Egypt

Egypt’s economy slowed down in 2008/09. The gross domestic product (GDP) growth rate reached 4.7% (Figure 1). The deceleration of growth was a result of the global crisis. Domestic final consumption proved resilient and increased public investments offset the decline in private investments to some extent. The key driving sectors in the economy were extractive industries, information and communications technology (ICT), construction and wholesale and retail trade. However, all sectors with international linkages were negatively affected by the global crisis especially tourism, the Suez Canal, and workers’ remittances. Foreign direct investment (FDI) dropped by around 38.7% in 2008/09. 

Egypt held up well during the first round of the global financial crisis thanks to its reformed banking sector and low integration into global financial markets as a whole.  As a result, Moody’s raised Egypt’s sovereign rating from negative to stable in September 2009. Egypt advanced by 10 ranks – to 106 out of 183 grades – in the World Bank’s Doing Business 2010 report. Its ranking also improved by 10 positions in the World Economic Forum’s Global Competitiveness Report 2009-10, to 70^th out of 133 countries. 

The overall budget deficit stabilised at 6.9% of GDP in 2008/09, close to its previous year’s level. As the Egyptian government continues its counter cyclical policy, the overall budget deficit is expected to widen to 7.5% of GDP in 2009/10. Average annual CPI inflation increased to 16.2% in 2008/09, up from 11.7% in 2007/08. As international prices continue to stay at a lower level, we expect inflation to decline to 13.2% in 2009/10. 

To counter the adverse effects of the global financial crisis on the Egyptian economy, the government took several measures to prevent a sharp decline in economic activity.  Fiscal and monetary policy boosted economic activity while targeted programmes cushioned the effects of the crisis on the most exposed sectors such as manufacturing, tourism and foreign trade.

The balance of payments is in deficit for the first time in five years because of declining current account receipts, falling remittances and receding foreign investment. As the impact of global economic crisis starts to subside and the world economic outlook brightens, the Egyptian economy is expected to grow at higher rates, 5.4% in 2009/10 and 6.1% in 2010/11. The balance of payments deficit is expected to decline. The biggest challenges are rising unemployment, especially with investment slowing-down, and unequal income distribution: more than two fifths of the population are close to the poverty line.  Illnesses such as hepatitis B and C represent major challenges to improving health and labour productivity as do, potentially, an H1N1 swine flu or bird flu epidemic. 

Egypt’s key goal for tax reforms is to increase tax revenues. Throughout the last decade, there have been several legislative and administrative reforms that have led to increased tax revenues. Yet more effort is needed to reduce the regulatory burden of tax compliance and to formalise the informal sector. On the other hand, the impact on income distribution and social welfare of new tax measures such as  the property tax or a new fully fledged value added tax (VAT) should be carefully studied.  

Egypt faces many challenges: lower savings and investments, lower FDI, rising unemployment, reducing poverty and improving health and education. All that in the context of an unpredictable political environment in the face of upcoming parliamentary and presidential elections.

Egypt weathered the first round of the global economic crisis well thanks to the reform of its banking sector in previous years, and its relatively low financial market integration with the world. Egypt, however, was negatively affected by the second round impact of the global crisis. GDP growth rate fell from its average of 7% in the last three years to a mere 4.7% in 2008/09. The growth rate achieved was due to the resilience of domestic consumption, which represents 81.5% of GDP, and increased public investments in that year of 83.5 billion Egyptian pounds (EGP).  In an attempt to lessen the blow of the global crisis, the government designed a rescue package to preserve demand and help the sectors that are directly affected. The fiscal stimulus package of EGP 15 billion (1.5% of GDP) in 2008/09 was one of the key features of this package. The extra public investment spending was mainly directed towards infrastructure and utility projects, particularly water and sanitation projects.

In 2008/09 total investments remained stagnant at the previous year’s level of EGP 200 billion. Yet, as a percentage of GDP, investments actually decreased from 22.5% in 2007/08 to 19.5% in 2008/09.  Share of private investments to total investments decreased remarkably from 64.3% of total investments in 2007/08 to 56.8% in 2008/09 (approaching the level of 2005/06). The share of public investments to total investments, on the other hand, increased from 35.3% in 2007/08 to 42.4% in 2008/09.

The sectors that contributed the most in 2008/09 were: ICT with a growth rate of 14.9%; the construction sector with a growth rate of 11.4%; and wholesale and retail trade with a growth rate of 5.8%. 

Conversely, all economic sectors with foreign transactions have been hit by the global crisis :  namely, revenues from the Suez Canal, tourism, and workers’ remittances. Revenues in foreign currency declined in 2008/09 by EGP 20 billion as compared to the previous year. Oil and gas exports decreased by 24% due to price fluctuations. Suez Canal revenues went down by 8.4% because of a slowdown in world shipping and the increased risk of piracy off the coast of Somalia. Revenues from tourism deteriorated slightly by 3.1% as the average number of nights spent in Egypt declined. Workers’ remittances dropped by 11.7% in 2008/09 compared with the previous year, reflecting an increase in Egyptian unemployment abroad as well as decreased wages.

The government took several measures to counteract the effects of the global crisis on Egypt’s economy. Macroeconomic policies were eased[1] and specific targeted programmes cushioned the blow to vulnerable sectors such as manufacturing and tourism.

In the manufacturing sector, the following measures were adopted: abolishing sales tax on machinery, equipment and capital goods for one year as of January 2009; postponing for one year, 75% of industrial land instalments owed to the government; fixing natural gas and energy prices for all operating plants till the end of 2009; and rescheduling energy connection fees over a three-year period. Other measures included: enhancing services provided by the Industrial Training Council, the industrial technology centres and the Industrial Modernisation Centre, by reducing contributions of the benefiting companies to 50%; increasing subsidies to services provided by technological centres to various industries; decentralising the process of issuing industrial and operating licences to the boards of the industrial zones at governorate level and streamlining the required procedures for the renewal of industrial registration; and reducing the time needed to acquire all of the required approvals for all new, non-energy intensive, industrial projects to one day.

As for the tourism sector, the following measures were put in place: rescheduling outstanding debt and providing loan facilities to projects in the sector; intensifying joint marketing campaigns with international travel agencies; concentrating marketing efforts towards emerging economies with high potential; supporting charter flight programmes and the introduction of low-cost carriers to the Egyptian market.

Egypt adopted the following measures to promote international trade: reducing tariffs on specific capital goods and production components that have no local substitutes; increasing finance to export programmes by 50%; and reducing participation fees for specialised international fairs and exhibitions by 50% while doubling the number of participating companies.

FDI was badly hit, falling by 38.7% from 13.2 billion US dollars (USD) in 2007/08 to USD 8.1 billion in 2008/09. FDI declined in all sectors with the exception of oil and gas, where it increased. Two-thirds of FDI was directed to oil and gas while the remainder went to manufacturing and other non-petroleum sectors (28.4%), construction (1.2%) or took the form of mergers and acquisitions (3.7%). Foreign portfolio investments decreased as foreigners sold their treasury bills (TBs), bonds and shares in Egypt following the initial outbreak of the financial crisis.

Economic growth is expected to pick up gradually, reaching 5.4% in 2009/10 and 6.1% in 2010/11. Still, it is likely that FDI inflows, workers’ remittances, tourism and Suez Canal revenues will remain lower than their levels prior to the global economic crisis. Therefore, the need will be ongoing for fiscal and monetary policies that promote economic growth.

The global economic crisis had a negative impact on Egyptian industry. Industry contribution to GDP declined to 31.5% in 2008/09 as compared to a contribution of 33% to GDP in 2007/08 (Figure 2). In 2008/09, manufacturing’s contribution to GDP amounted to 16.6% while the extractive industry contributed 14.9%.

Growth in manufacturing output decelerated to 3.7% in 2008/09 compared with a growth of 8% a year earlier – the result of a decline in investments directed to manufacturing (EGP 30 billion in 2008/09 compared with EGP 43 billion in 2007/08, a decline of 43%). Manufacturing share in total investments decreased to 15% in 2008/09 compared with 21% in 2007/08. According to the Industrial Development Authority (IDA), which oversees the government’s 1 000 Factory and Business Market programmes, investments of EGP 62.7 billion led to the establishment of 2 700 factories with an absorptive capacity of 277 000 workers from the beginning of the programmes in 2005 through June 2008/09.  During 2008/09, 371 new and/or expanded factories were established with EGP 9.6 billion in investments adding about 37 000 jobs to employment capacity.

The contribution of extractive industries to GDP was 14.9% in 2008/09. Yet the growth rate in extractive industry increased to 6%, led by an increase in oil refining. Egypt is both an exporter and an importer of petroleum products, with an overall surplus in this sector. In 2008/09, total production of crude oil condensates, butagas and gases grew by 6.5% to reach 81 million tonnes. Natural gas production rose by 7% to about 46 million tonnes. The production of petrochemical products in 2008/09 deteriorated by 4% to 35.6 million tonnes. Investments in the petroleum sector represented 19.2% of total investments in 2008/09. Increased investments in the sector led to several oil and gas discoveries in 2008/09, raising oil and natural gas reserves to 4.4 billion barrels and to 77.2 trillion M^3, respectively. Consumption of petroleum products and natural gas also increased, by 5% to a level of 63 million tons in the case of petroleum, leaving export volumes largely unchanged. Nevertheless, the trade surplus in oil and natural gas decreased from USD 4.9 billion in 2007/08 to a USD 4 billion because of the decline in global demand for oil and oil prices.

Although agriculture’s share in GDP was only 13.7% in 2008/09, farming plays an important role in rural incomes and employment, as well as export revenues. Employment in the agricultural sector was around 27% of total employment in 2006/07. The export of agricultural raw materials represents 4% of total exports. Production grew by 3.2% in 2008/09. During 2007/08, wheat production reached 8 million tonnes, representing between 55 and 60% of domestic consumption. In April 2008, a six-month ban on rice exports was instituted to divert supplies to the local market and decrease domestic prices in the face of a global shortage. The ban was extended to October 2010. Exporters are allowed to sell part of their rice abroad provided they deliver the same amount of rice to the state grain buyer in tenders. Rice production averages 4.6 million tonnes per year. Local consumption is about 3.2 million tonnes, leaving 1.4 million tonnes available for export. Other key agricultural exports include cotton, potatoes, citrus fruits, medicinal plants, groundnuts, onions and preserved and dried vegetables.

The contribution of services to GDP remained steady at 52% in 2008/09. Suez Canal revenues deteriorated by 7.2% to USD 4.7 billion in 2008/09, as the number of crossing vessels decreased by 8.2% to 19 354, and their net tonnage declined by 9% to 811.2 million tonnes. Tourism accounts for 19.3% of foreign currency earnings and 3.5% of GDP. This sector has been negatively affected by the global crisis, with its growth rate decelerating from 24% in 2007/08 to 1.1% in 2008/09. The number of tourists remained unchanged in 2008/09, at 12 million, similar to its previous year’s level. However, the total number of nights spent fell by 3% to 123.4 million in 2008/09. Investments in tourism declined by 2% in 2008/09 to EGP 5.2 billion.

ICT was one of the fastest growing sectors in 2008/09. With a growth rate of 15%, it contributed 3.8% to GDP. Investments in ICT reached EGP 13.9 billion in 2008/09 as compared to EGP 13.3 billion during 2007/08, an increase of 5%. In a country with a population of about 82 million people, the number of fixed-line subscribers reached 11.7 million in June 2009 and telephone capacity increased to 14.3 million lines. The number of mobile subscribers hit 48.5 million, growing at a rate of 38% in 2008/09 while Internet users rose by 20% to 13.5 million. As of June 2009, technology clubs numbered 1 892 and information technology companies totalled 3 211 working companies.

The construction sector proved resilient during the global crisis. Its contribution to GDP was 4.5% in 2008/09, growing strongly by 11.4% but less than the previous year’s growth of 15.7%. The average annual price of steel decreased by 49% while cement prices increased by 6.8%.   

Total investments in 2008/09 reached almost EGP 200 billion – similar to its previous year level of EGP 200.5 billion. In real terms, however, investments declined by 9%. Investment as a percentage of GDP declined from 22.3% in 2007/08 to 19.3% in 2008/09 (Table 1). Public investment represented around 42% of capital formation in 2008/09, reflecting investments in infrastructure and human and social development. Public investment grew by 28% while private investment declined by 12% in 2008/09. More than half of all implemented investments, 52%, were in the commodity sector, followed by social services and public utilities at 25%, and production services with a share of 23%. Distribution of investments by sector in 2008/09 was as follows: 15% for manufacturing; 20.9% for social services; 16.4% for petroleum; 11% for transportation and storage; 9.7% for tourism and communications; 18.3% for electricity and water; 3.4% for agriculture; 2.5% for trade and finance; and 1.9% for building and construction. Estimates and projections predict the continued growth of total investment at lower levels than 2008/09. Projected growth rates for 2009/10 and 2010/11 are 8.6% and 12.4%, respectively.

Despite the exposure to global international prices hikes and to the global financial crisis, the overall budget deficit stabilised at 6.9% of GDP in 2008/09 ─ close to the previous year’s level of 6.8% in 2007/08 (Table 2). As a percentage of GDP, total revenues were 26.8% while total expenditures stood at 33.5% in 2008/09. Total revenues increased by 25.8% during 2008/09 to EGP 278.6 billion, with tax revenues increasing by 18.9% to EGP 163.2 billion and non-tax revenues rising by 37% to EGP 115.4 billion. The increase in tax revenues came as a result of the rise in income taxes, which grew by 19.6% to EGP 80.2 billion; and that of taxes on goods and services, by 26.1% to EGP 62.7 billion. As for non-tax revenues, grants increased by more than five fold to EGP 7.6 billion. Other revenues grew by 30.2% to EGP 107.7 billion.

Total expenditures increased by 23.2% to EGP 347.7 billion in 2008/09 to EGP 347.7 billion. This is due to several factors. First, the increase in subsidies by 11.4% to EGP 93.8 (EGP 63 billion in subsidies for petroleum products, EGP 21 billion in food subsidies, and EGP 10 billion for other subsidies such as transport and housing). Second, the more than sevenfold rise in social benefits to EGP 28.5 billion, the surge in wages and salaries by 19.7% to EGP 75.2 and the increase in interest payments by 4.5% to EGP 52.8 billion. Moreover, the purchase of non-financial assets increased by 23.2% to EGP 42.1 billion as a result of the stimulus package launched during the year.

The government introduced a stimulus package of EGP 15 billion during 2008/09 to support economic growth. Government spending was mainly directed towards public investments (EGP 10.8 billion), especially for infrastructure projects (water and sanitation) while the remaining amount was in the form of current spending (EGP 2.7 billion) and forgone fiscal revenues (EGP 1.5 billion).

The overall budget deficit is projected to increase to 7.5% of GDP in 2009/10. This is due to an expected decline in tax receipts and the possible need for extra government spending to stimulate the domestic economy. The government intends to pursue a countercyclical fiscal policy next year. The 2009/10[2] fiscal budget includes some EGP 5.5-6 billion that can be a part of a second stimulus package. Of that, EGP 2.5-3 billion represents accelerated or additional investment expenditures that go beyond the normal increases in the annual budget. Most of those extra outlays are directed to finance investment projects, in addition to allocations for export promotion and developing internal markets, as well as the completion of the one-year sales tax rebate on capital goods that was launched as part of the first stimulus package. In January 2010, the prime minister requested the approval of the parliament for a third stimulus package of EGP 11.2 billion. Depending on the global outlook, there is a possibility that the Egyptian government will inject further stimulus while trying not to affect medium-term fiscal and debt sustainability.

By December 2009, all individuals and companies were requested to submit their property tax declaration according to the new Real Estate Tax Law of 2008. The deadline was later extended to the end of March 2010. It is expected that the new tax revenue will increase revenues by around EGP 3.5 billion per year. Potential measures that aim to ease budgetary constraints in the short term include encouraging public-private partnerships (PPP) in social sectors such as schools and water treatment and sewage plants. Other possible reforms include the gradual reduction of energy subsidies (or imposition of taxes) especially for energy intensive industries while taking account of the attendant inflationary impact.

In 2008/09, the gross domestic public debt reached EGP 640.6 billion (61.7% of GDP), compared with EGP 537.6 billion in 2007/08 (60% of GDP). Gross external debt declined to USD 31.5 billion in 2008/09 compared with USD 33.9 in the previous year. As a percentage of GDP, gross external debt decreased from 20.1% in 2007/08 to 17% in 2008/09.

Total government debt to GDP (domestic and foreign) stabilised at 81% in June 2009. This is in spite of the Egyptian central bank's reclassification of USD 4.3 billion as part of central and local government debt instead of “other sectors” debt.

The commodity price increases, including energy, that occurred in 2008 led to increased headline inflation from 10.5% in January 2008 to peak at 23.6% in August 2008. This led the central bank of Egypt (CBE) to adopt a restrictive monetary policy during the second half of 2008. Overnight deposit and lending rates were raised several consecutive times to 11.5% and 13.5% respectively, in September 2008.

Following the global financial crisis, international prices fell and inflationary pressures started to subside. Hence, the CBE adopted an expansionary policy to boost economic activity. The CBE cut its overnight deposit and lending rates six consecutive times from February to September 2009 to reach 8.25% and 9.75%, respectively, in September 2009. Annual headline consumer price index (CPI) inflation fell to a low of 9.9% in June 2009, down from the peak of 23.6% in August 2008.  It is worth noting that it took several months for the decline in international prices to impact on domestic price levels owing to the downward price rigidities in domestic markets.

Compared with the average CPI annual inflation of 11.7% recorded in 2007/08, average CPI annual inflation increased to 16.2% in 2008/09. With economic slow-down and lower international prices expected to continue in 2010, we expect average CPI annual inflation to decrease modestly to 13% ─ assuming that domestic oil prices remain unchanged. If domestic oil prices increase and come closer to international levels, that will push up inflation.

The declared monetary policy goal of Egypt's central bank is to achieve price stability. New monetary instruments are being developed to allow for a declared inflationary target. On 25 October 2009 the CBE launched its Core Inflation Index, which is derived from headline CPI. The core index excludes items characterised by inherent price volatility such as “fruits and vegetables”,  representing 8.8% of the headline CPI basket; and those with managed prices – “regulated items”  that make up 19.4% of the headline CPI basket. The Core Consumer Price Index is meant to complement the Headline Index and is not a substitute for it.

Total deposits with the banking sector (excluding CBE) increased to EGP 823 billion in July 2009 compared with EGP 763 billion in July 2008 (an increase of 8%) and 87.5% of deposits are non-government deposits. Similarly, total lending by the banking sector (excluding CBE) increased to EGP 428 billion in July 2009 as compared to EGP 407 billion in July 2008 (an increase of 5%). The overall loan-to-deposit ratio was 55.6% in 2008/09, in line with the previous year’s level of 55.4%. Dollarisation in total deposits decreased to 25.3% in July 2009 compared with 25.7% in July 2008.

In response to the global economic turmoil, the CBE took several measures. At the onset of the financial crisis, the CBE affirmed its role in guaranteeing all deposits in the banking sector. This move prevented possible panic runs on deposits. To boost the economy, the CBE adopted a less restrictive monetary policy. Furthermore, the CBE decided to exempt banks’ deposits, equivalent to the size of the loans extended to finance small and medium enterprises (SMEs), from the 14% legal reserve requirements. This move facilitated finance for SMEs, many of which are labour-intensive, to boost economic activity and employment. Similarly, the corporate investment sector in banking was banned from investing in instruments of more than three-year maturity with the purpose of encouraging the private sector to reinvest their residuals in their businesses.

Since January 2003, the Egyptian pound exchange rate has followed a managed float. During 2008/09, the Egyptian pound depreciated  by 4.7% against the US dollar from EGP 5.33 in June 2008 to EGP 5.59 in June 2009.  The depreciation is mainly due to the global economic slowdown and the current account deficit.

As a result of the global financial crisis, foreign demand decreased and led to slowdown of exports of goods and services. The balance of payments is in deficit for the first time in five years because of declining current account receipts from exports of goods and services, falling remittances and receding foreign investment flows.  The overall balance of payments switched from a surplus of USD 5.4 billion in 2007/08 to a deficit of USD 3.4 billion in 2008/09. In 2008/09, the current account deficit reached USD 4.4 billion while the capital and financial account achieved a surplus of USD 1.4 billion ─ this is in comparison to a current account surplus of USD 0.9 billion and a surplus of USD 7.6 billion for the capital and financial account in 2007/08.

The current account deficit in 2008/09 was induced by a wider trade deficit, coupled with a declining surplus in both the services balance and net unrequited transfers. Exports and imports decreased by 14.3% and 4.6%, respectively. Merchandise exports dropped to USD 25.2 billion. Oil exports decreased by 24% owing to a decline in oil prices while non-petroleum exports declined by 4.8%.  Merchandise imports decreased to USD 2.4 billion, as a result of the decrease in oil imports by 26% to USD 7 billion in 2008/09.  Non-petroleum imports, which represent 86% of total imports, remained close to the previous year’s level of USD 43.3 billion.

 

During 2008/09, the services surplus receded to USD 12.5 billion in 2008/09 compared with USD 15 billion in previous year. Such a decline stemmed from a decrease in Suez Canal revenues of 8.4% and a 3% fall in tourism revenues, all that in addition to a decrease in returns on investments abroad by 41% because of declining interest rates and the global economic slow-down. Net transfers fell by 12% to reach USD 8.2 billion in 2008/09 against USD 9.3 billion a year earlier. The decline is attributed to the drop in both net private and official transfers. Net private transfers declined by 8.9%, mainly asa result of the decrease in workers’ remittances by 8.8%. Net official transfers also fell with lower cash grants and donations to the Egyptian government.

In 2008/09, the capital and financial account declined to USD 1.4 billion compared with USD 7.6 billion a year earlier because of portfolio outflows and a substantial decrease in FDI – by 38.7%.

Net FDI inflows decreased from USD 13 billion in 2007/08 to USD 8.1 billion in 2008/09, of which the petroleum sector accounted for USD 5.4 billion or 66.7%. Greenfield FDI totalled USD 2.3 billion (28.4% of net inflows), acquisitions were USD 0.3 billion (3.7 of net inflows) and purchases in the real estate sector were USD 0.1 billion (1.2% of inflows).

Portfolio investment recorded a net outflow of USD 9.2 billion during 2008/09, of which net sales of Egyptian treasury bills posted USD 7.1 billion. This reflects a substantial divestment by foreigners. Foreigners’ net sales in the Egyptian stock market amounted to USD 1.1 billion. Net transactions on sovereign bonds and EGP bonds issued abroad unfolded an outflow of USD 1 billion.

Looking ahead, the external current account balance is expected to continue to show a deficit in both 2009/10 and 2010/11 (though less than 2008/09) as exports continue to perform below their pre-crisis levels. Revenues from tourism, the Suez Canal and workers’ remittances are not expected to increase from 2008/09 levels.  FDI inflows are unlikely to prevent a moderate decline in international reserves. There is also a risk of further capital outflows given financial market volatility.

The import coverage of international reserves decreased to 7.3 months during 2008/09, compared with 7.9 months in 2007/08 because the imports bill remained at its previous year’s level as international reserves declined. Net international reserves decreased to USD 31.3 billion in 2008/09 compared with USD 34.6 billion in 2007/08 – a decrease of 11%. It is worth mentioning that net international reserves increased to USD 33.5 billion by September 2009. The increase is principally ascribed to the IMF general allocation of special drawing rights (SDRs) to member countries. As a result, Egypt’s share of SDRs increased by around USD 1.2 billion.

Foreign public debt decreased by 8% to reach USD 31.5 billion in June 2009 (17% of GDP), compared with USD 33.9 billion (20.1% of GDP) a year earlier. The decrease was an outcome of two factors. First, the depreciation of most currencies against the US dollar, which led to the decrease in external debt by USD 1.3 billion. Second, the net repayment of USD 1.1 billion.

The external debt position continues to have a favourable profile with only 6.8% of total foreign debt composed of liabilities with short term maturity. The public sector is the major obligor, carrying 94.2% of total foreign debt as of the end of June 2009.

For the fourth consecutive year Egypt is a “top ten reformer” according to the World Bank’s Doing Business 2010 report. In terms of ease of doing business, Egypt ranked 106 out of 183 countries, up ten places from its previous year’s ranking of 116.  The areas of improvements included: making it easier to deal with construction permits thanks to the executive articles for the 2008 construction law and the elimination of most pre-approvals for construction permits; the creation of commercial courts to expedite contract enforcement; increased access to credit information with the addition of retailers to the database of the private credit bureau; and the removal of the minimum capital requirement for start-ups. Areas where Egypt’s ranking remains poor includes paying taxes (140 out of 183 countries), employing workers (120 out of 183 countries) and closing business (132 out of 183 countries).

Egypt’s rank also rose in the Global Competitiveness Report 2009-2010, published by the World Economic Forum, improving by 11 positions to 70 in a list of 133 countries. The reasons for the improvement are a reduction in customs tariffs, enhancement in infrastructure (especially electricity and telecommunications) and progress in the sophistication of financial markets.

Egypt has been resilient to the first round effects of the global financial crisis owing to its reformed banking sector and low integration in financial markets as a whole.  The Egyptian banking system was isolated from global turbulence as domestic banks had very limited exposure to failed and stressed global financial institutions. The exposure of banks to risky assets was marginal since domestic banks do not invest in structured credit products or other derivative products. Prudent regulatory surveillance and effective banking supervision, strengthened under the banking sector reform programme launched in 2004, have ensured the stability of the banking sector. Banks in Egypt are fairly liquid and well capitalised. The overall loan-to-deposit ratio is around 55%, with a high portion of assets being short term and liquid.

The global financial crisis negatively affected the Egyptian stock market. Market capitalisation decreased from EGP 813 billion in June 2008 (91% of GDP) to EGP 464 billion (52% of GDP) in June 2009. The Egyptian Exchange is expected to launch a new index that contains the best 30 companies that adhere to corporate governance rules including disclosure and corporate social responsibility criteria.

Egypt also undertook various reforms targeting non-bank financial institutions with the aim of deepening the capital market, restructuring the insurance sector, developing the mortgage market, and activating financial leasing and factoring services. Perhaps one of the most significant reforms that took place in 2009 was the issuance of Law No.10 of 2009, which led to the establishment of the Egyptian Financial Supervisory Authority (EFSA), from July 2009, to replace the Capital Market Authority. EFSA is responsible for supervising non-bank financial instruments and markets including but not limited to: capital markets, derivatives markets on financials and commodities, activities related to insurance services, mortgage finance, financial leasing, factoring and securitisation.

 

Several measures have been taken to reduce energy subsidies during the past few years. In September 2007, fuel oil prices were doubled to EGP 1 000 per tonne. The price of natural gas was adjusted for energy-intensive industries to international levels in three phases ending in 2009. Subsidies for non-energy intensive industries are to continue until 2013. The government has decided to keep energy prices (natural gas and electricity) unchanged for industrial users until the end of 2009. Prices of electricity and natural gas for non-energy intensive industries are likely to increase in the current year.

Targeting of food subsidies has not been very effective: the proportion of the total food subsidy received by the bottom quintile of the population is 17% while as much as 21% accrues to the top quintile. The government intends to improve the way it targets subsidies to low-income groups. It will introduce automatic adjustment mechanisms for administered prices and strengthen transfer programmes to the most vulnerable groups.

The Ministry of Industry and Trade has set ambitious targets for the period 2009-13 that aim at doubling manufacturing exports, increasing investments in manufacturing by EGP 60 billion and creating an additional 200 000 jobs. It has proposed special incentives to develop the south of Egypt where industry lags. If approved by parliament, these incentives will target sectors in the south for investment including textiles, ready-made garments, furniture, food products, chemical industries, electronics, pharmaceuticals, leather, and building and construction materials.

Egypt’s fiscal policy goals encompass achieving balanced economic growth, promoting fiscal and debt sustainability, and creating fiscal space ─ i.e. generating sufficient resources to finance investments with high social content and social programmes.

This section covers Egypt’s planned reforms to mobilise more tax revenues, including the evolution of its tax levels and tax mix. The period of investigation is from fiscal year 2001/02 to 2008/09 (eight years)[3]. During this period, tax revenues increased by an average of 20% annually. The increase in tax revenues is a result of tax code reform, tax collection measures, the restructuring of the Taxation Authority, and an increase in the tax base. On average, tax revenues represent 63% of total revenues and 15% of GDP. Non-tax revenues represent, on average, 33% of total revenues and 8% of GDP, respectively.  Grants as a percentage of GDP are in the vicinity of 1% and correspond to a mere 3% of total revenues.

Non-tax revenues increased from EGP 23.4 billion in 2001/02 to EGP 111.3 billion in 2008/09. The increase in non-tax revenues is due to significant increases in property income, sales of goods and services, and miscellaneous revenues.

Over the period of study, the share of direct taxes in total tax revenues amounted to 46% on average. As a share of GDP, direct taxes increased from an average of 6% in 2001/02-2003/04 to an average of 8% of GDP for the period 2004/05-2008/09 (following the introduction of income tax law in 2005). Indirect taxes (taxes on goods and services) represent on average 39% of total tax revenues and on average 6% of GDP. Taxes on international trade on average represent around 11% of total tax revenues (9% in 2008/09) and around 2% of GDP (1% in 2008/09).

Over the last eight years, Egypt’s tax reform covered legislative reform, restructuring of the tax authority and improvement of tax collection.  The most prominent tax-related legislation included the general sales tax (GST) laws No.17 of  2001 and No. 11 of 2002; the income tax law No.91 of 2005; and the property tax law No.196 of 2008. Customs tariffs were reformed several times. The latest amendments are represented in law No.11 of 2009.

Under the unified corporate and income tax law No. 91 of 2005, all companies are equally paying a 20% tax on profit instead of the previously applied rates ─ 32% or 40% depending on the activity ─ plus 2% as development duty. New tax holidays and special exemptions were eliminated, as was the state development duty. And the rules for multinational companies were improved. Egypt is now using the definition of permanent establishment based on UN convention; new rules for transfer pricing and thin capitalisation are in place.

 

The withholding tax on interest and royalties was decreased from 32% to a 20% flat rate. The calculation of asset depreciation is specified by law, hence removing the confusion about the use of different computation rules, which gave much discretion to the tax inspector.

Similarly, the personal income tax was changed by the same law. The highest personal tax rate decreased from a previous rate of 32% to 20%. All individual taxpayers get an annual tax exemption of EGP 4 000. Benefits in kind, such as medical insurance became tax exempt. And the tax base widened to cover residents working abroad and nonresidents working in Egypt.

Applying the income tax law required a change in the mindset of both tax collectors and taxpayers. It necessitated extensive training for employees of the tax administration and the launch of awareness campaigns for taxpayers. The result was an increase in income tax revenues as of 2005/06. The number of taxpayers increased from 1.7 million in 2005 to over 2.5 million in 2007 and an estimated 3.5 million taxpayers in 2008/09.  It is worth noting that 3.5 million seems too low in a country with a population above 80 million, yet not all taxpayers need to file returns; if the sole source of income is wage income, taxes are withheld at the source. Taxpayers with income other than wages must file a tax declaration at the end of the year to declare that extra income. So most of the 3.5 million taxpayers include only companies and the few wage earners with extra income from a small business. There is a need to ensure randomisation of the audit sample and to increase the role of tax collectors in collecting taxes in other areas where tax evasion is high, such as in the professions (medical doctors, engineers, and lawyers).

In May 2006, both the sales tax department and the income tax department merged into the Egyptian Tax Authority.  Moreover, the tax authority is offering SMEs an opportunity to join a new SME department to enable them to qualify for SME-related incentives. There is also a special department that services the needs of large taxpayers. Decentralisation plans are in place, too, but implementation is still a long way off.

Egypt was negatively impacted by the international price increases witnessed in 2007/08. The price shock was most pronounced for middle and lower income Egyptians; they spend on average 45% of their income on food, as much as 60% in the case of the lowest quintile. In order to alleviate their hardship, the Egyptian parliament endorsed law No.114 in 2008 with the objective of cushioning the effect of the crisis on the lower income groups while securing sustainable resources to maintain fiscal sustainability. In an effort to maintain fiscal discipline, cost-cutting measures were introduced on 5 May 2008. They partially scaled back energy subsidies, by EGP 7.5 billion, increased sales taxes on cigarettes, raised fees on vehicle licences and cement quarries, and eliminated some income tax exemptions. The elimination of tax exemptions covers: interest on T–bills; profits of educational institutions; and profits of energy–intensive free zone companiestypo3/#_ftn2, such as producers of petrochemicals, fertilisers and steel, as well as companies specialising in liquid natural gas (LNG) manufacturing, liquefaction and transportation.

In 2008, property tax law No.196 of 2008 was approved by the parliament. The property tax is applied to residential and commercial properties as of March 2010. According to the new property tax, houses and flats valued less than EGP 500 000 will be exempted from taxes, while houses valued at EGP 1 million would be taxed EGP 660 per year. Individuals and corporations were requested to submit their real estate records by end of March 2010. Units will be appraised every five years and owners are able to appeal against the valuation of their properties within 60 days of the decision.  To date, the new property tax law is subject to heated debate especially about the accuracy and objectivity of valuation. The new property tax is expected to generate EGP 3.5 billion a year from 2010/11.

Customs reforms have been continuing to match the requirements of the World Trade Organization (WTO). Customs tariff restructuring reduced the number of categories from 27 to 6 and the average rate from 14.6% to 8.9%; the biggest reductions were in tariffs on basic and essential goods. Law No.11 of 2009 reduced customs tariffs further for some categories such as capital goods essential for production, some medical final products, and energy-saving products and equipment. Customs reforms covered not only the legislative and tariff structure but also comprised administrative and procedural matters, customs valuation and release span, automation, ex-ante goods release, and one-stop shops.

To date, there are seven one-stop shops fully automated and interconnected that service customs in the fastest and best way possible.  In addition to one-stop shops, new pilot logistics centres are in place such as El Dekheila. The logistics centre offers the customers the opportunity to register their information, to pay customs and fees, and to finalise the freeing of imported or exported products at the centre.

To lessen the impact of the global economic crisis on investment levels, all capital goods were further exempted from the general sales tax for the year 2009.

According to the World Bank’s Doing Business 2010 report, Egypt ranked 140 out of 183 countries in terms of paying taxes ─ up two positions from its previous year rank of 142. In terms of tax payments (number per year), Egypt ranked 93, whereas it ranked 163 in terms of time to comply with taxes (hours per year). In terms of total tax rate (percentage of commercial profits), Egypt ranked 102. As clear from Egypt’s rankings in the subcomponents of taxes, the worst ranking was for the time required to comply with taxes, a matter which represents a challenge that needs to be addressed by the tax authority. Tax compliance imposes a heavy burden on businesses in terms of time and so has the potential to be a disincentive to investment and may be a major factor that encourages informality. Egypt’s ranking in paying taxes is expected to improve in the coming years, with major reforms in tax collection, auditing and increased tax awareness.

There is room both to increase the tax base and to reduce tax evasion. With 8.2 million people in the informal sector, 37% of the workforce, there is a great opportunity for broadening the tax base and increasing revenues. There is a plan to introduce tax on farmland, and transform the general sales tax into a fully fledged VAT. Although efforts towards the automation of the tax system are under developmemt, there is room for improvement and a need for new services for it to be operational.

Increasing the tax revenues is key to allow Egypt to embark on its planned social reforms such as health and social insurance and pension reforms that will put pressure on the fiscal budget.

Egypt’s political outlook is unpredictable. Parliamentary elections and presidential polls are due in 2010 and 2011, respectively.  The elections will be a real test to the National Democratic Party (NDP), the party that controls the parliament. In 2009, the NDP held its sixth annual conference in Cairo with the slogan “Just for you”. The conference covered various social and economic policies of which support to the most vulnerable, pro-poor policies and agricultural policies were key.

The year 2009 was characterised by a wave of public protests. Trade unions and syndicates of pharmacists, lawyers, teachers, doctors, factory workers, truck drivers, students and journalists have all protested against the government’s tax increases or demanded higher wages or pay. One of the successful strikes was that of pharmacists against tax increases. Ultimately, the government agreed to meet their demands. The pharmacists’ nationwide strike was a protest against a Ministry of Finance decision to enforce a 2005 tax law retroactively. The ministry announced that it would collect tax arrears dating from 2005 and that pharmacists would no longer be considered small businesses for tax purposes and hence subject to a 15% flat tax compared with the tax of 7% they were used to paying. Another notable strike is that of the citizens of Egypt’s El-Alamein zone on the Mediterranean coast who protested against the continued presence of World War II land mines that cause the death of civilians. The protesters demanded that the developed nations provide financial help in removing the land mines.

Egypt has already achieved the Millennium Development Goal (MDG) of halving the proportion of the population living in extreme poverty but regional disparities remain a key challenge. The percentage of Egyptians living below the national poverty line increased from 19.6% in 2005 to 21.6% in 2009. The percentage of population under the poverty line is highest in rural areas at 28.9%. It is higher in rural Upper Egypt where the poorest 100 villages are all located. Gini coefficient decreased from 31.2% in 2005 to 30% in 2009, indicating a slight improvement in income distribution.

The government’s five-year plan (2007-12) aims to reduce poverty to 15% by 2011/12 and to narrow the disparities between Lower and Upper Egypt and between rural and urban areas. To this end, a "poverty map" has recently been drawn to determine the most vulnerable areas and groups. Based on this map, two innovative programmes have been adopted to direct resources to those villages and people in greatest need: Geographic Targeting and Supporting the Most Vulnerable Families. In 2009, the government initiated geographic targeting to help the poorest  1000 villages by improving infrastructure and health services, reducing illiteracy, increasing job opportunities and introducing ration cards.

Perhaps one of the key developments that took place in 2009 was the creation of new bodies: the Ministry of Family and Population and the Slums Development Fund. They reflect the urgent need to deal with the demographic crisis and the slums problem. The slum areas increased from 1 174 in 2004 to 1 210 in 2006; also the share of urban population living in slums increased by 3.5% over the same period. If this trend persists, it will limit Egypt’s ability to achieve the MDG target of achieving a significant improvement in the lives of at least 100 million slum dwellers by year 2020.


The net enrolment ratio in primary education increased from 91% in 2000/01 to 94% in 2005/06. The literacy rate for 15-24 year-olds increased from 73% in 1996 to 87% in 2005. Illiteracy decreased from 28.8% in 2007/08 to 27.8% in 2008/09. Nevertheless the illiteracy gender gap poses a challenge. The 2007-12 five-year plan aims to increase enrolment rates, increase the number of schools, reduce class density, and support early childhood development.

Egypt has succeeded in eliminating gender disparities in general secondary education and is set to do so for primary education. Yet this MDG target may not be met at the technical education level. Women’s share in wage employment in the non-agricultural sector is quite low, at 17.7% in 2005. Women’s representation in the political arena is also limited: only 1.8% in the People’s Assembly in 2005 and 7% in the Shura Council in 2008. Despite the inclusion of gender targets in the current socio-economic plan for the first time in Egypt, and the establishment of the National Council for Women in 2000, there is clearly a need to promote greater participation of women in the formal economy and in the political realm.

Infant and under-five child mortality declined by almost 50% between 1990 and 2006. Infant mortality decreased from 8.4% in 2007 to 7.9% in 2008. Under-five child mortality declined from 19.2% in 2007 to 18.3% in 2008. Moreover, there is noticeable progress in measles immunisation. But disparities in infant and child mortality by region, social class and gender remain a key challenge. Maternal mortality declined from 174 maternal deaths per 100 000 live births in 1992 to 84 in 2000, already achieving the MDG goal.

HIV prevalence in Egypt is low, at less than 1% of the population in 2007. Egypt has succeeded in controlling malaria, and tuberculosis and schistosomiasis are regressing. Hepatitis B and C, however, constitute major health threats. They are the leading causes of severe liver damage, hepatocellular carcinoma and death in Egypt. The Ministry of Health and Population plans to reform the health insurance system as part of a nationwide health care reform strategy with the objective of achieving universal coverage for all Egyptians by 2012. At present, only 52% of the population has health insurance coverage via the local Health Insurance Authority.  The Ministry of Health and the Ministry of Finance are currently finalising the draft of the new health insurance law. The draft law is expected to be submitted to the parliament in the next session. The new system aims to reduce the amount of disposable income spent on health care to around 35% only.

Perhaps one of the key health-related challenges in 2009 was controlling the epidemic H1N1 influenza. The Ministry of Health adopted several measures to prevent the spread of the swine flu. Yet major challenges included getting sufficient vaccines and creating the necessary awareness in dealing with the illness.  The epidemic is likely to impact negatively both on learning outcomes and labour productivity in the short term. Schools and classes within schools closed for considerable period of time as soon as a positive case was confirmed.

The decline in investments and slower economic growth led to the creation of fewer new jobs, which reached 600 000 jobs in 2008/09 as compared to 690 000 jobs created in 2007/08 (a decrease of 13%). The unemployment rate increased to 9.4% in 2008/09 as compared to 8.4% in 2007/08. Unemployment remains highest among women and new entrants to the labour force. The failure of the educational system to provide skills that the labour market demands remains a key concern.