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 مجلة علوم انسانية WWW.ULUM.NL السنة السادسة: العدد 41: ربيع 2009  - 6th Year: Issue 41 Spring

Contemporary Issues and Tendencies in Egypt’s Economy

 Prof Dr. Karim Naama

University of Veliko Turnovo “St. St. Cyril and Methodius”

Department “International Economic Relations”

Abstract: …….

Key words: Egypt, GDP, Enterprise, Foreign trade, Tourism, Banking system, Mega- projects.

JEL classification: E01, O11, O55.

 Introduction:

The assessments of the  contemporary state of the Economy of the Arab Republic of Egypt, which is one of the hugest developing countries, differ too much from one another. According to the official statistics, the GDP growth /Gross Domestic Product/ , in reality, exceeds 6 % per year, Inflation is low at rate, the Budget deficit of the Current operations Balance of payments goes down and  the golden and currency reserves stay stable. Meanwhile, Budget expenditure growth over the incomes during the ending financial year /its end comes in the middle of the calendar year/ proved to be bigger than what was initially expected, the interest rate went too high, the Fund market situation in the last months characterized in the hugest decrease from 1998 up to now. Nevertheless, the country shows no traces of crisis.

I/. Egyptian economy, in its Enterprise, is being assessed in a slightly different way. Business-like circles emphasize on the shortage of freely convertible currency resources, the continuously growing of storing up goods (which is practice in lots of companies), as well as, on the crossing difference between Governmental statistics and the actual situation /which is partially because of the existing semi-legal economy in the country/. Some observers tend to claim that this situation comes close to a recession.

Some optimism may be sought after within the confessed mistakes in the sphere of Economy, that came from the Cabinet last year and the following execution of corrective measures. The main Governmental initiative was undertaken this current year and dealt with the transition into a new system of forming of the national currency exchange rate , its “regulated fixing towards the American dollar in a strictly limited interval”, that is being estimated in a different way. Some economists believe, that the exchange rate of the Egyptian pound towards the USA currency is still higher, and the Central Bank of Egypt can not yet work effectively within the frames of the new currency system.

Within the banking circles, pity is showed, regarding that the Central Bank refused, in the beginning of 1999, to use the currency reserve, to raise for some time the interest rate and to introduce a floating rate of exchange over the Egyptian pound. In such a situation, the currency reserves, even less in size, could be preserved and the actual national currency rate would be reached very fast.

In practice /certainly, yet off-the-record/, the passing onto a floating rate was accomplished in the mid of last year. Yet, the lack of clear Governmental policy, led to an obvious decrease in the Pound’s rate. The Prime-minister A. Obeid announced the passing into a new system of forming the currency rate. There has been conducted a “binding”, where the Egyptian pound was bound (related) to the USA dollar in proportion of 3.85 pounds for one dollar. The currency dealers were given the right to undertake operations, diverting from the basic rate, but not more than +/- 1% per 24 hours. As a result of this system’s implementation, the national currency rate went down gradually, reaching 3.9 Egyptian pounds for one dollar. Practically, the sales of freely convertible currency up to these days, are being limited and banks refuse to sell dollars, according to the official exchange rate. Transactions are carried out in proportion, not less than 4 Egyptian pounds for one dollar. Most bankers outside the Central Bank believe, that the official rate is unrealistic.

In case, the Currency Policy of the Authorities comes to fail the expectations, at least the undertaken actions for leveling the Balance of payment has turned out to be much effective. Reduction is observed in export exceeding over the import. “The export of capitals” was reduced to its minimum. All these tendencies made the financial sphere’s state stable, but the overall recovery of the Economy, towards reaching its normal status, can only be achieved by the re-establishing of the Local and Foreign entrepreneurs’ trust.

The Foreign trade balance deficit during the first half of 2000/2001 financial year /that is July- December/ was 4814 millions dollars, so as for the whole year, the negative balance will probably not exceed 10 milliard. For the last three years, this same index rated to 12 milliard per year. Progress is achieved, thanks to the considerable increase in Oil export and overall export, as well, and thanks to the restraining of import, on reasonable basis.

The state of the Balance of payments improved as well. Its essential part are the incomes from Tourism, which, at present grow gradually and are now exceeding 4.5 milliard dollars per year. During the 1997/1998 financial year they could not reach even 3 milliard dollars. /At that time, the negative influence came from Luxor and the tragic events there/.

There was, as well, some anxiety over the money transfers of those Egyptians, who are temporarily working outside Egypt. During July- December 2000, these transfers cut down in huge. The reason is that the private holders of remittances, observed the official exchange rate of the Egyptian pound to be high and that was why, they transferred their sums of money, using alternative channels.

The Current operations Balance of payment deficit during the first half of the  2000/2001financial year amounted to 270 million dollars, while during the last three years, it came to 1.8 milliard dollars, at average.

Balance in the movement of capitals reflects the abrupt reduction in the receipts from direct investments in the country, which partly due to the inert realization of the Privatization Program. The abrupt change in the index, which occurs in the Balance of payment relationship’s with the outside world in the “Errors and Omission” item /which is 1312 million dollars for the 1998/1999 financial year and 679 million dollars during the first half of the financial 2000/2001/ relates to the scale of “the capital export”.

Eventually, the Balance of payment deficit for the first half of the current financial year, came to be equal to 712 million dollars, while for the last two years it exceeded about 5 milliard dollars. The official currency reserve /assessed at 13-14 milliard dollars/ was enough to meet the national necessity for import for 10 months.

Under these circumstances, the Egyptian Government prepares, as if for an exam- the first emission of euro-bonds at official level, and their distribution, should demonstrate the rate of putting trust from within International investors onto the Managing system of the Egyptian economy. The supervising of euro-bonds operations is assigned to influential financial groups, like “Merrill Lynch” and “Morgan Stanley Dean Witter”.

The increase of Egypt’s integration with the World economy, assists the strengthening of the country’s positive image in the eyes of the foreign  entrepreneurs. Moreover, here the leading role is set to the developing of the foreign economic relations of that country.

 II/. The Foreign trade of Egypt will get a great stimulus for its furthermore growth, in result of the signing of the Agreement on the associated membership of Egypt in the EU /40 % of the Egyptian foreign trade turnover are aimed at this Community/. The negotiations around the signing of that Agreement ran about 5 years. In January 2001, the General document was signed. In accordance with it, 12 years after it had been ratified, there should be fully-created a Free Trade Zone. Attention should be paid, that automobile and agricultural goods trade is excluded from the context of this Agreement. Realization of the signed terms will stimulate the attraction of foreign capital to Egypt and the further rationalization of the country’s rural economy.

Egyptian experts have already got duty-free access to the EU’s markets for all goods, except for food supply, cotton and cotton yarn. Here comes the issue upon signing the mentioned Agreement, which will increase national producers’ vulnerability, as a result of the straining of Competition rivalries with the West-European companies. The Minister of economy and foreign trade J. Butros Gali foresees the positive role of this Document within the creation of the prerequisites for the continuation of the agricultural reforms in the country. During the initial period in the realization of the terms, agreed upon with the EU, duties on raw materials and production equipment go down, which is in accord with many Egyptian industrial companies’ interests. The realized output, produced in Egypt, will find itself within conditions of rough competition, but after some time.

Being part of the World Trade Community, Egypt does not have to sign agreements for the Free Trade Zone, that grant to one of the negotiating sides much more priorities over the other. This was the disadvantage of the previous agreement between EU and Egypt. The new agreement, however, opens broad access for West- European foods to the Egyptian market /this, of course, will not happen at once, but in a gradual manner/. In that way, in practice, the “playing zone” for both participants in the Free Trade Zone becomes even.

An essential feature of the Agreement is the input of materials and components from Jordan, Morocco and Tunisia, that are used at producing the Egyptian output for export to the EU, at the added value in Egypt. In that way, the EU aims to stimulate the trade between developing countries, knowing, that the process takes place within conditions, when analogous liberalization agreements between the EU and the countries from the Near East and the West Africa Region are being prepared.

At present, Egypt liberalizes its Customs-Tariff System on three basic trends. First, in conformity with its engagements within the frames of the World Trade Organization (the average duty rate should be cut down to 20 %; there has already been done some considerable reduction in it); second- within the range of the State’s policy on undertaking reforms in the national economy /reduction in Customs tariffs for many positions have been made/; third- regarding the respective clauses in the Regional Trade Agreements /together with the Document, signed with the EU, there is another agreement in force, that is with the Common Market with countries from Eastern and Southern Africa (COMESA) , signed four years ago and the Pan-Arab Agreement for free trade.

According to experts from the Egyptian Center for Economic Researches, the agreed upon terms with the EU, will have much tangible influence over the Egyptian economy, than those, signed upon within the World Trade Organization. The execution of the Agreement, signed at progress of the “Uruguay Circle”, that involved multilateral negotiations within the frames of The General Agreement on Duties and Trade  and The World Trade Organization does not hold a strictly binding nature.

As a whole, there might be expected a deterioration in Egypt’s Balance of payments, as a result of the increase in its Foreign trade lack of balance, within the conditions of liberalization of the World economic relations. The overall negative tendency in the payment relations with the outside world, will lead to instability in the growth of the country’s revenue from International tourism.

 III/. Tourist business in Egypt develops at high speed. During the financial 1999/2000 year, a record in foreign tourists influx was registered, as 5.5 million people visited the world-famous Egyptian pyramids, some traveled on the Nile and/or stayed at resorts, situated on the Red Sea Coast. The currency income from tourism reached 4.3 milliard dollars, that is 33 % more, in comparison with the 1998/1999 financial year /a tendency of rapid growth is as well observed this current calendar year/. The average foreign tourist in Egypt spends increasingly bigger sums of money /according to 2000 year data, about 800 dollars- that is  7 % more, compared to 1999/. The stay duration is as well increasing /last year it extended to 7 days, in comparison to 1999/. A dominating position within the examined sphere from the national economy is being dwelt by the Public Sector. The number of tourism-employed reaches 150 thousand people.

During the last quarters, appeared some indications, that the tourist business’s state in Egypt is suffering a slump. Hotel owners, especially those, at the Red Sea Coast, have been forced to reduce the prices of the hotel rooms, in order to avert the slump in the tourist influx, noticed in the beginning of the current year. There are external factors, that are exercising some influence over the Branch’s state, as well. In the end of the 90-ies, the growth of the resorts on the Red Sea got an extra impulse, after there had been a slump in the Turkish tourism /because of the earthquake and the appearance of Kurdish separatists/. However, after the devaluation of the Turkish lira  /See BIKI, March the 13^th, 2001/, the standard package for the foreign tourists in German marks and British pounds, did considerably lowered and that had a favourable influence on the tourist business in Turkey. At the same time, “binding” the Egyptian pound to the American dollar, led only to a slight devaluation of the Egyptian currency /in comparison to the beginning of last year/. On such condition, an extra tourist influx to Egypt from Europe is not expected, regarding, the euro has slightly weakened towards the American dollar. Negative influence on the examined branch may be exerted, as well, by the straining of the Jews-Palestinians relations, even though, such a dependency has not been observed before May, 2001.

The goal of the Egyptian Government is to double the foreign tourist influx to the country /up to 10 million people/, as well as, the Tourist Branch’s income /up to 10 milliard dollars/. In order this to be achieved, a special marketing program has been developed, airports and modern high-ways are being built.

 IV/. Exploitation of the Suetz Canal.

In the past it brought much more revenues to Egypt, than the foreign tourists did. At present, the situation has much changed the other way round. Nevertheless, charging of the passing vessels, is still one of the main sources for freely convertible currency in Egypt. In 2000 more than 14 thousand tankers, land-loadable, military and passenger vessels used this Water road’s services. On the other side, the 1996 index has not been reached up to this day, that is, the registered figures before the beginning of the Asian financial crisis, that had negative impact over the international trade, as a whole and on the sea trade, in particular. If, we take into consideration the tonnage (the carrying capacity) of the vessels, anyway /namely, this is the basis, on which the rate for crossing the Canal is being calculated/, this will take us to the conclusion that, in 2000 there had been registered a record. Then, Egypt had a revenue, amounting to more than 1.9 milliard dollars, that is 6 % more than 1999. The Suetz Canal Administration aims at the maximization of the receipts into the Exchequer, as they manoeuvre in a good way with the charge rate for crossing the Canal. The traffic capacity of that Water Road is 80 vessels per 24 hours. However, in practice, it is being crossed by 40 big and middle-sized vessels.

As a rule, the size of the cargos is bigger in the South-North direction, than the other way round. Serious competition to the Canal is offered by the Pipeline, through which Oil is being transported from the Near East. The following combination scheme is much used, as well: Oil is being removed from the tankers at the Ain Suhna Terminal. That is because their water-displacement does not allow them cross the Canal at “Suhmed” Oil-pipe, built in 1967, when the Canal wasn’t used, because of the military actions in the Region. The return lading of the tankers is done near Alexandria.

Between the measures, that were undertaken to improve the Canal’s functioning, it is worth mentioning the Project /it cost 400 million dollars/ over the further digging of the Canal, so as vessels, sailing at 62 feet, to be served as well. Over the next decade there are plans for even further digging- in more 10 feet. The Suetz Canal Administration aims such a depth, which will allow the crossing of tankers, whose water-displacement is 350 thousand tons.

 V/. Realization of Mega-projects is a characteristic feature of Egypt’s economic life, at present. Three of them are given the guiding role- in Toshka, in Northern Sinai and in East Oveinat, where an agrarian and industrial Complex is planned to be opened, on the basis of  the agricultural adoption of the areas. The first two projects foresee the usage of the Nile’s huge water resources, while the third one- the usage of the underground waters. There are two other large-scale initiatives, related to the establishing of Harbour-industrial zones at the Suetz Canal and in East Port Said. Western economists recommend, that their own economists should pay attention to the latter two projects, as they come to be  well-grounded. At the same time, Egypt’s public opinion is that the Toshka Project /Southern Egypt/ is the most important one. It is about the use of Lake Nasr’s water resource, which capacity is 5.5 milliard cubic metres- within the frames of the annual quota, assigned to Egypt, according to the Agreement with Sudan. Sceptics believe, this Project is poorly effective, regarding economy and they as well doubt, whether the adopted region would be attractive for the people, because of the extreme meteorological conditions in it. However, the Government does not foresee another alternative out of the critical situation, that necessitates food-provision for the fastly increasing population and new vacancies for the young people. It is planned, that one of the biggest Pumping stations in the world will be built, that will transfer water from Lake Nasar into the 72-kilometre Canal “Sheikh Zaid ben Sultan Al- Nahaiana” (he is, in fact, the person who granted 100 million dollars for this Project). Water will reach the arable areas, which total size is 540 thousand acres, flowing over a concrete bed, with four distribution arms. The capital investments for the engineering of that Canal and of the Pumping Station /planned to be accomplished in October, 2002/ will reach 1.67 milliard dollars. The realization of the whole Toshka Project, on the other hand, will cost 80 milliard, 20 % of which will be given by the State and 80 %- by the Private Sector. The Project includes the export production of early fruit and vegetables, at a minimum water resource consumption (as ripeness time, characteristic for Europe, will be outrun). As a result, about 2017, the living standard of the population in this Region, which is about 2 million people, should surpass the level, characteristic of the people, living in the Nile’s Valley. It is hardly possible, that the material resources turn insufficient for the realization of this Mega-project, as it is believed an “offspring” to the President Mubarak /like the Artificial Lake of Aswan was “offspring” to G.A.Nasar/. The problem is, whether there will be interest in the collateral (satellite) projects, within those investors, who can afford financing land adoption, building of modern irrigation systems, developing of a transportation network, which will allow the transfer of products from the distant Southern regions of the country. Up to now, the single big private investor was the Saudi businessman Prince Al-Walid ben Talal, whose Company “Kingdom Agricultural Development” got one of the four tracts, separated by the Egyptian Government. Using the technology of the Californian Corporation “Sun World International”, it is planned to grow highly-productive sorts of grape, stone fruit and other cultivations. The initial efforts showed wide effectiveness of growing such crops in the Region of Toshka. Prince Al-Walid expects a 20 %-return on the invested capital /which will amount to 600 million dollars/.

Another huge project of international importance, that is being carried out in Egypt, is the so-called “Nile Basin Initiative”, that started in 1999, and is supported by the International Bank for Reconstruction and Development. This Mega-project, that was approved by all countries in the Region, except Eritrea, envisages a cooperation between the participant countries, within the frames of projects, concentrating upon Electricity production and export, the organizing of an all-embracing control over the Environmental state and the prevention, in joint efforts, of the drought and flood effects.

The Egyptian and Ethiopian Authorities assess the work already done, as “rather beneficial and effective”. In the near future, there will be established the juridical basis for the realization of co-projects and the signing of a multilateral Agreement between 10 countries in the Region. The main problem in the preparation works is the setting of the principles for distributing of the Nile’s water resource. Egypt’s share, according to the Agreement with Sudan, in 1959, is 55.5 milliard cubic metres per year, as 18.5 milliard cubic metres are for Sudan. At present, huge quantity of the water resource is lost- 10 milliard cubic metres- because of the evaporation of Lake Nasar and  the Artificial Lake of Aswan, that was built with the participation of the USSR. Ethiopia, which participated in the previous Agreement, exerts a bigger influence on water provision to Egypt, since it is its territory, where the Blue Nile River takes its source and it is the one, that provides Egypt with 85 % of all river waters. More than once, Egypt had to defend its right to get its share, according to the Agreement with Sudan. Ethiopia, that is often stricken by disastrous droughts, claims for a considerable part of the Nile’s Basin water resource. In connection to the demographic growth, Egypt looks to an increase in its share, otherwise, about 2005 there will be only 637 cubic metres of water per capita, unlike 1996, with 981 cubic metres. The critical point is set at 1000 cubic metres of water consumption. If it can not be accomplished, most people will remain under the poverty line.

One of the main problems at present in Egypt is the over-crowdedness of the Nile’s Valley (especially, in the Region of Cairo), while there are still large desert areas, that stay unlived. In fact, 66 million Egyptians are concentrated on only 5 % of the whole area of the country. The measures, planned by the Egyptian Government should change the situation. About 2007, it is foreseen an increase in the populated areas share in 25 %, as a result of the widening of the cultivated lands with other 3.4 million acres. However, the realization of these projects needs huge financial funds and a great part of these, should come as bank loans and credits. Regarding this, great responsibilities are laid on the Financial Institutions in Egypt.

 VI/. Egypt’s Banking system comprises about 80 banks, among which stands out the National Bank of Egypt, whose assets are 74 milliard Egyptian pounds, that is, 19 milliard dollars. Roughly, 9 million bank accounts were opened in the country, which is obviously insufficient for a 66-million population. The small services within the examined area turn out to be much limited in scale. Within the frame of the reforms, which the Egyptian Government launched in the second half of the 90-ies, it is allowed that foreign companies may increase their participation share in co-banks and even purchase them. In practice, an inflow of foreign capital within the examined Branch was insured in that way. “Citibank” acquired 20 % of the local “EFG Hermes” Investment Bank’s  stock. As well, in October 2000, in Egypt, doors opened the “Arab banking” Corporation /with a Head-office in Bahrain/, “Banque Nationale de Paris”, “Barclays Bank”, etc. “HSBC” spent 503 million Egyptian pounds to increase its share in “Egyptian-British Bank” ’s capital /it’s now renamed in “HSBC Egypt”/ up to 90 %.  However, not all of these deals are easily negotiated. For example, the Kuwaitian National Bank, which is one of the most influential ones in the Arab World’s sphere of Banking, refused to buy the small “Misr America International Bank”, nevertheless, it has shown a permanent interest in the acquisition of bank property in Egypt.

If we are to analyze the structure of the Banking Sector in Egypt, regarding the size of the assets, we may conclude, that the dominant place is occupied by four state banks, as 65 % of all assets in that Branch belong to the Government. At the same time, its share, though slowly, lowers anyway. The Big Four /”National Bank of Egypt, Banque du Caire, Banque Misr, Bank of Alexandria”/exerts a considerable amount of influence over the National economy, thanks to the fact, that these banking companies have big possessions in Industry, Agriculture, the Financial Sector and in other branches. During the time of the recent delay in the Economy, state banks continued increasing their assets, while private ones were forced to limit their credit allowances and harden their credit policies. At the same time, state banks have huge budgets, they have not mastered the information technologies on the necessary level and experience capital deficit. These financial structures function on the basis of the merchandise principles. However, foreign analyzers estimate their condition, as being insufficiently stable, as a considerable share of the Big Four’s credit portfolio consists of operations of public assigners, as well as, of financing projects of desert territories adoption and of developing of the textile industry.

Egypt’s Private Banking Sector is comparatively in good state. While the two average Banking companies’ profit /MIBank” and “Egyptian American”/ went down in 2000, others, like “Commercial International Bank, National Societe Generale Bank, Egyptian British Bank” realized profits growth, despite the rise in the reserves for securing of bad debts.

The foreign banks in Egypt enjoy the Central Bank’s support and suffer none of the risks, that face foreign companies, for instance, in Turkey. Problems connected to liquidity, grew to some extent- less in number,  after a decision was voted, that all requirements, that banks should keep 15 % of all their deposits, which term is more than 3 years in the Central Bank with no interest accretion, will be repealed.

 Basic Data on Egypt’s Economy Growth

 Sources: Economist Intelligence Unit 

(2)  Prognosis

(3)  Annual growth of basic goods’ consumer prices

(4)  By the end of the year

  مجلة علوم انسانية WWW.ULUM.NL السنة السادسة: العدد 41: ربيع 2009  - 6th Year: Issue 41 Spring