworldnancial crisis.Data available for the periodApril-June2008/2009show aGDP growth rate 4.5

percent, still a high rate compared with the world ratesduring the same period (Figure I.1.b).

Domestic demand was largely driven by

consumption demand; however during the

scal years 2006/2007 and 2007/2008

the contribution of investment demand

signicantly strengthened and picked up

with the contribution of consumption. Data

of scal year 2008/2009 reveal a downward

trend in investment due to the impact of

the nancial crisis on capital inows and

foreign direct investment.

The growth in consumption demand is expected totriggerasecondaryeffect.Inscalyear2007/2008,investment contribution to growth in domesticdemand picked up with contribution of consumptiondemand to domestic demand growth. In absoluteterms, investment undertaken during the scalyear 2008/2009 has amounted to LE163 billions,representing 19.5 percent of GDP.

The revealed downturn trend in investment is causedby the impact of the nancial crisis on capital

inows and foreign direct investmentwill bepartlycompensated by the expansionary scal stimuluspackage for 2008/2009 that the Ministry of Financehas put together and was approved by Parliament.

Annual Foreign Direct Investment (1990/1991- 2008/2009)

US$Millions 13237

8113

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2008

/09

2007

/08

200

6/07

2005/

06

2004

/05

2003

/04

2002

/03

2001

/02

2000

/01

1999

/00

1998

/99

1997

/98

1996

/97

1995

/96

1994

/95

1993

/94

1992

/93

1991

/92

1990

/91

FIG. I.28 Source: CBE.

Foreign Direct Investment (FDI) has grownexponentially over the past few years. According tothe World Banks Doing Business Report 2009, Egyptis among the rst ten countries, for the third time,

in implementing reforms concerning Governmentregulations that lured foreign direct business activities.This year also, Egypt still leads reformers in the MENAregion. In 2008, Egypt came on top of the list of worldreformers, making it much easier to attract foreignbusiness. However, because of the global recessionaryenvironment, the Egyptian economy received amoderateFDIinowamountingtoUS$8.1billionsin

June 2009 compared to US$13.2 billions in June 2008.

Table I.1.1 Doing Business in Egypt

(2007-2009)

CategoryDoing

Business2007 rank

DoingBusiness

2008 rank

Changein rank

DoingBusiness

2009 rank

Changein rank

Ease of Doing Business 152 126 26 114 12

Starting a Business 126 55 71 41 14

Dealing with Construction

Permits165 163 2 165 -2

Employing Workers 106 108 -2 107 1

Registering Property 147 101 46 85 16

Getting Credit 156 115 41 84 31

Protecting Investors 105 83 22 70 13

Paying Taxes 152 150 2 144 6

Trading Across Borders 86 26 60 24 2

Enforcing Contracts 146 145 1 151 -6

Closing a Business 124 125 -1 128 -3

Source: World Bank, Doing Business in Egypt 2008 & 2009.

The macro-economy was more favorable to

private sector led growth since 2004/2005.

As a result, private sector growth continued

to dominate the uptake in consumption

demand. Data for 2008/2009 reveal the

increased share of public spending that was

effected as a scal stimulus.


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Annual Percent Contribution of Public & Private Consumption Demand toFinal Consumption Demand Growth(1998/1999 - 2008/2009)

%0 1 2 3 4 5 6

Final Public Consumption

Final Private Consumption.

2008/09

2007/08

2006/07

2005/06

2004/05

2003/04

2002/03

2001/02

2000/01

1999/00

1998/99


Although private sector growth was negatively affectedby the economic slowdown during the early years ofthe millennium, the acceleration of consumptiondemand since 2002/2003 which has carried into

2007/2008 is owed mainly to a stronger private sector.Thus in real terms, total consumption is largely drivenby private consumption demand (Figure I.4; AppendixB-Table1.3.b).

In order to keep encouraging the private

sector, the Government is implementing

many measures aiming to support SMEs in

order to keep production and consumption

at their highest levels

According to Egypts census in 2006, Egypt has

2.4 millions SMEs, with less than 10 workers,which employ 5.2 millions workers and another 39thousandSMEs, with between10-50workers.SMEsaccount for more than 80 percent of employment inEgyptsnon-agriculturalprivatesector,includingbothformal and informal. SMEs, therefore, are crucial toEgypts prospects for growth and development, andthe welfare of not just the very poor but the also theaverage citizen.

The global nancial crisis is likely to transform theSMEs sector to be a refuge for those who will beunemployed from the larger formal sector enterprises,

meaning those who lose jobs as a result of the globalrecession. The SMEs cater more to local consumers,so they are more protected from the slowdown andcan prove more resilient as domestic demand remainsstrong.Intheshort-term,itisimperativethatSMEshaveaccesstocreditandallofthenon-nancialservicesthat help enhance productivity and market access. Itwill also be important to promote SME access to ICT inan effort to better inform small entrepreneurs of marketchallenges and opportunities.

A special tax treatment was offered by the Ministry

of Finance to SMEs nanced through the SocialDevelopment Fund. MOF adopted a strategy topromote and strengthen a favorable environment forSMEs eight years ago. The initiative took the formof a project targeting small and medium and microenterprise policy development..

and the GOE is supporting the private

sector role in society through numerous

initiatives, among which is the MOFs newly

born PPP initiative.

The private sector clearly needs to be pushed towardsgreater formalization, i.e. to provide greater socialsecurity and job stability by becoming more formal.

This has already happened with a labor law that waspassed in 2004, so there are incentives for them toprovide formal employment. The private sector inEgypt is also being promoted as the state could notbecome again the employer of rst and last resort.People have accepted the idea that it is the privatesector that is going to provide the main engine ofemployment growth. However, how to get the privatesector to provide good jobs will depend on theregulatory framework.

In 2006, the Government of Egypt adopted a newlong-term policy of pursuing partnerships with theprivate sector to expand and increase the countrysinfrastructure investments.

In line with the economic reform agenda and strategyto increase private sector involvement in public socialinfrastructure services by leveraging private spendingagainst public spending, the GOE has taken theinitiative to introduce a Public Private Partnerships(PPP) policy and program through the establishmentof the PPP Central Unit within the Ministry of Finance.

As the public face of PPP in Egypt, the PPP Central

Unit acts as the PPP center for support and expertise,identiespilotprojectstogetherwithresponsibleLineMinistries, sets national guidelines for implementation,standardizes PPP contracts, provides technical/advisory support to infrastructure Line Ministries andmonitors the implementation of PPP projects.

Brief on PPPs pilot projects:

New Cairo Wastewater Treatment Plant: The NewCairo Wastewater Treatment Plant PPP Project isone of the key PPP pilot projects whereby the Min-istry of Housing, Utilities and Urban Development

(MHUUD) through New Urban CommunitiesAuthority (NUCA) with the technical assistance ofthe PPP Central Unit has invited private sector par-ticipation, through a competitive bidding processto enter into PPPs for the design, construction,nancing, operationandmanagementof a newWastewater Treatment Plant with a total capacityof 250,000m /day to treat wastewater within NewCairo City, Madinaty and El Mostakbal with theobjective of implementing a model of PPP trans-action in the urban services area which can thenbe replicated in other projects of the wastewatersector. The Project has been awarded to Orasqua-lia (Orascom Construction Industries, Aqualia

and Aqualia Infrastructions), Contract signed June2009, and the Financial Closure is expected onDecember 2009.


10/24

24 Two New Public University Hospitals & a Blood

Bank in Alexandria: The new University HospitalsPPP Project is one of the key PPP Pilot projectswhereby the Ministry of Higher Education, repre-sented by Alexandria University, with the techni-cal assistance of PPP Central Unit has invited theprivate sector participation through a competitivebiddingprocesstoenterintoPPPsforthenanc-ing, designing, constructing, equipping, furnish-ing, maintenance, operating and provision ofnon-clinical facility services for two UniversityHospitals & a Blood Bank through PPP Contract,to be tendered in two lots whereby each of thequaliedBiddersisentitledtosubmititsbidforone or both lots as follows:

1. Smouha Maternity University Hospital and aBlood Bank; a 200 bed hospital and a bloodbank in the same hospital building with aseparate entrance which will be located at theSmouha Hospital Complex.

2. Mowassat Specialized University Hospital; a224 bed with Centers of Excellence (COE) forthe provision of highly specialized servicesin Neurosurgery and Urology/Nephrology(including kidney transplants). The hospital willbe located in the same site adjacent to the oldMowassat Hospital.

It is scheduled to hold one to one separate meetingswith qualiedbidders to respond to theirquestions&providethenecessaryclaricationsduringJanuary2010,itisalsoexpectedthatqualiedbidderssubmittheir technical & nancial bids in May 2010 afterwhich the winning bidder will be announced during

August 2010.

From a sectoral perspective, that most of

the GDP growth has been driven by the

private sector.

Private sector growth is the key to enhancing the growthmomentum. Macroeconomic stability will continueto nurture the private sector as an engine for growth.Recent tax and trade reforms, and continued reformsto reduce red tape and bureaucratic constraints areall serving to increase the contribution of the privatesector to the economic recovery.

Between 2003/2004 and 2007/2008, the privatesector has contributed around two thirds of the GDPgrowth rate. (Table I.1.2) Main engines of growth inthe ve years were from manufacturing, wholesaleand retail, agriculture, construction and buildingand communication, amounting to three quarters ofthe contribution of the private sector. The remainingmomentum came from extractions, restaurants andhotels and real estate activities.

Dataavailableforthescalyear2008/2009conrm

a 3.31 percent growth in the private sector activitiesversus 1.35 percent growth in the public sectoractivities. The same sectors, manufacturing, wholesaleand retail, agriculture, construction and building andcommunication, led the private sectors contributionto growth.

The textiles sector in particular remains one of thedriving forces of the exportable industry. The QIZagreement signed December 2004 with the UnitesStates gives Egyptian textiles manufacturers tariff freeaccess to the US market. Data for 2006 reveal thatQIZ cumulative exports rose by 221 percent abovethe 2005 level and by 74.4 percent in 2007. (Source:Ministry of Trade and Industry)

Egypt also has a robust pharmaceuticals industry. Inaddition, food processing has always been a driver ofEgypts manufacturing sector. More recently, Egypt haschanged from a net importer of fertilizer products to anet exporter. The fertilizer industry employs some 34percent of the labor force.

Special economic zones, another vehicle to providecompetitiveadvantagestomanufacturingrms,haveserved to increase manufacturing in fertilizers, ironand steel, pharmaceuticals, building materials andpetrochemicals, which all heavily depend on gas forenergy. Currently there are two special zones: NorthWest Suez and East Port Said. Continuing reforms thatboost private growth and employment will be the keyto sustaining the strong growth momentum.

Table I.1.2 Annual Private and Public

Sectors Contributions to Real GDP Growthfor 2007/2008 and 2008/2009

Sectors2007/2008 2008/2009

Public Private Public Private

Agriculture, Woodlands & Hunting 0.00 0.47 0.00 0.43

Extractions 0.41 0.12 0.62 0.28

Manufacturing Industries 0.14 1.15 0.04 0.56

Electricity 0.11 0.00 0.07 0.00

Water 0.02 0.00 0.02 0.00

Construction & Buildings 0.05 0.62 0.06 0.47

Transportation & Communication 0.21 0.60 0.18 0.56

Suez Canal 0.56 0.00 -0.26 0.00

Whole Sale & Retail 0.01 0.58 0.02 0.61

Financial Intermediaries & Supporting

Services0.19 0.11 0.12 0.06

Insurance & Social Insurance 0.28 0.01 0.19 0.00

Restaurants & Hotels 0.00 0.96 0.00 0.05

Real Estate Activities 0.00 0.10 0.00 0.10Public Government 0.24 0.00 0.27 0.00

Education, health, social, cultural, entertain-

ment & personal services0.03 0.19 0.01 0.18

Sub-Total of Sectors 2.26 4.92 1.35 3.31

Total Real GDP Growth Rate 7.18 4.66

Source:EstimatedfromAppendixB-Table1.5.e


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Overview

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25

Following the global trends, the ination

rate began to decrease reaching 9 percent

in August 2009.

Annual Percent of Month on Month Changes in the CPI(June 2006 - August 2009)

%G

rowthRates

0

2

4

6

8

10

12

14

16

18

20

22

24

26CPI Inflation

Aug-0

9Jul

-09

Jun-09

May-0

9

Apr-0

9

Mar-0

9

Feb-0

9

Jan-09

Dec-0

8

Nov-0

8

Oct-

08

Sep-08

Aug-0

8Jul

-08Jun

-08

May-0

8

Apr-0

8

Mar-0

8

Feb-0

8

Jan-08

Dec-0

7

Nov-0

7

Oct-

07

Sep-07

Aug-0

7Jul

-07Jun

-07

May-07

Apr-07

Mar-07

Feb-0

7

Jan-07

Dec-0

6

Nov-0

6

Oct-

06

Sep-06

Aug-0

6

July

06

June

-06

May-0

6

Apr-0

6

Mar-0

6

Feb-0

6

Jan-06

FIG. I.5 Source: CAPMAS

While the slowdown in the economy is a concernbecause of its potential impact on poverty rates, fallinginationrateswillincreaserealincomes.In2008,theGovernments economic policy was mainly focused onreducinginationwhichhadreachedapeakof23.6percent in March 2008, because of the worldwideincrease in food and oil prices. The latest guresindicate that with the weakening demand and fallinginternationalcommodityprices inationhassteadilydeclined since the last quarter of 2008. In December2008,inationreached18.3percentandfurtherfellto9 percent in August 2009.

Annualurbanheadlineinationroseto10.7percentin September 2009, from 9 percent in August 2009,mainly due to higher food prices. Food, recreation andculture and miscellaneous items increased by 17.4percent, 6.3 percent and 10.2 percent, respectively,from their level in September 2008. The annual changein these items in August 2009 was 13.4 percent, 5.7percent and 9.6 percent. On a monthly basis, pricesof items in the food and beverages and recreationand culture items increased by 3.7 percent and 0.7percent, compared to an increase of 3.1 percent infood prices in August 2009, as increased consumption

in the summer and Ramadan led to higher food prices.

The increase in ination in September, conrminga higher resistance of ination and implying ahigher volatility in food prices. Detailed data on thebreakdown of food items prices showed a higher risein the prices of grains, dairy products, vegetables,meatandshandsugarproducts.Problemsbetweenfarmers and milk producers since the beginning oftheyearhadbeenhelpingfuelfoodination,asdidthe recent rise in international sugar prices. Changesin the prices of vegetables, fruits and proteins havebeen more responsive to seasonal changes related

to increased demand and one-off factors like theavianu.Internationalcommoditypriceshavebeenrecovering, rising throughout 2009, applying pressure

to local prices of imported items. Fluctuations in thepricesoflocally-producedfruitsandvegetablesalsofuelledfoodination.

In the meantime, the pound has continued

to stabilize

After the announcement of a free oat in January

2003, both the nominal and real effective exchangeratesfellsignicantly,reectingarealdepreciationofthe pound, and increased competitiveness (Table I.1;Figure I.6).

... in response to a number of factors, three

key ingredients were:

The establishment of an interbank

market...

Annual Effective Exchange Rate Indices

(January 2003 - December 2007)

0

30

60

90 Real Effective Exchange Rate

Nominal Effective Exchange Rate

Dec-07

Nov-07

Oct-07

Sep-07

Aug-07

Jul-07

Jun-07

May-07

Apr-07

Mar-07

Feb-07

Jan-07

Dec-06

Nov-06

Oct-06

Sep-06

Aug-06

Jul-06

Jun-06

May-06

Apr-06

Mar-06

Feb-06

Jan-06

Dec-05

Nov-05

Oct-05

Sep-05

Aug-05

Jul-05

Jun-05

May-05

Apr-05

Mar-05

Feb-05

Jan-05

Dec-04

Nov-04

Oct-04

Sep-04

Aug-04

Jul-04

Jun-04

May-04

Apr-04

Mar-04

Feb-04

Jan-04

Dec-03

Nov-03

Oct-03

Sep-03

Aug-03

Jul-03

Jun-03

May-03

Apr-03

Mar-03

Feb-03

Jan-03

FIG. I.6 Source: IMF

The launch of a formal and active interbank market forforeign exchange in December 2004 served to createa liquid foreign exchange market and to converge theofcial andparallelmarket rates. Inaddition,con-denceintheeconomyhasspurredsubstantialinowsof private foreign capital that supported the accumula-tion of reserves and the repayment of external debt.The real effective exchange rate has thus shown signsof appreciation since December 2004 (Figure I.6)

... The elimination of surrender

requirements

The Prime Minister issued Decree No. 2059/2004rescinding Decree No. 506/2003 that requiredexporters to surrender 75 percent of their foreignexchange proceeds. This step helped enhance theliquidityofthemarketbecauseitgavecondencetothe international community that Egypt will pursuesound economic policies that preclude the need to use

such a restriction.


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26 and the adoption of a credible and

transparent monetary policy

The Prime Minister issued Decree No. 2059/2004rescinding Decree No. 506/2003 that requiredexporters to surrender 75 percent of their foreignexchange proceeds. This step helped enhance theliquidityofthemarketbecauseitgavecondenceto

the international community that Egypt will pursuesound economic policies that preclude the need to usesuch a restriction.

and the adoption of a credible and

transparent monetary policy

A Monetary Policy Committee, established in2003 is in charge of putting in place a credible andclaried monetary policy whose primary objectiveis price stability. Towards this end, the Central Bankis committed to maintaining a market determinedexchange rate system. In addition, open marketoperations (OMOs) and a corridor for the overnightinterbank rate have been established. The introductionofOMOs is a pre-requisite for the Central Bank toadoptinationtargetingasplanned.TheCBEisalsoworking on upgrading its technical capabilities. Allthese factors worked against the positive impact of tariffcutsimplementedinSeptember2004onination.

Egypts external debt position continues to

be strong

91.68%MEDIUM &

LONG TERM

PUBLIC & PUBLICLY

GUARANTEED DEBT

Total Medium & Long Term and Short Term Debtas of March 31st, 2009

8.07%SHORT

TERM

DEBT

0.25%

MEDIUM & LONG TERM PUBLIC &

PUBLICLY NON-GUARANTEED DEBT

FIG. I.26 Source: CBE

Egypts total external debt in terms of net present valuehas declined from US$29.9 billions in 1990/1991 toUS$22.8 billions in March 2009. Its maturity structureis favorable, with short term debt constituting 8.07percent of total external debt (Figure I.26; AppendixB-Table4.2).AsapercentageofGDP,foreigndebtstood at 17 percent in June 2009 compared to 20.1percent in June 2008. Debt service, as a percent ofcurrent account receipts and of exports of goods andservices, is 5.3 percent and 6.2 percent respectively in

June 2009, up from 3.9 percent and 4.6 percent a yearearlier (Table I.1).

... and the scal decit is expected to widen

for a short period in order to provide for

the scal stimulus ...

Annual Overall Fiscal Deficit and Cash Deficit (2001 GFS)

as Percent of GDP(2001/2002 - 2008/2009)

10.409.50

9.60

8.20

7.506.00 6.90

6.70

9.109.109.40

6.005.60

9.20

0

5

10

15 Cash Deficit

Overall Fiscal Deficit

2008/092007/082006/072005/062004/052003/042002/03

%o

fGDP

FIG. I.8 Source: MOF

In2005,theMinistryofFinancereclassiedGovern-ment according to the IMF 2001 GFS classicationstandard(modiedtocashprinciples),inlinewithin-ternationalbestpractices.There-classicationresult-edinhigherrestatementsofthebudgetdecitsstarting2001/2002, and illustrates the Governments commit-ment to tackle a tough issue.

In compliance with its medium term scalconsolidation plan designed to reduce the budgetdecitbyonepercenteveryyeardiscussedabove,thecashbudgetdecitfellfrom9.4percentofGDPin

2004/2005 to 9.2 percent in 2005/2006 and reached6.8 percent in 2007/2008. This is despite deep reformssuch as implemented income tax and tariff rate cuts,as well as possible sources of pressure in the comingyears arising from energy price adjustments, pensionreforms and bank restructuring. (Figure I.8; AppendixA-Table1.1.a&1.1.b).

However,thescalyear2008/2009haswitnessedawideningbudgetdecit,6.7percentofGDP,duetotheexpansionarycorrectivescalplanadoptedbytheGovernment.Temporary increase in scal spendinghas been front loaded. The Ministry of Finance has

accelerated spending on public projects that arealready planned and approved within the medium termnational plan. A decelerated rhythm will follow whenthe market absorbs the external shock of the globalnancialcrisis.Thusbudgetdecitwillbethesameon average for the medium term. This is a temporarymeasure that will allow an expansion without settinga permanent problem in the structure of the budget.


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Overview

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27

Meanwhile, public and Government debts

remain manageable.

Annual Domestic Debt as Percent of GDP(2002/2003 - 2008/2009)

% of GDP0 10 20 30 40 50 60 70 80

Net Domestic Public Debt

Net Domestic General Government Debt

Net Domestic Budget Sector Debt

2008/09

2007/08

2006/07

2005/06

2004/05

2003/04

2002/03

FIG. I.12 Source: MOFAccording to IMF projections, under the baselinescenario (GDP growth rate of 5.6 percent), net public

debtwoulddeclineafter ve years to65percent ofGDP. A more ambitious adjustment path (a sustainablerate of growth of more than 6 percent) would lowerdebt to 58 percent of GDP by June 2011.

With more reliance on non-inationary nancingsince 1999/2000, net budget sector and generalgovernment debts have slightly increased. Relative toGDP, net budget sector debt was some 53.5 percentin June 2008 compared to 54.1 percent in June 2009.During the same period, net general Government debtwas 42.7 percent of GDP compared to 44.7 percent(Figure I.12).

Egypts debt dynamics will benet from expectedstrong nominal GDP growth; the resumption ofprivatization; and the stabilization of the exchangerate. Furthermore, better tax compliance under thenew simplied tax system could help improve thescalpositionandpublicindebtedness.

Development in Debt Management.

The UNCTAD has been contracted to supply, installandgivelicensetoadebtmanagementandnancial

analysis system DMFAS to retain and process all thedata of internal and external indebtedness related toLoanroll-overservicedbyTheMinistryofFinance.Thesystem will provide a database for the debts and it isin the process of being linked with the database of theCentral Bank of Egypt, which would contribute to thestandardization of concepts and full compatibility tothe data of this debt. This system is aimed to lead to aneffective management of Public debt. A full databasefor domestic and foreign debt has been established.

DebtManagementUnitMinisterofFinancesOfcehas succeeded extending the debt maturity to two

years. In September 2004, debt maturity was 0.8years.TheUnithasusedthepolicyofissuinglong-term treasury bills and Government bonds to avoid thenegativeeffectsofuctuatinginterestratesonthecostof public debt. The Debt Management Unit has alsosucceeded in reducing domestic and external debtfrom 120 percent to 80.6 percent.

A new three-year public debt management projectwas recently introduced with the aim of improvingEgypts public debt management and developing theGovernment securities market. The project focuses on:

Implementing sound issuance practices,

Developingacomprehensivemedium-termdebt,

Management strategy covering both domestic andexternal debt,

Enhancing repurchase agreement (REPO) transac-tions and regulating the REPO market,

Introducingnewnancialtoolssuchasshortsell-

ing, bond lending, as well as buyback and ex-change operations,

Developing the primary and secondary market,

and promoting secondary market liquidity andpricing transparency.

Prior to the nancial crisis, theMinistryof Financewascommittedtoimplementingamediumtermscalconsolidation plan designed to reduce the budgetdecit byonepercenteveryyear.Asarst step theGovernment introduced an energy subsidy reductionpackage last July 2006. It has also announced deep

reforms in the sales and real estate taxes with a viewto widening the tax base and enhancing revenues. TheTreasury Single Account Law passed on June 2006by Parliament (See Appendix D) gave the Ministryof Finance better control over its cash managementoperations and hence improved debt management.

Annual Current Account Balance, Trade Deficit and Net Servicesas Percent of GDP (1991/1992 - 2008/2009)

%o

fGDP

-6

-3

0

3

6

9

12

15

18

Trade Deficit

Current Account Balance

Net Services

2008

/09

2007

/08

200

6/07

2005

/06

2004

/05

2003

/04

2002

/03

2001

/02

2000

/01

1999

/00

1998

/99

1997

/98

1996

/97

1995

/96

1994

/95

1993

/94

1992

/93

1991

/92

FIG. I.19 Source: CBE


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Overview

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29

I.1.2 .. CHALLENGES AND OPPORTUNITIES AHEAD

Global Economy Outlook for 2009

ThestressesinthenancialmarketsoftheUnitedStatesthatrstemergedinthesummerof2007transformed

themselvesintoafull-blownglobalnancialcrisisinthe fall of 2008: credit markets froze; stock marketscrashed; and a sequence of insolvencies threatenedthe entire international nancial system. Massiveliquidity injections by central banks and a variety ofstop gap measures by Governments proved inadequatetocontainthecrisisatrst.

Markets all over the world have been engulfed in aglobal economic crisis, with stock markets sharplydown and volatile, almost all currencies havingdepreciated substantially against the dollar, and risk

premiums on a wide range of debt having increasedby600ormorebasispoints.Bothprivate-sectorandsovereign interest rate spreads for developing countrieshave spiked even higher.

Commodity markets too have turned a corner.Following several years of increase, prices haveplummeted, and although well above their 1990slevels, they have given up most of the increases of thepast 24 months.

Growthprospectsforbothhigh-incomeanddevelopingcountries have deteriorated substantially, and the

possibility of a global recession cannot be ruled out.Based on the outlook for 2009, the Japanese recessionis expected to increase over 3.2 percent, accompaniedby price increases of 1.4 percent and unemploymentsoaring to 4.4 percent. GDP is projected to shrink in2009to-0.1percent.AsfortheUSA,GDPisexpectedtoslowdownfrom1.4percentin2008to-0.5percentin 2009.

Reductions in the nance available for rms andconsumers, coupled with a slowdown in developingcountries import demand, have set the stage fora recession in the United States, Europe, and Japan

beginning in the second half of 2008 and lastinginto 2009. International Monetary Fund directorhas indicated on several occasions that worldwiderecession could cause global economy to contract byas much as 3 percent this year.

Overall global GDP growth is projected to declineto 0.9 percent in 2009, with developing economiesexpanding by 4.5 percent well below the 7.9 percentgrowth rate recorded in 2007. International tradedecelerated sharply, with global export volumesdecliningforthersttimesince1982.Asaresult,both

commoditypricesandinationhaveeased,withoilprices averaging about US$75 a barrel in 2009 andfood prices declined compared with their average for

2008. Prices in all commodity markets have fallensharplysinceJuly2008reectingrevisedexpectationsof slower GDP growth. Because commodity pricesreect forward-looking expectations, the sharp

slowing of growth that is expected over the next yearhas caused prices to decline rapidly even though theunderlying supply and demand tensions are littlechanged from just a few months ago when these priceswerecloseall-timehighs.

The main source for the slowdown in both developingandhigh-incomecountrieswillbethroughinvestment,which for 2009 is expected to decline 3.1 percentin high-income countries. In developing countries,investment growth is projected to slow sharply to 3.4percent in 2009 from more than 13 percent in 2007.Developing countries, are facing higher borrowing

costs, and lowercapitalows, (those countries facea credit shortfall of up to US$700 billions) leading toweaker investment and slower growth in the future.

Low-income countries will also be affected by theslowdown mainly through indirect mechanisms,including slower global growth, lower commodityprices, slackening remittance receipts, and partialscalebackinaidowsasaresultofstimuluspackagesfor the major economic powers that will limit moneyavailable for their assistance. The crisis is threateningto unravel Africas economic and social success over

the last decade and millions of people are prone to bethrown back into poverty.

Onthemorepositivesidethatisemergingafterscaland other interventions by Governments, althoughfull recovery will take time, it is expected that aneconomic revival is a great potential. In the USA, someGovernment efforts are already paying off, seen in lowermortgagerates,stablemoney-marketfundsandmorebusiness lending. Another bright spot in the gloomypicture is the Chinese economy. Chinas contributionas being very positive in keeping many markets fromgoing down as far as they would otherwise.

Policy Challenges For EgyptThe nancial crisis has shown that with increasedglobalization,therearehugeeconomicbenetstobereaped through regional and international economicintegration, but also risks that need to be mitigated.Longer-term reformswill help improveEgypts long-term competitiveness and mitigate future risks.Managing these challenges will enable the Egyptianeconomy to emerge stronger and more resilient fromthisexceptionallydifcultperiod.


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130

2. Status of Recent Economic Legislation

ENACTED LAWS

1. Financial Leasing Law No. 95/1995, amended by Law No. 16/2001

2. Central Depository Law No. 93/2000

3. Money Laundering Law No. 80/2002

4. Special Economic Zones Law No. 83/2002

5. Civil Association and Establishments Law No. 84/2002

6. Telecommunication Law (UTL) No. 10/2003

7. UniedLaborLawNo.12/2003

8. Central Bank, the Banking System and Monetary Law No. 88/2003

9. Electronic Signature Law No. 15/2004

10. Small and Medium Enterprises Law No.141/2004

11. Income Tax Law No. 91/2005

12. Competition Law No. 3/2005

13. Governmental Accounting Law No. 139/2006

14. Real Estate Tax Law No. 196/2008

15. Presidential Decree No. 231 of the year 2004 concerning the organization of the Ministry of Investment

16. Presidential Decree No. 300 of the year 2004 issuing the Customs Tariffs

17. Explanatory Note on Presidential Decree No. 39/2007 Concerning the Issuance of the Customs Tariff

DRAFT LAWS

1. Draft Law for Regulation of Public Private Partnership PPP


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Appendices

131

3. Overview of Selected RecentEconomic Legislation

Law No.196 of 2008 was issued on June 23rd 2008to introduce a new real estate tax system, whichaims to remedy the obstacles and ambiguities thatprevious real estate laws could not overcome. Byreplacing previous real estate tax laws, the new Lawstipulates a new set of provisions and procedureswhich creates a transparent and straightforwardreal estate tax system. The law is composed of sixchapters and two schedules which determines thevalue of the real estate tax.

The real estate tax shall be imposed on the owner

(natural person or legal entity) of the estate or theperson entitled to its exploitation or usufruct right.

The value of the real estate tax shall be determinedat 10 percent of the value of the annual rental valueof the estate unit. The annual rental value shallbe determined by the Assessment Committee,in which the law stipulates its formation andcompetence. The assessment committee shalldetermine the annual rental value based on thegeographical location and level of construction andutilities connected to the unit. The determinationoftherentalvalueshallbereevaluatedeveryve

years.Attheendoftheveyearperiod,newrentalvalues shall be determined, provided that the newassessment of the rental value shall not exceed 30

The Electronic Signature Law No.15 of 2004 wasissued on April 21st 2004. The Law was issuedwith the objective of promoting the industry ofinformation technology and communication andis composed of 29 Articles.

The Law grants the electronic signature andelectronic documents in commercial, civil andadministrative transactions, the same status of thesignatures stipulated in the evidence provisions ofthe Civil and Commercial Laws, provided that theelectronicsignatureordocumenthasfullledtherequired conditions stipulated by the Law.

percent of the previous rental value for residentialunits and 45 percent for non residential units.

The rental value assessments shall be published intheofcialjournalafterraticationbytheMinisterofFinance.Realestatetaxpayersshallbenotiedof the rental value assessments by a registeredletter at their listed address.

The real estate tax shall be imposed on all realestate located in Egypt, regardless of its function,located underground or overwater, occupied orunoccupied. However the Law has determinedcertain estates which shall be exempted from thereal estate tax.

Residential units with an annual rental valueevaluated at less than six thousand Egyptianpounds shall be exempted from the real estate tax.

The law grants the taxpayer the right to appealthe annual rental value and has determinedthe procedures in which the appeal could besubmitted.

Taxpayers whom commit tax invasion accordingto the provisions of this law shall face a penalty

which is not less than one thousand EgyptianPoundsanddoesnotexceedvethousandPounds,in addition to compensation to the real estate taxauthority equal to the amount of the unpaid tax.

As a step by the Government to facilitate electronictransactions and information transfer, theInformation Technology Industry DevelopmentAgency was established by virtue of the Law,afliated with the Ministry of Communicationsand Information Technology. The Agency is thecompetent authority for issuing licenses necessaryfor electronic signature and electronic services, aswell as determining the regulatory standards andtechnicalspecicationsoftheelectronicsignature.

Any fraud or violation to the provisions of theLawshallbepenalizedbyanewhichisnotlessthan Ten Thousand Egyptian Pounds and does notexceed One Hundred Thousand Pounds.

3.1 The Real Estate Tax Law No. 196 of 2008.

3.2 Electronic Signature Law No. 15 of 2004.


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Presidential decree No. 300/2004 and its amendmentsconcerning the Customs tariff were issued in 2004.The tariff reductions that came into force then werelargely driven by national and international changesthe Egyptian economy had experienced at the time.The Egyptian Governments long term developmentplan since 2004 has been to create an investor friendlyenvironment that is increasingly led by the privatesector and that provides rapid job growth. In thiscontext, a new Customs tariff issued by PresidentialDecree No. 39/2007 has made amendments deemednecessary to achieve the Governments economicobjectives in a changing environment.

The main objectives of the amendments were asfollows:

To simplify the structure of tariff rates with a viewto reducing distortions in tariff rates and facilitatingtheir implementation by all concerned parties.This objective is achieved through the followingreductions:

a. 12 percent down to 10 percent;

b. 22 percent down to 20 percent;

c. 32 percent down to 30 percent;

d. 40 percent down to 30 percent (with theexception of bands included in Chapter 87).

To achieve a balance between tariffs imposed onmanufactured products, intermediate goods andraw materials, that are used entirely or in part inthe production of nal goods, while taking intoconsideration the contradictory goals of supportingthe national industry, reducing the burden onthe Egyptian people, and supporting the variousproductive activities.

To comply with Egypts commitments to theInternational Convention on the HarmonizedCommodity Description and Coding System, asstipulated by Presidential Decree No. 33/1999, by

adopting the HS 2007 issuance as the basis for theEgyptian Customs tariff. This will help facilitateEgypts external trade, put Egypts statistics at parwith international standards, and ultimately servenegotiations on bilateral and multilateral tradeagreements.

To review Article 3 of the Customs Law concerningthe collection of Customs taxes due on goods thatare subject to temporary admission whether forrepair purposes or for completion of manufacturingactivities in order to ensure sound implementationof the Law.

Eliminate many of the tariff lines and keep only thosestrictly necessary in order for the tariff schedule tobe at par with international practice.

Reduce the current tariff rates on selected imports ofbasic commodities, medications (especially thoseused for chronic illnesses) and intermediate andcapital goods used for production activities.

Support production activities while creating afair and competitive environment that does notrepresent a burden on the Egyptian consumer.

Develop a partnership with all stakeholders toensure transparency a pillar of the internationaltrading system in the decision making process.The tariff schedule was discussed widely with all

concerned parties such as commodity councils,chambers of commerce, the Federation of EgyptianIndustries, a number of private and public sectorproduction units, and industrial and investmentcompounds. The objective was to harmonize allpoints of view, and to ensure that all stakeholdersare partners in the decision making process so asto engage all parties and factors concerned withproduction and commercial operations.

Contribute to the creation of a clean environmentby applying to selected environmental products aCustoms duty of 2 percent of the value of the product.

(In cases where a lower tariff rate below 2 percenthas been in force, the lower rate applies.) This taxwill be applied on stations supplying vehicles withnatural gas, on parts needed to transform vehicles touse natural gas, on equipment used to monitor andcontrol various products of environmental concern,and on equipment for renewable and new sourcesof energy (wind and solar energy) and their spareparts.

The Customs Law No. 66/1963 stipulates in Articles6 and 9 that the Customs tariff should be issued bya Presidential Decree that has the power of law,on condition that it be submitted to the legislativeauthority in its current cycle as soon as it becomeseffective. If Parliament is in recess, it is to be submittedto the following legislative cycle.

3.3 Explanatory Note on Presidential Decree No. 39/2007 Con-cerning the Issuance of the Customs Tariff


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On July 2006, Law No. 143 of the year 2006was passed by the Peoples Assembly. The Lawwas issued to amend certain articles of theStamp Tax Law no. 111 of the year 1980. Suchamendments reected an enhancement in theeconomic activity and investment promotion, anexample of such is the elimination of the stamptax which was imposed on copies of nancialinstruments such as checks of all types and values,stocks and commercial bills. Stamp Taxes oncertain banking operations such as opening ofnancialcredit,loansanddebtreturns,lettersofcredit, opening of banking accounts, extractionof banking statements, portfolio collection werealso eliminated. An estimated Tax was imposedon credit facilities balances and loans provided bythebankduringthenancialyearbyavalueoftwo of a thousand.

The Law also eliminated Stamp Taxes imposed oncompany establishment, certain capital increases,and copies of minutes of board and assemblymeetings, such eliminations reect investmentpromotion. Other abolished Stamp Taxes includetaxes which were imposed on Egyptian nationalityissuance decrees, Commercial Navigationdocuments, invoices and clearance vouchers ofa value not less than One Pound, invoices ofproperty taxes. Stamp Taxes which were imposedonallkindsofcerticatesissuedfromgovernmental

agenciesexcludingcertaineducationalcerticateswere eliminated as well.

The Law requires a percentage to be paid offinsurance installments as a Stamp Tax with ratesof 1 percent, 10 percent and eighth in a Thousand,where each percentage rate is determinedaccording to the nature of the insurance. The insurerand the insured bear the due Tax equally, wherethe insurance company bear the tax imposed onthe total insurance installments. However such theTax is not imposed on reinsurance installments.

Additionally the Law imposes a Stamp Tax on allbrand promoting advertisements, equivalent to 15percent of the advertisement fee or cost. Accordingto the Law, the Advertising agency is to notify theTax Authority of all circulated advertisements andits cost, as well as the due Stamp Tax. Entities areto pay the due Tax to the competent Tax Authority;however the advertising agency is to levy the dueTax for advertisements created for natural personsand service it to the Tax Authority.

Another main feature of the new Law is the disputesettlementforallcasesledorpendingatcourtsof different levels prior to the effective date of thisLaw are to be settled by servicing a percentage ofthe tax and other disputed due payments accordingto the following grades;

30 percent of the tax and other disputeddue payments of sums amounting to OneHundred Thousand Pounds.

60 percent of the tax and other disputed duepayments of sums exceeding the amount ofOne Hundred Thousand Pounds.

3.4 Law No. 143 of 2006 amending Stamp Tax LawNo. 111 of the year 1980


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The Minister of Finance has issued the ExecutiveRegulations of the Stamp Duty Law, as well as

other ministerial decrees in relation to the generaldirectives and executives regulations of therespective Law.

The Executive Regulations includes several articlesthat aim to promote and enhance condencebetween taxpayers and the Tax Administration.Additionally, the regulations seek to augment thesupervisory role undertaken by the Ministry ofFinance in order to ensure and maintain a balancedrelationship between the aforementioned parties.

With regards to the tax due on bank transactions,businesses and documents, as well as the akin tosuch,theExecutiveRegulationshavedenedsuchtaxable bank bases and types, as follows:

According to the amendment, all transactionsrelated to the Uses and Resources of theGeneral Budget of the State, including thetransactions related to non-nancial assets(investments), must be recorded on cash basis.With this provision, the Budget recording willbe in perfect compliance with the internationalstandards.

An estimated tax shall be levied on the

consolidated balances of loans, creditfacilities, inventories in all their forms,including bank obligations, i.e. shares,speculations, interest accruals or any otherform of funding.

Consolidated balances shall be determinedquarterly (referred to hereinafter as theperiod) according to the total amountsgranted to creditors and which aredeposited into their own accounts, withthe exclusion of such unused amounts thatare within the bounds of authorized creditfacilities, loans.

The consolidated balance shall bedetermined at the close of each period

(on a quarterly basis) and shall be enteredinto the opening balance of the followingperiod, accompanied by credit facilities,loans and inventories advanced by banks,after the deduction of paybacks settledduring the same period of time.

In the event where credit accounts appears incredit facilitates, loans at the end of each period,such accounts may not be debited from the totalconsolidated balances, as well as allocations ofloans and accrued interests may not be debitedfrom the total consolidated balances.

The Executive regulation does not impose anestimated stamp tax on interest accruals ormarginal revenues which are not added up to thecredit facilities, loans for customers and banks.The estimated stamp tax shall fall due only onsuch debits from credit accounts of creditors andwhich are listed in their accounts, except thoseamounts that are not used from the authorizedcredit limit of credit cards. The estimated stampdutymaynotbeleviedondebitcardsorstored-value cards, including smart cards.and moreprogressivepublicnance.

3.4.1 Ministerial Decree No. 525 of 2006 promulgating theExecutive Regulation of Law No. 163 of 2006 concerning StampTax Law.


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On June 17th Law No. 139 of 2006 was ap-proved by the Peoples Assembly. Law No.139 is issued to amend Articles 5, 6 and therstparagraphofarticle30ofLaw127of1981concerning Governmental Accounting.

Recording on cash basis:

According to the amendment, all transactionsrelated to the Uses and Resources of theGeneral Budget of the State, including the trans-actionsrelatedtonon-nancialassets(invest-ments), must be recorded on cash basis. With thisprovision, the Budget recording will be in perfectcompliance with the international standards.

Treasury Single Account:

LawNo.139willintroduceanothersignicantimprovement to the State Budget. The Law statesthat a single account must hold all the accountsof:

The Ministry of Finance,

The administrative body units,

Local administration and public service

Economic authorities

All other accounts of public and govern-mental agencies already opened.

3.5 Law No.139 of 2006 amending some of the articles ofLaw No. 127 of 1981 concerning Governmental Accounting

The new accounting system develops a moretransparent and effective State Budget. Previously,public money was fragmented into:

48,400 accounts within the Central Bankof Egypt

5,000 accounts in other commercialbanks

By the end of December 2005, the cash in theseaccounts amounted to LE 82.3 billions whichrepresents around 14 percent of GDP.

The Treasury Single Account will consolidatesub-accountsforeachoftheabovementionedentities. With this additional remedial step, theMinistry of Finance is heading towards a lower

budgetdecitandmoreprogressivepublicnance.


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The provisions of article 4 of law 186 of 1986regulating customs exemptions, concerning thecollection of customs duty at a xed rate of 5percent of the value, shall apply to companies andestablishments for all their imported machinery,equipment, devices, means of transportation formaterials and vehicles (other than private cars)necessary for establishing projects, includinginvestment projects, hotels, tourist establishments,stated in law 1 of 1973.

The provisions of article 8 of law 186 of 1986regulating customs exemptions states thatmachinery, equipment, devices (other than privatecars) shall be temporary released to be rented orused within the country at a tax rate of 20 percentof the value for every year or portion of a year

that they remain in Egypt. Article 9 paragraph Agenerally restricts the usage of items that havebeen exempted or that have a discounted customstarifforhaveaxedtaxrate.Accordingtoarticle4, it is prohibited to use these items within aspeciedperiod for anymeansother than theirmain purpose, except after paying the applicablecustoms duties.

There was a debate concerning the validity of thexedrateof5percentformachinery,equipment,anddevicesasspeciedinarticle4.Therefore,thematter was reviewed and discussed by the cabinetcommittee concerned with settling investment

disputes and decided the expansion of thepreviously mentioned category.

The application of the 20 percent tax rate asstated in article 8 will be a burden on the projectsthat import machinery, equipment and devices.This could prevent them from importing suchequipment despite the need for them.

In addition, article 9 paragraph A of the samelaw states the prohibition of usage of these itemsuntil paying taxes and fees and prohibition oftransferring them to other projects that havesimilar privileges. According to the decision of thegeneral assembly of the departments of fatwa andissuing legislations in State Council, these projectsbecame deprived from reusing such machinery,equipment and devices despite the fact that theseitems could be imported and be exempted or haveadiscountedrateorhavethexedtaxrateof5percent.

For all these reasons, the amendments of theprevious articles are required to settle any disputemay arise in the projects stated in article 4 whoenjoyed the 5 percent tax rate, and to ease the

burden on the institutions and establishments thatarewilling tobenet fromarticle8.In additionto permitting the transference of the exemptedmachinery, equipment and devices or enjoyed adiscounted customs tariff rate or have a customsduty of 5 percent to other projects that havethe same privileges during the period of seizurewithout forcing them to pay any customs duties.

Meanwhile, the law includes re-regulating theperiod of seizure in exempted commodities orhave a discounted tariff rate or have a 5 percentxeddutyrateaccordingtoitsexpirydatesandtypes and following the principle of graduation in

setting the customs duty in cases of transferringsuch commodities during the seizure period.

The attached law also states the necessity to revisethe requirement for commercial and manufacturingsamples for the exempted commodities accordingto article 2 of the mentioned law to inspect whetherthese commodities shall be exempted or not.

3.6 Law No. 8 of 2005 amending the Customs ExemptionsLaw No. 186 of 1986


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Less than two months after the appointment of thenewCabinet,MinisterofFinanceYoussefBoutros-Ghali presented a new income tax law during theannual conference of the National DemocraticParty, held in September 2004. The draft lawwas circulated and discussed by all stakeholdersand then sent to Parliament for approval. TheParliament has passed the new law and thePresidenthassignedandissueditintheOfcialGazette in June 2005.

The new income tax law makes the Egyptian taxsystem more transparent for both national andforeign companies looking to invest in Egypt. It cutspersonalandcorporateincometaxes,anduniestax exemptions and legislations. It introduces a50 percent reduction in personal and corporatetaxes to a maximum rate of 20 percent. It hasalso restructured income tax brackets into three

categories, with tax rates of 10, 15 and 20 percent.Existing tax exemptions for annual earnings ofunder LE 5,000 would double. Working spouseswouldbenetfromthenewlawaseachofthemwould be eligible for an exemption of LE 5,000on wages. Civil servants would get a personalexemption of LE 4,000 annually.

Additionally, the law grants a general amnesty fortaxpayers in all cases before courts the subject ofwhich is the disagreement between the taxpayerand the Tax Authority on the tax estimation,provided that the disagreed tax amount does notexceed LE 10,000. Moreover, the law provides for

a settlement process in tax evasion cases or otheroffences upon request from the concerned personwithin one year of the entry into force of the law.These provisions are seen essential in order toencourage Egypts informal economy to legalizeits status.

The law also provides for phasing out taxexemptions for newly established companies.Companies listed on the Stock Exchange wouldalso lose the tax exempt status of their paid-incapital.

In addition to rate reductions, the law providesfor streamlining tax administration and merge all

income tax legislations into one law. The law isintended to encourage the voluntary submissionof tax returns by taxpayers, the timely paymentof taxes, and greater compliance of citizens whopreviously evaded taxes whether because of highrates or cumbersome procedures. A key elementof the lawis the introductionof self-assessmentfor taxpayers. This places the burden of proof for

tax evasion on Tax Authority which will now limitits inquiry to a sample of some 5 to 10 percentof all taxpayers. The elimination of what hadbeen viewed as discretionary assessments aims atregaining the missing trust between taxpayers andthe Tax Authority.

TheMinistryanticipatesasignicantimprovementin the cost effectiveness of the Tax Authority and areduction in costs to enterprises and individualsassociated with the payment of taxes. The newsystem raises revenue from a limited number oftax rates and will therefore substantially reduceadministration and compliance cost. Avoidanceof numerous taxes that yield limited revenuewill also facilitate tax assessment and avoid theimpression of excessive taxation. The new lawalso introduces high deterrent penalties againsttax fraud.

The proposed rate reductions and administrativechanges will, in the medium term, stimulatethe economy. Higher prots for businesseswill encourage faster economic growth, thusexpanding the tax base and ultimately increasingtax revenues. This should partially make up forthe shortfall in tax revenues, estimated at betweenLE 3.2-3.5 billions. GDP growth rates shouldincreaseby2-2.5percentgivingrisetoatleastLEtwo billions in additional revenues.

A broad tax base with limited exemptions enablesrevenue to be raised with relatively low rates.The erosion of the tax base through exemptionsrequires higher tax rates to make up for the lossin revenue. Higher rates only serve to increasethe likelihood of tax evasion. Hence, expectedimproved tax compliance under the new reformsshould also cover a large part of the loss in taxreceipts.

Proceeds from an ambitious privatization programthatincludes172state-ownedcompanies,apublicsector bank and the stake of the Government injoint venturebankswill alsobeusedtonancethetemporaryincreaseinthebudgetdecit.

Over the longer term the Government will be

building up the administrative capacity of thestate to collect taxes. In addition, a plan was set,immediately after the issuance of the law, to createawareness of taxpayers in order to encouragethem to take part in the reform. This plan dependsto a large extent on press and media campaignsdirected to all classes of society.

3.7 Law No. 91 of 2005 Concerning the Income Tax


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Article Eighth of the law issuing the income taxlaw provide that the Minister of Finance shall issuethe Executive Regulation for the tax law.

Accordingly, the Minister issued decree No.991of the year 2005 promulgating the ExecutiveRegulations of the Income tax law. The Regulationset forth the guide lines and interpretation of taxlaw articles, and helps in leading the way to thebest application of the concepts laid down in thelaw,byprovidingthedenitionsoftheprinciplesstipulated in the law and the procedures neededto apply such principles therein.

The Executive Regulations consist of 146 articlescontained in six books.

Book One speaks about general provisions whichdeals with the issues of the calculation of the taxperiod and the conditions needed to approve achange in the tax period. In addition, the caseswhen the natural person is considered as havingpermanent residence in Egypt and the actualheadquarters of a legal person as well.

Book two deals with the Income Tax of naturalPersons with regard to the following issues:

Tax scope and rate,

Salaries and the like

Commercial and Industrial activity,

Exemptions,

Revenues of non commercial professions,

Real estate revenues

Taxes on theprots of the legalpersons is thesubject of Book Three from the regulations. Itdeals primarily with determining the scope of the

tax and the equation of calculating the averagecapital stock, the average of loans and advancesof determining taxable income .

Book Four set fourth the withholding of tax atsource, and the issues of Deduction, Collection,and Tax advance Payments are the subject ofBook Five from the regulations. Book Six setsthe obligation of Taxpayers and others whichincludesnotications,bookkeepingtaxreturn,taxassessment, tax audit and investigations, collectionguaranteesandnallyappealprocedures.

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