Download the  Country Brief [230k pdf] Since the appointment of a reformist Government in July 2004, Egypt has embarked on a reform path. The reforms, which were generally in line with several longstanding recommendations of the Bretton Woods Institutions, have been sustained until now and the Government has established a solid track record as one of the champions of economic reforms in the Middle East and North Africa region (MNA). Key reforms implemented over the last years include: (i) Improved exchange rate management, building on the floating of the Egyptian pound and currency depreciation of 2003-04; (ii) Reduction in import tariffs to a weighted average tariff of 6.9 percent (which puts Egypt at the lower end of the international trade tariff scale); (iii) Rationalization of the tax system, including reduction of tax rates (highest corporate and personal rate is now 20 percent down from 32 to 40 percent) and improved tax administration (number of taxpayers rose from 1.7 million in 2004 to 2.5 million in 2006); (iv) Improvements in budget management and controls (e.g., introduction of a single treasury account); (v) Restructuring of the financial sector, to gradually disengage the State; and (vi) Enhancement of the business environment
These reforms have also improved the ease of doing business. In 2009, Egypt was ranked in the “top 10 performers” under Doing Business for the fourth time. It moved up to 106 from 116 among 183 economies worldwide in the overall ease of doing business ranking. Egypt has made business start-up less costly, expedited the construction permit process, expanded the information available from the private credit bureau, and created commercial courts to speed up contract dispute settlements. Against the backdrop of a positive external environment, Egypt experienced high economic growth in FY06-FY08 (about 7 percent on average). This economic growth was broadly based, with non-oil manufacturing and wholesale trade contributing to about half the overall total, and with construction, the Suez Canal, communications, and tourism among the fastest growing sectors. Household surveys indicate that the reforms have had a positive effect on reducing poverty. Social indicators have improved dramatically over the last decade (e.g., between 1995 and 2005, infant mortality and malnutrition among under-5 children both decreased by half, and life expectancy increased from 64 to 71 years). The economic growth of the last years has improved outcomes and living standards of the vast majority of the population, although in an uneven manner. Yet, about 18 percent of the population still live below the poverty line (up to 40 percent in rural Upper Egypt), and about 20 percent of the population have moved in or out of poverty over the last few years, heightening a sense of social vulnerability and insecurity. Recent Economic Developments The global economic crisis is having multiple impacts on the Egyptian economy: while the shock to the financial sector has been limited (in large part thanks to recent reforms), the real economy has been affected – especially through the decline of Suez Canal revenues, tourism receipts, FDIs, stock market activities, and construction sector. The banking system remains liquid with a loan-to-deposit ratio of 53 percent. Bank credit is still growing robustly (16.5 percent in January-09), but driven by lending to the government (27.3 percent). The stock market continues to decline (-66.3 percent in February-09). In response, the Government is implementing a multi-pronged and flexible response program. The Government has also repeatedly stated its commitment to further implementing pro-market reforms, in spite of calls to reverse the achievements of the last years. Measures recently taken include: - Adopting a LE15 billion stimulus package financed from the Government’s budget (about US$2.7 billion, 1.4 percent of GDP), and accelerating an additional LE15 billion package of investment to be financed via Public Private Partnerships focused on infrastructure. The stimulus package financed with public resources will be mostly spent on infrastructure (sewerage and potable water); for an export support fund; and to compensate for a lowering of tariffs and taxes on capital goods;
- Adopting incentives to encourage the private sector in tourism (e.g., promotional tours, exemption of landing fees), Suez canal (e.g., lowering of transit fees), and manufacturing (e.g., cancellation of tax on cement, iron, and steel exports, freeze of the energy subsidy phase-out for energy intensive industrial users);
- Taking trade restriction measures (e.g., ban on rice exports; anti-dumping duties on sugar; import tariffs on steel);
- Following a proactive monetary policy (e.g., reduction of Central Bank of Egypt lending rates by 250 bps to 10% currently, computing loans to SMEs as reserve requirement holdings);
- Freezing an energy price adjustment program. A program of raising energy prices for energy-intensive sectors begun last year was interrupted temporarily. It has been announced that the program will resume by the end of 2009.
In this context, GDP growth rate picked up to 4.5 percent in the second quarter (Q2) of the calendar 2009 (Q4 of the fiscal 2009, FY09) from 4.1 percent and 4.3 percent in the previous two quarters, leading to an annual growth of 4.7 percent in FY09 and pointing to a possible upturn in economic activity – subject to continued improvements at the global level. Inflation declined to about 9 percent in August 2009, from a peak of 21 percent in mid-2008. In spite of Government efforts, the crisis has slowed down efforts to gradually reduce the budget deficit – a perennial and major issue in Egypt. Over the last years, the Government aimed to reduce the deficit by a target of 1 percent of GDP a year, through: (i) further reducing energy subsidies (currently at 5.5 percent of GDP for direct subsidies); (ii) expanding the value-added tax and improving collection of the property tax; and (iii) generating savings through improved financial management practices. In the context of the global crisis, the objective is now to stabilize the deficit (as a share of GDP) at about 5.9 percent of GDP. The fiscal stimulus adopted earlier this year is expected to be deficit neutral in FY09, as savings on budgeted subsidies should be realized following the decline in international commodity prices. World Bank Group Assistance The World Bank Group has scaled up its support to Egypt over the recent period, with a comprehensive program of activities by IBRD, IFC, and MIGA. This effort is geared towards supporting the implementation of the ongoing reform program in a rapidly-growing Middle Income Country. The current IBRD portfolio includes 15 ongoing projects (commitment value of about $2 billion of which 1.5 billion still to be disbursed). The sectoral distribution of these projects (by value) is as follows: infrastructure (78%); financial sector (2%); agriculture (15%); and social sector (5%). Projects approved in FY09 and FY10 include: - Affordable Mortgage Development Policy Loan ($300 million): The main developmental objective of the project is to build a stronger link between the housing subsidies program and mortgage loans for low and middle income housing, improving market efficiency, transparency, and social targeting.
- National Railways Restructuring Project ($270 million): The objective of the project is to assist the Government in improving the reliability, efficiency and safety of the railways services through signaling and track renewal investments by the Egyptian National Railways and the modernization of its management and operating practices.
- Ain Sokhna Power Project ($600 million): The project development objectives are to (i) assist the Government of Egypt to ensure continuous electricity supply to meet demand in a sustainable manner through investment in new generation capacity; and (ii) improve the sector's financial sustainability by providing assistance to the Egyptian Electricity Holding Company to support sector revenue improvements.
IBRD is also providing substantial knowledge services, including through an expanded program of fee-based technical assistance, in particular in following areas: (i) assessing the expected macroeconomic impact of the crisis and possible stimuli; (ii) SME finance and savings; and (iii) health insurance and poverty monitoring. Egypt is one of the IFC’s two largest exposure countries in MENA region with a total committed portfolio of US$616 million. Its portfolio includes operations in the financial sector, power, export-oriented manufacturing, ports, oil and gas, metals, agribusiness and IT. IFC is also providing technical assistance (through its PEP-MENA facility) to strengthen financial markets, simplify business start-up procedures, SMEs, corporate governance and providing transaction advice for public-private partnerships in health, education and infrastructure. MIGA’s most important contribution to date has been to support and enable investments by an Egyptian telecom company in two telecom projects in Pakistan and Bangladesh, with a combined gross exposure of US$152 million – an example of South-South investment.
All dollar figures are in US dollar equivalents. September 2009 For more information, please contact:
In Washington:
Najat Yamouri: nyamouri@worldbank.org
Xavier Devictor, Phone: (202) 478-7237; Email: xdevictor@worldbank.org
Roseleen K. Mba-Kalu, Phone: (202) 473-5060; Email: rmbakalu@worldbank.org In Egypt:
Sidi Boubacar, Phone: 20-2-2574 -1670, E-mail: sboubacar@worldbank.org
Santiago Herrera, E-mail: sherrera@worldbank.org |
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