WORLD BANK MIDDLE EAST AND NORTH AFRICA ECONOMIC STUDIES \w/ ~~~1776~5 Work in progress for public discussion Mac h Iq 8 Egypt in the Global Economy Strategic ChoiCes for Savilgs, Inuestments, andLong-Term Growth -Jf WORLD BANK MIDDLE EAST AND NORTH AFRICA ECONOMIC STUDIES Egypt in the Global Economy Strategic Choicesfor Savings, Investments, and Long-Term Growth The World Bank Washington, D.C. Copyright © 1998 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing March 1998 Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910,222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. ISSN: 0253-7494 Cover photo by Ray Witlin, 1975, "Cairo. View of the City at Dawn." Library of Congress Cataloging-in-Publication Data Egypt in the global economy: strategic choices for savings, investments, and long-term growth. p. cm. - (Middle East and North Africa economic series) ISBN 0-8213-4066-2 1. Egypt-Economic policy. 2. Egypt-Economic conditions-1952. 3. Investment, foreign-Egypt. 4. Foreign trade promotion-Egypt. 5. Savings and investment-Egypt. I. World Bank. II. Series. HC830.E377 1997 338.962-DC21 97-31580 CIP Contents Foreword vii Acknowledgments viii Abbreviations, acronyms, and definitions ix Currency and exchange rates xi Strategic overview xiii Chapter 1 Employment and growth-an overview 1 Saving, investment and growth-a virtuous cycle 2 Trade openness and investment-friendly policies for a higher growth trajectory 4 Notes 7 Chapter 2 Post-stabilization macroeconomic policy-managing success 9 Recent developments 9 Managing success: in capital ilflow problem 12 Why is there a probleim? 12 Egypt's capital inflow problem 13 Implications for fiscal and exchange rate policy 14 Risk in the immediate future 16 Sterilization problems 16 Issues in banking 17 Notes 19 Chapter 3 Long-term policy changes 21 Divergent growth scenarios 21 The base case scenario 21 The high growth scenario 22 Benefits of rapid growth 23 iii Long-term consistency issues 23 What should be done while the investment expansion lasts? 24 What should be done if investment expansion does not accelerate? 25 Notes 26 Chapter 4 Promoting outward orientation through exports 27 The environment 27 Achievements 28 The agenda for action 28 The incentive regime-asymmetric prices between import and export 29 Import transaction costs 30 Export transaction costs 34 Core areas for action 34 Infrastructure 34 Customs reforms 35 Quality controls 36 Maximixing FDI and its benefits 37 Forging 'buyer-seller linsks 38 Creating an export mentality 39 Notes 39 Chapter 5 Natural resource depletion and savings 41 Nonrenewable resources 41 Projected oil and gas rent 42 The competing use of the oil and gas rent 43 Consumption 43 Investment 44 Oil and gas fund 45 Summary and conclusions 46 Notes 46 Annex 47 Chapter 6 Increasing long-term savings to build the basis for growth 51 Increased savings from privatization and public expenditure reform 51 The PE saving-investment gap and its roots 52 Potential gains in savings from reforms: a simulation 54 Financial sector reforms to increase private saving 56 The social insurance system 56 iv EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH The National Investment Bank 59 Reforming the social insurance system - short- to medium-term measures 61 Reforming the social insurance system - longer-term proposals 62 The insurance industry 64 The capital market and its links with saving 66 Notes 67 Selected bibliography 69 Statistical annex 71 Boxes 2.1 The dynamics of debt and the sustainability of fiscal deficit 16 6.1 Methodology and assumptions 55 Tables 1.1 Selected cconomic indicators, 1990/91-1995/96 1 1.2 Growth and employment 2 1.3 Per capita income growth performance, 1980-93 3 1.4 Average tariff rates in Egypt and selected East Asian economies5 1.5 Growth and policies in 86 countries, 1966-93 5 1.6 Egypt and Indonesia: comparative indicators 5 1.7 Growth and policies in Egypt and Indonesia,1966-93 6 1.8 Regression estirnate for Egypt 6 1.9 Growth counterfactuals 6 2.1 Recent developments in saving and investment 11 2.2 Distribution of private investment 11 2.3 Tariff duty to import ratio and indexes of effective exchange rates 12 2.4 Indexes of domestic prices of tradables and nontradables 12 3.1 Outcome of the two scenarios in Egypt 22 4.1 Tariffs and taxes affecting Egyptian exports 30 4.2 Effects of expensive Egyptian port services 31 4.3 Effects of cumbersome Egyptian import clearances 32 4.4 Effects of restrictive Egyptian quality control system 33 5.1 Scenario assumptions for nonrenewable resources (oil and gas), 1996-2015 43 5.2 Estimated implicit subsidies to major petroleum products and gas 44 5.3 Illustrative rates of return on public subsidies 45 5A.1 Prices of Egyptian crudes, 1996 47 5A.2 Price of Suez Blend, 1992-95 47 5A.3 Long-run marginal cost of gas exploration and production, 1993/ 94 48 5A.4 Petroleum product end-user prices in Egypt 49 5A.5 Estimated annual deadweight loss in Egypt (1995) 49 6.1 Estimated increases in savings from reforming PEs: total 54 6.2 Estimated increases in savings from reforming PEs, by government and private sector 54 6.3 Estimated increases in savings from reforming PEs: origin of the change 55 'I 6.4 Sensitivity analysis 56 6.5 Social insurance system indicators 57 6.6 Comparative public pension schemes and demographic indicators, using most recent data 57 6.7 Contribution rates for social insurance 58 6.8 Public pension spending as shares of most recently published indicators 58 6.9 NIB funding sources as percentage of total 59 6.10 Growth of private funds, 1991-95 60 6.11 Action plan for social insurance system reform 68 6.12 Action plan for insurance industry reform 68 Figures 2.1 Average growth rate for selected stabilizing economies 9 2.2 Term structure of deposit interest rates 10 2.3 Real effective exchange rate 10 2.4 Current account balance, change in reserves and capital inflows 14 2.5 Composition of capital inflows 14 2.6 Inflation, inventory, and exports 15 2.7 Domestic debt as percentage of total public debt stock 17 2.8 Domestic vs foreign interest rate 18 .3.1 Distribution of sales proceeds from privatization 24 3.2 Volatility of Egypt's key revenue sources 24 5.1 Share of oil and gas sector in GDP 41 5.2 Share of petroleum exports 41 5.3 Oil and gas production 42 5.4 Estimated oil and gas rent 42 5.5 ]Resource rent/GDP 42 5.6 Egypt's projected oil and gas revenue over 20 years, 1995-2015-- high-case scenario 43 5.7 Egypt's projected oil and gas revenue over 20 years, 1995-2015 -low-case scenario 44 5.8 Annual incremental investment over 20 years to compensate for decline in rent in low-case scenario 45 5.9 Annual contributions to Egyptian oil revenue stabilization fund, from 1995 (low-case scenario) 46 5A.1 Price of Dated Brent 47 5A.2 Heavy fuel oil price 48 6.1 Saving-investment gap as a percentage of GDP in Egypt and 46 developing countries, 1987-93 52 6.2 Egyptian saving-investment gap and its sources of finance, 1987/88-93/94 52 6.3 Saving-investment gap of PEs in Egypt, 1987/88-93/94 53 6.4 Financial performance of public enterprises in Egypt, 1986/87-93/94 53 6.5 Proceeds from privatization of Law 203 companies in Egypt, 1994 to September 1996 53 6.6 Comparative performance of selected pension funds 61 vi EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH Foreword This report is the third in a series of World Bank economic and socio-political imperative, and requires Middle East and North Africa Economic Studies, substantial and sustained job creation over the coming which are being published as a contribution to years. Job creation depends critically on accelerating knowledge about the economies of the Middle East and economic growth, in turn entailing large increases in North Africa (MENA) region--a region whose future is domestic investment and savings rates. Meanwhile of substantial strategic and economic importance to the Egypt needs to press forward with the process of rest of the world. The present study is devoted to opening up to the global economy while ensuring that Egypt, which has the largest population in the Arab capital inflows support rather than pose risks to world and plays a central role in regional affairs, both macroeconomic stability. geopolitically and economically. It summarizes Egypt's The strategy described in this report is recent economic progress, highlights key opportunities designed to help Egypt meet these challenges. On the and challenges currently facing its government and external front, it emphasizes reforming the trade people, and outlines a strategy for securing its future regime, boosting exports, and entering into a prosperity on the brink of a new millennium. partnership agreement with the European Union (EU) Following dynamic economic growth in the of the kind already concluded by other countries in the decade beginning in 1975, Egypt, along with most region. On the domestic front, it outlines a set of other countries in the Middle East and North Africa, policies to ensure that macroeconomic stability is was hard hit by the oil price slump of the mid-1980s. In maintained, and a range of structural reforms to recent years, however, thanks to the strong stabilization promote the higher savings and productive investment and reform policies implemented by the government on which rapid growth must depend. Effectively since 1991, the economy has staged a remarkable pursued, these reforms have the potential for bringing recovery. Inflation and fiscal imbalances have been about a virtuous spiral of growth, savings and dramatically reduced, but not at the expense of investment that will enable the Egyptian people to economic growth, which has improved year on year achieve steadily growing prosperity into the twenty- from a low of under 2 percent in 1991/2 to an estimated first century. 5 percent in 1995/6. And Egypt today is attracting I believe that Egypt's prospects today are unprecedented interest from foreign private investors, brighter than they have been for more than a decade, increasingly the source of external resource flows for and that turning these prospects into daily reality will development worldwide,, not only be good for the Egyptian people but will But substantial challenges remain. Poverty and contribute substantially to prosperity, stability and unemployment remain serious problems, and the labor peace in the MENA region. We in the World Bank force is expected to grow by nearly 3 percent a year intend to maintain and deepen our partnership with over the next ten years. Many of today's jobless are in Egypt's government and people, with lending as the 15-24 age group, as will be a large proportion of requested but also through non-lending services the more than half a million new job seekers expected (including analytical work, of which this report is an to enter the labor market each year. Meeting young example) designed to support their development and Egyptians' aspirations for a decent livelihood is an reform efforts in the years to come. Kemal Dervi§ Vice President, Middle East and North Africa Region The World Bank vii Acknowledgments T he Bank team wishes to acknowledge the guidance The Bank team consisted of Chang-Po Yang (Team and support it has received from senior Government Leader); Daniela Gressani (Macro-economics); David officials in carrying out this study. In particular, we wish Dollar (Savings, Investment and Growth); Sweder van to thank: H.E. Dr. Zafer El-Bishry (Minister of State for Wijnbergen (Macro-economics); Ahmed Galal, Sahar Planning and International Cooperation); H.E. Dr. Atef Nasr (Privatization and Savings); Albert Martinez Ebeid (Minister of Public Enterprises); H.E. Dr. Ahmed (Private Savings and Pension Reforms); Linda van Goueli (Minister of Trade and Supply); H.E. Dr. Youssef Gelder (Export Development); Robert Crawford Boutros-Ghali (Minister of Economy); Mr. Ismail Hassan (Investment Promotion); Bjorn Larsen (Natural (Governor, Central Bank of Egypt); Dr. Ibrahim Fawzi Resources and Savings), Anqing Shi (Demographic (Chairman, Investment Authority); Mr. Abdel Hamid Implications for Long-term Saving), and John Wetter, Ibrahim (Chairman, Capital Market Authority); and Alaa El-Shazly (Modelling and Statistics). The editorial General Ehab Elwy (President, CAPMAS). production team included Patricia Zord, Jenepher We would also like to extend our gratitude to Moseley, Georgette Munir, Rosario Bartolome and numerous other Government officials, private sector Alexandra Sperling. representatives, and scholars, who have guided and Messrs. John Page (Chief Economist, MENA assisted the Bank team, including Mr. Ismail Badawi Region, World Bank), Khalid Ikram (World Bank (Advisor to the Ministry of Planning and National Country Director in Egypt) and Jayanta Roy (Lead Investment Bank); Dr. Faika El-Refaie (Sub-Governor, Economist, MENA Region) provided overall direction. Central Bank of Egypt); Mr. Momtaz Said (Director Special thanks to Dr. Heba Handoussa (Director, General for the Budget, Ministry of Finance); Dr. Taher Economic Research Forum) for her helpful comments Helmy (Partner, Helmy & Hamza, Baker & McKenzie); and suggestions. The analysis on export issues also Mr. Omar Mohanna (Managing Director, Egypt Arab- benefited from the following USAID-funded studies: African Bank); Mrs. Fatma Ishac (First Undersecretary "Quality Control to Quality Assurance in Egypt: A for Planning, Social Insurance Organization); and Mrs. Program for Change"; "Egypt's Trade Policy Reform Ragaa Mansy (Consultant to the Minister of Social Plan"; "Stanford Research Institute Study on a Strategy Insurance). for Egyptian Exports." viii Abbreviations, acronyms, and definitions BMP Black market premium CA Current: account CBE Central Bank of Egypt CIF Cost, insurance, and freight CMSA Constant market share analysis CPI Consumer Price Index DB Defined benefit DC Defined contribution DWL Deadweight loss DWT Deadweight EBA Egyptian Businessmen's Association EEPC Egyptian Export Promotion Corporation EGPC Egyptian General Petroleum Corporation EISA Egyptian Insurance Supervisory Authority EMA Europe and Mediterranean Agreement EU European Union FDI Foreign direct investment FEI Federation of Egyptian Industries FOB Free on board GAFI General Authority for Investment GDP Gross domestic product GOEIC Government Organization for Export and Import Control GNP Gross national product GNY Gross national income HS Harmonized Coding and Classification System IAS Internalional auditing standard ICOR Incremental Capital Output Ratio IMF International Monetary Fund ISO International Standards Organization JD Jordanian dollar LE Egyptian pound LIBOR London interbank offered rate LLP Loan loss provision NEE Nominal effective exchange rate NIB National Investment Bank NTCPI Nontradable consumer price index ODA Overseas development assistance OECD Organization of Economic Cooperation and Development PE Public enterprise REER Real effective exchange rates SGS Societe G6n6rale de Surveillance SIS Social insurance system ix SME Small and microenterprises TCPI Tradable consumer price index TOKTEN Transfer of Know-How through Expatriate Nationals UNCTAD United Nations Commission for Trade and Development UNDP United Nations Development Program WEF World Economic Forum WTO World Trade Organization List of definitions Bank provisioning: Bank capital set aside against doubtful loans. Defined benefit pension plan: Pensions are determined by an actuarial computation that incorporates salary and years of service. Defined contribution pension plan: Pensions are solely determined by the accumulated contributions to an individual account and on the investment performance of the fund. Pay-as-you-go pension plan: Benefits received by current retirees are equal, on average to contributions by current active workers. Open door policy: Introduced by Law 43 or 1974 (and its amendment Law 32 of 1977) to encourage foreign investment, as a gradual shift towards a private based economy through granting investors privileges including tax exemption, immunity fronm sequestration and unrestricted repatriation of profits. This was followed by trade liberalization through Law 118 or 1975 which allowed the private sector to import goods except those identified as important for hygienic and security purposes (e.g., wheat). Saving: Rate of wealth accumulation. Savings: Stock of financial assets. Sterilization: Sale of government securities by the monetary authority to absorb excess liquidity in the economy. x Currency and exchange rates Currency Unit: Egyptian Pound (LE) Fiscal Year LE per US$ July 1-June 30 Period averages Weights and measures 1988=2.230 Metric system 1989=2.389 1990=2.708 1991=3.296 1992=3.323 1993=3.334 1994=3.373 1995=3.394 1996=3.395 xi Strategic overview A fter Egyptian growth slowed in 1986 from its These problems combined with an inward- A unprecedented boom during 1975-85, the looking growth strategy have created an incentive government responded by adopting adjustment regime biased against domestic saving and the policies to stabilize the economy and restore production of tradable goods, in particular those growth. Growth resumed quickly, averaging 4 that can be exported. The reasons for the bias are percent during 1993-96 and culminating in a twofold. First, transfers from abroad increase financial market boom that started in the second Egypt's domestic income, and therefore its demand half of 1996 (see table 1.1). Nevertheless, Egypt's for both tradable and nontradable goods. Prices of challenge remains daunting. nontradable goods (such as land and labor) are not constrained by international market forces, and are Egypt's challenge is to sustain and accelerate relatively free to adjust in the domestic market, but growth in order to overcome high prices of tradable goods (such as food and unemployment rate and to pursue integration vegetables) are constrained. Transfers from abroad in the global economy tend to give rise to higher prices for nontradable goods, encouraging their development at the Official estimates of unemployment still stand expense of tradable goods. The concentration of at about 10 percent of the existing working age investment in nontradable goods and the shift in population, and the size of the group will increase relative prices in their favor undermine the ability annually, over the next ten years, by more than a of Egyptian industries to produce tradables. This million. It is therefore imperative for Egypt to can lead to higher imports of goods and services increase job and income opportunities to meet the than of exports and lower domestic saving. rising expectations of the young and grow-ing Transfers from abroad also tend to create volatility population. To this end, the Egyptian government and therefore uncertainty in the level of national has set a target for gross domestic product (GDP) income (see figure 3.2). This tends to reduce the growth at an annual rate of 6 percent by the year level of domestic saving because such uncertainty is 2000 (see table 1.2). more likely to affect saving before consumption. To Egypt has a unique opportunity to achieve this achieve long-term self-sustaining growth, Egypt target. World trade is growing rapidly, the must tackle the structural obstacles to the growth of European Union (EU) is seeking closer cooperation domestic savings and the growth of exports. with the region, and large amounts of intemational capital are seeking productive investment. Egypt, Egypt's most promising route to rapid growth being close to the key world markets, could is to achieve a virtuous circle of saving, capitalize on these developments and become a investment, and growth through higher public center of growth and investment for the region. To saving and structural reforms accomplish this, however, requires that two long- term structural problems be overcome: Egypt has already decided to limit foreign * Reliance on exogenous resources (remittance borrowing, but this will also limit the resources income, Suez Canal income, exports of oil and gas, available for investment. Given this decision, how and foreign assistance) to finance domestic could Egypt achieve the higher rates of economic expenditures makes growth too vulnerable' to growth for which saving and investment are so extemal shocks. important? First, we know from the experience of * Low levels of domestic saving and other countries that though essential for rapid investment, cloud Egypt's long-term growth growth, saving and investment may not by prospects through the resultant slow accumulation themselves be sufficient (see table 1.3). This causal of human and physical capital. relationship is influenced by other factors. STRATEGIC OVERVIEW xiii Although we do not know exactly what those Attempts to avoid nominal appreciation and to factors are, we know that policies which promote meet the monetary growth target were reconciled growth and investment will also promote saving in a during 1991-94 through a strong sterilization: that virtuous circle. We also know that growth, saving, and is, the monetary impact of foreign exchange investment are mutually reinforcing and that there are purchases by the central bank was offset by sales of ways for countries to jump start or accelerate the domestic securities. The result has been to create a process. Our analysis shows, for example, how far high Egyptian reserve position (at $18 billion- all Egypt could have boosted its economic dollar amounts are U.S. dollars)-or 17 months of performance by emulating policies already adopted imports) offset by a substantial increase in domestic by Indonesia-a country comparable in character debt (see figure 2.7).2 At the same time, real and resources (see table 1.7). Compared with appreciation in the exchange rate, which is Indonesia, being less open to trade is estimated to continuing, poses a threat to the current recovery. have reduced the growth rate of Egypt's real per In order to arrive at an appropriate policy capita GDP by 2 percent per year over the period response to capital inflows, it is important to 1966-93. determine which of two possible causes of these Other features of Egyptian policy, such as the inflows are exerting pressure on the exchange rate. fiscal deficit, government consumption, and the It could be an excessive expansion of aggregate level of inflation, are estimated to have reduced demand or a portfolio shift toward LE-based assets. GDP growth by 0.7 percent annually. This suggests The distinction is crucial. Only if an excessive Egypt has scope to boost its rate of GDP growth per expansion of demand is behind the upward capita per year by at least 2.7 percentage points pressure on the exchange rate would contractionary primarily through trade opening. Another estimate fiscal and monetary policies be needed. If, however, (Sachs 1996) shows that Egypt could boost its per a renewal of business confidence in governunent capita growth by as much as 3.7 percent a year if it policies-a portfolio shift towards Egyptian achieves the level of market efficiency of the fast assets-is causing the increase in capital inflows growing East Asian economies and their average noncolitractionary policies would be preferable. level of savings (see table 1.9). Trade liberalization, See chapter 2 for detailed explanatioin. a critical element in structural reforms, would give So what is the answer? Indicators shown in probably the largest impetus to further growth, figure 2.6 suggest that for now there is little sign of which would in turn stimulate private saving, an overheating economy and point to an asset particularly through the development of long-term market explanation (shift in portfolio choice) for the saving instruments and institutions. Higher public upward pressure on the exchange rate. This saving is needed to finance the initial growth; appears to justify the government in resisting accelerated privatization, that results in sales further appreciation and accommodating any proceeds used to retire public debt and thus allow a downward pressure that might develop. What then reduction in interest cost, would raise public are the policy measures that could be applied in saving. resisting the upward pressure? But first Egypt must effectively manage the Resisting upward pressure success of stabilization Egypt has used two typical policy measures in In the long term, if growth brought about by response to capital inflows. They have been stabilization is to be sustained, a buildup in the effective up to a point, but cannot be carried too far. level of domestic saving is critical. In the short run, The first, sterilization, tried in 1993/94, led to a however, capital inflows from abroad resulting very rapid accumulation of domestic debt and from the success of stabilization are putting could, if pushed further, perversely aggravate the upward pressure on the exchange rate and thereby size and consequence of capital inflows. The threaten the current recovery. Egypt has been second, fiscal stringency, should be maintained as a experiencing the effect of capital inflows in terms of cornerstone in managing capital inflows and to upward pressure on the exchange rate, both keep the fiscal deficit at its already very low level. nominal and real, since 1991. However, substantial further tightening would risk xiv EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH eroding the economic recovery by unnecessarily deposits are matched with loans in the same foreign contracting aggregate demand. In any case all the currency, the problem remains: borrowing firms obvious cuts in expenditure have already been may default on bank loans after a devaluation, made. wiping out the banks' capital. Policy actions to The measures now proposed would safeguard the soundness of the banking system complement fiscal stringency in managing capital should include the following: strengthened inflows. They are suggested because the recovery to supervision by the central bank focusing on the date has been associated with real exchange rate adequacy of loan loss provision, aggressive appreciation and domestic interest rates enforcement of rules for provisioning against bad persistently higher than rates on major foreign loans; prevention of excessive foreign exchange currencies. They include setting equivalent interest exposure by banks. (For details of these rate returns on foreign and domestic currency recommendations see chapter 2.) These actions are reserves with the central bank to eliminate crucial in the post-stabilization period to strengthen incentives for banks to borrow in dollars and lend the banks, or at least to make the extent of their in domestic currency (see below); requirements for exposure clear to managers and regulators alike. banks to invest surplus foreign exchange deposits abroad; encouragement for pensions to invest in Toward a trajectory of high growth foreign fixed income securities and equities; further acceleration of privatization with proceeds applied Solving the immediate problems outlined to reducing domestic debt. A speedup in import above will reduce Egypt's vulnerability to crises but liberalization could also help alleviate the upward this is not sufficient to get Egypt on a path to rapid pressure on the exchange rate bv increasing import growth supported by higher rates of saving and demand. investment. Continuing growth will need increases in public saving until private saving can take up the Internal debt and the exposure of the banking burden in response to stronger growth. The latter system also threaten the current recovery will need to be boosted by rapid structural reforms in particular trade liberalization and privatization. Related to the management of capital inflows is Developing sound long-term savings instruments the management of internal debt. At 50.6 percent of and institutions would be criticai to ensure efficient GDP it is large, and service costs are high. At 4.7 intermediation between savings and investments. percent of GDP, they are comparable to the size of In the interim, however, three issues need to be the total civil service wage bill. Reducing the debt to addressed: maintaining a strong fiscal stance over GDP ratio depends on the speed of growth and the level the longer term; adopting supportive policies to of real interest rates. Interest rates in excess of the rate sustain and accelerate the recovery; and adjusting of GDP growth could result in debt financing via macroeconomic policies if the recovery reverses monetization, with capital flight as its itself into recession. consequence.3 Thus, primary surplus should be maintained at a minimum of 3 percent of GDP or Fiscal stance higher to allow a reduction of debt to GDP ratio. The soundness of the banking system is also a The current fiscal stance appears strong and source of concern. The interest rate differentials consistent with other policy objectives. However, would make it attractive for banks to borrow in uS the size of internal debt limits the extent to which dollars and lend in local currency, but this makes the government could apply an expansionary fiscal them vulnerable to a currency devaluation. Cross- policy in a slowdown, and the sustainability of country experiences show that foreign exchange internal debt could come into question if growth exposure increases substantially when banks are does stagnate. More important, the large intermediating between local and foreign government borrowing requirement, which has currencies. Egyptian banks now have sufficient raised the domestic interest rates and caused the liquidity in foreign exchange assets, but their recent rapid accumulation of internal debt, constrains the success in mobilizing financing from international ability of the government to allocate budgets markets highlights a likely growing trend. Even if toward more productive ends, such as health and STRATEGIC OVERVIEW xv education. Against this backdrop, Egypt faces domestic inflation. Increased foreign savings could continued uncertainty in its revenue sources, in sustain the recovery but would also increase particular the likely decline in long-term external Egypt's vulnerability to external shocks. Therefore, assistance. Furthermore, as mentioned above, the a critical longer term issue is the recovery of scope for further expenditure cuts is limited, as domestic saving. obvious expenditure cuts have already been taken. The composition of private investment is also a Thus, reducing internal debt should be pursued as cause for concern. The current recovery has been a central policy objective in maintaining the fiscal led for the most part by private investment in stance. nontradable goods (see table 2.2). The concentration Accelerated privatization is one way to help of investment in nontradable goods and the shift in strengthen the fiscal stance. By substantially relative prices in their favor undermine the ability increasing central government revenue it would of Egyptian industries to upgrade their export reduce the govermment's financing requirements (in capability and to compete more successfully in particular, servicing of internal debt) and so reduce production of tradables (see table 2.4). This poses government claims on domestic resources. This another threat to the current recovery. If there is a would allow interest rates to be lowered and so property market crash, or major realignment of reduce the incentives for short-term capital inflows. relative prices, the resulting losses would have to be absorbed, not only by investors using their own Accelerating the recovery funds, but also by banks using funds from the depositors. This threat reinforces the need for Although growth has resumed, the pace and supporting policies to encourage production of composition of investment and saving have not tradables, to maintain vigilance against excessive kept in step with each other (see table 2.1). bank exposure to the real estate markets, and to Declining public sector investment has been adopt aggressive provisioning against accompanied by rising public sector saving; and nonperforming assets in banks' portfolios. while private sector investment is rising, private Another cause for concern is the delay of a sector saving, having remained at around 11 major export recovery. The rise of capital good percent of gross national income since 1994, has not imports in the current recovery needs to be yet shown signs of recovery. balanced by growth of export earnings, thus the The increased public saving resulted mostly speed of export recovery is critical. The successful from the reduction of budgetary transfers and export experiences demonstrate that a soind subsidies and from the improved financial relative price incentive regime is necessary, but not performance of Law 203 companies-enterprises sufficient. Strong and responsive supporting owned by the government but subject to the same policies are also needed to ensure quick and timely regulatory framework as private enterprises. But the export supply response. increase in public saving has gone about as far as it can go until privatization transfers the bulk of state In case of a slowdown enterprises and economic authorities to private ownership. Data are not available to determine the Should export response turn out to be slow, extent to which the lower private saving is due to private savings remain insufficient, and concen- weakness in corporate saving or in household tration of investment in nontradables continue, the saving. However, the recovery of private current growth recovery may very well slow down. investment appears to be financed largely by If it slides into a recession, a real exchange rate retained earnings, so it is likely that the behavior of depreciation would be required at some stage. households may be responsible for the stagnant Appreciation can be justified by strong income performance of private saving). growth but without such growth, appreciation can The timing of the response in private saving is a threaten a recovery that is just beginning. Before cause for concern. A significant lag would that happens, introducing an element of flexibility necessarily be accompanied by a widening of the through the adoption of a crawling band, should be current account deficit, and upward pressure on considered seriously. xvi EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH Solid medium-term saving and investment The high growth scenario effort will be needed to support long-term growth This scenario is based on the vision that Egypt should and must grow faster, and that the benefits of Two scenarios compare the efforts needed and rapid growth outweigh the potential risks. First, Egypt the payoffs (see table 3.1). would maintain sound macroeconomic policies strengthened by vigorous structural reforms in The base case scenario (the "base case") trade, capital and labor markets, privatization, and deregulation and would strengthen incentives to As in the high case, sound macroeconomic raise productivity growth. A rapid and large-scale conditions are assumed to be present. Fiscal privatization program would provide sales stringency will be maintained, and external debt to proceeds toward reducing domestic debt. This GDP ratio will continue to decline, thus increasing would be complemented by rapid growth of headroom for managing hiternal debt and adopting private investment. Second, fiscal stringency would expansionary policies if needed in the future. give rise to increased public sector 'saving and Growth of aggregate expenditures will be slow, therefore rapid increases in domestic saving. with the current account in balance. Growth of Private saving would be boosted subsequently by 'oroad money will be kept below growth of nominal the other structural policy reforms-rapid trade GDP. Inflation will be comparable to that of liberalization ar.d privatizatiorn-and by rapid per Organization of Economic Cooperation and capita income growth. However, the increased Development (OECD) countries. By choosing to domestic saving would not be large enough to maintain its current levels of intermational reserves finance all the investnent requirements; a (at more than 17 months of imports), Egypt would significant gap would still have to be filled with be able to cope with external shocks with relative portfolio and foreign direct investments and with ease. foreign borrowing. Lhis scenario is distinguished by two main 77Tis scenario indicates that gross national product features. First, such structural reforms as there are (GNP.) in real terms would eai:h a, rowth trajectory of move slowly imd the fundamental problems about 6-7 percent by around the year 2000, and nominal impeding growth of saving and investment remain. export earnings (of nonoil merchandise) would grow at Divestiture of public sector interest is limited, and more than; 15 percent a year during much of 1996-2002. the current recovery of private investment does not While the debt stock would grow with increased accclerate. Second, Egypt would choose to limit foreign borrowing, the growth of GNP would be foreign borrowing (on a commitment basis) to the much faster, thereby keeping the growth of debt range of US$ 1.0-1.5 billion a year during 1996-2002 stock well behind the increases of Egypt's capacity despite the large interest rate differential between to carry and service debt. As under the first foreign and domestic borrowing. This means that scenario, the debt problem would be well contained the debt stock will decline in real terms, and (Egypt would remain "moderately indebted.") The relative to output as well. The outcome of this decline in foreign exchanige reserves (to no less than scenario is significant. Growth will continue-but nine months of imports) would be moderate, at a slow pace of 4.5 percent a year. Per capita assuming the enlarged current account deficits are income growth will be constrained. The rapid financed by using a range of financing instruments growth of the labor force, along with constrained such as foreign direct investment (FDI), portfolio growth of private sector investment, will result in investment, and commercial borrowing. The rising unemployment (as shown in table 3.1) and viability of this scenario, as with the base case, probable increases in the spread of poverty. depends on the level of domestic saving. Should Furthermore, slow growth of nonoil merchandise domestic saving not rise far enough or quickly exports (at 5 percent) limits the scope for Egypt to enough to support the growth of private reduce its reliance on exogenous resources, despite investment, foreign savings would have to be relied the large foreign exchange reserves that it holds upon, and inflationary pressure would emerge, against external shocks. increasing Egypt's vulnerability to external shocks. STRATEGIC OVERVIEW xvii The benefits of rapid growth achieve growth of exports at 35 percent a year for five years to just to regain the 0.27 percent share of The outcome of this scenario indicates that GNP global export trade that it achieved in 1970. in real terms would reach a growth trajectory of A key issue is to determine what policies and about 6 to 7 percent, and nominal export earnings institutions can help to expand exports, and enable (of non-oil merchandise) would grow at more than Egypt to catch up with the growing trend in 15 percent a year. More specifically, the benefits of globalization. Account must be taken of the rapid growth through the high growth scenario changing external environment. The global trend include: towards a free trade and investment environment * Reduction in unemployment to 6.4 percent has changed the 'rules of the game.' The by 2002 as compared with a rise to 14 percent in the technological and managerial changes that have base case. occurred in the last decade or so have induced the * A rise in the level of trade integration (export OECD countries to adopt structural reforms to plus import) to 33.1 percent of GDP by 2002 enhance the competitiveness of firms (compared with 25.2 percent in the base case). headquartered in their territories. An increasing * Reduced vulnerability to external shocks as a number of these firms have in turn become result of decreases in exogenous resources as a multinationals, sourcing from all over the world. share of GNP, from 12.6 percent to 8.8 percent in Competition for markets, investment, and 2002 (compared with 9.4 percent in the base case). technology has intensified. * Increased per capita income to reach $ 1,650 In this context, the ongoing process of a year by 2002 (compared with $ 1,465 in the base partnership negotiations with the EU is of case). particular importance, and can be argued to have If rapid growth is to be sustained through reduced the options confronting Egypt. The increased exports and domestic savings, the extension of large parts of the EU integration necessary sound macroeconomic conditions must mechanisms to partnership countries, such as be maintained. To put the high case in hand, Egypt Morocco, Jordan, and Israel, implies that a Korean- will need to look at the following questions: how to style policy mix-one that relies on protection of expand export production and sales rapidly, how to the domestic nmarket with a broad-based drawback replenish income generating assets through sound mechanism to allow exporters to compete on world pricing and management of nonrenewable natural markets-has become less feasible. The trend resources, how to mobilise domestic saving; what toward adopting deeper regional and multilateral sort of instruments and institutions are needed to trade and investment integration, as well as trade ensure efficient intermediation between savings disciplines, implies that firms located in the and investment. partnership countries must become more competitive on a global scale. As more market- Export and sales push friendly regulatory mechanisms are introduced and Egypt s export growth has lagged behind that tariffs are gradually eliminated in regional of global trade. Had Egypt maintained the same rate of economies and worldwide, Egypt has little choice export growth as the rest of the world during 1983-93, but to follow suit. The issue iS to what extent and its exports should have reached $ 6.3 billion, rather than over what time frame. $3.1 billion. Constant market share analysis (CMSA) The forthcoming partnership agreement with was used to estimate this cumulative $ 3.2 billion the EU would give credibility to Egypt's own trade loss of export eamings and to attribute it to a liberalization efforts and allow a transition period combination of factors. Of these the most important for tariffs to be gradually removed. Removal of has been Egypt's inability to adapt to changes in nontariff barriers and reduchon of overhead market demand (loss of $ 2.3 billion); of lesser business costs would also become critical if the importance has been her inability to maintain cost export sector is to compete internationally, because tariff comsor shares in the expanding export liberalization alone may only encourage more imports cmpretitivenssof09billion.. . and production for domestic sales. Removal of nontariff markets (loss ofac 9 bllion ). Apte wou aver co barriers and reduction of overhead operating costs are prerequisites for a strong export push, which is key to xviii EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH Egypt's success in achieving sustainable growth. Our physical capital (machinery and equipment, etc.) recommendations for encouraging exports focus on and natural resources (oil and gas, and so forth). relaxing practical constraints or creating incentives For this reason, the concept of genuine saving in the following areas: has been developed (World Bank 1997). Genuine * Trade logistics and transportation; saving, simply defined, is gross national saving, * Customs procedures; less depreciation of capital stock, and less depletion * Quality control and product standards; of natural resources. Within this framework, rates of * Attracting FDI; gross national saving will have to be much higher for * Forging buyer-se:ller links; and economies that depend on extraction of natural resources. * Creating export nientality; The need for higher saving rates is apparent from See chapter 4 for specific recommendations. estimates of Egypt's genuine savings. Valuing the depletion of oil and gas indicates that total income Increasing domestic saving generating assets have not increased much in Egypt Apart from reaching the general conclusion that in the 1990s. In other words, the genuine savings Egypt could achieve additional per capita growth rate (as a percentage of GDP) is close to zero. Thus, of 2.7 to 3.7 percentage points per year by adopting for economic growth to be sustainable at a higher sound policies, several specific policy and level, gross national savings (and investment) institutional issues at the sector levels need to be would have to increase to a level even higher than addressed. The central rmessage is that Egypt must that which might be suggested by international save a lot more to maintain its capital resource base- comparison (see table 1.9). that is, to replace the depletion of income gene- Projections of oil and gas production indicate rating assets resultng from the extraction of oil and that Egypt's income from resource extraction could natural gas. Further, Egypt can save a lot more increase over the next several years, due to through prizatization and reforms of public enterrises, substantial growth of gas production, but would through strengthening jfinancial instruments and then gradually fall. Egypt could become a net institutions for long-term saving, and through efficient energy importer by the year 2010, in light of intermediation between savings and investments. increasing domestic energy demand. The extent to Implications of resource extraction for saving and which economic growth would be affecteu by the capital fornation. Egypt derives a large share of its future decline in rent income could depend on national income front the extraction of nonrenew- policies adopted now that will affect how the able natural resources, such as oil and natural gas. current rent income is used. The production of oil and gas averaged about 10 Historically, a substantial share of the rent percent of Egypt's GDP and 50 percent of its income has been distributed in the form of implicit merchandise export each year during the 1990s. The subsidies to petroleum product and natural gas oil and gas reserves are national assets that consumers. These are estimated to be 45 percent of generate income (rental) to Egypt.4 Because of the resource income in 1991 and 24 percent in 1995. decline in international prices of oil during the past Since subsidies result in inefficient use of energy five years, the rent as a share of GDP declined from resources, the rate of return on the energy subsidies 14 percent in 1991 to 8 percent in 1995. However, is estimated (based on cross-country data) to be the change in the international prices of oil negative at -5 to -7 percent. In contrast, returns to notwithstanding, the income derived from expenditure in education, and to infrastructure that extracting oil and gas is bound to decline as the facilitates private investment in productive assets, reserves are being gradually depleted. Other forms normally exceed 10 to 15 percent. of capital will have to be created to replace the The policy implication is clear. Egypt could income from oil and gas if the growth of national maintain its income generating assets by directing income is to be maintained. Therefore, the resources toward human and infrastructure framework of national accounts needs to be investment. To do this, Egypt can continue to reduce adjusted to account for the depletion and/or the implicit energy subsidies that result in more rapid accumulation of income generating assets such as depletion of energy resources and low resource efficiency. STRATEGIC OVERVIEW xix How much saving can come from privatization and of saving in the next 15 years by about 24 reform of public enterprises? Privatization could percentage points, or roughly 1.6 percent a year. increase savings, in part because the transfer of 7his demographic trend is likely to increase the operating ownership to the private sector is associated with surplus of the social insurance system) making this a higher productivity. Higher productivity generates good opportunity for Egypt to implement much needed more resources that can be consumed or saved. pension reforms. The need for these has been brought to Also, privatization may attract more savings from the fore by the problems of the country's emerging abroad, as happens when specialized multinational financial markets. firms buy such enterprises as telecommunications. The problems, many of them common to the Beyond these effects, privatization could stimulate financial markets of other developing countries, saving indirectly; if the proceeds from sales are include a concentration of investments in used to retire public debt, this could lead to lower government securities, underdeveloped long-term taxation with favorable effects on public saving. savings instruments, and a lack of competition Another positive effect is improved competitive- among contractual savings institutions. These ness of other industries if privatization lowers the problems have the effect of limiting private saving cost of producing intermediate goods and services. as evidenced in the underdevelopment of principal Finally, privatization can contribute to saving by instruments of pensions funds and life insurance. boosting capital market development, which has By ending government intervention in portfolio been shown to contribute positively to growth. allocations, Egypt has already undertaken the first A sample of Egyptian public enterprises (PEs) of two actions required to bring private savings up analyzed indicated that assuming enterprise profits to full potential. The second is to encourage the increase because of investment and productivity development of more flexible and competitive growth, privatization and commercialization of the long-term saving instruments and institutions. The sample would bring additional annual savings to latter is essential fo: encouraging long-term private Egypt of about 2.4 percent of GDP (see table 6.1). saving and for more efficient intermediation More significandy perhaps, since the sample of between investments and savings. Egyptian PEs analyzed only represents about a The following will focus on three institutions third of the sector, the gains could be as high as 7 that are key to the development of private long- percent of GDP, which is about the amount Egypt term saving: pension schemes; contractual savings needs to match the saving/investment ratio to GDP such as life insurance; and the capital market. In the of the fast-growing economies. first instance, evidence from other countries shows Moreover, the sample analysis indicates that that generous pay-as-you-go state pensions tend to the results are sensitive to variations in investmnent depress household saving, and that a mandatory (see table 6.4). This not only suggests that the gains saving scheme is most likely to increase household from investment in the course of privatization are saving. Second, sound contractual saving significant, but also that care must be taken to institutions, such as the life insurance industry, ensure that investment will be forthcoming. The tend to favor the formation of long-term financial design of privatization transactions should commit assets over fixed assets such as real estate, thereby the new owners to an investment program, where enabling households and private corporations to appropriate, to maximize the gains to society. borrow long term; this may indirectly contribute to increased private savings. Third, development of a What policy and institutional changes will capital market both supports and is supported by encourage long-term savings? the development of contractual saving institutions. It could augment domestic saving by attracting Egypt's level of saving is likely to be boosted by foreign savings. its demographic trends. It is estimated (using demographic data and GDP growth rates during Social insurance 1960-94 to explain changes in saving rates in an econometric model) that the rising share of The social insurance system (SIS) provides one working-age population, and the declining share of of the most important sources of long-term saving child dependency, will both contribute to increases in Egypt (with contributions at 3.5 percent of GDP xx EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH in 1994/95-a very low level compared with many both employers and employees. The number of other countries). It effectively works as a pay-as- employees covered more than doubled during the you-go system. It has been producing an operating period 1990-95, to almost 0.5 million. About 48 surplus in the last 10 years due to the high ratio of percent of the assets of the private funds are in contributors to pensioners (see table 6.5). This fixed bank deposits, while another 42 percent are operating surplus has been invested, via the invested in government bonds. Only about 7 National Investment Bank (NIB), in government percent are invested in equities and real estate. projects and, until recent years, in public Lack of professional investment management enterprises as well. Social insurance funds (new capacity, the dearth of financial instruments, and and reinvested) accounted for 68 percent of the the risk-averse nature of these funds have led to the fund sources of NIB during the past five years (see concentration of investments in bank deposits and table 6.9). government paper. NIB used to pay interest on the SIS funds at 5 to Refonning the social insurance system. The 6 percent per year, even though inflation was about working age population will continue to grow, and three times higher. This represents significant SIS is likely to maintain its operating surplus. rhis erosion of the real purchasing power of the reserves provides a favorable environment in which reforms at the SIS and a net subsidy to NIB. Starting July should be implemented without delay. 1992, NIB raised the interest rate on incremental SHORT-TERM PROPOSALS: In the short- to social security funds (including reinvested reserves) medium-term, the proposed reforms would aim to to 13 percent, providing a positive real rate of improve the efficiency and solvency of the existing return over the average inflation during 1992-96 of system. There are three priorities. The first is to about 10 percent. improve the transparency with which the The contribution rates under the SIS are high government uses SIS resources; the second is to (on the basic wage) relative to the pension benefits develop a portfolio and investment strategy that and the insurance it provides. The eligibility criteria supports capital market development without .for retirement in Egypt: (age 60 for both men and compromising safety; and the third is to improve women, under the major programs of Law 79/47) is the efficiency and sustamiability of the SIS by lower than that of OECD countries (whose average correcting certain design deficiencies. See chapter 6 retirement age is 64.4 years for men and 62.9 years for specific proposals. for women), but comparable with many developing LONG-TERM PROPOSALS: A country's social countries. Redistribution has been made by security system typically has three major objectives. providing pensioners from the agricultural sector- The first is to enable the population to shift income about 45 percent of total pensioners in 1995-with from working years to old age (savings). The the equivalent of minimum wages (LE 45 per second is to protect those with low incomes by month), and by setting a minimum pension for providing a basic income floor during old age those with a certain number of years' contribution. (redistributive or poverty alleviation). The third is Pensions on basic wages are fully adjusted, to insure against certain types of risks, such as while those on variable wages are not. Over the disability, longevity, and inflation (insurance). In period 1987-96, the adijustments mandated by the order to achieve all three objectives, it is recom- legislature preserved the purchasing power of the mended that a multipillar system be put in place basic pensions for most of the 10 years; however, consisting of: pensions on variable wages are not automatically indexed - A fully-funded mandatory defined benefit or adjusted by the legislature, in line with inflation. public pillar that insures workers' earnings up to a Private pension plans provide a strong certain level. complement to the social insurance system. The * A mandatory defined contribution private number of voluntary private pension plans has pillar that insures workers' wages above a certain been increasing significantly- as of June 30, 1995, level. there were 504 plans, compared with 330 in 1991. * A purely voluntary scheme that could These plans are typically set up by employers on a supplement the first two pillars. In addition, the defined benefit basis, with contributions made by development of a more competitive and stable STRATEGIC OVERVIEW xxi insurance industry should be encouraged to control with price reporting. The deregulation of provide many accompanying services, such as life most insurance products shifts the focus of and disability insurance and annuity products. supervision to solvency monitoring. The The public pillar would provide a minimum regulations are basically in line with international retirement income while the compulsory and (especially EU) practices and definitions. However, voluntary private systems would enable workers to solvency monitoring requires good information and supplement the pension from the public pillar. The technical capability on the part of the supervisor. consumption tax principle should be applied fully The reform proposals. Following these regulatory to all contributions and benefits, depending on how reforms and current efforts to strengthen they are distributed. See chapter 6 for details. supervisory capacity, the next generation of reform efforts should focus on the issues in competition Contractual savings-insurance and ownership structure. Specific actions that EISA may consider include: The insurance industry in Egypt is still Allowing the entry of new firms-including underdeveloped-life insurance premiums to GDP foreign insurance companies -as long as they meet were an insignificant 0.2 percent in 1995- the licensing criteria, to encourage more compared with 6 percent for average OECD competition. (This means that the 49 percent countries. Total assets to GDP of all insurance maximum ownership by foreign firms should be companies (life and nonlife) in Egypt were about 4 abolished). percent in 1995, while life insurance assets alone -were 38 percent of GDP for average OECD * Providing level treatment for both state- countries. There are 10 insurance companies in owned and private insurance companies. Egypt, of which eight transact all classes of D Focusing on disclosure requirements to the insurance and business, and two transact only public on prices and commissions to complement nonlife. The industry is highly concentrated and the liberalization of product prices and virtually under state control. The largest state- commissions. owned company coi itrols 50 percent of both life and See chapter 6 for other specific details. aonlife business, and the largest three state-owned companies account for 93 percent of life and 89 The role of the capital market percent of nonlife markets. In the past, direct foreign ownership was only allowed in those The principal role of a capital market is to mnake companies operating in Egypt's free trade (export savings mnore readily and clieaply avoailable to investors processing) zones. Currently, regulations place a 49 by creating liquidity and reducing transaction costs. percent limit on foreign ownership of direct Capital markets allow investors a wide range of insurance companies and no restrictions on foreign instruments to finance investment, and savers have ownership of reinsurance companies. Total more alternatives than bank deposits, precious investment of the insurance industry as of June 30, metals, or real estate. 1995 was LE 5.4 billion, representing 2.6 percent of The development of capital markets in Egypt GDP. Lack of financial instruments and both supports and is supported by the conservative investment policies have led to very development of contractual saving institutions. As high concentration of investment in bank deposits discussed in the previous sections, the investments and government securities. of private pension funds and insurance companies A new law on insurance was passed in 1995, have been mainly in government securities and and in June 1996, a new set of regulations was bank term deposits. Capital markets would allow issued by the Egyptian Insurance Supervisory greater diversification and perhaps higher yields Authority (EISA). Among other things, thelaw for these investments, thereby improving the requires distinction and separation of the reserves financial performance of contractual saving from life insurance and nonlife insurance institutions; this should result in greater benefits to businesses in companies that operate in both savers in the form of lower contribution rates to markets. The new regulations also deregulated the pensions schemes and lower premiums for pricing of most insurance products, replacing price insurance. At the same time, pools of funds from xxii EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH contractual saving institutions could be tapped emerging as major low-cost competition in the through capital markets to finance investments. world market. With the technological revolution in In addition, active capital markets provide an information and communications, and the enabling environment for attracting foreign conclusion of major regional and global trade savings. The existence of liquid capital markets agreements, the barriers to exchange among nations gives a foreign investor better exit options, thus are being rapidly reduced. Accelerating growth encouraging more froreign direct investment. through maintaining a stable macroeconomic Foreign portfolio investors would focus on actively environment and implementing bold and rapid traded securities in the stock market. With private structural reforms will prepare Egypt well for the capital dominating the total capital flows to challenge and opportunities of the twenty-first developing countries, and an increasing shift century. toward equity financing, the development of capital markets becomes essential in attracting Notes private foreign savings. But the risks inherent in foreign savings would be kept to a minimum ifforeign savings augment, rather than replace, domestic saving. 1. The vulnerability is economy wide, as Finally, the development of capital markets and externally-induced sudden changes in earnings the process of privatization are mutually from tourism, workers' remittances and exports of reinforcing. Capital markets provide more options oil and natural gas affect the balance of payments. for divestiture, while privatization increases the However, the largest volatility arises from official supply of securities in the market, tlhus providing transfers impacting particularly strongly on the securities market with more depth. The govermnent financing. deepening of capital markets-as reflected in 2. The debt estimate includes *he net governmenit increased market capitalization .o GDP, greater borrowing from the National Lnvestaent Bank. liquidity (higher turnover to market capitalization), 3. Under these circumstances, debt dynamics are ancd less concentrauion of market activity on a few unstable. Suppose that the government tightens stocks-would enable capital markets to absorb the monetary policy by reducing its rate of printing expected increase in portfolio investments from money and increasing borrowing. The debt both domestic and foreign sources and would increases; either deficits will be higher in the future mitigate against the extreme movements of asset or the government will have to print more money prices and the drastic reversal in portfolio flows. in the future to keep the deficit constant. If the Facing the twenty-first century future deficits are to be held constant, the increased printing of money in the future will mean more Egypt is poised for accelerated growth into the inflation in future. Generally, the expectation of twenty-first century. H-ler prospects are good, but future inflation increases current inflation. global competition has intensified. Eastern 4. This rent is defined here as the difference European countries and states of the former Soviet between the economic value of the reserves and the Union are rapidly integrating in the world cost of production and normal returns on capital economy, and both China and India have been equipment. STRATEGIC OVERVIEW xxiii Chapter 1 Employment and growth-an overview After suffering reversal in the latel980s, Egypt has successfully recaptured growth through macroeconomic stabilization. To boost employment and integration with the global economy, she must sustain and accelerate the current expansion. Her most promising route to rapid growth is to achieve a virtuous circle of growth, saving, and investment through higher public saving and structural reforms. E~'gypt achieved unprecedented economic down to below 10 percent in 1995. Macroeconomic E growth during 1975-85 following the stabilization led to a strong recovery. GDP growth adoption of open door policies boosted by sizable rose from the stagnation of the early 1990s, to increases in foreign assistance, workers' 4.7 percent in 1995, and continued its upward remittances, and foreign direct investment. This momentum into 1996 (table 1.1). ended in 1986, as a result of Egypt's remaining Notwithstanding these developments, Egypt's inward-oriented economic policies and a regional long-term challenges remain daunting. At present, economic slowdown brought about by the decline official estimates of unemployment stand at about in the price of oil. Egypt experienced a dramatic fall 10 percent. Over the next ten years, there will be in growth and severe macroeconomic imbalances. yearly increases of more than one million in the In the early 1990s, per capita income grew by a working-age population. The numbers of those modest 10 percent from its mid-1980s level. Both entering the labor force (assuming a constant poverty and unemployment remain high. participation rate) will expand at 2.8 percent a year. The Egyptian government responded by This will amount to, about 560,000 new job-seekers, adopting adjustment policies to stabilize the more than one-fourth of whom will be of the 15-24 economy and restore growth. The first phase of the age group-a most politically vocal and active stabilization policies has been highly successful. segment of society. Thus, it is essential for Egypt to Fiscal deficits have been reduced, and the external create jobs and income opportunities to meet the current account deficit has been kept at low levels. rising expectations of the younger generation. At the same time, restrictions on capital movement Economic growth offers an effective response to and interest rate controls have been lifted. With the this challenge. Our estimates show (table 1.2) that effective fiscal adjustment and management of Egypt could reduce unemployment to 6.4 percent sound monetary policies, inflation was brought with GDP growth of 6.5 percent a year from now TABLE 1.1 Selected economic indicators, 1990191-1995196 (percentage of GDP, unless otherwise noted) Indicator 1990191 1991/92 1992193 1993/94 1994/95 1995/96' Real GDP growth rate 3.6 1.9 2.9 3.9 4.7 5.0 Inflation (change in CPI) 14.7 21.1 11.1 9.0 9.4 7.2 Consumption 85.9 83.0 83.3 84.9 83.1 86.0 Investment 23.3 18.2 16.2 16.6 16.3 16.7 Govemment investment 13.4 8.5 7.0 6.1 5.5 5.5 Domestic saving 16.0 17.0 16.7 15.1 16.9 13.9 Overall fiscal balance (exduding grans) -18.1 -5.4 -3.5 -2.1 -1.2 -1.3 Current account balance (induding transfers) 5.2 4.1 5.1 0.2 0.6 0.2 Official reserves $ billons 6.1 10.6 14.9 17.0 17.9 18.4 Extemal debt/GOP 107.7 89.5 69.2 58.0 55.7 49.2 a. Estimates. Source: From data provided by Ministry of Planning, Ministry of Finance and Central Bank of Egypt until 2002. Otherwise, with GDP growth at the level therefore its demand for both tradable and of 2 percent a year, Egypt will have to contend with nontradable goods. While prices of nontradable unemployment rising to 20 percent of the labor goods (such as land and labor) are not constrained force by 2002. by international market forces, and are relatively free to adjust in the domestic market, prices of TABLE 1.2 tradable goods (such as food and vegetables) are Growth and employment constrained by those forces. Thus, transfers from Rate 1995 1997 2002 abroad would give rise to higher prices of goods Ratmployment (percentage )1995 1997 2002 that cannot be traded internationally than of goods Unemployment (percentage) 9.6 nl.a. n.a. At 2 percent of GDP growth - 11.0 20.0 that can. Other things being equal, this sort of At 4.5 percent of GDP growth - 10.3 14.0 relative price regime would encourage production At 6.5 perr;ent of GDP growth -9.0 6.4 of nontradable goods at the expense of tradable -Not available. goods, including goods that can be exported. This n.a. not applicable Note: Key assumptions: population growth rate of 2.1 percent p.a.: labor force would lead to a larger resource gap (that is, more growth of 2.8 percent pa.; and a participation rate of 47.2 percent. imports of goods and services than exports), and Source: Base year information for 1995 was provided by CAPMAS; iprso od n evcsta xot) n remainder from staff projections. thus lower domestic saving. Furthermore, transfers from abroad could be sources of income volatility The Egyptian government has formulated a set or uncertainty and affect the level of domestic of sound economic policies to accelerate economic saving, because societies generally tend to smooth growth to above 7 percent by the year 2000, and to their consumption over time. Declines in their substantially reduce poverty and unemployment income, particularly if perceived as transitory, need over the medium term. Egypt has the opportunity not lead to a proportional cut in consumption; in and the potential to achieve the growth target set most cases saving is likely to be compressed first. by the government. World trade is growing at a Thus, achieving long-term self-sustaining growth rapid rate, regional peace seems to be evolving, the requires that Egypt tackle these structural EU is seeking closer cooperation with the region, problems, and adopt policies to encourage and large amounts of international capital are domestic saving and to accelerate growth of available for financing productive investment. exports. Egypt, as a force for peace in the region, and being Saving, investment, and growth-a virtuous close to key markets of the world, could capitalize circot on these developments and become a center of circle growth and investment for the Middle East and How can Egypt achieve higher rates of growth? North Africa region. This, however, would require One prerequisite for rapid growth is high levels of that two long-standing structural problems be investment (table 1.3) associated with high levels of effectively tackled. They are: domestic saving. But this is not sufficient, since a * Reliance on exogenous resources (remittance country's economic growth can exceed or fall below income, Suez Canal income, exports of oil and gas, the level predicated by its level of investment. The and foreign assistance) to finance domestic repancies, expenditures, creating vulnerability to external disc as shown intlen1.3, ectnthe shocks. other important factors influencing economic sh Lowlevelkofsdomestic.saving, and growth and these are indicated in the per capita Low level of investment; thevresultant income growth equation spelled out in the note. consequent , . , , , Across countries and over time, higher growth slow accumulation of production factors, both rates are associated with higher investment; higher human and physical, clouds Egypt's long-term investment with higher saving; and higher saving growth prospects. sving growth prospects. ~~~with higher growth rates (World Bank 1993a; The lack of domestic saving has been associated v wit higher grtherat es (od a 1ghea Edwards 1995). Furthermore, countries with higher with the relance on exogenous resources, that is, levels of per capita income tend to save and invest a private and official transfers from abroad. The larger fraction of their national income. While these reasons are twofold. First, transfers from abroad e wouldincrase Eypt' dometic ncome and empirical relationships are well established, there is little agreement among economists about how to 2 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH interpret them, in particular the exact there is good reason to expect that higher saving interrelationships among saving, investment and (=investment) leads to higher growth, and that growth, and directions of causality. Policy makers increased saving provides more resources for do not have to be preoccupied with the exact capital investment, which accelerates growth at mechanisms affecting saving investment and least temporarily, and perhaps permanently growth; what matters is whether the same policies (Harrod 1959). aimed at encouraging investment also encourage While saving causes growth in this proximate saving. sense, there is no agreement on what causes saving, or whether there is reverse causality from TABLE 1.3 investment and growth on the one hand, to saving Per capita income growth performance, 1980-93 on the other. Deaton (1995) explains how this could (percentage) happen: Per capita Actual relative The international correlation between growth to expected Investment to GDP growth and saving rates comes from the Country (percentage) growth ratbos (percentage) response of growth to investment, as China 8.2 (+++)41 predicted by a variety of growth models. Hong Kong 5.4 (++) 27 Saving responds passively to investment Singapore 5.8 (++) 44 through mechanisms that are at present not Thailand 6.5 (+) 40 well understood. A likely candidate is the Indonesia 4.1 (-) 28 Malaysia 3.7 () 33 saving behavior of firms or small Chile 3.4 (.) 26 entrepreneurs, who retain profits in order to Pakistan 3.2 (+) 21 India 3.2 (+) 24 finance investment. In any case, such saving Sn Lanka 2.5 (-) 25 is done, not by the mass of households, who eypat 2.3 () 17 play little part in the process of aggregate Egypt 2.3 H 17 ~~~~~~~accuinulation, but by a few relatively well- Note: The per capita income growth equation is estimated as follows: gdpeap = a+b GDPCAPUS+c INVGDP+d OPEN+e labpop+f PRENR70+g SCENR70: off people or by firms. where gdpcap is GDP per capita growth rates; GDPCAPUS is per capita GDP This view suggests a virtuous circle. High in sample countres relative to the United States at the beginning of time periods; INVGDP is gross domestic investment to GDP; OPEN is a dummy investment leads to rapid growth, which increases variable for openness as defined in Sachs and Warner (1995); labpop is growth the profits of firms and As as in labor force relative to growth in population; PRENR70 is primary enrollment entrepreneurs. long rates in 1970; and SCENR70 is secondary enrollment rates in 1970. The growth is anticipated to continue, these agents save sample is 35 low- and middle-income countnes in Asia, Middle East and North Africa, and Latin America, and is pooled for the two periods 1970-80 and and invest a large fraction of their profits. In thlis 1980-93. way, saving, investment, and growth are mutually (+), (.), (-) indicate actual growth was higher, equal, or lower than expected growth. reinforcing. If one accepts the "mutual causality" Source: WDR 1995, and staff estimates. argument, then the policies that promote growth and investment will also be ones that promote The answer appears to be strongly affirmative. saving. Both theories and empirical evidence support the It is easy to see how a virtuous circle can keep view that there is very little deviation of saving going once it has started, or alternatively, how a from investment rates (Feldstein and Horioka country can get stuck in a low saving-investment- 1980). This holds for both developing and growth trap. It is more difficult to see how a developed countries. Hence, the same factors country can accelerate growth once it is entrenched (country characteristics and policies) that determine in a low saving-investment-growth trap. This saving also influence investment in the same question has been addressed by examining factors direction. In other words, the factors that create a and policies associated with the emergence and good climate for investment also create a good maintenance of a virtuous circle. climate for saving. Although it is difficult to sort Higher saving, investment and growth seem to out at the macro level the different determinants of depend on certain policies and country saving and investment, a good model that explains characteristics. First, macroeconomic instability- investment across countries and over time will also evidenced by high inflation, large budget deficits, be a good model that explains saving across and overvalued exchange rates-was found to be countries and over time. From this point of view, EMPLOYMENT AND GROWTH-AN OVERVIEW 3 detrimental to both the quantity and the efficiency investment to GDP ratios that were 5 percentage of investment (Fischer 1993). Second, countries with points higher than those of closed countries, and rapid growth of private investment and per capita experienced per capita GDP growth rates that GDP are ones whose governments invested in averaged 2.5 percentage points higher than those of infrastructure financed out of national revenue closed countries after controlling for determinants (that is, government saving). These are also of growth such as education and investment (Sachs countries with less nonproductive government and Warner 1995). consumption and less noninfrastructure public In short, good economic management is investment (that is, in state enterprises). After associated with the virtuous circle of higher saving, controlling for these variables, various tax higher investment, and faster growth of GDP. measures had no significant association with Elements of good management include: low growth or investment. This latter finding suggests inflation, low fiscal deficit, public expenditures that taxation is not an obstacle to investment if the targeted to productive areas, and openness to resulting income is used for infrastructure external trade. The mechanism at work is probably investment or productive expenditures on that these good policies spur investment by making education or protection of property rights (Easterly it more profitable, and also increase the growth and Rebelo 1993). Third, there is a strong impact of any given level of investment by making association between the degree of trade openness it more productive. Over the long term, it may be and rates of per capita growth.' that saving responds passively in the way Although openness is good for growth, many envisioned by Deaton above. Of course, some of the fear that there will be significant and immediate good policies spur saving directly. The most negative consequences in going from closed to open obvious example is government saving, which is a economies. The short-run national effects on direct contribution to national saving, according to aggregate output and employment of opening a the experiences of many countries. But other cointry to external trade depend importantly on policies, such as trade liberalization or reform of the initial conditions. These include the macroeconomic regulatory regime, also have a direct effect on situation and the relative competitiveness of saving by increasing the returns to saving, existing industries. In the short run, the relative strengthening property rights, or reducing rates of job creation in expanding sectors and job transaction costs. loss in declining sectors are important considerations. The production and investment Trade openness and investment-friendly decisions of enterprises that determine this are a policies for a higher growth trajectory function of the flexibility of the labor market. The greater this flexibility, the more rapid the To what extent could Egypt boost itself onto a adjustment and the lower the net effect on higher trajectory of growth by adopting policies employment. Hence the flexibility of labor markets associated with the virtuous circle? The results of is crucial for reaping the benefits of trade reforms. empirical growth analyses using panel data3 from Empirical studies suggest that the output response the World Bank and other sources can be used to to significant trade reform can be rapid, with per analyze the key policies that have affected Egypt's capita incomes rising in the period immediately growth performance, and to identify areas of policy following trade liberalization.2 reform that could put Egypt on a higher trajectory In the longer run, open economies tend to have of long-term growth (Dollar 1992). more rapid capital accumulation, higher export The results of empirical growth analyses from growth rates and more rapid increases in real two different sources (Dollar 1996, and Sachs 1996) wages. Consequently, lower-income countries with show that Egypt could achieve 2.7 to 3.7 percent open policy regimes tend to attain higher rates of higher per capita GDP growth by emulating the per capita income growth. Openness to external economic policies adopted by same East Asian trade is associated with both higher output growth countries (table 1.4). Table 1.5 shows the regression per capita, and higher output growth per worker. results (Dollar 1996) derived from the growth Countries with open policies in 1970-89 had performance of 86 countries over the period 1966- 4 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH 93. The results confirm that a large fiscal deficit, 1985-94, compared with 1.3 percent for Egypt. high government consumption, and high inflation Indonesia is also far more involved in international all have a negative relationship with growth. A trade, with commodity exports of 23 percent of black market premium (BMP) on the exchange rate GDP in 1994, and has an export base more diversi- as a proxy on inflation also has a negative fied from exports of oil. The comparable figure for relationship with growth. Egypt was only 6.4 percent. Finally, Egypt receives TABLE 1.4 far more foreign aid: 6.4 percent to GDP in 1994, Average tariff rates in Egypt and selected East Asian compared with 1.0 percent for Indonesia. economies Table 1.7 shows the extent to which Egypt (percentage)Egp could boost its economic performance by emulating Country Average tariff rates the policies already adopted by Indonesia. The Indonesia 6.0 differences in macroeconomic policies and in trade Republic of Korea 4.0 openness account for an estimated 2.7 percentage Malaysia perenag Thailand 9.3 points in growth. The actual difference in growth Egypt 30.0 was 5.2 percentage points. The impact of Egypt Source: UNCTAD-Trade Analysis and Information System Data on CD- being less open to trade is estimated to be 2.0 percent lower real per capita GDP growth rate TABLE 1.5 per year over the period of 1966-93. The impact of Growth and policies in 86 countries, 1966-93 other policies, the size of government saving, Variable (1) (2) (3) (4) (5) (6) consumption, and macroeconomic stability as Policy 0.06 .. 0.08 0.08 0.06 0.08 measured by the BMP on the exchange rate, is variables estimated to be 0.7 percent. Budget (2.34) (3.41) (3.19) (2.27) (2.99) In an alternative empirical analysis of a sample surplus of 49 countries, per capita GDP growth over the Govemment 4.06 -0.09 -0.05 -0.07 -0.02 period of 1992-95 is estimated as a function of consumption initial per capita income, the national saving rates, (2.16) (3.29) (1.82) (2.38) (0.77) and an overall index of market efficiency. The latter Inflation -0.01 -0.02 -0.01 35)-0.02 -0.02 is based on the following indexes: openness of the BM(2.63-6 -3.426 -2.350 9 3 .47 (3.1) economy to trade and financial flows, size of (0.87) (0.67) (1.31) (2.41) (1.06) government, and degree of labor market flexibility. Openness 0.02 0.02 0.18 0.02 0.02 TABLE 1.6 (7.00) (7.29) (6.69) (7.21) (7.05) Egypt and Indonesia: comparative indicators R2 0.27 0.26 0.26 0.26 0.27 0.18 Indicator Egypt Indonesia .. Not available. Population (millions) 56.8 190.4 Note: The policy variables are dropped one-by-one in order to assess the Per capita GNP (1994 Intl. $)a 3,720 3,600 robustness of the results, which appear to be robust. Dependent variable: Gini coefficient 32 32 growth rate of real capita GDP n=86 countries, 7 time period (four-year Infant mortality 52 53 averages). Included observations = 474. (per 1,000, 1994) Source: Dollar (1996). Primaty school enrollment 1993 In analyzing growth performance, the East Female 89 112 Asian economies are often taken as a reference Male 105 116 point to which other countries' policies and growth Secondary school enrollment 1993 performance are compared. In this report, Indone- Female 69 39 sia is taken as a relevant comparator for Egypt, Male 81 48 InvestmentlGDP 1994 18 29 since the two have similar country characteristics. (percentage) Table 1.6 provides some basic descriptive data. Saving/GDP 1994 6 30 Both are large countries with similar per capita (percentage) FDI/GNP 1994 (percentage) 2.3 4.2 gross national product and social indicators, parti- ODA/GNP 1994 (percentage) 6.4 1.0 cularly very similar human capital bases. They dif- Exporls/GNP 1994 8.1 22.9 fer in that Indonesia has been growing much more (percentage) rapidly, with 6 percent per capita growth during GNP per capita in intemational dollars is converted at purchasing power Source: Dollar (1996). EMPLOYMENT AND GROWTH-AN OVERVIEW 5 TABLE 1.7 given current income levels (GDP per capita at Growth and policies in Egypt and Indonesia, 1966-93 purchasing power parity in 1993) and current market efficiency; and (2) the projected growth rate Estimated for Egypt for current income levels but an Policy Egypt Indonesia Impact Poiy gpt Idoeia ipat improved market efficiency index equal to the Growth of real per capita GDP 0.2 5.4 n.a. Budget surplus (percentage of GNP) -5.4 -1.0 03 average for the East Asian economies. According to Govemment consumption 14.1 9.5 0.3 the regression estimates, improvement in Egypt's (percentage of GNP) market efficiency to East Asian standards would Inflation (percentage) 16.5 7.7 0.1 Black market premium (percentage) 11.6 10.7 0.0 raise annual per capita growth by some 1.9 Open no yes 2.0 percentage points per year, to an overall predicted Total impact of policies na. n.a. 2.7 rate of 4.55 percent per year. If Egypt also had the n.a. Not applicable, saving rate of the seven Asian economies, per capita growth would reach 6.33 percent. Although the coefficients vary somewhat The overall index of market efficiency ranks the 49 depending on which additional variables are countries in terms of more openness, smaller included in the analyses, the general point is quite government (as measured by government robust. Egypt could buy itself about 2.7-3.7 per expenditure as percentage of GDP, and various capita GDP growth per year if it emulated the rates of taxation), and more flexible labor markets. policies adopted by the fast growing East Asian Among the 49 countries, Egypt ranks 22nd on economies, including of course Indonesia. The openness (with a rank of 1 being the most open), effects of these policies on saving may be quite 31st on size of government, and 40th on flexibility indirect in that, for example, trade reforms and TABLE 1.8 Regression estimates for Egypt TABLE 1.9 (dependent variable: real per capita GDP growth 1992-95) Growth counterfactuals Independent vanables Seven Asian Independent variablesVariable Egypt Percentage economies Log inital income -1.17 (-2.58) intali 2.77 3.67 Saving rate (1995) 0.098 (2.20) Log inibal income 2.77 3.67 Efficiency index 2.75 (3.17) Saving rate 1995 16.84 35.01 Constraint 4.59 (2.18) Effidency index 0.142 0.563 R2 0.404 Growth 1992-95 -2.26 6.33 N 42 Egypts predicted growth rate (1992-95) = 2.61 Source: Sachs (1996). Predicted growth if Egypt had efficiency index of the seven Asian economies: 2.61+1.94 = Predicted growth if Egypt also had the saving rate of labor markets. The average score of the East of the seven Asian economies: 4.55+1.78= 6.33 Asian economies4 would rank 25th on openness, Source: Sachs (1996). third on size of government; and ninth on flexibility (Sachs 1996'. macroeconomic adjustments directly spur (Sachs 19). investment and growth, and these in turn The basic regression for Egypt is shown in table enuae angrothe ev d pved above 1.8. As expected, initial income enters with a show tat se plc eforms arevan efcve siniicn neaiecefcet:poe.onre shows that these policy reforms are an effective significant negative coefficient: poorer countries way of spurring saving in the long run (table 1.9). tend to grow more rapidly, all other things being Key elementsaof the policies th at ll proot equal. Also, as expected, more efficient economies got and t fore investmet and srvmogs (that is, those with a higher score on the efficiency include: index) tend to grow more rapidly. According to this equation, Egypt's growth is held back by its * Macroeconomic policies that ensure a stable relatively poor ranking on the various components macroeconomic environment, high public trade, of market efficiency. To estimate the growth and national savings. consequences of Egypt's efficiency index, * Trade policies that encourage growth regression estimates were used to calculate two through outward orientation. growth rates: (1) the predicted growth for Egypt 6 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH * Financial policies and infrastructure that Notes establish strong incentives for long-term private savings. 1. Openness is usually measured by the extent of Egypt's most promising route to rapid growth is the integration in the world economy, as reflected in achievement of the virtuous growth, saving and variables such as trade to GDP ratios, the level of investment circle through higher public saving and trade barriers, and the relative importance of structural reforms. Higher public saving is needed to foreign direct investment and intra-industry trade. finance the initial growth; accelerated privatization, 2. Using a large cross-country dataset, Sachs and with sale proceeds used to retire public debt, would Warner (1995) found that economic growth allow reduction in interest costs, and raise public increased by an average of 1.3 percent following the saving. Trade liberalization, a critical element in the opening of the economy. structural reforms, would give probably the largest 3. The panel approach will enable us to pick up impetus to further growth, which would in turn not just cross-country variations, but also variations stimulate private saving, particularly through the over time for each country, thus giving increased development of long-term saving instruments and confidence that the relationships being examined institutions. can be exploited by policymakers. 4. Hong Kong, Rep of Korea, Taiwan (China), Thailand, Philippines, Indonesia, and Malaysia. EMPLOYMENT AND GROWTH-AN OVERVIEW 7 Chapter 2 Post-stabilization macroeconomic policy-managing success But the success of stabilization brings other problems that threaten the recovery by boosting exchange rates and discouraging exports. Egypt shouldfocus in the short term on addressing the adverse effects of capital inflows and protecting the soundness of the banking system. If a sound macroeconomic environment is a The program was set up along orthodox lines: a necessary condition for achieving higher long- strong improvement in fiscal performance run growth, has Egypt obtained this condition? If provided the leeway to sustain a tight monetary so, how can Egypt sustain it, and protect it from policy. Fiscal stringency was achieved through both external shocks? expenditure restraint and revenue measures, and was further facilitated by important concessions Recent developments that the Paris Club made on Egypt's external debt. The first phase of the stabilization program can Macroeconomic balances. Egypt has gone through now be considered as successfullv concluded. major changes since the reform process was Investor confidence in the economic policies initiated in 1991. Inflation, which hovered between followed by the government seems strong on all 20 and 30 percent in the late 1980s, is now around indicators. One such indicator is the stronig 7 percent and falling. Growth slowed in the first international interest in Egypt's capital markets. two years of the stabilization program, but it Over the past year, foreign activity has grown to resumed by 1993/94. GDP growth for 1995/96 is almost 30 percent of the turnover on the Cairo stock estimated at around 5 percent. Thus, the exchange. Several Egypt funds have been stabilization effort brought inflation down to established and a large number of investment funds manageable levels without a major slowdown in have shown interest in individual stocks. Well over output, and was followed by a relatively fast 100 funds are currently active in the Egyptian stock recovery. Egypt's growth performance resembles market. Portfolio flows alone in the first half of 1996 those of other economies that carried out successful amounted to about $ 500 million. stabilization (figure 2.1). Another indicator can be derived from the term FIGURE 2.1 structure of interest rates in Egypt (figure 2.2). In Average growth rate for selected stabilizing economies general, interest rates on the Egyptian pound remain above U.S. dollar levels, notwithstanding the firmly fixed exchange rate. But long-term rates 6.21 now lie below short-term rates. Such an inverted yield curve signals expectations of future interest 3.5 2 40 07 rate declines and thus confidence in continued low 2 .8 9 g inflation. Although inflation came down relatively fast, it ___________._________ -did not do so instantaneously, and the nominal Mexico Argentina Egypt Israel exchange rate has been remarkably stable since 19S7-92 1990-95 1990-96 1985-90 Egypt switched to effective current account Source: Based on data from World Bank 1995 (WDR) and staff estimates for convertibility and unified the exchange rate system. Egypt. 9 As a consequence, the real exchange rate has private enterprises.) As the recovery progresses, appreciated significantly over the past five years however, spare capacity will progressively be (figure 2.3). This appreciation came after a eliminated. Thus it can be expected that, without a significant real depreciation prior to the reform robust recovery of investment, growth cannot be process. The exchange rate has not returned to its sustained. In turn, a robust recovery of investment peak of the mid-1980s. will require robust savings. FIGURE 2.2 Table 2.1 reveals that aggregate gross domestic Term structure of deposit interest rates investment as a share of gross national income (GNY) has been growing moderately, reflecting contracting public investment and a significant recovery of private investment-by almost 3 Percent ____ ____ _______________ percentage points of GNY between 1993 and 1996.1 15 1s99 r It also shows that the increase in private investment 1 31 1- - - - - _ - - - has been accompanied by rising public saving and 14 -~ - 1i9 P a modest current account deficit. Private saving 9 - -_ - - - - -'*- ~.(excluding Law 203 enterprises, which since 1994 m_nth 99<1 i have experienced an increase in net operating 3- 6-month 1 2-month 5-year profits and thus savings) is not yet showing signs of recovery, having remained at around 11 percent of Source: Estimates based on data collected by the World Bank mission in GNY since 1994. Cairo. The increase in public saving is particularly encouraging and indicative of the strength of The process of liberalization has now continued stabilization. This increase has resulted mostly from to the point where Egypt's exchange rate is fully the reduction of budgetary subsidies and current convertible even on the capital accounts. transfers and from a decline in interest costs; International and domestic investors have clearly improved financial performance by Law 203 interpreted the opening up as a sign of confidence, enterprises, which recorded aggregate profits in and have responded strongly to the continued 1994-96. has also played a part. If these trends are interest rate differential in favour of LE securities. sustained and consolidated,. public saving should Capital intlows have been strong over the whole continue to grow, though only up to a limit. reform period, putting strong upward pressure on Significant further increase in public saving is the exchange rate. Attempts to both maintain FIGURE 2.3 monetary restraint and avoid nominal appreciation Real effective exchange rate could only be reconciled through a strong sterilisation effort. This was done in a straight- forward manner: the monetary impact of foreign ([ndex: 1990- I00) exchange purchases by the central bank was offset by sales of domestic securities. In effect, the 140 counterpart of Egypt's high reserve position is a 120 substantial increase in its domestic debt. 10K Saving and investment balances. Although growth 90 has resumed, investmnent (as a share of GDP) has not returned to its pre-1990 levels (table 2.1). This 6 points to the existence of large spare capacity at the .D beginning of the recovery and, perhaps, increased 2. factor productivity, thanks to reforms in the 0 o~ agriculture sector and the establishment of financial autonomy for Law 203 public enterprises. (Law 203 1985 19S6 19S7 19SS 1989 1991 1991 1992 1993 1994 1995 enterprises are owned by the government but subjeterpto the samedby re ath gorframewok at Source: From data provided by Central Bank of Egypt. subject to the same regulatory framework as 10 EGYPIT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH unlikely until a comprehensive reform of the civil financed largely by retained earnings.2 It is thus service is undertaken and privatization transfers likely that the stagnant performance of private the bulk of state enterprises and economic saving is to be ascribed to the behavior of authorities to private owrnership. households, an issue to be addressed in chapter 6. The decrease of public investment is also Data are available, however, on the compo- encouraging, as it resulted mostly from a reduction sition of private investment (table 2.2) that sheds of public involvement in the commercial sphere. some light on the determinants of its recovery and This decrease took place through a contraction of future prospects. Abstracting from developments in budgetary investment in economic sectors such as the petroleum sector-which are dominated by tourism and the decline in investment by external factors-private investment has been nonfinancial state enterprises (from over 4 percent increasingly concentrated in nontradable sectors. of GDP prior to 1992 to about 1.5 percent during Although the data display significant year-to-year the last three years). It is now unlikely that these variation, this trend appears to hold generally for trends in withdrawal of state involvement will all nontradable sectors. continue, as further significant reduction in public Among possible causes underlying the investment cannot take place without jeopardizing increased concentrationi of private investment in the government's ability to provide basic services nontradable sectors, relative price changes have and infrastructure. played an important role. As shown in table 2.3 and Data are not available to determine the extent to table 2.4, relative prices between tradables and which the lower private saving is due to weak nontradables - measured by consumer price household or corporate saving. However, it is likely indexes for tradables (TCPI) and nontradables that corporate saving has been increasing, since the (NTCPI) respectively-have shifted in favor of recovery of private investment appears to be nontradables since 1991, reflecting the large TABLE 2.1 Recent developments in saving and investment (in percent) Share 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96a Shares of GDP Gross domestic investment 26.1 35.9 32.6 29.1 21.9 18.2 16.2 16.6 16.3 16.6 Gross national saving 19.9 31.8 27.4 24.9 20.7 24.7 23.0 15.4 15.9 15.5 Foreign saving 6.2 4.1 5.2 4.3 1.1 -6.5 -6.8 1.2 0.5 1.1 Shares of GNY Grossdomesticinvestment 23.4 31.9 29.3 26.7 20.1 17.0 14.8 15.8 15.5 16.0 Publicb 15.5 20.7 13.6 13.6 12.5 10.0 8.2 7.5 6.6 6.5 Private 8.8 11.3 15.7 13.0 7.6 7.1 6.6 8.3 8.9 9.4 Gross national savingb 17.8 28.3 24.6 22.7 19.1 23.1 20.9 14.7 15.1 14.9 Public -0.7 -2.9 -0.8 -0.2 -1.3 3.1 2.5 3.3 3.7 3.7 Private 18.5 31.1 25.4 22.9 20.3 20.0 18.4 11.4 11.4 11.2 Foreign saving 5.5 3.6 4.7 3.9 1.1 -6.1 -6.2 1.1 0.5 1.1 Memo: GDP/GNY 89.6 89.0 90.0 91.5 92.1 93.6 91.2 95.5 95.1 96.1 a. Estimates. b. The public sector includes central and local government, and public enterpneses. Source: Estimates based on data provided by the Ministry of Planning, Central Bank, and Public Enterprise Office. TABLE 2.2 Distribution of private investment Investment 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Petroleum and petroleum products 20.0 19.7 20.8 22.6 26.5 25.5 19.1 20.1 14.0 Nonoil tradablesa 39.4 46.4 40.9 41.0 36.8 35.6 32.5 31.7 50.7 Nontradablesb 40.7 33.9 38.4 36.3 36.7 39.0 48.4 48.2 35.3 o/w housing 25.3 21.0 26.5 23.3 23.7 25.3 26.8 27.9 18.5 Total private investment(LE million)c 5,699 7,569 9,508 9,705 10,758 11,666 11,547 12,895 21,051 a. Includes agriculture, irrigation and land reclamation; manufacturing and mining; transportation, communications, tourism and Suez Canal. b. Includes electricity and energy; construction; trade, finance and insurance; and social services. c. Total does not exactly match figures from national Income accounts. Source: Estimates based on data provided by the Ministry of Planning, Central Bank, and Public Enterprise Office. POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS 11 exchange rate appreciation. However, the relative concentration of state-owned enterprises in certain price shifts are negligible when comparison is made sectors-for example, textiles, food processing, and between 1987 and 1995. In any case, caution should construction materials, where state enterprises be used in interpreting these price data. It is in fact account for more than 40 percent of total output- likely that the consumer price indexes (CPIs) may discourage private firms from entering, because underestimate the rate of inflation of nontradable they expect collusive behavior on the part of the state- prices, owing to the dominance of administered owned enterprises. Third, high and probably prices, such as for food, housing and public increasing "sunk costs" of producing for export utilities, which are not relevant for private markets may make these activities substantially less investment decisions. profitable than nontradable activities. These sunk TABLE 2.3 costs would be attributable not only to quality and Tariff duty to import ratio and indexes of effective marketing prerequisites for breaking into foreign exchange rates (1990=100) markets, but also to administrative compliance, Tanff Trade Bias customs, and shipping. Fourth, investment in Year Dutyl REERa NEER-Xb NEER-Me Index Imports (NEER-x/ housing and connected services may be responding NEER-m)*100 to some overall demographic and urban 1985 0.25 74 31 42 74 concentration trends that are not captured by relative 1986 0.20 73 38 48 79 1987 0.14 69 42 50 84 prce shfts. These would iclude among other things, 1988 0.13 62 43 51 84 repatriation of savings accumulated abroad by 1989 0.12 69 58 64 90 migrant workers since the devaluation of 1991 and 1990 0.11 100 100 100 100 1991 0.10 121 145 136 107 the Gulf War, and government incentives to develop 1992 0.14 113 149 144 103 "new cities." 1993 0.14 98 136 137 99 1994 0.17 95 137 143 96 1995 0.16 94 142 148 96 Managing success: in capital inflow problem a. Real effective exchange rate; decrease is real appreciation. b. Export-weighted nominal effective exchange rate. * a * * c. Import-weighted nominal effective exchange rate, adjusted for import duty. Havig acheved stablization and icreases in Source: From data provided by Central Bank of Egypt; IMF (1996). private investment, Egypt now seems well placed for a takeoff to sustained growth. However, as TABLE 2.4 other successful reform-cum-stabilization countries Indexes of domestic prices of tradables and have experienced, success presents its own nontradables (1987=100) challenges. Post-stabilization macroeconomic Tradable CPI Nontradable Salter Rabo policy is surprisingly difficult, as Mexico and Year (TCPI) CPI (TCPI/NTCPI)'100 several other Latin American countries recently 1985 69 85 81 leamed. Success breeds investor confidence and the 1986 80 91 88 capital inflows noted above that such confidence 1987 100 100 100 generates. These inflows are at the root of the 1988 121 110 110 difficulties in managing the macroeconomics of 1989 145 120 121 1990 178 139 128 success; most of this chapter will analyse post- 1991 202 164 123 stabilization macroeconomic problems. In addition, 1992 240 208 116 1993 255 259 99 concentration of private investment in 1994 277 285 97 nontradables, and lower levels of private saving 1995 308 300 103 may restrain the extent of recovery. Unless private a. GDP, tradable sectors. b. GDP, nontradable sectors. saving rapidly catches up with the growth of Source: From data provided by the Ministry of Planning and CAPMAS. investment, and investnent shifts toward tradable and exportable activities, Egypt's present recovery Factors other than relative price changes may may go under. also have played a role in promoting the concentration of private investment in nontradable Why is there a problem? sectors. First, the current private investment recovery may be dominated by the establishment of Capital inflows after a favourable shift in new, small, labor-intensive enterprises.3 Second, confidence put upward pressure on the exchange 12 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH rate, but the real appreciation that results may Such exposure may be hidden. The banks may abort the recovery newly underway. If renewed achieve what seems like a balanced position in optimism, justified or not, pushes the exchange rate foreign exchange by sharing the spread with firms. up, while lingering downward wage and price This can be done through dollar loans passed on at rigidity prevents the fall in wages and prices that a mark-up that may be significant but is still cheap could offset the appreciation's impact on product compared with local currency loans. The exchange markets, a slide back into recession becomes risk persists but in the guise of commercial risk, as inevitable. This in turn may threaten the hard-won the firms, who now carry the risk, are more likely success of stabilization; a recession undermines than not to default if things go wrong and a fiscal stringency as tax revenues fall, and slower devaluation occurs. growth magnifies the imapact of any given deficit on the debt-output ratio, a key indicator of Egypt's capital inflow problem creditworthiness A key question is whether upward pressure on Strong appreciation of the real exchange rate the exchange rate is niecessary to accommodate a and continuing capital inflows pose new policy booming economy, or whether it results simply dilemmas for Egypt of a sort that are common to all from anticipation of future wealth, with a successful stabilizers and could be described as an corresponding impact on capital inflows. Strong embarrassment of riches. Tight monetary policy spending on home goods, by foreigners or domestic and a reliable nominal anchor based on a stable residents, will make a real appreciation exchange rate send clear signals of a government's unavoidable. If the nominal exchange rate does not resolve. Once that signal has been convincingly accommodate such pressure, high inflation will conveyed, however, a portfolio shift back into the bring it about anyway. If, however, the country brings in such a large inflow of capital that appreciation is purely the result of a portfolio shift the monetary policy or the exchange rate come into the country, downward pressure on inflation under threat, in seemingly inconsistent directions. will result, as the rising real exchange rate makes The choice is between letting the nominal rate home goods uncompetitive; output will go unsold appreciate or letting money growth exceed its as exports slow down and domestic expenditure targets. Sterilization-offsetting the monetary switches to cheaper imports. impact of foreign exchange purchases by the central Inflationary pressure and inventory levels thus bank through sales of domestic securities-is an provide key signals. If inflation continues its attempt to avoid that choice. downward path, and inventories start rising in Egypt's recent experience clearly demonstrates relation to sales, indications are that asset markets the issue. The fiscal and monetary stringencies are the driving force an,d that the appreciation thus adopted in 1990/91 have restored current account needs to be resisted. 'If inflation is reigning and balances (figure 2.4) and entailed a substantial rise capacity fully used, with inventories falling, tight in capital inflows, particularly private capital fiscal policy and an accommodation of the inflows (other capital in figure 2.5). In addition, appreciation is needed. removal of restrictions on the capital account and The Latin American experiences indicate that liberalization of interest rates encouraged a major the banking sector is a serious threat to stability in shift in favor of holding LE-based assets, and such circumstances. With the exchange rate dollarization declined from 51.8 percent to appreciating and monetary policy still tight in the 29.4 percent in 1995. aftermath of the stabilization, domestic interest Capital inflows may be an embarrassment of rates will remain high compared with foreign rates riches, but ignoring the issue may well cause plus ex post nominal devaluation. Thus it becomes serious problems later on. Mexico financed huge highly profitable for banks to borrow in dollars and current account deficits with remarkable ease lend in local currency. Of course, if a devaluation through a continuing flood of short-term private does happen, banks talce a capital loss and may in capital inflows after a successful debt reduction fact become insolvent, as happened both in Chile in restored investor confidence. However, short-term 1982 and in Mexico in 1994. private capital inflows have a minus side too, as POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS 13 Mexico found: if the confidence declines, rapid credibility, with inflation set to go into single digits reversals can take place and lead to severe crises. for 1994. What this suggests is that several years FIGURE 2.4 into a successful stabilization program, the policy Current account balance, change in reserves and challenges change. Early on, the key objective is to capital inflows convince investors of the consistency and sustainability of the reform program, and to demonstrate the government's resolve. Hence the US$ M iion importance of fiscal restraint, tight money, and a 8000 rigid adherence to a nominal anchor strategy (for 6000 example, through a fixed exchange rate). 5000 Once this program is widely believed, the 4000 priorities change. While fiscal stringency remains 2000 important to provide long-term confidence, rooo S00 0 -J |113L_l flexibility and robustness against external shocks -0 may become more of a challenge. Lower debt -2000 creates more room for expansion if needed later on, 990 1991 992 1994 195 but flexibility to insure the program's ability to survive unforeseen setbacks takes on additional ECurre.tAccrntDeficit MChangeinNetinternationalReserves ECapital ' importance. This is especially so for Egypt, given its ______ heavy reliance on exogenous resources. Source: From data provided by Central Bank of Egypt. Implications for fiscal and exchange rate Egypt's current situation is different from policy Mexico's in 1994 in several important aspects; in particular, Mexico's crisis was due to a sustained A need for flexibility does not necessarily imply effort by its government to mask the impact of a wholesale move away from fixed exchange rates. political uncertainty on investor confidence, and to Mexico went for a flexible rate after the collapse of offset reserve outflows through a rapid issue of its exchange rate regime because its loss of reserves dollar-denominated debt in an effort to offset during the crisis and reduced credibility reserve outflows. When a huge refinancing afterwards, left it no other choice. But Egypt is in a requirement of nearly $30 billion approached, much stronger position; it has avoided many of anticipation of refinancing difficulties brought the Mexico's errors and can take the necessary exchange rate down in late 1994. precautions. Egypt has an external debt comparable to Mexico's at that time. But as a result of Paris Club FIGURE 2 5, negotiations, Egypt has a remarkably smooth debt- p P service schedule. Unlike Mexico, Egypt faces no refinancing peak in any year between now and far u 000 into the next century, thus Egypt's dollar liabilities 7000 signal no future crisis. Moreover, the fiscal position 500- L seems more firmly based than Mexico's was. Social 4000 and health expenditure has been largely exempted 3000 t__ _ from the retrenchment.4 Tax reform may bring 2000 further consolidation, and, importantly, the pension ° - - _ _ system in Egypt is actually generating surpluses 990 1991 992 1993 1994 199S (see Chapter 6). ________ (see Chapter 6). _-W-~~~~~~~~~~~~~~~Prvate -Investm-ent (net-) E3 Net Foreign Lending -- For all the differences, Mexico's experiencedoes U OtficialCapitalGrantos OtherCapital Flows contain some lessons. Mexico was in no way insolvent in 1994; its public debt was less than half of what it was prior to the debt crisis. Moreover, its Source: From data provided by Central Bank of Egypt. stabilization effort had gained considerable 14 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH There are strong arguments against increased account.5 More worrisome is the internal debt; a flexibility in the exchange rate at this time. In the large share is short term and at high real interest presence of asset market uncertainty or, as in Egypt rates. Currently the debt stands at around 50 now, clear shifts in investor confidence, nominal percent of GDP. This makes Egypt's overall total flexibility will lead to spurious real volatility. This debt around 80 percent of GDP (taking the problem is made more acute by the privatization concessional nature of some of Egypt's external drive, which apparenily is attracting substantial debt into account). For comparison, the Maastricht foreign interest. SuchL capital inflows may be criteria call for a 60 percent debt ratio. Of course, difficult to manage, given Egypt's relatively such numbers are arbitrary; it is obvious from the underdeveloped capital markets, with upward strong investor interest in Egypt and in pressure on the nominal exchange rate thus Government of Egypt paper that the government's becoming ever harder to resist. Sterilization, with solvency is not in doubt. At current growth and Egypt's domestic currency debt already high, will interest rates, the debt-output ratio will decline: the be difficult, and in fact increasingly expensive, as nominal interest rate, at around 11 percent, is interest rate differentials persist. roughly equal to the nominal growth rate of GDP However, if the exchange rate pressure is real - (in fact, currently slightly lower, since the latter is that is, driven by a boom in goods markets rather projected at 12 percent for 1996/97). than a portfolio shift into Egyptian assets-the Concerns arise nevertheless, for two reasons. correct response would be to tighten fiscal policy so One, the high debt level restricts the government's as to create room for export production. But the ability to engage in more sterilization efforts on a boom in goods markets is unlikely to be the large scale. The sterilization effort of 1992-94 led to explanation. Inflation, although on the high side, an increase in marketed government debt equal to has shown no sign of increasing, and some 12.7 percentage points of GDP by 1995; repeating indicators point towards rising inventories. All this that experience would, given the difference evidence points to an asset market explanation for between the cost of internal debt and the return on the upward pressure on the exchange rate, foreign assets, start to seriously undermine fiscal justifying the government's determination to resist stringency. further appreciation and to accommodate any FIGURE 2.6 down-ward pressure that might develop Inflation, inventory, and exports (figure 2.6). Fiscal policy is severely constrained by the need to maintain confidence in the stabilization prog- Percent ram's continued success, and by Egypt's high level 30 I of internal debt. Ultimately, the credibility of 25 restrictive monetary and exchange rate policies is 20 4 Inflation determined by the fiscal backing they receive. If 15 10 ~ netory/sales debts spiral out of control (although that is NOT 5 happening now) because of interest rates in excess 0 ------L---- -* of the nominal growth rate of GDP, monetization -5 L Growth of non- " \ becomes the likely alternative to debt finance, with 10 oil exports all the consequences for capital flight that were seen -20 L in Mexico in 1994. Thus, maintaining a fiscal deficit 1990 1991 1992 1993 1994 1995 that will lead to a gradual decline in debt-output ratios is imperative, whatever the exchange rate Source: Estimates based on data collected by World Bank mission in Cairo. system. Potential liabilities that are not explicitly Implicit in the above discussion is a second counted as government debt must be taken into issue-the level of Egypt's debt. Clearly Egypt is consideration. Currently, it is not known how many not insolvent. Its external debt, at a face value of such liabilities exist. Claims on state enterprises by about 47 percent of GDP, is actually around 30 such paries may ultim ate enterpie ino external parties may ultimately become the percent once its concessional nature is taken into government's liabilities; promises to make up for POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS 15 high purchase and low selling prices for cotton to denominated securities. In consequence, Egypt's LE trading companies have not yet been met; liabilities debt shot up (figure 2.7) as reserves accumulated. of public enterprises to the utilities, and the size of Holding such a high level of internal debt, at nonperforming assets in bank portfolios are, for the interest rates substantially in excess of the return on time being, unknown. Equity and real estate are the equally high foreign reserves, is obviously undervalued in bank portfolios, but loan losses undesirable from a fiscal point of view. A may not be adequately provisioned for. Treatment reasonable estimate of the return on dollar assets of government guarantees in loan loss provision would be at most 5 percent, the short term U.S. T- calculations are another concern. bill rate. But internal debt now goes at more than 10 A further issue involving debt concerns a state's percent while the exchange rate is stable against the vulnerability to downturn. In Egypt, a slowdown in dollar. If we double the reserves for imports from a economic growth is not likely, but not impossible safe level of three months coverage to six months, either. Further turmoil in the Middle East might this would still be only about one third of what undermine tourism revenues even if, as is likely, Egypt is currently holding, indicating that the Egypt stays out of direct confrontations. If growth Central Bank of Egypt (CBE) has excess reserves of slows down, the comparison between interest rates around $ 11 billion, or about 16 percent of GDP. At and nominal growth rates of GDP would turn a 5-percentage point interest differential, that distinctly unfavourable. At zero growth, there is a makes for an annual loss of about 1 percent of GDP. 5-percentage-point difference opening up at short If the return on assets is lower, the loss is maturities. At current debt levels, that requires a correspondingly larger, with a maximum loss of 2 primary surplus of between 3 and 5 percent of GDP percent of GDP if the foreign assets earn no return for stability (box 2.1). If growth slows down, at all. A cautious strategy to reduce reserves would problems could arise from this surplus. thus be called for, rather than further debt-financed Slow growth will lead to less private saving, reserve accumulation, as will happen if traditional less tax revenue, and pressure for more sterilization strategies are followed. expenditure. All this will lead to larger external BOX 2.1 deficits and larger fiscal deficits, thus making debt The dynamics of debt and the sustainability of fiscal a more serious problem. For this reason, an active deficit policy-while growth is still high-to reduce the The change in the debt ratio (d) is equal to: debt-output ratio to much smaller numbers is debt-output raio to much smaler numbers isChange in d = (primary defjciVlGNP) - (seignoragelGNP) called for; this would make the government less + (real interest rate - growth rate) x d vulnerable to a crisis from external shocks. This equation, which is the key to understanding debt dynamics, Risk in the immediate future has a simple intuitive explanation. The noninterest deficit has to be financed with new debt to the extent that this deficit exceeds the amount of money creation by the central bank. In addition, The discussion so far suggests that with nominal interest expenditures have to be refinanced with new stabilization and resumption of growth, policy debt. But since the denominator of the debt ratio is nominal focus should shift toward raising national saving, GNP, the debt ratio will decline either with inflation or with real GNP growth in the absence of new borrowing. and protecting the success of stabilization. Higher GN .rwhi heasneo e borwn. The dynamics of debt and the sustainability of deficits are national saving would provide a solid foundation particularly affected by the difference between the real interest for Egypt to cope with long-term external shocks. In rate and the growth rate of GNP. Assume first that the real the immediate future, however, two specific risks interest rate on debt exceeds the growth rate. Then debt dynamics are unstable, and it becomes impossible to run a require attention. permanent primary deficit that exceeds the amount of revenue the government can obtain through seignorage. The conclusion Sterilization problems deserves emphasis: if the government is running a primary deficit larger than the amount of seignorage it can obtain, and if the real interest rate exceeds the economy's growth rate, the debt to The large inflows in 1993 and 1994 were GNP ratio will continue rising without limit. At some point it will sterilized in classical fashion. The monetary impact be impossible for the govemment to sell its debt, and the process of the central bank's foreign exchange purchases will have to be brought to an end by cutting the budget deficit. was offset by sales of domestic currency- Source: Fischer and Easteriy (1 990); Anand and van Wijnbergen (1989). 16 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH A dangerous alternative would be to reduce rate, they have a strong incentive to lend in local reserves by encouraging a larger current account currency. Thus, this asymmetry not only (CA) deficit through, for example, import tariff encourages capital inflows, but also puts the capital reduction that is not offset by other equivalent of the banks at risk by providing undue incentives revenue-raising measures. While running a larger to increase foreign exchange exposure. (This is CA deficit might slow down the reserve discussed below in the section on "Issues in accumulation, it would significantly increase banking".) A strong policy recommendation is Egypt's vulnerability to a crisis. The resulting either to start paying interest on reserves against pattern could be very much like Mexico's in the domestic deposits, or to stop paying interest on period leading up to its crisis, where high but reserves against foreign deposits. volatile capital inflows were funding a large CA Before the Palestine switch out of Jordanian deficit. The inflows may easily be, reversed, but the dollars (JDs) triggered Jordan's current reserve CA deficit is much harder to efil..,nate. Over time, problems, Jordanian banks receiving foreign reserve accumulation should be stopped by exchange deposits were required to hold an eliminating undue incentives for capital inflows, equivalent sum in assets abroad. This forced banks and, for example, by widening the pension system's to match capital inflows with oufflows of equal ability to invest abroad i(chapter 4). size. A third policy measure (that should be One key incentive' that unduly encourages considered for other reasons, but that will have an capital inflows is asymmetric treatment between impact on reducing net capital inflows) is to allow bank loans funded from foreign sources and loans the pension system to invest in high-grade foreign funded from domestic sources. Domestic deposits assets, such as U.S. government paper or blue chip face a 15 percent reserve requirement over which equity. This will allow the funds to spread risks no interest is paid. Since domestic interest rates are better, and has the added advantage of encouraging over 10 percent, this greatly raises the cost of capital oufflows when inflows are too high from a funding loans from domestic deposits. On the other macroeconomic point of view. hand, while reserve requirements against foreign exchange deposits are also high at 15 percent, they Issues in banking are remunerated at London interbank offered rate (LIBOR). This makes for a differential cost of almost Banks, whether state-owned or private, are the 1 percentage point, or a large fraction of the banks' Achilles heel of many reform programs. A recession profits per pound lent.6 in the early phases of a stabilization program will Through this asymmetry, banks are encouraged lead to a deterioration in the quality of loan to borrow in dollars; because of the persistent portfolios, as firms, in distress because of the interest differential in the face of a stable exchange recession, stop servicing their debts. In the upturn FIGURE 2.7 that follows, the real exchange rate typically Domestic debt as percentage of total public debt appreciates, and long periods persist when nominal stock rates on domestic currency stay above foreign rates plus the ex post rate of devaluation. As noted above, such interest differentials, in Percent turn, make it attractive for banks to borrow in U.S. 55 so - ii i jjw dollars and lend in local currency (figure 2.8). As 450 long as the exchange rate stays fixed, profitability will stay high, but, of course, foreign exchange 40 _ exposure opens up, and the banks become 35 0 X23_l l | l | ' | _ extremely vulnerable to a devaluation. Even if 30 dollar deposits are matched with dollar loans, the 25 problem remains. Although the banks will then be 1990 1991 1992 1993 1994 1995 matched in foreign exchange, typically the borrowing firms are not, so they will default on Source: From data provided by Central Bank of Egypt. bank loans after a devaluation, wiping out the POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS 17 banks' capital. In this case, exchange risk remains, problems were back in less than a year. A pure but is transformed into foreign exchange-related recapitalization merely gives bank management commercial risk. This happened during the banking more taxpayer money to squander. crisis in Chile in 1982, during the big Mexican crisis FIGURE 2.8 in 1982, and again in 1994. Domestic vs foreign interest rate Thus, careful bank supervision and aggressive provisioning against bad loans are absolutely Percent crucial in the post-stabilization period, so as to 25 strengthen the banks, or at least make the extent of 20 \ their distress clear to managers and regulators /Domestic interest rate alike. The central bank needs to be extraordinarily 15 . / vigilant in preventing excessive foreign exchange / / exposure in banks. Simply matching dollar assets xchange-rite adjusted LIBOR with dollar liabilities and such is not enough; the 5 - quality and foreign exchange exposure of the borrowing firms will have to be considered 1990 1991 1992 1993 1994 1995 explicitly. This issue is becoming acute, as pressure by bank clients to give U.S. dollar loans is Source: From data provided by Central Bank of Egypt. apparently mounting, the risk of devaluation notwithstanding. If recapitalization is needed, the preceding The extent to which these two problems exist is audit should be a hard-nosed one done by an not altogether clear in Egypt. The four main state experienced foreign audit company. Egyptian audit banks (with 70 percent of the loan portfolio) are companies may be competent, but may also be clearly exposed to a substantial number of bad concerned about future business with the bank in loans., since they are the lenders to state enterprises. question or its clients. A foreign auditor without an On the other hand, they seem to have made office in Egypt faces no such incentive problem. substantial profits during the sterilization period of The audit should assess the adequacy of loan loss 1992-94, most of which were used for provisioning. provisions (LLP) and thus report on the accuracy of Their true capitalisation cannot really be assessed the current value of capital. This is a crucial on published data alone; a careful audit based on question: almost all major banking crises in the international auditing standards (IAS) is very West and the East involved banks that seemed urgent to bring out their true capitalisation. This in adequately capitalised (Continental Illinois, Credit turn will indicate whether cost cutting and Lyonnais, and Banesto all had capital adequacy improved loan approval and credit quality control ratios in excess of the Basle norm of 8 percent on procedures are enough, or whether more drastic the day of their collapse). What was wrong was the measures are required. grossly inadequate provisioning for specific loan What is to be avoided at all costs is straight losses. recapitalization without more drastic reform in the This may also be a problem in Egypt, although incentive structure of the bank and its officers (not modem loan classification schemes and to mention management change). A recapitalization provisioning rules were introduced in 1993, and are without further reform signals to the bank that the apparently enforced-at least for the private banks. behaviour that led to the problems is rewarded First of all, it is not clear how stringently these rules with subsidies; the behaviour will thus continue, are being enforced for the state banks; second, LLP and all problems will reappear with a vengeance must come out of current profits. This makes it within, as experience tells us, one year. Hungary is highly unlikely that banks have been able to a good example. The state banks were recapitalized provision sufficiently against the portions of their in 1992, 1993 (twice) and 1994, each time for $ 1 portfolios that apparently went bad prior to 1993. A billion, for a cumulative total equal to 10 percent of final issue concerns the tax treatment of LLP. LLP is Hungarian GDP. After each recapitalization, banks not deductible under corporate tax; presumably continued their poor loan quality control, and the losses can only be taken when loans are actually 18 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH written down. Allowing at least a partial tax 2. The share to the private sector of total domestic deduction on LLP would obviously strengthen the credit fluctuated around 55 percent between 1993 incentives to provision adequately against specific and 1996. loan losses. 3. This is consistent with data on business A second issue concerns the criteria used to registration, which show a large increase in the classify a loan. If part of the amortisation payments number of new enterprises, and with the data on are not met, the entire loan has to be downgraded, posted job vacancies, which show no significant not~~~~~~~~~~~ juste the missedes amotistio payent Butlicn not just the missed amortisation payment. But change; new small businesses are in fact less likely missed interest payments that are simply rolled to post vacancies to recruit, relying usually on over are apparently no reason for downgrading, family members or business relations. and this is a major issue. This rolling over of interest presents auditors with a difficult problem, 4. Total government expenditures as share of GDP one that is currently ignored in Egyptian audits. Is declined from 45.3 percent in 1991 to 28.4 percent in rolling over simply a matter of maintaining credit 1995 while government expenditures on health and relations with a creditworthy client, or an early educationincreasedfrom3.8percentto4percentof warning sign of borrower distress? Is the risk of the GDP loan portfolio as a whole adequately assessed? All 5. By convention, the present value of contractual loans to the construction sector are now probably debt service-which takes into account the good, but if they all withdraw tomorrow, this concessional nature of external debt-has been outlook will change. Can subjective criteria (instead calculated using a discount rate of 10 percent in of the objective one of rnissed payments) be used to future service payments. The ratio of present value downgrade a loan? Finally, foreign exchange to face value of debt stock was 64 percent for 1995. exposure, both of banks themselves and of their 6. Fifteen percent at zero rate adds 176 basis major U.S. dollar borrowers, needs to be carefully points to the cost of a loan (10 percent of 15 percent monitored and kept wit-hin manageable bounds. over 1 minus 15 percent). Foreign funding, as long Notes as the exchange rate remains stable, costs only 88 basis points per pound lent (5 percentage points 1. It should be noted ithat the definition of private interest differential over a 15 percent reserve investment used here excludes Law 203 enterprises, requirement, scaled up by (1 minus 15 percent). whose investment has contracted modestly in real The cost difference between foreign and domestic terms during the last three years. sources of funds is thus a full 88 basis points (0.88 percentage points) per unit lent! POST STABILIZATION MACROECONOMIC POLICY-MANAGING SUCCESS 19 Chapter 3 Long-termy policy challenges Whatever happens to growth, Egypt needs to reduce internal debt to maintain her freedom of action. She could do this in part by applying revenues from pnvatization of public enterpnses, thereby also boosing public saving. If the expansion slows, flexibility in the exchange regime should be considered. Solving the immediate problems outlined above other expenditure categories slow down too much would reduce Egypt's vulnerability to crises, to sustain output on a high growth path (the third but much more needs to be done. The existing challenge), it may be determined that the exchange favorable circumstances present three long-term rate requires a downward adjustment. If so, how challenges of which the first two concern, in can that be achieved without triggering a balance of particular, the current expansion of private payments crisis? investment. The first of these two is to ensure that as long as expansion continues the government's Divergent growth scenarios macro policies remain internally consistent. Assuming expansion continues or if it accelerates, Two medium-terrn scenarios have been devised the second challenge is to define policies to support to address the challenges outlined above. They will it, in the absence of a strong recovery in private illustrate the magnitude of the investment and saving and given the concentration of private saving efforts needed to support either moderate investment in nontradable sectors (chapter 2). growth or high growth. 'ihey will also demonstrate Conversely, the third challenge is to determine a the scale on which the divergent payoffs of response to a slowdown in investment or any other moderate growth or high growth will affect important expenditure category. employment and income growth. Macroeconomic The achievement of long-term consistency consistencies are assumed to underlie both centers around fiscal balance and external scenarios. Only the high-case scenario, however, financing. The other two goals each center around will be assumed to be underpinned by substantial one of two key questions that cannot be ignored. efforts at structural reform (see section below on For growth to nudge further up as envisaged in a "Long-term consistency issues"). The respective proposed scenario for high growth considered outcomes of the two scenarios are summarized in below, investment must remain strong or accelerate table 3.1. (the second challenge itemized in the preceding paragraph). If this happens, the real exchange rate The base case scenario may be sustainable, since strong continued expenditure will support its appreciation. The base case scenario (the "base case") is However, external balance is likely to deteriorate, predicated on the condition that the and a Mexican situation may develop, with private macroeconomic policies are internally consistent. capital inflows financing a large current account Fiscal stringency will be maintained and the deficit. While this may be sustainable for a long external debt to GDP ratio will continue to decline, time, the Mexican experience amply demonstrates thus increasing headroom for managing internal that high growth with a deteriorating external debt and expansionary policies if needed in the balance is a vulnerable situation, and it probably future. Growth of broad money will be kept below cannot continue indefinitely. Conversely, if the growth of nominal GDP. Inflation will be investment expansion does not accelerate, or if comparable to that in OECD countries. Real GDP 21 growth will be at around 4.5 percent, and extemal will lead to limited growth in job and income financing requirements will be minimal. By opportunities, and therefore to further increases in choosing to maintain its current levels of unemployment. Moreover, slow growth of nonoil international reserves (at more than 12 months of merchandise exports (at 5 percent) will limit the imports), Egypt would be able to cope with external scope for Egypt to reduce its reliance on exogenous shocks with relative ease. resources, despite the large foreign exchange This scenario is characterized by two features. reserves that it holds against external shocks. The First, while the macroeconomic policies will large fiscal costs arising from holding reserves limit continue to be internally consistent, structural the headroom for expansionary policies. reforms will move slowly; thus the fundamental problems impeding growth of saving and The high growth scenario investment will remain. Divestiture of public sector interest will be limited in scope, and the current The high growth scenario is based on the vision recovery of private investment will not accelerate. that Egypt should and must grow faster, and that Second, Egypt would choose to limit foreign the benefits of rapid growth outweigh the potential borrowing (on a commitment basis) to the range of risks. This scenario is characterized by the $ 1.0-1.5 billion a year during 1996-2002. This following features. First, Egypt would maintain means that the debt stock will decline in real terms, internally consistent macroeconomic policies and relative to output as well. Egypt would find strengthened by vigorous structural reforms in itself denied an opportunity to attract private and trade, capital and labor markets, privatization, and foreign investment through rapid structural deregulation, as well as by strengthened incentives reforms. The constrained private sector investment to raise productivity growth. In particular, a rapid TABLE 3.1 Outcome of the two scenarios in Egypt (percentage) Indicator 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/02 2003/05 Base-case scenario GDP at market price, real grwth rate 4.9 4.4 4.4 4.5 4.5 4.6 4.6 Inflation, GDP deflator 7.4 5.3 5.0 4.8 4.7 4.5 4.4 GNP, real growth rate 5.0 4.6 4.5 4.5 4.6 4.6 4.7 Gross national disposable income, real growth rate 4.5 4.2 4.2 4.6 4.4 4.4 4.5 GDP per capita, real growth rate 2.7 2.2 2.2 2.4 2.4 2.5 2.6 Unemployment percentageoflaborforce 9.7 10.3 11.1 12.0 12.9 14.0 17.0 Consumption/GNP 84.2 84.3 84.5 84.9 85.0 85.2 85.3 Gross investmentUGNP 20.7 20.0 19.6 19.5 19.1 18.5 17.6 Grossdomesticsaving/GNP 17.0 16.7 16.4 16.0 15.9 15.7 15.4 Gross nationalsaving/GNP 20.8 20.2 19.7 19.4 19.1 18.7 18.0 Overall budget deficiUGDP -1.3 -0.9 -1.3 -0.3 0.0 0.3 0.6 Currentaccountbalance/GDP 0.1 0.1 0.1 -0.1 0.0 0.1 0.4 Non-oil merchandise exports, growth rate 5.0 5.0 5.1 5.1 5.1 5.2 5.2 M2 growth rate 13.0 10.0 9.7 9.6 9.5 9.3 9.2 High-growth scenario GDP at market price, real growth rate 4.9 5.7 6.0 6.3 6.5 7.0 7.5 Inflation, GDP deflator 7.4 7.0 6.7 6.5 6.4 6.0 5.5 GNP, real growth rate 5.0 5.9 6.2 6.3 6.5 7.0 7.5 Gross national disposable income, real growth rate 4.5 5.4 5.7 6.4 6.3 6.8 7.3 GDP per capita, real growth rate 2.7 3.5 3.8 4.1 4.4 4.8 5.4 Unemployment, percentage of labor force 9.7 9.2 8.6 7.9 7.2 6.4 6.0 ConsumptionlGNP 84.2 85.5 84.0 83.0 81.5 80.0 75.0 Gross investmentlGNP 20.7 21.2 21.6 23.8 24.5 25.6 26.0 Grossdomesticsaving/GNP 17.0 15.6 16.9 18.1 19.6 22.0 28.0 Gross national saving/GNP 20.8 19.0 20.0 21.2 22.3 24.5 29.0 Overall budget deficit/GDP -1.3 -0.9 -0.6 1.4 2.3 3.0 4.0 CurrentaccountbalancelGDP 0.1 -2.1 -1.7 -2.6 -2.2 -1.7 2.2 Non-oil merchandise exports, growth rate 5.0 15.0 16.0 16.0 16.0 17.0 17.0 M2 growth rate 13.0 13.2 13.2 13.3 13.4 13.5 13.5 Source: Word Bank staff estimates. 22 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH and large-scale privatization program would be government spending is prioritized to provide complemented by rapid growth of private basic social services (including a social safety net) investment. Second, fiscal stringency would give and public infrastructure. Real exports of rise to increased public sector saving, which would agricultural and manufactured goods would grow contribute to rapid increases in domestic saving. at about 10-15 percent in the high growth scenario, Private saving would be boosted subsequently by compared with 5-7 percent in the base case. Export rapid per capita income growth and other earnings from sources vulnerable to external shocks structural policy reforms. However, the increased and depletion of natural resources, such as tourism, domestic saving would not be large enough to the Suez Canal, and petroleum, are expected to finance all the investment requirements; a grow at similar rates in both scenarios. More significant gap would still have to be filled with specifically, the high-case scenario would offer the portfolio and foreign direct investment and foreign following improved outcomes over the base case: borrowing. * Addition to national income on the The simulation indicates that, in this scenario, magnitude of $ 37.3 billion over the next six years. GNP in real terms would reach a growth trajectory * Addition of about 5.9 million jobs. of about 7 percent, and nominal export earnings (of * A rise in the level of trade integration (export nonoil merchandise) would grow at more than 15 plus import) to 33.1 percent of GDP by 2002 percent a year. It also shows that while the debt (compared with 25.2 percent in the base case). stock would grow with increased foreign * Reduced vulnerability to external shocks. borrowing, the growth of GNP would be much This would result from decreases in exogenous faster, therefore keeping the growth of debt stock resources as a share of GNP from 12.6 percent in well behind the increases in Egypt's capacity to 1996 to 8.7 percent in 2002 (compared with 9.4 carry and service debt. As under the first scenario, percent in the base case). the debt problem would be well contained (Egypt * Increased per capita income to $ 1,650 a year remains "moderately indebted"). The decline in by 2002 (compared wvith $ 1,465 in the base case). foreign exchange reserves (to no less than 9 months Rapid growth, as envisaged in the high case of imports) would be mnoderate, as the enlarged scenario, requires, of course, maintaining macro current account deficits are expected to be financed policy conisistency, as well as adopting the policies also by increases in foreign borrowing. necessary to sustain growth firmly supported by Nonetheless, the viability of this scenario depends increased domestic savings. The following on the level of domestic saving. To the extent that discussion is based on the assumption that Egypt saving did not rise sufficiently and quickly to should pursue the high growth scenario. support the growth of private investment, foreign savings would have to be relied upon, and Long-termyi consistency issues inflationary pressure would emerge, leading to heightened concern about vulnerability. The current fiscal stance of the government Benefits of rapid growl:h appears internally consistent. The deficit is small, and interest and growth rates are such that the Overall, the high growth scenario would imply current primary surplus is high enough to foresee a an investment/GNP ratio of 22-25 percent and an medium-term decline in overall debt-output ratios incremental capital output ratio (ICOR) of 3.8, in (as implied in both scenarios above). An issue that contrast to 18-20 percent and 4.4 respectively in the will come up, however, is the likely decline in long- base case. Gross domestic saving as percentage of term external assistance. The current level of $2 GDP would be in the 17-18 percent range in the billion per annum will obviously not continue high growth scenario, against 16-17 percent in the indefinitely. If Egypt's reform process continues, base case. The fiscal deficits as shares of GDP are private inflows will doubtless take the place of estimated to turn to su,rplus by the turn of the diminished external official flows. But an open century in both cases. However, better budgetary question is whether such a structural dependence results are expected earlier in the high growth case, on volatile private inflows is in fact desirable. A as the privatization process gathers pace and case can be made that it is not. This reinforces the LONG-TERM POLICY CHALLENGES 23 case for measures to increase saving, and such further reduction is limited. The government has measures are considered below. now initiated a program to carry out civil service These measures will also need to include fiscal reforms in the medium term. Although a successful measures if it turns out that internal debt is not reform could reduce the dead weight on the falling sufficiently as a percentage of GDP. economy, one has to be cautious with regard to the Although Egypt is not insolvent, the high level of size of fiscal saving that could be generated in the internal debt restricts the government's ability to short term. In the meantime, Egypt may have to use expansionary fiscal policy in a slowdown. Its cope with uncertainty in its key revenue sources. sustainability could come into question if, for Figure 3.2 demonstrates high volatility of key whatever reason, growth does slow down. Thus a revenues derived from foreign aid, the Suez Canal, strict fiscal policy, aimed at significantly reducing and oil exports. This highlights the need for Egypt the level of internal debt with respect to GDP, is to reduce internal debt so as to increase the recommended. headroom for coping with external shocks. Applying privatisation revenues to debt reduction should be considered as it will also stimulate public saving. However, it is unlikely to FIGURE 3.2 be enough. In fact, the last three years saw no Volatility of Egypt's key revenue sources proceeds from privatization being applied to reducing government debt but rather to propping ta o up ailing state enterprises through reinvestment 0.18- 0.17 and restructuring (figure 3.1). This practice should 0.16, 0.14 - be avoided. Propping up those enterprises 012 010 postpones their adjustment to new realities and 001 wastes taxpayer money; once the privatisation 0.08 .07 005.35 comes to an end, the hard measures will have to be 0.06 m 0.04 taken, and the proceeds of privatisation will have 0.02-* been wasted. A strict policy of applying o i --- tirivatisation revenues to debt reduction, rather OilanldGas Suez Tourism Worker OfficialGrants Canal Rernittanoes than to finding state enterprise deficits, is thus strongly recommended. Much has been done in the last few years to source Calculated from data providedbyCentral BankoFEgypt reduce public expenditure, and the scope for What should be done while the investment FIGURE 3.1 e Distribution of sales proceeds from privatization expansion lasts? If investment remains strong, or accelerates to levels necessary to achieve the 6 to 7 percent GDP Uncollected Financial growth rate required to absorb new entrants to the installments restructuring labour force, increasing external deficits can be 34% 23% anticipated on the current account. Once again, Re-investment private capital inflows are most likely to be 13% available to fund such deficits, but such a Bank deposits Transaction fees & tax configuration will make Egypt highly vulnerable to 17% 13% reversals of investors' confidence. Thus, measures to increase saving to levels closer to East Asian ones are strongly recommended. Most savings come from one of three sources, Note: Sales from all transfers of assets to private ownership estimated at LE and government measures can be classified accordingly. First, theory notwithstanding, there is Source: Calculated from data provided by Public Enterprise Office. ample practical evidence that raising public saving 24 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH some but not all government saving. Thus, further What should be done ff investment expansion measures to increase fiscal surpluses and reduce does not accelerate? deficits will certainly help. This is, however, not the first~~~~~ araweemau'saerqie,snes Despite this optimistic outlook, there are causes first area where measures are required, since so fo ocr.Snetercvr a enldb much hs alredy bee done n thisfield for concern. Since the recovery has been led by mche hsalreandy been donrce in thvisg fied. rp private investment in nontradable activities, there The second main source oftaing i ate is a danger that the recovery may be held back by saoving. th most ountrieoffuds, ore inved mearnig the size of the domestic market.' In addition, to the exprviethre. main source of fundsufor investment extent that the concentration of private investment in nontradable activities is a result of lack of encourage companies to retain more earnings. The c i first group makes private investent more radable sectors, the productivity of attractive and therefore funding for it more private investment will suffer, thus limiting further valuable. Privatisation, improving the regulatory growth. and competitive environment, simplifying the The concentration of investment in government's still complex administrative nontradables, in particular real estate assets, is a . . . ~~~cause for concern. The enterprises working in procedures, and using ex licit tax measures >afll all casfocner.Tentpieswkngn pontrocedures,andusingexplicit tax measuresewill.all tradables face the need to upgrade their capabilities contribute to this end. Second, explicit tax measures to promote and to compete more successfully. Yet they are Secoined expicitr at measuresd toi promot attracting far fewer resources than the real estate retained thearnin, shoru a leas eonsder. d mnexat sector. The shift in relative prices (tables 2.3 and againstcthem,hou bs fhe onsidere on eamleow 2.4) since 1990 and the concentration of investment of discriminahton is the practice of allo i nontradables undermine the ability of Egyptian ery industries to engage in production of tradables. capital, but not for retained earnings. Since '- - t . . , . . D- ~~This may bring about another problem. To the statutory capital is fixed, this deduction has no extent that investment is intermediated through the useful incentive effect once the size of statutory A capital has been decided upon. One alternative would be to extend the privilege to retained The real estate boom is expected to end as soon as earnings. Another alternative would be to allow the demand is satisfied and market euphoria is investment credits that are explicitly limited to over. If there is a crash or a drastic realignment of in as is relative prices, the resulting losses would have to investmdnen fina frome countrietsoained earnings, be absorbed tnot only by investors using their own already done in some countries so as to encourage fnsbtas ybnsuigfnsfo coprt savng funds but also by banks tising funds from c orporate saving. The third source of national saving is private depositors. Another cause for concern is the speed of a saving. Much has already been done to encourage Ajor expor recov. e above senario major export recovery. The above scenario saving by those with considerable surpluses: envisages increases in capital good imports, and a Egypt's capital markets now offer a wider choice rise in private investment in tradables in response and higher returns than ever before, with improved to the improvement of price regimes and transparency and investor protection. The recent supporting policies. The rise of capital good rise of private inivestment also offers further imports needs to be balanced by growth of export optimism. If, as argued in chapter 1, an earnings; thus the speed of export recovery is environment good for iivestment is also good for critical. The successful export experiences saving, then the current rebound in private demonstrate that a sound relative price incentive investment will likely bring about a rebound regime is necessary but not sufficient. Strong and private saving as well. This prediction is responsive supporting policies are also needed to not only by the curre-nt sound macroeconomic als by the decnin publicinv men ensure quick and timely export supply response. In stance, but * the case of Egypt, two types of investment could be in commercial activities (see paragraph on "Forging considered: first, investment of a long gestation, buyer-seller links" in chapter 4), and by further characterized by relative high capital and skill development of the capital market. intensity or, second, investment with short gestation and quick payoff and with relatively high LONG-TERM POLICY CHALLENGIES 25 labor and low capital intensity. The supporting continue, the current growth recovery may very policies indicated in this report are aimed at slow down. The long-term response to a slowdown generating investment with quick export payoff. in investment and to the need to actually sell the A further cause for concern is the timing of the goods the recently constructed capital helps response of private saving. Even in the high case produce is key to long-term success. Such a scenario outlined above-where the strong slowdown would require a real exchange rate recovery of private investment itself brings about depreciation at some stage. But achieving a real an increase in private saving-a significant lag in depreciation while maintaining the fixed exchange the response of private saving would necessarily be rate is exceedingly difficult; it requires sustained accompanied by a widening of the current account inflation rates below the main trading partners' deficit. Resumed growth and stabilization may inflation. To forestall these possibilities, enable Egypt to attract a large amount of foreign introducing an element of flexibility in the savings to further finance the recovery, but there is exchange rate, for example through the adoption of a limit; Egypt's overall exposure to external shocks a crawling band, should be considered seriously, is already very high-owing to the large before the fixed rate is perceived as a matter of contribution of oil exports, workers remittances and prestige. A crawling band sets rates of change to foreign grants to the current account-and would both an upper and lower bound within which the be increased by higher reliance on foreign savings. exchange rate can move freely. Should export response turn out to be slow, Note private saving remain insufficient, and concentration of investment in nontradables 1. Egypt's national income of about $ 60 billion, is equivalent to that of a metropolitan area in Europe. 26 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH Chapter 4 Promoting outward orientation through exports If domestic investment accelerates, current account imbalances may occur. Egypt should encourage exports to balance the current account and to hasten her integration into world markets. The import/export process imposes prohibitive costs, and needs to be made far less cumbersome than at present. Three issues have emerged as central to getting competitive. In other words, producers must have on a path of hig]her growth: first, fiscal access to world class inputs at world prices. stringency is needed to maintain internal In recent decades, Egypt has been essentially an consistency, and to increase the headroom for import oriented economy, where foreign exchange managing short-term risks (through reducing necessary for imports is being earned primarily internal debt); second, supporting policies must be through services and other activities. The existence adopted to substantially increase allocation of of other sources of foreign exchange (Suez Canal, resources to production of tradables and worker remittances, tourismn, oil) has been both an exportables, therefore reducing the current account advantage and a disadvantage. While these imbalances that are likely to emerge if the current resources created a bigger domestic market, this investment expansion accelerates; and third, long- large domestic market absorbs supply that term domestic savings must be mobilized to cope otherwise would be exported-especially since the with the volatility of external inflows, and to domestic market is protected (profitable) in support domestic investment. The first issue has potentially exportable sectors. been discussed in chapter 3. The second issue is the Using CMSA, one calculates that if Egypt's topic of this chapter. Chapter 5 and chapter 6 will exports grew at world rates during the period tackle the mobilization of savings. Addressing these 1983-93, then exports should have reached $ 6.3 three issues is the starting point for establishing the billion rather than $ 3.1 billion. Egypt's "under- basis for long-term growth. performance" amounted to an annual loss of $ 3.2 The environment billion in 1993. The causes of this lag are the failure to change to export markets that were growing Egypt needs an internationally competitive rapidly (loss of $ 0.7 billion) and not adapting the economy that produces world-class goods. Her composition of commodity exports to changes in comparative advantage may lie in the export of world demand (loss of $2.3 billion); the residual high value-added, lightweight products such as measures the loss in international competitiveness software, electronics, or highly perishable ($ 0.2 billion). While it is encouraging that Egypt horticulture items. Focus on exports is critical to has not suffered a major loss in competitiveness, achieving competitiveness, as it provides the exporters' inability to adjust to changing product mechanism to modernize the economy and enhance demands and to penetrate new markets points to a productivity-not only in the export sector but in lack of agility in Egypt's manufacturing sector the rest of the economy as well. To be competitive For Egypt's nontraditional exports to reach in world markets, producers must have access to $ 10,000 million by the year 2000 (often cited as a raw materials and inputs that allow them to government target), merchandise exports would produce goods of the quality required by need to grow at an estimated annual rate of 35 consumers in any given market at a price that is percent. At such a growth rate, it is estimated that 27 Egypt would capture 0.25 percent of world brought about by the large inflows of capital merchandise exports within five years (almost discussed in chapter 2. This stance is likely to catching up to it's share in 1970, which was 0.27 continue in order to prevent the erosion of Egypt's percent, and approximating the share of Thailand export competitiveness. in 1970). Sustaining that rate for 10 years, Egypt would be a world player-capturing 1 percent of The agenda for action world merchandise exports (the level of Brazil in 1972; Korea in 1978; and Thailand today). This A key matter is to determine what policies and clearly requires a quantum leap-making export institutions can help to expand exports, and thus development high on the government 's agenda. help to achieve the government's objectives of raising GDP growth and employment. Account Achievements must be taken of the changing external environment in designing the trade policy The trade liberalization effort of the last five component of this growth strategy. The trend in the years provides a good basis on which to move world at large of moving to a free trade and further towards integrating Egypt into the world investment environment for both goods and economy. The government has done a great deal to services has changed the rules of the game. The reduce the magnitude of, import restrictions, technological and managerial changes that have enhance the transparency of applicable trade occurred in the last decade or so have induced the policies, and eliminate export disincentives. The OECD countries to initiate structural reforms foreign exchange system was decontrolled and gradually to enhance the competitiveness of firms unified, and the foreign exchange quota system for located on their territories. An increasing number public enterprises eliminated. The number of of these enterprises have in turn become imports requiring prior government approval was miultinationals, sourcing from all over the world. reduced to zero, as compared to 55 before 1989. All Competition for markets, investment, and suspensions of letters of credit for imports were technologies has intensified. lifted. Legislative efforts have been undertaken to Egypt's ongoing process of integration with eliminate the discriminatory treatment of foreign Europe is of particular importance (World Bank trading companies, allowing them to operate on an 1996b), and may have reduced her available equal footing with domestic competitors as far as options. The extension of large parts of the exports are concerned. Controls by the General integration mechanisms to countries such as Authority for Investment and the General Morocco, Tunisia, Jordan, Turkey, and Israel Organization for Industrialization on imports of implies that a Korean-type of policy mix relying on equipment were abolished, as were import protection of the domestic market with a restrictions maintained by the Ministry of Military broadbased drawback mechanism to allow Production and the jurisdiction of the Industrial exporters to compete on world markets has become Monitoring Authority over imports. less feasible. The trend toward adopting more and The tariff level was reduced, and the tariff wide-reaching bilateral and multilateral trade structure rationalized. Greater transparency was disciplines implies that firms located in these achieved through the adoption of the international countries must become more competitive on a Harmonized Commodity Classification and Coding global scale. As more market-friendly regulatory System (HS). The government's most recent mechanisms are introduced and tariffs are economic program, supported by the International gradually eliminated in the regional economies and Monetary Fund (IMF), shows a continued worldwide, Egypt has little choice but to follow commitment to tariff reduction and to using the suit. The issue is to what extent and over what time exchange rate as a policy tool. The pace may be frame. slower than the IMF would recommend but the Despite the reform program pursued by the government feels comfortable with as being government, investment and production decisions sustainable. At the same time, efforts have been continue to confront a distorted incentive structure. made to maintain the exchange rate Levels of tariff and nontariff protection remain competitiveness against the upward pressure high. For many producers and traders the protected 28 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH domestic market remains much more profitable market for larger profit and less competition. All than exporting. Perhaps more importantly, the these features seem rather unusual for a developing regulatory burden that affects the private business country like Egypt which possesses superior sector in Egypt-wwhether import-competing, natural resources (high-valued agricultural export-oriented, or nontradable -is high. Trade and products, sufficient oil and gas reserves); abundant tax policies and their administration, the monopoly cheap labor (Egypt's labor rate at a minimum of provision of port services, cumbersome and $ 0.55 per hour is only one-third of that in Cyprus complex import and export administrative at $ 1.88 or Turkey at $ 1.72 per hour, and one-tenth procedures, and uncertainty regarding the of that in Israel or Tunisia); and convenient objectives and planned policies of the government geographical location (Suez Canal and are important disincentives to investment and Mediterranean ports). Egypt does not occupy a export-oriented production. clear competitive niche on the world market, yet Reducing the burden of regulatory oversight, similar economies with even less favorable improving the predictability and transparency of endowments, like Singapore and Indonesia, have customs administration, and allowing more already achieved rapid export-led growth. A competition in the service sector are key to cursory study of Egypt's economy reveals, not accelerating export growth. A more efficient service surprisingly, that the twin effects of import sector is a necessary conldition for firms to be able substitution and domestic monopolization have to compete in international markets. Interviews been the major culprits behind this "high cost" with private sector firms suggest that export character. Import substitution prevents foreign development has been constrained by the low competition from accessing Egypt's market, while quality and high cost of support services; the domestic monopolization stifles internal absence of adequate information on foreign competition. As lack of competition breeds lack of markets; an inability to satisfy foreign technical competitiveness, Egyptian products command high specifications or standards; and inadequately prices but deliver low quality. ;rained or skilled work force and management. This section details many of the existing These are to a greater or lesser extent all "service transaction costs in the import and export processes issues" in that greater competition in the service that contribute to high domestic prices in Egypt sector could eliminate or help offset such relative to competitive world market prices. Should weaknesses. The threat of foreign competition- this asymmetry prevail in its current form, the while very powerful-is rarely sufficient to ensure domestic market will remain more profitable, that internal marke!ts will become more entrepreneurs and firms will continue to orient competitive. Supporting actions are required. inwardly, and the strategy of export development Experience in numerous countries suggests that will fail. Worse still, without reducing transaction such actions include privatization, the introduction costs, Egyptian industries may go under in the face of hard budget constraints for public enterprises, of increased import competition brought about by and demonopolization of services. trade liberalization. Identifying the sources of high transaction costs is a first step toward The incentive regime -asymmetric prices understanding their role and importance. Doing between import and export this would go a long way toward the design of optimal policies to remove these obstacles, fulfilling Successful competition in both international Egypt's economic growth potentials, stimulating and domestic markets requires that Egyptian entrepreneurs to face competition, and ultimately products be of low cost and high quality, which are, building a strong and vigorous economy. unfortunately, both lacking in their current The following two sections cover: import operation. Egypt has been dubbed a "high cost" transaction costs and export transaction costs. The economy. Domestic prices can be even higher than former contributes to high domestic prices and the world market prices. As a result, many producers weak incentive to export, the latter to the lack of and traders are short of incentives to sell in the export competitiveness. These two areas are world market and prefer to adhere to the domestic interrelated, because when imports are used as PROMOTING OUTWARD ORIENTATION THROUGH EXPORTS 29 intermediate inputs into the production of exports, Temporary admission allows exporters to import the added import costs translate into the extra costs commodities free of border taxes, whereas duty of exports, further elevating prices and drawback and tax rebate reimburse tariffs and taxes downgrading competitiveness. The section on to exporters should they use imported goods in the import transaction costs is divided into four parts: production of exports. However, these schemes tariffs and taxes, port handling services and freight involve cumbersome procedures and excessive rates, import clearances, and quality control. All paperwork. An exporter has to go through each of these costs are only part of many existing forms of the following eight steps to obtain a refund or a transaction costs, such as marketing, information, permit: (1) customs form 22, (2) letter of guarantee management skills, finances, and so forth. There are or insurance letter, (3) release permit, (4) a form to also immense production costs on top of industrial surveillance authority, (5) production transaction costs. However, as transaction costs are reviewing process by industrial control authority, more regulatory and bureaucratic, they are more (6) customs form 13, (7) export form, and (8) tangible and therefore more accessible for determination of refund by a committee (SRI immediate policy actions. International 1995). These procedures are inevitably costly in time, money, effort, and attention. Besides, Import transaction costs step-by-step documentation of each transaction for refund is difficult, nonsale indirect tax cannot be Considerable effort has been taken by the rebated, and e'ligibility .s subject to local content Egyptian government to reduce the magnitude of requirement-only if the local content of final its high levels of import restrictions. It has reduced products reached 20 percent or more shall the tariff rates and reformed the tariff structures, and it imported components be eligible for a tariff has enhanced the transparency of import policies reduction. In other words, these export-promoting by adopting the HS. schemes have become another form of transaction Tariffs and taxes. However, the average tariff cost. They only partially alleviate the h-igh import rate still remains at a high level of 16 percent, with duties and remain insurmountable for small the import-weighted tariff at 31 percent and the enterprises and emerging exporters. manufacturing-wide effective protection rate at 70 Port handling services nnd freight rates. The percent. In addition, tariff differentials between four maritime transport services, Darmietta, Port different product groups and within each group are Said, Dekheila, and Alexandria, and other smaller quite large, creating large distortions in the relative ports are essentially state-owned monopolies. A prices. The high tariffs are further compounded by multitude of problems at the ports, such as high a number of fees and surcharges that make the service charges, low service quality, delays, and import tax regime less transparent and deterioration of port installations and equipment, discretionary. has grown to the point where the ports could well Also, there are stiff tariffs on fertilizers (30 become a major impediment to the growth of percent), trucks (70 percent) and agricultural export (table 4.2). machinery (50 percent), in addition to import bans In general, Egypt's seaport service charges for on seeds, poultry, textiles, and clothing. There is a imports triple that of competitors (Hoekman and sales tax of 10 percent applied to all commodities, even to inputs for export goods. All these duties, TABLE 4.1 tariffs, bans, and taxes inevitably increase the cost Tariffs and taxes affecting Egyptian exports of imports, contributing to the high cost of Barier/impediment Net effect production, consumption, and export from Egypt High taiff rate (table 4.1). Overall tariff rate 16 percent Average imported-weighted tariff 31 percent cumbersome drawback and rebate schemes. To Average manufacturing-wide 70 percent ensure that exporters can circumvent these trade effectve protection rate barriers and have access to imported inputs at Bans on imports of seeds, poultry, Infinitely increasing the level of protection textiles, and clothing for the domestc industres. world market prices, schemes such as temporary High sales tax 10 percent sales tax is applied, even on admissions, duty drawback, and tax rebate have inputs for exported goods. been developed by the Egyptian government. Souse: World Bank staff estimates. 30 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH Bernard 1996), which raise cost, insurance, and TABLE 4.2 freight (CIF) charges for imports to Egypt by over Effects of expensive Egyptian port services 10 percent-a significant number. Freight plus port Barier/impediment Net effect costs are as much as 40 percent of the CIF price for Seaport services Overall charges triple that of some perishable goods requiring refrigerated competitors. containers. Port costs for containerized cargo Container freight rate 15-20 percent higher than other represent 9-14 percent of the CIF price (Nathan C Mediterranean ports. Container handing cost 2-3 times that of nearby ports Associates, Inc. 1996). Terminal handling charges Double that of nearby ports. Container freight rates to Alexandria are (stevedorng, transport to rest generally 15 to 20 percent higher than to other transport) Mediterranean destinations. The freight charge on a Housekeeping and Nonexistent, resulting in poor 20-foot dry container from Northern Europe to maintenance physical condition of the port and Alexandria is between $ 280 and $ 500 higher than poor quality of service. to Piraeus, and $ 650 to $ 1,000 higher for a 40-foot Vessel tme lost Nearly 10 percent of total chargeable time, due to delay in container. In Alexandria, container handling costs testing for radiation and in time are about $ 225 per 20-foot container; in nearby between unloading the cargo and foreign ports, they are only $ 120 to $ 180. Terminal departure of the vessel. Airport services Air-freight rate is twice as much handling charges (stevedoring, transport to the first ($1.0-1.41kg) as other Middle East point of rest, and delivery to consignee's transport) countries (e.g., Israel $0.45- for containers on liner terms range from 0.50/kg). approximately $ 183 to $ 225 for a 20-foot dry General remarks: It was estimated that the seaport charges raise CIF cost for container and $ 367 to $ 441 for a 40-foot unit, imports to Egypt by over 10 percent-a relatively high cost. double the costs in Antwerp at $ 109 and $ 117 and Source: SRI Intemational (1995). in Zeebrugge at $ 100 (20 or 40). Housekeeping and maintenance are practically nonexistent. The impediments to trade. rhe administrative process physical condition of the infrastructure is mostly for complying with customs regulations and the fair to poor, and particularly bad in Alexandria. resulting red tape are still considered a major Vessel time lost in port appears excessive. As an stumbling block. In particular, foreigners still find example, a 43,500 deadweight (DWT) bulk carrier doing business in Egypt extremely difficult, due to was charged with wheat at Alexandria. Due to a nontransparent procedures and regulations, as well long delay in testing the ship and cargo for as inefficient bureaucratic practices. Egyptian radiation and waiting time between unloading the customs procedures are particularly complicated cargo and departure of the vessel, total chargeable and rigid, as shown in table 4.3. time was 196.70 hours, of which nearly 10 percent Clearance of imported foodstuffs is a particular was dead-time. Assuming $12,000 per day for problem that involves five agencies in authorizing excess waiting time or demurrage ($ 500 per hour), entry: the atomic energy agency, the food control the vessel lost nearly $ 10,000. agency of the Ministry of Health, the agricultural Air-freight rates are considerably higher than quarantine body, the animal quarantine body and those of other Middle East countries, largely the Government Organization for Export and because EgyptAir flights tend to travel loaded only Import Control (GOEIC). Imports of the same one way so the charges have to assume the costs of product in consecutive time periods are subject to an empty return flight. The average cost of air repeated sampling. There are multiple steps, freight from/to Egypt on EgyptAir to/from licenses, inspections, and charges. The cumbersome northern European cities ranges from $1.00 to import procedures add another 15 percent to the $ 1.40 per kilogram, double that of, say, Israel at an costs of imports. For Egypt as a whole, if imported average of only $ 0.45-$ 0.50 per kilogram. intermediate goods account for 60 percent of Import clearances. These are still cumbersome. production cost, then a 5 percent increase in import Even though the import/export paperwork process costs of intermediate goods would contribute to a 3 has been greatly simplified compared with the past, percent increase to the cost of export production, excessive bureaucracy still remains one of the main PROMOTING OUTWARD ORIENTATION THROUGH EXPORTS 31 and a 15 percent increase would add to a 9 percent included in quality control list while toys and hand increase in the cost of export production. tools, which can be dangerous items too, are not TABLE 4.3 (see table 4.4 for details). Effects of cumbersome Egyptian import clearances The current quality control system has two main deficiencies. The first deficiency is the Barrer/impediment Net effect Multiple clearance Clearance of imported foodstuffs is particularly a multiplicity of agencies involved in issuing and agencies problem with five agencies involved in authonzing enforcing the regulations. This in turn leads to an entry-the atomic energy agency, the food control increase in cost due to multiple inspection fees, agency of the Ministry of Health, the agrcultural quarantine body, the animal quarantine body and delays, product loss in the clearing process, and the GOEIC. higher facilitation and overhead costs. Testing of Multiple procedures Permit of delivery, Form No. 11 if imports are and licenses financed through a bank, a procedure form, etc. industrial products sometimes takes a long time, Multple inspections Inspections from the Atomic Energy Authority, especially if the required equipment is not and charges control department for determination of available. Importers that regularly buy the same preliminary custom duties and sales tax, specific customs control for inspection, tarff manager for goods from the same foreign suppliers remain prcing, calculation of customs duties, sales tax, subject to inspection on a shipment by shipment service charges, customs gate for another basis. Fees charged for inspection activities are inspection. Delays, extra storage Total delay amounts to three days and there is a based on either the weight of a consignment or the charges, and the lost storage charge bome by importers. number of units it contains. Fees range from 0.5 time and efforts General remarks: These costs amount to a tarff equivalent of 15 percent (a piasters per kilogram to a maximum of LE 10,000 conservative figure). If imported intermediate goods represent 60 percent of per consignment. As is the case for tariff rates, fees producers cost, then a further 5 percent increase in producers cost would for goods that are intended for retail sale are contribute to a 3 percent increase to the cost of exports. gnr at leat tie as lar as sat are Source: SRi internationali0s99) generally at least twice as large as those that are applied if the good is not prepared for retail sale.' Quality control. The system for this is restrictive. Final release of imports requires the approval of the The GOEIC inspects a sample of every consignment GOEIC, as well as of one or more of the otlher of goods enterinig Egypt that is on a list of products bodies mentioned earlier for certain goods. subject to quality control. Some 1,550 tariff lines or Clearance of foodstuffs is particularly time 25 percent of the tariff schedule is subject to quality consuming, as all the bodies involved (GOEIC, control, of which about half are foodstuffs. Once health, agriculture, atomic energy agency) sample applicable duties have been paid on goods consignments. According to one recent study, for subjected to inspection requirements, at least 1 some products such as meat it takes at least two percent of each consignment must be sampled and weeks before releases are issued and another ten inspected for compliance with the relevant days to complete the paperwork. In manufacturing, Egyptian standards. The pervasive application Of GOEIC has been responsible, but many times quality control reflects a fundamental confusion others have to be involved as well; for between quality standard and safety standard pharmaceuticals and medical devices, the Ministry In theory, quality controls are mandatory for a of Health is also involved. number of imported products, primarily for health The second deficiency is the lack of and safety reasons, and sometimes to protect transparency and due process in the system. Egyptian consumers from low quality produce. In Transparency covers the ability to know clearly practice, however, quality control has become a what regulations apply to a product. Due process is means to protect local industry. Certain imported -the process by which laws, decrees, standards, products removed from the list of banned imports technical specifications or any other official desig- were put on the quality control list, effectively nation are implemented. Adequate information, retaining the import restrictions through long giving all affected parties advance knowledge of delays in approval. In fact, it is even questionable proposed changes, for example, can provide input that all the mandatory quality control regulations into exporters' decisionmaking. The GOEIC, are based on health, safety, and quality grounds. It however, reportedly ignores internationally is surprising, for example, that spare parts for cars recommended methods of testing and certification, are subject to quality control, while imported cars and does not recognize internationally known and are not, and that imported playing cards are 32 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH TABLE 4.4 Effects of restrictive Egypitian quality control system Barrierlimpediment Net effect Standard control set by Ministry of Health: Food and health related goods Egyptian Organization for Standards Restrictive standards on size, shape, color, and texture and, for food, on fat and sugar content. For example, amount of ink in a ballpoint pen and the length of matches are, among others, mandatory items. (part of Ministry of Industry) Industrial products and services. Enforcement: Various quality control ministries Content standard Shelf-life standard Extensive, but many are inconsistent. For exarnple, granulated sugar has a shelf life of 24 months while powdered sugar has 12 months. Quality control shared by 5 ministries agriculture, health, economy, industry, and supply Extensive mandatory inspection items Some 1,550 tariff lines or 25 percent of the tariff schedule or 116 of imports is subject to quality control, of which about half are foodstuffs. In Europe, only 112069 imported commodities in 1991, 111 in 1992, 159 in 1993 was under quality control. Overlapping and duplicative centers of Wth little coordination between these ministries, over half or more of Egypt's regulatory authority, multiple test requirements analytical capacity is devoted to quality testing. Lack of transparency and due process Induces transaction uncertainty, reduces imports and investment. High compliance costs Excessive sampling and testing, extended port charges due to delays, unnecessarily rejected products. Fees Each agency that undertakes inspection charges a fee, based on weight or unit-0.5 pilasters per kilo to a maximum LE 10,000 per consignment. Time and effort consumed Clearance takes 2 to 3 times as long as other Mediterranean ports. Low efficiency Customs clearance rate is valued at $ 600,000 of product per official per year, compared with _$ 666,000,000 in Singapore. General remarks: It is estimated that the quality control system increases costs to affected producers and traders by 5-90 percent. The highest costs are for food proclucts and imported final consumer goods. Export values decrease, as a consequence of increased import costs, by an estimated 9 percent to 12 percent, GDP loses by more than 1 percent. Source: SRI Intemational (1995). accepted quality and certification marks (such as substitute machinery at' high cost, or halt that of the European IUnion or the International production temporarily. Executives may be Standards Organization (ISO). The lack of required to spend valuable time dealing with transparency and due process in Egypt increases administrative red tape problems, time that could uncertainty in decisionmaking and has a negative be much more productively used managing their impact on imports and investment. business. The policies briefly described above directly It is estimated (Nathan Associates 1996b) that affect imports, and thus exports. They impose large the current system of quality control increases welfare losses in the aggregate, and make it more direct and indirect costs to affected producers and difficult and costly for firms to obtain inputs that traders by from 5 to 90 percent, according to are required for export production. For example, industry. The highest of these added costs are for farmers producing for export must have ready and food products and imported final consumer goods. reliable access to seeds and plant cuttings so as to Exports decrease by at least an estimated 9 percent be able to develop and grow varieties that are to 12 percent as a result of these costs, and GDP demanded by export markets. Manufactured com- loses by more than 1 percent By discouraging ponents and intermediate inputs are often key trading activity, the system also reduces access to elements of export-oriented production in the the regionally important Euro-Mediterranean industrial sector. Exporters need to have timely market, decreases foreign and domestic investment, access to the imported inputs that are required to reduces product variety and availability, and satisfy export orders. Delays in clearing customs or wastes government resources on duplicative and passing inspection can be extremely costly. unnecessary activities. Producers may find themselves having to rent PROMOTING OUTWARD ORIENTATION THROUGH ExPoRTs 33 Export transaction costs initiatives include the following: (1) the number of forms to be used to register compliance with export In general, export transaction costs are not as regulations has been reduced to one; (2) exporters have prohibitive as those of imports, thanks to been exempted from fees for safety-security procedures; government intervention aimed at encouraging (3) many of the port service fees charged to exporters exports. Government measures have included have been reduced; (4) the shipment cost of containers regulating seaport charges with the aim of making carried by the Egyptian Navigation Company were them internationally competitive for exports; the reduced by 50 percent; (5) transport of containers within government has also eliminated almost all quality the port is now free; piloting fees and dock storage restrictions on exports. Nevertheless, firms are still charges were lowered by 20 to 75 percent; (6) handling burdened with cumbersome administrative and security charges for export goods and the electricity procedures that again involve multiple inspections, cost of refrigerated containers were reduced by 50 certificates, and charges. One estimate shows that percent; (7) regulations relating to overtime incurred in to complete all the required steps for a typical applying export-related administrative requirements export costs LE 1,052 per consignment. Procedures were eliminated for exports; and (8) a 1989 decree include completing forms for agriculture imposing afee on refrigerated goods that were not held in qncluarantine; compu of Custfoms Formcul13 public sector storagefacilities was abolished. quarantine purchase ofCustomsForAlthough recent government actions have been completing certificate of origin, customs certificate, substantial, many of these efforts can be perhaps bank export form and statement of accounts; best characterized as alleviating symptoms. More inspections from customs, export and import fundamental reforms are necessary for export-led control authority; fees for inspection, sealing, sotrorag andtlosity tmee fof inspecthreedeaysi(R growth to take place. The costs of doing business in International 1995). Egypt must be reduced if Egyptian industries are to IneAltional 1995or compete more successfully in world markets . Only Although seaport services are not signicanyin through competition will Egyptian industries expensive for exports, the air-freight rate remains become stronger and will service suppliers be given lofty. As noted above, the same distance costs the incentives to expand the diversity of services double the price in Egypt ($ 1.0-$ 1.4 per ofe upgrade th quality, ad price services kilogram)compared with, say, Israel ($ 0.45-$ 0.50 offered, upgrade their quality, and price services kiloramcomare wit, sy, sral (S0.4-S .50 competitively. The rest of the chapter focuses on per kilogram), because of the empty back hauls of ctions eto en re orts by reducin th EgyptAir. As a result, an outrageous air-freight rate transatoncostsgo im ports desreduabove adds 40) percent to the cost of grape exports, to trnato cot fiprsa dsrbdaoe n nadd 40e percmlen by creating strong buyer-seller links and an export name one example. Overall, exporters report that the serious mentality. These are some of the ways to unblock constraints on increasing sales abroad include: high bottlenecks to the growth of exports. and uneven import tariffs; low-quality domestic Infrastructure inputs; cumbersome duty drawback and temporary admission regimes; excessive paperwork, fees, and Outdated infrastructure can pile up bottlenecks. delays for customs and various inspections during Seaports. Charges and quality of port handling import and export; workers poorly prepared for the . . . i jobs available; insufficient incentives to export; and services should be iternationally competitive. This ack f acessto nfomatin o foeignmaretS can be achieved by permitting private national and lack of access to information on foreign markets foreign companies to engage freely in port service and product standards. operations, competing on equal terms against each Core areas for action other and against existing state-owned companies. An important factor raising the costs of The government is aware of the problems exporting is the quality of the services provided outlined above and the concerns expressed by the and the level of port service fees for handling and exporting community in Egypt that the high storage of goods. Port services, transportation, transaction costs reduce their competitiveness on handling, and so forth are not natural monopolies. global markets. Many initiatives have been taken Experience in other countries has demonstrated by the government to address these concerns. These that great efficiency gains can be achieved through 34 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH greater competition in this area. Deregulation and must pay air freight costs both ways-that is, privatization of port services had a major impact in exporters must pay for both the fully loaded Mexico. Entry into the relevant service activities "headhaul" and for the empty back haul when the was made free, service market segmentation was aircraft returns. eliminated, and firms were allowed to subcontract freely and set prices according to market forces. Customs reforms The results were immediate. In one year the cost of In today's increasingly competitive global services in the port of Veracruz declined by some marketplace, the ability to import quickly and at 30 percent, while container turnover went up by the lowest costs is crucial for maintaining a almost 50 percent. Similar elimination of barriers to competitive advantage in exports-particularly in compettion in the provision of port services n countries such as Egypt where dependence on Chile led to substantial reductions in operating imported raw material and inputs is relatively high. costs (by about 50 percent over two years). By The ability to deliver competitively-priced products reducing the costs of shipping by almost 50 percent, fast and on time is considered a prerequisite of small and medium sized firms that would effective linkages with key markets. It is imperative otherwise be marginal have been able to expand that Egypt improve customs administration to their export activities (World Bank 1993b). Thus, reduce transaction costs of imports so as to the Egyptian government may wish to consider the encourage exports and modernize industry. following reform actions. Temporary admission and duty drawback schemes. * Start legislative p:rocess to terminate the legal Actions can be taken to further improve the and regulatory status of state monopolies in port temporary admission and drawback systems. services. Law 12-1964 and other regulations Procedures for obtaining duty drawback or using pertaining to such state monopolies should be the temporary admission mechanism cal be abrogated or changed to permit the participation of simplified and made more transparent and private national and foreign companies. efficient. Establishing a set of standard input- . Eliminate interlocking directorships and output coefficients for broad categories of goods shareholdings between port authorities and could help in expanding the use of these operating companies or among port operating mechanisms. Extending access to agricultural companies, since they inhibit competition and producers should also be pursued. Customs impede effective supervision by the port authority clearance procedures should be greatly simplified, of companies with port policies. become more automated and move towards a Airports. Since Egypt's comparative advantage paperless environment. may lie in exporting high value-added, lightweight Import inspection and valuation. Under the World products such as software, electronics, or highly Trade Organization (WTO), all members, including perishable horticulture items, developing adequate developing countries, must abide by the capacity in cost-effective air shipping services is requirements of the agreement on customs vital to export developrnent. Currently, the average valuation. This requires that, in principle, the basis cost of air freight from Egypt on EgyptAir to for valuation is the invoice presented by the northern European cities is anything from two to importer. In Egypt the introduction of these three times higher than its main competitors. The multilateral rules may require a change in current Egyptian government may wish to consider the procedures. Customs valuation is generally following actions: considered an uncertain process by importers to * Relinquishing monopoly control of air Egypt unless Egypt's minimum or reference prices transport and easing regulations restricting are used rather than invoice values. Often these competition from non-Egyptian airlines and reference prices are imposed by customs, and may charters. be higher than what was actually paid for the * Reducing costs by permitting tourist charter goods. However, developing countries that were flights to accept air freight on the backhaul or not party to the 1979 (Tokyo round) agreement on return flight. As noted above, Egypt is one of the valuation-which includes Egypt-may delay few countries in the region where exporters usually implementation of the agreement for five years PROMOTING OUTWARD ORIENTATION THROUGH EXPORTS 35 after the date of entry into the WTO. Developing costs would be borne directly by the importers. countries that currently value goods on the basis of Duties would be paid on the basis of value and officially established minimum values may request classification determined by the preshipment a reservation to enable them to retain such values inspection body. Customs officers would be obliged on a limited and transitional basis, subject to the to allow sealed containers to pass through customs terms and conditions required by the other WTO without inspection and harassment upon payment members. Although there is a fair amount of slack of duties. built into the agreement, in the medium term Egypt * Developing a comprehensive plan for will have to alter its customs valuation procedures. customs reform that would minimize face-to-face This will require training, as well as upgrading of contacts between importers and customs officials. It the information base on product prices available to would reduce required signatures, consolidate customs officials. required inspections, and rely on an enforcement Egyptian enterprises producing for export must mechanism based on spot checks and stiff penalties then be able to source quality imports at world for cheating rather than the current system that market prices, free of taxes and duties, if they are requires inspection of most shipments. not to operate at a cost disadvantage. Although Quality controls temporary admission and duty drawback systems exist, as noted above, they are generally seen as Streamlining the quality control process and only partially alleviating the high import duties focusing it on safety concerns would reduce the that are applicable to many imports of intermediate cost of doing business and move Egypt towards a inputs. Moreover, the transaction costs associated system that is consistent with its obligations under with obtaining relief under these schemes are often WTO and Europe and Mediterranean Agreement prohibitive for small enterprises.2 Furthermore, (EMA) membership. Furthermore, substantial customs officials in Egypt appear to be unwilling or efforts to improve quality will also be necessary in unable to take responsibility for such nonroutine order to raise the international reputation of decisions, unlike officials in other countries, who Egyptian products. Efforts could be made to can handle cases, claims, and disputes. Cases stimulate the awareness of quality control and the involving drawbacks in Egypt are generally passed importance of satisfying foreign standards on to higher levels of authority, greatly increasing (whether they be mandatory, health an-d safety the average time involved in obtaining decisions. related, or technically in conformity with The Egyptian government may wish to consider the specifications required by foreign buyers). Such following actions: efforts could also help firms in improving quality o Establishing a "green channel" through control and management systems, and aid them in which exporters can import intermediate raw obtaining internationally recognized "quality" materials and capital goods to be assessed for duty certification. The relevant international standards on the basis of invoices submitted by accredited for this are the ISO 9000 series of standards. One exporters. There would be no inspection of option that could be explored is to establish a merchandise, but a provision for random ex-port "certification fund" that can provide matching factory audit should exist, and any violation would funds for ISO 9000 certification and for the services be subject to penalties. Repeat violators would be of consultants to audit companies.3 The Egyptian removed from the list of exporters eligible to use government may wish to consider the following the green channel. actions. * Adopting a principle of voluntary * Revamping the inspection process by preshipment inspection. Importers would be able to establishing a single authority for inspection and obtain documentation classifying and valuing testing. consignments from a small number of accredited * Focusing testing on safety concerns rather international inspection firms selected by the than quality standards. A review process- government. Examples include Societe Generale de including on the panel international experts with Surveillance (SGS) or Bureau Veritas. These firms extensive experience in this area-should be would inspect and seal containers. The associated initiated to determine whether existing standards 36 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH are necessary, and, if so, whether they are given the size of the internal market, its strategic compatible with international ones. If not, location, and its vast labor pool. Increasing the level international norms should be adopted where will require marketing as well as continued efforts possible. Such controls should be motivated only to ensure not only the absence of overt by the health and safety of consumers, animals, and discrimination against foreign companies, but also plants. the availability of an adequately skilled and * Recognizing international standards productive work force, an infrastructure that meets certification for nonfood imports; foreign test minimum standards of quality, the protection of results of-and certification by-internationally intellectual property, and the availability of recognized bodies should be accepted. efficient service suppliers. * Reducing inspection levels to minimum spot Egypt needs a honed inward investment checks that use compliance history as the basis for promotion agency4 with a highly targeted approach the frequency of sampling and testing of imported based on current best practice. Options to achieve products. this include the following: * Introducing cost-based fees for inspection i A small group of experienced sales services rather than the currently used specific fees. professionals could be created (perhaps reinforced * Supporting standardization of laboratory for a short time by outside specialists to deliver quality through certification by the National training and offer advice). This elite group might be Institute of Standards. Results from any certified drawn from across different parts of the civil laboratory should be acceptable, thereby service and should be distinguished by a strong eliminating multiple testing and increasing- commitment to making Egypt the premier FDI transparency by assuring quality of laboratory location in the Middle East. The new agency would results. Private testing agencies and laboratories not have a control function, but rather would focus should be allowed to contest the "inspection exclusively on sales and marketing, aftercare and market" once certified on the basis of objective sector development. The body could have a criteria-as laid out by procedures developed supervisory board made up of both foreign under auspices of international organizations such investors-those already in Egypt, and local as the ISO. companies-and of officials and ministers. The * Increasing transparency and due process by purpose of this board would be twofold: to assess giving advance notice of any proposed new rules, the performance of the agency and to advise it on providing an opportunitv for public comment, key aspects of industrial trends and international establishing known implementation dates, and investment. providing a clear appeal process. * The entire FDI business could be privatized * Establishing a "certification fund" that can by giving it to a group that works to specific and provide matching funds for ISO-9000 certification agreed targets by volume of investment flows and and for the services of consultants to audit is also responsible for other areas such as aftercare companies. development. If this approach were adopted, it Maximizing FDI and its benefits would require close monitoring to ensure that performance targets were achieved. It might also Trade and factor flows have become make sense to place within it Egyptians who would increasingly complementary over time as firms become the corps of a new investment body in due specialize and diversify the production process course. Tasks such as assisting local companies geographically. Attracting inward foreign direct with quality and delivery programs would be investment-both equity and nonequity-is considered separate and would have to become the particularly important in fostering exports. In responsibility of another body to allow the private addition to creating employment and contributing company to fulfill its targets and to focus directly to export growth, FDI also brings with it exclusively on winning investments. One great opportunities to nurture indigenous industry advantage of this model lies in the fact that it by helping the latter to enter export markets. would create a group completely dedicated to kick- Egypt's level of FDI is well below its potential starting the country's FDI promotion efforts. PROMOTING OUTWARD ORIENTATION THROUGH EXPORTS 37 * A focus on aftercare could be developed by To export, it is necessary to be able to produce a appointing a key official with responsibility for good or service that meets the requirements of regularly contacting existing businesses investing foreign buyers -that is, it must meet their product in Egypt. In the context of letting them know that specifications and deadlines, and the supply must their investments are highly valued, these visits be reliable). It is also necessary to be able to identify would be an opportunity to find out if companies potential clients and obtain a contract. The latter use domestic sources and if not why not; if requires knowledge of available technologies that something could be done to facilitate integration can be used to produce specific products; the know- with the local suppliers; and if the businesses could how necessary to bring existing plant to the level be encouraged to invest more in the country. This where it can meet foreign market specifications; inquiry should be done with care to avoid the access to labor inputs, raw materials, components, appearance being a high-pressure tactic. and capital equipment; and mechanisms to ensure * An environment friendly to FDI could be that quality standards are met. Many Egyptian created by attending to the details that affect first firms are weak in all these areas. Two deficiencies impressions: for example, visa requirements, in this respect are mentioned most often as being airport customs, and orderliness of taxi queues. particularly pressing. They are weaknesses in * Similarly, the potential of export processing marketing and establishing a presence in overseas zones to attract investments could be enhanced by markets by Egyptian firms, and the lack of attention providing "one-stop shopping," ensuring no given to meeting quality standards required by bureaucratic obstacles such as with customs and foreign buyers. Relatively little use is made of quality control. outside, independent certification bodies like SGS Forging buyer-seller links or Bureau Veritas. Such firms are established in Egypt. but their services are usually mandated by As in many of the 'tiger' economies, the foreign buyers and not demanded by local government has created support agencies for producers. Very few intermediaries exist that can exporting firms. In the tiger economies, these supply information services. Weaknesses in this bodies are compatible with and facilitate the efforts regard reflect historical circumstances: a relatively of firms and are especially important for those closed economy, with much of its manufactured small- and medium-sized enterprises with limited, exports occurring in the context of trade based on if any, export experience. Of course, they cannot negotiated protocols with former centrally planned and should not do the work of these companies, but economies. Marketing and associated skills were the services they do provide can make a critical not required in such an environment. Large foreign difference to exporters, and there are many retailers and other specialized buyers and trading outstanding examples of this happening. houses are generally absent in Egypt as buyers of Unfortunately Egypt's public export agencies are products. not sufficiently resourced or coordinated to offer * To meet this situation, the Egyptian govern- the kind of support common in many other parts of ment could create a single, one-stop-shop export the world. Their functions and activities are promotion center. This would require the constrained, inter alia, by limited resources, lack of centralization of Trade-Point, the Egyptian Export staff training and motivation, low public-sector pay Promotion Corporation (EEPC), and the GOEIC scales, insufficient permanent dialogue and into one agency to boost their effectiveness. Such an interaction with the beneficiary enterprises, and approach would liberate economies of scale thereby absence of financial and other inputs from the releasing both financial and manpower resources, latter. Were this deficiency compensated for by a enhance coordination, and boost productivity; it buoyant FDI marketplace -which can attract export should also lead to simplified customer service and activity by experienced overseas companies that do access. The exact nature of the new structure could not require assistance to export-then perhaps the be the subject of a task-force to include situation would be less grave. But this is not the representatives of the Egyptian Businessmen's case. 38 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH Association (EBA), the Federation of Egyptian business is done is required. Industries (FEI), possibly someone from a major Second, it could follow up with specific actions foreign exporter, say a Japanese trading house, and to help stimulate an export mentality and to both Egyptian small microenterprise (SME) and educate the public. The following are types of large company representatives. Possible outcomes action that have been used in some countries: could include: The prime minister could hold a monthly TV press- * A publicly fundedL agency with a private conference where export statistics are announced. sector-dominated board.. The board would give This can create an excitement and awareness about direction to the management of the agency, and in exports. It also contributes to an environment so doing would instill confidence in the new body friendly to the private sector by ensuring the timely among the private sector as a whole. availability of information. Retention of the existing bodies but with much * Annual national contests could be held that greater coordination, for example, by the Ministry reward entrepreneurs who open up new markets or of Trade and Supplies. The disadvantage of this introduce new products. The president could model is that it is unlikely to gain a vote of present awards, and there could be substantial confidence from the private sector, which is likely press coverage of the winners' activities. to continue to pursue its own interests. It also * A media campaign could be used to explain misses the opportunity to achieve a radical break the importance of exports. with past practices that have not worked. * Egyptian industrialists overseas could be * Entire responsibility for exports to be lodged encouraged to return to Egypt for 1 to 3 months to with a private body funded on a "performance work with sister companies. Or UNDPs TOKTEN bounty" basis. Quantitative performance could be (Transfer of Know-How through Expatriate measured by using nontraditional export growth in Nationals) program could be used to help bring the designated export sectors and in countries expertise and marketing know-how back to Egypt. selected by the body for targeting. For a qualitative In Egypt this program has so far been used only for measure, client companies could be asked for an academic and cultural exchanges. But in countries opinion on the new body's performance. such as Vietnam and China, it has been used * Enhanced information management systems, successfull, for industrial exchanges. and a data base containing information from Notes reports/studies such as area of reform, recommen- ded action, iniplementation status, and reference document. ~~~~~~~1. To give one of the more extreme examples of document. fee 'escalation" animal lard, fats, and margarine Creating an export mentality face a fee of LE 2 per ton if unprepared for retail sale; as opposed to LE 500 per ton if packaged for Current producers are content to service a retail sale. large, protected domestic market. They are 2 For example, the department of Customs comfortable in the current protected environment. 2. . . res onsible for admiisterin the temporar To create an export mentality, the government g vp ry admission and drawback systems is located in needs to set ambihious export goals, create an Cairo, not in the ports. environment in which goals can be met, and engage 3. The rationale is that small and medium sized in public relations policy campaigns. The firms may be financially constrained and/or government could do this in several ways. unaware of the need for ISO-9000 certification. First, it could set an ambitious export target and Creating such a fund on the basis of matching with strive to meet it. For Egypt's nontraditional exports firm's contribution should help accelerate ISO-9000 to reach $ 10,000 million by the year 2000 (an often- certification, an important step toward integration cited government targel), exports would need to with international standards. grow at an estimated amnual rate of 35 percent. 4 As currently constituted, the General Authority Setting such ambitious targets has the advantage of for Investient (GAFI) is basically a control agency making clear that tinkering on the margin will not and does not act to market Egypt, support investors be successful and that fulLl scale change in the way already in the country, and target new investors. PROMOTING OUTWARD ORIENTATION THROUGH EXPORTS 39 Chapter 5 Natural resource depletion and savings Wel before oil and gas resources run out in twenty years time, Egypt must develop other income producing assets to maintain the required rate of savings and growth. She may consider applying oil and gas revenues, now used to subsidize inefficient consumption, to developing human capital and infrastructure. So far we have addressed the general conclusion now as opposed to being saved for consumption in that Egypt could achieve additional GDP per the future? And in what should the resource rent be capita growth of 2.7 to 3.7 percentage points per year invested to support sustainable growth? by adopting sound policies that lead to a virtuous circle of higher growth and higher rates of saving Nonrenewable resources and investment. In addition several specific policy and institutional issues at sector levels need to be Nonrenewable natural resources have played an addressed, and we will do so in this and the important role in Egypt's economic development. following chapters. The central question is how These consist of oil and natural gas, which much more does Egypt need to save in order to contributed about 10 percent of Egypt's GDP during maintain its capital resource base - that is, to replace the 1990s (figure 5.1). The crude oil and petroleum the depletion of income generating assets resulting product exports have been close to $ 2 billion during from extraction of oil and natural gas. the 1990s, and accounted for roughly 50 percent of Countries that derive a significant share of their total merchandise export (figure 5.2).' national income from the extraction of nonrenewable Oil production increased almost four-fold during natural resources are faced with several issues 1975-84, from slightly more than 10 million tons to related to the sustainability of economic growth. more than 40 million tons, and has been relatively How important are noinrenewable resources in the stable at about 44-46 million tons since 1988 (figure macroeconomy? What are the effects on output 5.3). Marketable natural gas production also grew growth of the future rate of resource extraction? during 1975-84, and continued its increase from less How much of the resource rent should be consumed than 4 million tons of oil equivalent in 1985 to more FIGURE 5.1 Share of oil and gas sector in GDP FIGURE 5.2 (at constant prces; in percent) Share of petroleum exports Percentage Percentage 1 8~~~~~~.0. . .......... . ..... ... . . ............ ...... ........ .. . .... _.. -----l --- -- 16.0 00 14.0 ~~~~~~~~~~~~~~~80 12.0$ -__ 60 - 8.0 -_ _ _ _ i 2 0 l _ _ _ ____ _ _ _ _ _ _ _ _'_ _ 8.0~~~~~~~~~~~~~~~~6 20 __ n_ ° °-- 1991 1992 1993 1994 1995 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 Source: Egypt Ministry of Planning. Source: From data provided by the Central Bank of Egypt. 41 FIGURE 5.3 Oil and gas production being depleted, other forms of capital will have to be (million tons) created to replace the income generated from oil and gas. tonnage Based on estimates of the cost, normal return on capital, and economic value of oil and gas resources, 5000 ^~~t Oil the resource rent (see annex to this chapter) has been in the order of $ 4-4.5 billion a year during 1991- 3000- t wz ~ 95.2. The oil rent fluctuated between $ 3 and $ 4 2000- ~ l Gas billion but was generally decreasing; the gas rent increased from $ 0.5 to $ 1 billion (figure 5.4). The fluctuations in the oil and gas rent are due to 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 fluctuations in intemational crude and fuel oil prices. Overall the rental income from oil and gas as Source: From data p;ovided by the Central Bank of Egypt a share of GDP (based on current prices) declined from 14 percent in 1991 to 8 percent in 1995 tham 10 million in 1994. While a substantial share of (figure 5.5). oil is exported, natural gas is mostly consumed at home. FIGURE 5.5 home. ~~~~~~~~~~~Resource rentIGDP The oil resources are primarily extracted under (current prices; in percent) production sharing agreements by international oil companies whose output share corresponds to their cost of production and return on capital. Natural gas Percentage is produced under similar arrangements and the 20 18 -- - - - - - - -- - - - - . . price of gas received by the international companies 16-_ . is tied to the international fuel oil price. The resource 12 '------=--= - = - rent-the difference between the economic value of 10 : . i . oil and gas, and cost of production and return on 6-. . __1 capitalaccrues to Egypt. 2 . .. = _. . The issue of the resource rent has a significant 0 macroeconomic dimension. Oil and gas reserves, are 1991 1992 1993 1994 1995 income generating assets, like productive capital in Source: Bank staff estimates based on official statistics. the manufacturing, service, and agricultural sectors. As oil and gas reserves are finite, the reserves will Projected oil and gas rent only generate income over a confined time period. Projection of future oil and gas rent depends on Thus, as the nonrenewable reserves of oil and gas are the magnitude of new oil and gas discoveries, world FIGURE 5.4 prices of crude oil, production costs, and rate of oil Estimated oil and gas rent and gas extraction. Two scenarios are developed for the 20 years from 1995 for which assumptions are US $ millon, current presented in table 5.1. The difference between the 6000- two scenarios is a slower decline in oil production 5000 - - ----.--- ------ and higher real oil prices in the "high" scenario. 4000 Oil -- ~ - _______ Current gas reserves are at least 23 trillion cubic 3000 _ _ _ _ 7t __ _ __ _ _ ' feet, or close to 60 years of current production levels. 2000- _ __/_ __. _ __ Reserves are sufficient to allow an average annual -- _- Gas increase of 8 percent over the next 15 years and a o0 ___ stabilization of production thereafter beyond the 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 scenario time horizon. Thus, no distinction in gas productionrate is made between the two scenarios. Source., Wodd Bank staff estimates. Proven oil reserves stand at about 3.4 billion barrels, or 10 to 11 years of current productionlevels. 42 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH Thus, the magnitude of additional discoveries has a TABLE 5.1 bearing on production levels over the next 20 years Scenario assumptions for nonrenewable resources (oil as can be seen in table 5.1. Projections of future oil and gas), 1996-2015 prices entail substantial uncertainty. Reserve High case Low case In the high case, real oil prices increase at an Proven oil reserves (billion bbis) 3.4 3.4 annual rate of 1.5 percent, while they are constant in Additional oil discoveries (billion bbis) 1.7 0.6 Gas production increase (percentage/yea,) the low scenario. The oil rent is 70 percent of crude Year 1-15 8.0 8.0 oil prices in both scenarios (the same as in the 1990s). Year 16-20 0.0 0.0 The gas rent is fuel oil price minus long-run Oilproducion increase (percentageyear) 0 0 Year 1-6 0 0. marginal cost of production (see annex to this Year 7-20 -5.0 -7.5 chapter). llncrease in real crude and fuel oil prices 1.5 0.0 The projected oil and gas rent for the 20 years (percentage/year) r rs . s . . . s . ~~~~~~~~~~~~Source: World Bank staff estimates. from 1995 in the high case scenario is presented m figure 5.6. It shows an increase in rent for the first 7 Corporation (EGPC). EGPC exports and sells years, peaking at $ 800 million higher than the level domestically Egypt's oil production share, whether of rent in 1995. The projected oil and gas rent does crude or refined products. EGPC also manages oil not fall below 1995 levels until after year 18. The product imports and sale of natural gas. projected rent in the low case scenario is presented m Most of central government revenues from the figure 5.7. In this case, the oil and gas rent peaks at oil and gas sector are from taxation of and profit about $ 400 million higher than the 1995 level after 6 transfer from EGPC. Given production sharing years. The rent falls below the 1995 level after 8 years con*acts with interational partners and a policy by and by $ 2,600 million in year 20. EGPC of retaining after-tax profit, the maiin factors The low scenario may be the reality of the future, that affect the level of goverment revenues are urdess substantial new oil reserves are discovered 'n magnitude of oil and gas production, international the next few years. The decline in oil and gas rent oil prices, and domestic petroleum product prices. coiild have negative inmpacts on future income tn r ' could The n vpact s on future income in Thus, keeping domestic petroleum product prices Egypt. The impact on future iode d l below economic value implies a loss of goverunment on the use of the oil and gas rent today. revenues and is a way of distributing the resource rent among the general population. The competing use of the oil and gas rent Consumption The rent from the Egyptian oil and gas rent has Three obvifrous uses: Egypirs uli cndgasumnti Historically, a substantial share of the rent has thre obiou uss: irs, pbhcconumpion been distributed to the population, although expenditure that does not increase the productive capacity of the economy; second, public investment FIGURE 5.6 that does increase the productive capacity, either Egypt's projected oil and gas revenue over 20 years, through investment in physical income generating 1995-2015-high-case scenario capital or investment in ]human resources; and third, investment in income generating financial assets- that is, an oil and gas fund. It can be argued that Egypt's policy has been and is a combination of the three. Some aspects of the possible use of the oil and am_ gas rent are discussed below. -- - The public sector has the dominant role in ° - allocating the oil and gas rent. Most of the rent is 4 .0 made available to the central government budget; the rest is used to cross-subsidize operations of .° =-=- -=------ public sector companies or invested by these ss companies in gas transmission and distribution infrastructure. The main domestic player in the oil and gas sector is the Egyptian General Petroleum Note: Rent is relative to 1995 level. Source: World Bank staff estimates. NATURAL RESOURCE DEPLETION AND SAVINGS 43 FIGURE 5.7 gasoline price in Egypt remains substantially below Egypt's projected oil and gas revenue over 20 years, the price prevailing in, for instance, Tunisia, 1995-2015-low-case scenario Morocco, and most Eastern European countries (and all Western European countries). caistt US Implicit subsidies, in total dollar terms, to diesel 150-. __ .____ __ and kerosene declined substantially from 1991 to -000 1995, while subsidies to fuel oil only declined by 13 percent. In terms of combined subsidies to the four o____ ___ E_____E s ] N : _ products in 1991 and 1995, about 65 percent of the -1200D- reduction can be attributed to nominal retail or -1500- - delivery price increases in Egypt, 27 percent to a -2 _ decline in international spot prices, 11 percent to -25D - -234507891011121314151 =7181~ Plower domestic consumption and -3 percent to the 1 2 3 4 5 6 7 8 910111213141S1617181920 slight nominal depreciation in the foreign exchange Yeas rate. Increased gas consumption, which occurred Note: Rent is relative to 1995 level. despite an increase in bulk gas prices of more than 60 Source: World Bank staff estimates. percent, had the effect of significantly increasing the ueecconsumption implicit subsidies to gas between 1991 to 1995. unevenly, in the form of indirect consumption Although the estimated subsidies are indirect or subsidies (prices lower than opportunity cost). Not implicit in the sense that they are not budgetary but only did this benefit larger consumers more, that is, prevail as a consequence of price regulation, the relatively wealthier, but it has also resulted m nevertheless, the subsidies repTesent a large bud- excessive consumption, waste, and inefficient getary revenue loss. The subsidies are estimated at economic allocation of investment resources. 45 percent and 24 percent of the estimated oil rent in Moreover, these subsidies can be considered a tax on 1991 and 1995, respectively. the future generation as the oil and gas reserves that would be available are being diminished. Invesfment Petroleum product retail/deliveryprices and gas prices have been adjusted upwards substantially The use of the oil and gas rent on public since 1990, although they have in real terms expenditures for current consumption does not deteriorated significandy since 1993. Estimated provide a basis for sustainable economic growth if it subsidies for major petroleum products and gas are is accompanied by underinvestment in the presented in table 5.2, and amounted to $2,000 economy's productive capacity in other sectors. Such million in 1991 and $ 1,050 million in 1995. For underinvestment could be drawing resources from petroleum products, the estimates are based on areas such as health and education (to increase petroleum product prices and consumption in human capital) or basic infrastructure (to support Egypt, and international spot prices plus allowances and increase efficiency of economic activities) where for distribution cost (see annex to this chapter). public sector contributionis needed. Distribution cost from refinery to retail outlet or delivery used in the estimate is one-half the costs in Estimated implicit subsidies to major petroleum the United Kingdom and Germany. For gas, the products and gas estimate is based on bulk prices and consumption of (millions of $) gas, and internationalfuel oil prices (FOB) as a proxy Fuel 1991 1995 for the economic value of gas. Gasoline -50 -295 The only major product with an implicit tax (in Gas oil/diesel 725 235 negatives) is gasoline, and the implicit tax has Kerosene 430 110 increased substantially as a result of domestic price Heavy fuel oil 520 450 increases. However, if the gasoline retail price were atual 2,000 1,050 to reflect the cost of road infrastructure and social Total 2e000 tl( a4 cost of traffic accidents and pollution, it should be Soutre:lWored Bankstaff estimates. significantly higher than the current level. The 44 EGYPT IN THE GLOBAL EcoNoMy: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH To illustrate the possible scope of such losses, a TABLE 5.3 range of rates of return for alternative uses of Illustrative rates of return on public subsidies government revenues-resource rent is presented in (percentage) table 5.3. Returns to energy subsidies are estimates Subsidy Rate of return for Egypt in 1995. They are based on estimated Energy -5.5 to -7.1 subsidies and their efficiency costs in leading to Education Primary 1 o2 higher energy consumption. Returns to education Secondary 11 to 18 are cross-country estimates; returns to infrastructure Higher 10 to 12 are averages for World Bank projects during 1974- infrastructure Transport 18 to 21 92. These rates of return can only serve as indicative Irnigation and drainage 13 to 17 for Egypt. Return to education clearly depends on Source: Energy: estimate for Egypt in 1995. Education: Psacharopoulos 1994 more than education expenditure, and can be greatly (the range reflects estimated averages for and differences across regions of developing countres); Infrastructure: World Bank projects (1974-82 and affected by variables in quality of education and by 1983-92) presented in World Development Report 1994 (retums to transport labor market policies. Similarly, return to projects are averages for airports, highways, ports, and railroads). infrastructure would depend on factors such as the level and quality of current infrastructure. cushion a decline in future oil and gas rent. Still to be An eventual decline i,n oil and gas rents could be resolved, however, are two questions: how large compensated for by higher private sector would such a fund have to be if it is to generate an investment, as envisage(d in the low case scenario income equivalent to the rent lost through the presented in figure 5.8. Incremental annual reduction of oil and gas production revenues, and investment would start in year 6 to meet rent decline how much should be placed in the fund each year? from year 9. The estimated annual incremental The latter depends largely on three parameters, that investrnent to yield an income (incremental GDP) is, the annual oil and gas production to the year of equivalent to the amnual rent decline is based on an depletion, the future price of oil and value of gas, incremental capital-output ratio of four and a and the rate ot return on the financial assets. A straight line depreciationrate of 10 percent. substantial degree of uncertainty is associated with the first two parameters. Oil and gas fund The low case scenario is used to estimate the annual contribution to the fund. This assumes new An alternative, or supplementary, use of the oil oil discoveries of 20 percent above known reserves to and gas rent, already adopted by Egypt, is to invest be added to current reserves, and constant real prices the rent, or part of it, in financial assets to of crude oil and fuel oil. The real rate of return on the compensate for the depletion of income generating financial assets of the fund is assumed to be 4 oil and gas. Many oil and gas producing countries percent. Annual contributions to the fund are have established such funds. In doing so, Egypt has taken a step in the right direction, but still has further FIGURE 5.8 to go. Annual incremental investment over 20 years to Egypt's fund from oil and gas revenues stood at compensate for decline in rent in low-case scenario about LE 5.1 billion ($ 1.5 billion) in fiscal year 1995/96. The fund increased from LE 0.8 billion in Constant US$m 1989/90 to LE 3.8 billion in 1990/91 and has 2500 increased modestly in each succeeding year. The 2000 - - - fund is raised through the issuance of bonds, 1500 __ __ ____ primarily held by EGPC. The fund serves as an oil 'moo _ _ _ - ---- revenue stabilization furtd in the event of declining 500 ____ __ intemational oil prices. The purpose of the fund is 0 *- l l- a* i | also investmnent and development of altemative 1 2 3 4 s 6 7 8 9 1011 121314151617181920 energies to reduce domestic dependence on Years consumption of fossil fuels. Indirectly, the fund also serves as a transfer of oil rent from the present to the future. As such it could source: World Bank staff estimates. NATURAL RESOURcE DEPLETION AND SAVINGS 45 presented in figure 5.9, and amount to two-thirds of production of 7.5 percent a year from year 2002. In the projected annual oil and gas rent in the period this case, the combined oil and gas rent would fall before depletion begins. A contribution at that level below the 1995 level in year 2004 and thereafter would obviously have significant negative impact on decline rapidly to only 40 percent of the current level current income. Fostering private sector investment in year 2015. and investing in priority infrastructure, quality Although declines in oil and gas rent may be education, and health improvements seem like avoided during the next 6 years, alternative uses for viable alternatives to the anticipated future decline of oil and gas revenues during this period deserve oil and gas rent. serious consideration. Petroleum product and FIGURE 5.9 natural gas prices have been raised significantly AnnURE5. contributions to Egyptian oilrevenuesince 1990, but have declined in real terms since Annual contributions to Egyptian oil revenue stabilization fund, from 1995 (low-case scenario) 1993. Estimated implicit subsidies to petroleum products and gas stood at more than $ 1 billion in 1995, or 24 percent of the resource rent. Constant US $ m Estimates of the efficiency cost of energy 4000 subsidies in Egypt in 1995 suggest that energy 3500 subsidies have a rate of return to the economy of -5.5 3000 -- -_ percent to -7.1 percent. In contrast, well spent 2000 - investments in education and priority basic 1000 - _ __ infrastructure could yield a return on the order of 500 ___ 15-20 percent. Fostering private investment already 0- >-- ----- - ----!-- i 1- X- -4---1 forms part of Egypt's growth strategy. Incremental 1 2 3 4 S 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 private sector investments, rising to $2 billion a year Years (above current levels) by the year 2014, would compensate for the anticipated decline in resource rent from oil and gas. Source: Bank staff estimates based on official statistics. The policy implication is clear. Egypt could maintain its income generating assets by directing Summary and conclusion resources toward human and infrastructure investment. This can be achieved by reducing the Nonrenewable resources account for importantt implicit energy product subsidies that result in more parts of the economy with oil and gas production at rapid depletion of nonrenewable resources and low 10 percent of GDP, and oil and petroleum product resource efficiency. exports at about 50 percent of total merchandise exports. The resource rent-that is, value of oil and Notes gas less production cost and normal return on investment-is estimated at about $4.4 billion, or 8 1. Petroleum exports (crude and products) and percent of GDP. merchandise export figures do not include exports The level of future oil and gas production and by international oil production partners. consumption could have significant bearings on 2. The economic value of oil is the price of Egypt's future output growth. Two scenarios of projected oil crude oil, while the value of gas is approximated by and gas rent have been envisaged. The "low" the price of heavy fuel oil (FOB), heavy fuel and gas scenario could become the reality-a decline in oil being close substitutes. 46 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH TABLE 5A.1 A nnex " Prices of Egyptian crudes, 1996 (average differentials relative to Dated Brent: $/bbl) Crude First quarter Second quarter July-August Egyptian crude oil prices Suez Blend -1.33 -1.63 -2.45 Ras al-Bihar -0.95 -1.03 -1.60 Zeit Bay -1.00 -1.08 -1.65 The Egyptian crude oil prices have traditionally Belayim -2.03 -2.36 -3.13 been set on the basis of a formula with weighted Ras Budran -2.18 -2.54 -3.33 average differentials to selected internationally Ras Ghab -3.03 -3.44.18 Source: Calculations based on monthly differentials published in Arab Oil and traded crudes; of these Dated Brent was the most Gas (various 1996 issues). important (see figure 5A.1 for historic annual average price of Dated Brent). The formula was Economic value of natural gas simplified in January 1996 with export crude prices set relative to the Dated Brent. The average Natural gas produced in Egypt is consumed differentials of major Egyptian crudes to the Dated domestically and there are so far no pipelnes for Brent are presented in table 5A.1. The differentials export. An export parity price is therefore not are reviewed monthly. available. Natural gas consumed domestically is FIGURE 5A.1 largely replacing the use of petroleum products in Price of Dated Brent power plants and industry. The petroleum product MOWb, replaced is predominantly heavy fuel oil. The price of heavy fuel can therefore serve as a reasonable -35 __ _ ,_ = proxy for the economic value of natural gas. In fact, 30 - _ _ production agreements with international oil 25_- _ _ J companies in Egypt set the price of natural gas 2__ _ _ I received by the oil companies relative to the 10 __ __ international market price of heavy fuel oil. The o annual average international spot price of high sulphur heavy fuel oil is presented in figure 5A.2. 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 Years Calculation of oil and gas rent Source: Energy Prices and Taxes; OECD. The annual realized oil and gas rent is the economic value of annual oil and gas production, In the pricing formula prior to 1996, the Suez less costs of production and normal return on capital. Blend served as a reference crude, and the price was The economic value of the oil is the Egyptian crude tied through price diffe:rentials to the Dated Brent oil prices multiplied by the quantity of the respective and the Iranian Heavy crude by a weighting crude production volumes. The economic value of formula. The other Egyptian crudes were tied to the the natural gas is the international high sulphur Suez Blend. The Suez Blend pricing formula with heavy fuel oil price multiplied by the number of tons differentials during 1992-95 are presented in table of oil equivalent of gas 5A.2. The price differentials of the other Egyptian crudes relative to the Suez Blend during 1992-95 TABLE 5A.2 were in the range of -3.85 (in $ per barrel, i.e. cheaper Price of Suez Blend, 1992-95 by $ 3.85) to + 0.65 (more expensive). (differentials relative to crudes in weighting formula: $/bbl) Production of Suez Blend crude was about Weiht 32 percent of total production in 1993 (against about Crude (percent) 1992 1993 1994 1995 32 percent in 1992), Ras Gharib about 20 percent Dated Brent 60 -2.4 to -3.2 -2.8 to -3.2 -1.2 to -1.7 -0.6 to -1.9 (22.5 percent), Ras Budran about 19 percent Iranian Heavy 20 -0.5 -0.5 -0.5 0.0 to -0.5 (12 percent), Ras al-Bihar about 14 percent Suez Blend 20 parnty panty parnty parity (11.5 percent), and Belayim about 13.5 percent Source: Arab Oil and Gas (various issues 1992-95). (19 percent). 47 Figures for the cost and normal return on capital FIGURE 5A.2 in use for oil production are not readily available. Heavy fuel oil price However, since most of Egyptian oil production is under production sharing contracts with VW international oil companies, the oil companies' 30 production shares serve as a good proxy for the cost 25 _ _ - _ _ and return on capital. The aggregate annual 20 --------------------- production share has been in the neighborhood of 15- -_--- - A - 30-33 percent in the five-year period between 1990 10 and 94. Thus, the oil rent is estimated at 67-70 s -- - - percent of the economic value of crude production. 0 The most recent years are more relevant for assessing 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 both the role of the rent in the Egyptian economy Year today and future policy associated with the rent; less emphasis has therefore been placed on an accurate calculation of the rent in the earlier period of the Soure Energ Prices and Taxes; OECD 1970s and 1980s. Thus, the rent calculation has been based on 70 percent of the crude oil value, although since the mid-lo 80si while Petrobel's output has been this may understate the rent in periods of high oil inceteid-i ThescowhileePetaober'seoutputnhassbeen increasing. The companies have recently intensified prices and overstate the rent in the 1970s. efforts to increase recovery rates from existing fields To obtain figures for natural gas, British Gas . . calculated long-run marginal costs for EGPC m 1994. The costs are summarized in table 5A.3. The long, lft and water injection) and by developing new The coss are smmarize in tabe A.3 Th long extensions to their fields. These measures contribute run marginal cost of existing fields have been .signi to sustain es toal annual applied to calculate the gas rent of current and productle However, p tio fom new historic gas production. For historic years, the costs field discoveries tends to be relatively low. Four have been deflated. fields started production in 1994 with a total Oil and gas reservesandproduction production capacity of 35,000 barrels per day, or about 3.9 percent of total annual production from all Proven oil reserves in Egypt stood at about 3.4 productionfields. billion barrels as of January 1, 1995, equivalent to Natural gas reserves were estimated at about 21 about 10 to 11 years worth of production at current trillion cubic feet in 1995, or almost 600 billion cubic annual production levels of about 45 million tons. meters. In contrast, annual production in 1995 was a Proven reserves have been relatively constant for little more than 10 million tons. Gas production has several years, implying that recent discoveries have increased at an annual rate of 8 to 9 percent in the replaced annual production. However, output from 1990s, and Egypt's policy is to continue gas existing fields is projected to decline over the coming production at or about this rate of increase. If annual years. Thus, substantial discoveries will have to be production is increased at an annual rate of 8 percent made to sustain annual production at about 44 to 46 until it reaches about 30 billion cubic meters, and million tons. then levels off at around 33 billion cubic meters, the reserves of almost 600 billion cubic meters will last Of 23 principal oil fields in Egypt, SIX were discovered in the 1980s. Seven fields account for TABLE 53 about 80 percent of total oil production. Gupco, Long-run marginal cost of gas exploration and Petrobel, and Suco are the three largest operators in production, 1993/94 Egypt, accounting for slightly more than 80 percent ($ per 1000 cubic meters) of total oil production. In 1993, Gupco's annual oil Gas fields Base case Most likely case production stood at somewhat more than 20 million Existing fields 11.1 11.1 tons, Petrobel's production at a little over 12 million Existng discoveries 38.3 37.7 tons, and Suco's production at almost 4.5 millon Unproven reserves 40.5 40.3 tons. Source: Calculations by EGPC/Brtish Gas. 48 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH for at least 20 more years, and it is unlikely that no The annual deadweight loss (DWL) can be more discoveries are madle. estimated in two steps: Petroleum product and gas subsidies Retail (end-user) prices in Egypt for major petroleum products and gas bulk prices are where Qe is energy consumption (tons) in the presented in table 5A.4. All prices were substantially absence of subsidy, Qs is energy consumption (tons) increased from 1990 to 1993, but have not been in the presence of subsidy, ps is the subsidized adjusted since 1993. Although budgetary subsidies to energy price (LE/ton), pe is the price at economic petroleum products are almost nil, price regulations value of energy (LE/ton), and e (<0) is the price have kept retail prices below economic value or elasticity of energy demand. opportunity cost for all major products except gasoline, implying that implicit subsidies prevail. (2) DWL= (pp)(Qs - Qe)/2 Efficiency cost of energy subsidies with a linear approximation of the energy demand Historic energy subsidies in developing fucto inter.vnpierne countries have been substantial for many reasons. Based on the consumption of major petroleum Policy makers' arguments have included protection ducts one kosene, of diesel, ue of the poor and of infant industries. However, oil) and natural gas, domestic prices, and estimated subsidized energy prices (direct budgetary transfers economc value of the products and gas, estimates of and price regulations) provide reduced incentive to edeadwe os in 1995 are prestinatable use nerg effcietly,resutin in xcesive the deadweight loss in 1995 are presented in table use eergyeffiienty, reultig inexcesive 5A.5 for vanious assumption of the price elasticity of consumption compared with the level that would d femand. prevail if prices reflected the opportunity cost of energy. A methodology often used to assess the annual TABLE 5A.5 efficiency cost of subsidies is the estimation of Estimated annual deadweight loss in Egypt (1995) deadweight loss. The deadweight loss can be seen to Elasticity Deadweight loss Deadweight loss represent the resource waste in the economy. When a of demand (US$ million) (percent of estmated subsidy) subsidy is removed, users of energy will tend to -0.3 58 5.5 reduce energy consumption as long as energy -0.4 75 7.1 efficiency improvements and conservation cost less 0.5 92 8.7 than the increase in thLe energy price. Thus, the Source: World Bank staff estimates. difference between the economic value (opportunity cost) of energy saved, and the cost of saving energy, The DWL as a percentage of estimated subsidies is the deadweight loss (or resource waste) in the can be seen as the (negative) economic rate of return presence of a subsidy. to providing energy subsidies. TABLE 5A.4 Petroleum product end-user prices in Egypt 1990 1990 1991 1992 1992 1992 1993 Product Unit May September May January June December July Premium gasoline LE/Atr 0.55 0.60 0.80 0.80 1.00 1.00 1.00 Regular gasoline LE/Atr 0.50 0.55 0.70 0.70 0.90 0.90 0.90 Kerosene LE/ltr 0.10 0.10 0.20 0.30 0.30 0.30 0.40 Gas oil LE/ltr 0.10 0.10 0.20 0.30 0.30 0.30 0.40 Gas oil (for power) LE/ltr 0.15 0.15 0.25 0.25 0.35 0.35 0.45 Diesel oil LE/ltr 0.09 0.09 0.18 0.27 0.27 0.27 0.36 Fuel oil LE/ton 50 50 80 80 100 130 130 Gas (bulk) LE/th n9 46.7 46.7 75 75 94 122.5 122.5 Source: As published in various ministerial decrees. NATURAL RESOURCE DEPLETION AND SAVINGS 49 II Chapter 6 Increasing long-term savings to build the basis for growth Egypt has a golden opportunity to catch up with fast growing economies by shifting public enterprises to pnivate hands, thereby triggering public and corporate saving. As financial sector reforms increase household saving, privatization in life insurance and pension reform together could promote private saving through development of the capital market. The scope for further expenditure reductions is effects, privatization could stimulate saving limited, and fiscal revenues remain volatile indirectly. For example, if the proceeds from sales (chapter 3). How, and by how much, could Egypt are used to retire public debt, this could lead to a increase public sector savings? Furthermore, given reduction in the size of government through lower the favorable demographic trend in Egypt-that is, taxation, with favorable effects on public saving a stable elderly population, and rapid growth of the (Sachs 1996).1 Another example relates to the working-age population (Shi and Yang 1996)-how favorable effect of privatization on the could private savings be encouraged? competitiveness of industries if it were to lower the cost of producing intermediate goods and services Increased savings lfrom privatization and (for example, power, telecommunications, services). public enterprise reform Finally, privatization could contribute to saving indirectly by boosting capital market development, It is often thought that countries like Egypt are which has been shown to contribute positively to unable to compete in a more globalized world growth (ILevine and Renelt 1993). because they are saddled with large, inefficient PE The positive link between privatization and sectors. The irony is that the same countries can be saving has important implications for countries said to have an opportunity to gain rapid keen to grow fast but unable to wait for savings to productivity growth by shifting the assets of PEs to accumulate from economic growth. To such more efficient use. The fact that the gains from countries, privatization, along with other reforms reforms, especially in terms of savings, can be (for example, of pension funds), can help jump-start substantial suggests that some countries have a real the growth process, thereby creating a virtuous opportunity to break the vicious circle, and begin a circle of saving, investment, and growth. An process of catching up with the fast-growing important question in this context is: how is it economies. Egypt is one of those countries. possible to raise saving from reform of PEs, and Privatization could increase savings, in part what is the magnitude of the potential increase in because the transfer of ownership to the private savings from privatization? The methodology used sector is associated with higher productivity (Galal in addressing these questions is based on and others 1994; World Bank 1995). Higher comparing the saving from the PE sector under productivity, in turn, generates more resources, continued public ownership and its saving under which can either be consumed or saved. In the counterfactual scenario of privatization and addition, privatization could attract savings from commercialization.2 Because the potential gains in abroad, which may not occur without privatization. saving depend on the initial conditions of the PE This typically happens when specialized sector (including its level of efficiency and size), we multinational firms buy such enterprises as power start by measuring the past performance of the PE and telecommunications. Beyond these first-round sector, and exploring the roots of the problem. 51 The PE saving-investnent gap and its roots Of course, whatever gap Egypt's PEs accumulated in the past had to come from Availability of consolidated accounts for the elsewhere in the economy: the government budget, entire PE sector in Egypt limited the analysis below domestic saving, foreign borrowing, or a mix of all to 356 enterprises.3 These enterprises operate in three. As can be seen from figure 6.2, the almost all branches of the industrial sector, but the government clearly carried the bulk of the burden, few missing PEs, known as the "economic although the budget's contribution fell dramatically authorities" in Egypt, are relatively important ones, in recent years. The banks were the second major and include such large entities as the Suez Canal, contributor to PEs, and this contribution increased telecommunications, power, and the railway. The in recent years to partially offset the reduction in bias in the sample favors PEs, given that previous budgetary transfers dictated by tighter fiscal analysis has shown that the economic authorities policies. The shift of financing from the government tend to perform less well than other PEs on average budget to the banking sector could pose problems, (World Bank 1987). given that banks are also publicly owned; this The PE saving-investment (S-I) gap is defined means that commercial criteria may not have been as the difference between the PEs' current surplus, followed in allocating these funds. before transfers to or from the government, and their fixed capital formation. Current surplus is FIGURE 6.2 defined as operating revenues minus operating Egyptian saving-investment gap and its sources of expenditures, plus net nonoperating income before finance, 1987188-93194 MVi.. of LE taxes and dividends. For the sample analyzed, the -000 ___ _ gap for the PE sector in Egypt averaged -2 percent . " of GDP over the period 1987/88 to 1993/94.4 This - 1 _ gap is notably higher than the average of 0.4 2000 1 > - percent for 46 developing countries (figure 6.1), but -- ; the Egyptian PEs did better over time. The S-I gap reversed from -7.3 percent of GDP in 1987/88 to a surplus during 1991/92-1993/94. Since then, the i _ PEs in Egypt have 'oeen self-sufficient, generating 000 most of tie resources they needed for operation - - - and expansion. -0-ou - _ _ _ _ _. Source: Calculated from CAPMAS data (varous issues). FIGURE 6.1 While a smaller PE S-I gap is desirable because Saving-investment gap as a percentage of GDP in Egypt i frees sourcer tE mor producive priate and 46 developing countries, 1987-93 it frees resources for the more productive private Perce-t of GDP sector, the way this gap is reduced matters. 2 1 Unfortunately, the improvement in the S-I gap of 1- 46 devloping , the PE sector in Egypt came primarily from a Cowits ,, ' reduction in capital expenditures, rather than from ° -- -- --R-----3g -i-- -- - a; 1 an increase in saving (figure 6.3). Capital .1 - - , expenditures were cut sharply twice (in 1988/89 * * ,' and 1991/92), and never recovered since. At the .31. 8 Egypt " 8 ' same time, saving as a percentage of GDP has -3 , v ^ #deteriorated between the beginning and the end of the period. The reasons for the deterioration in saving are .5 ,' low rates of return on capital and low productivity. _____________ j__-~ ~ Egyptian PEs were not net losers on average, but they made only modest rates of return on capital (figure 6.4).5 Between 1986/87 and 1993/94, their Source: Developing countries: World Bank (1995); Egypt: computed from ope surplu ree to apd was CAPMAS data (various issues). operating surplus relahve to capia employed was 52 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH FIGURE 6.3 average performer. Moreover, the performance of Saving-investment gap of PEs in Egypt, 1987188-93194 the sector lags significantly behind those of such P.,.nt GOP _ _ successful reformers as Korea, Chile, and Mexico. r0 - The roots of the modest performance data of 8 lPEs in general are relatively well known: e o N _ _ The government has overextended itself in 4 !: _ commercial areas not suited for public ownership. * Managers of PEs face little incentive to - ~ -> behave efficiently or to respond to consumer tastes ° r----- --- - ------ ,-St -- ~and market conditions. *2 -° ja.5.;,p rD E To be sure, the government has attempted to -47 ," "',' , address the two causes of the problem of PEs in __ ! Egypt. With respect to privatization, a process was initiated a few years ago, and picked up more Source: Calculated from CAPMAS data (various issues). steam in 1996. Not only did the proceeds from sales increase in the first nine months of 1996, but the 11.9 percent, which is relatively low given that the nature of privatization changed in favor of the sale surplus represents the returns to owners as well as of majority stake, in some cases to anchor investors. lenders. Profit-, net of taxes and subsidies to net So far, the government has sold stakes in 39 worth reflect an average return below the deposit companies (figure 6.5); the private sector acquired a rate over the last few years. Finally, the rates of majority of the shares in 18 of these (4 acquired by return on revalued capital only averaged close to anchor investors and the remaining 14 sold on the 5.5 percent during the period. stock market). In addition, the government sold a Productivity is difficult to measure for the majority of the shares in 11 comparnles to entire PE sector, in part because no meaningful employees, along with the partial sale of 21 composite price indices exist for outputs and enterprises on the stock market. The total proceeds inputs. However, a comparison between real per from sales to date are ,ust below$ 1 billion. unit variable cost and operating surplus to sales of As for commercialization. the government has the PE sector in Egypt and a sample of eight also made substantial progress. It incorporated PEs countries indicates that thie PE sector in Egypt is an under Law 203 and provided a framework in wvhich a legal distinction has been rnade between FIGURE 6.4 Financial performance of public enterprises in Egypt, FIGURE 6.5 1986187-93194 Proceeds from privatization of Law 203 companies in Percat Egypt, 1994 to September 1996 14_xd _ _, LE Not weiafing l~~~amo 11 SpliS ~ 40+0 E 0 o 6j ~ ~ e ( -0 -- 8 _._ _ _ I Cl 1200 O t 0 - 0 Ł Source: Calculated from CAPMAS data (various issues) Source: From data provided by Public Enterprise Oflice. INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 53 TABLE 6.1 Potential gains in savings from reforms: a Estimated increases in savings from simulation reforming PEs: total NPV of profits Total increase Annual increase in Assuming that the government undertakes the before taxes in savings savings necessary reforms to improve the performance of Type of reform (millions of 1995 LE) (percent of 1995 GDP) the PE sector, how much additional savings will 50 percent such reforms bring about? priatization 89,879 In answering this question, the emphasis is 50 percent epai commercialization 132,095 42,216 2.1 centered on the addition to savings as a result of 50 percent privatization, rather than on the budgetary impact 50ppercent of privatization. This means that what matters is commercialization 140,032 50,153 2.4 whether or not privatization and commercialization Source: Calculated from CAPMAS data (various issues). generate additional resources that could be consumed or saved by the public or the private ownership and management responsibilities. In this sector.6 As argued at the outset, these additional context, budget transfers to PEs have been reduced, savings could come from behavioral changes at the and the banking sector is being encouraged to lend firm level, such as improved productivity and to PEs on commercial grounds. Competition has increased investment. The next section elaborates been enhanced by opening up the economy and the methodology followed to estimate the addition allowing the private sector to participate in many to savings. sectors previously reserved for PEs. Finally, 17 Simulation results. Based on the assumptions holding companies were formed with a view to (box 6.1), privatization and commercialization of giving managers more autonomy in the sample of PEs analyzed are expected to bring decisionmaking. about additional savings to Egypt to a magnitude Notwithstanding the progress on privatization of 2.4 percent of GDP (table 6.1). For reasons and commercialization, success in reducing the explained above, the gains from privatization (2.1 relative size of the sector to restore a healthy percent of GDP) are much more substantial than balance between the public and private sectors in from commercialization (0.4 per-cent of GDP). the economy remains to be seen. On the More significanty perhaps, given that the FE commercialization front, some PEs still receive sample analyzed only represents about a third of subsidies.Theihardbudget constraintwas imposed the PE sector in Egypt, the addition to savings by cutting investment, with limited progress on could be much more. Indeed, unless returns on the measures to improve saving. Banks have not been gains in savings diminish unexpectedly, they could prudent in lending to PEs. The holding companies be as high as 7 percent of GDP. This is about the are proving to be less than keen on privatization, as size of the gap Egypt needs to bridge if its it diminishes their power. In short, despite the saving/investment ratio to GDP is to increase improvement in the PE S-I gap in recent years, the sufficiently to match the fast-growing economies. sharp cut in investment and the relatively low rates The gains in savings from privatization and of return on capital suggest that there is some room commercialization would be made by both the for squeezing more savings from reforming the PE government and the private sector. Table 6.2 shows sector. the distribution of these gains between the two of TABLE 6.2 Estimated increases in savings from reforming PEs, by govemment and private sector Total increase in savings Annual increase in savings (millions of 1995 LE) (percent of 1995 GDP) Type of reform Govemment Private sector Total Govemment Private sector Total 50 percent prvatzafion -17,751 59,967 45,216 -0.9 2.9 2.1 50 per cent commercializabon 7,937 0 7,937 0.4 0.0 0.4 50 percent pnvatzation and -9,814 59,967 50,153 -0.5 2.9 2.4 50 percent commercialization Source: Calculated from CAPMAS data (various issues). 54 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH them, witlout taking into account the price to be paid by the private sector to the government for the BOX 6.1 purchase of 50 percent of PEs in the sample. The Methodology and assumptions effect on saving is positive (2.4 percent of GDP). The potential gains in savings from privatization and commercialization of the PE sector are obtained by subtracting Finally, table 6.3 shows the gains in savimgs the net present value (NPV) of profits before taxes under from privatization and commercialization by continued public ownership (or the factual scenario) from the origin. The gains are split almost evenly between NPV of profits before taxes under privatization and origin, ~~~~~~~~~~~~~~~commercialization (or the counterfactual scenario). To this end, investment and productivity. More interestingly, three scenarios are first constructed. however, the gains to the country are greater when The No-Reform scenario, in which the current performance of both behavioral differernces are present because of the sector is projected into the future by extrapolating the sector's revenues, costs and investment according to their synergies, or the interaction between productivity historical trends. The projections are made for all items in the and investment. When both are present, a larger income statement and balance sheet. Profits before taxes are stock of resources is used more efficiently, and then discounted at 10 percent to obtain the NPV under the No- there is a compounded effect on performance, and Reform scenario. The Privatization scenario, in which the performance of the thus on savings. sector is also projected into the future, but under the Sensihivity analysis. Given that the results assumption that productivity will improve annually by 1.5 depend on the assumptions made, it is useful not percent, and investment will increase annually by 20 percent relative to fixed operating assets. The same procedure with only to separate the effect of each assumption from respect to discounting is then applied as in the No-Reform the effect of the other, but also to explore the scenario. The result is another NPV of the sector, representing sensitivity of the results to these assumptions. The one extreme counterfactual scenario (100 percent separation of the impact of each assumption has The Commercialization scenario, in which the performance of already been done, and can be used by the reader to the sector is projected into the . future, assuming that accept or reject anv of the assumptions and still commercialization will lead to an improvement in productivity of 1 percent per annum, accompanied by no change in obtain useful results. The remaining issue is to investment behavior. The result is an NPV of the sector, explore the sensitivitv of the results to the key representing another extreme counterfactual .;cenario (100 assumptions. This is done here, and presented in commercializaticn). table 6.4. The table shows the results under two From these three NPVs the additin to saving estimate by making the realistic assumption that the government will sell extreme scenarios: full privatization of the sample only half the sector and commercialize the operation of the of PEs analyzed, and full commercialization. For rest. In all instances, the NPVs are calculated by discounting each of these scenarios, the results are shown for the streani of benefits antdhe osum ofer the reus tofthembuyers various discount rates (8, 10, and 12 percent), and sellers. The costs are the resources used to generate the various productivity diffierentials (1.0, 1.5, and 2.0 benefits, including the costs of labor, capital, and intermediate percent for privatization) and various investment ip possibilities (15, 20 and 25 percent of net fixed Source: Galal (1996). assets). moderately sensitive to variations in productivity, Two broad conclusions can be drawn from and most sensitive to variations in investment. This table 6.4. First, reforms of the sample of PEs not only suggests that the gains from investment in investigated here can produce gains in savings of the course of privatization are significant, but also 1.2 percent of GDP at a minimum, and as high as that care must be taken to ensure that investment 4.3 percent of GDP. Second, the results are least will be forthcoming. The design of privatization sensitive to variations in the discount rate. They are transactions should commit the new owners to an TABLE 6.3 Estimated increases in savings from reforming PEs: origin of the change Total increase in savings Annual increase in savings (millions of 1995 LE) (percentage of 1995 GDP) Productivity Additional Productvity Additional Type of reform improvement investment Synergies Total improvement investment Synergies Total 50percentprivabzabon 11,966 23,300 6,950 42,216 0.6 1.1 0.3 2.1 50 percent commercializaton 7,937 0 0 7,937 0.4 0.0 0.0 0.4 50percentprivatzabonand 19,903 23,300 6,950 50,153 1.0 1.1 0.3 2.4 50 percent commerdalization Source: Calculated from CAPMAS data (various issues). INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 55 investment program, where appropriate, to conditions, attract private foreign savings. Finally, maximize the gains to society. tax policies that are biased in favor of investment Financial sector reforms to increase private and against consumption could encourage saving saving by both households and the corporate sector, though the empirical evidence still appears Saving is affected in various ways by different unsettled. financial policies and institutions. Three policy The social insurance system areas that could increase the rate and improve the composition of private saving will be addressed in The Egyptian social insurance system (SIS) has this section: reforming the pension system, re- an important impact on several macroeconomic structuring the insurance industry, and developing and welfare issues, such as saving, redistribution, capital markets. capital market development, social protection and There is increasing evidence that generous pay- public finance. In 1994/95, contributions bv as-you-go state pensions tend to depress household employers and employees to the pension fund saving. Econometric work for this report shows a amounted to 3.5 percent of GDP, equivalent to negative correlation between private saving and about 21 percent of gross domestic saving. Benefit government spending on social security as shares of payments and fiscal transfers (wage taxes and GDP. It also shows that a mandatory saving scheme investment income) to the pension fund were 2.5 is most likely to increase household saving. percent and 1.5 percent, respectively (table 6.5). SIS Furthermore, the contractual saving institutions, inflows (including investment income) less such as the life insurance industry, have a clear outflows was 5.3 percent of GDP in 1994/95, and impact on the composition of savings, by favoring accumulated reserves were 33 percent of GDP in long-term financial assets (invested by financial mid-1995. By way of comparison, combined market institutions), over fixed assets such as real estate, capitalization in both stock exchanges was about 13 precious metals, and land (invested by individuals), percent of GDP at end-1995. even though it is not clear whether sound contractual saving institutions lead to higher The surplus from the SIS is invested via the aggregate saving. With well-developed contractual National Investment Bank (NIB) -a government- saving institutions, households and private owned instituticn that finances primarily scorporations are able to borrow long term (Poterba government projects. Thus, the SIS effectively 1994). The insurance industry also supports works as a pay-as-you-go system. The national pension reform by providing specialized products reserves of the SIS at the NIB represent public debt and services such as annuities and life-disability due in the future when the SIS starts incurring a insurance. To the extent that pension reform and deficit. Access to cheap funds appears tc increase privatization programs increase household and the propensity of governments to spend, and corporate saving respectively, capital market crowds out the private sector-during the period development has an impact on the level of private 1970-94, the public investment share of total saving. In addition. capital markets, under certain investment in Egypt averaged about 68 percent. TABLE 6.4 Sensitivity analysis (annual increase in savings as percentage of GDP)a Investmentb Productvivtf Discount rate Typeof refomm 15 20 25 1 1.5 2 8 10 12 100 percent privatization 1.7 4.1 7.7 3.5 4.1 4.7 4.4 4.1 3.9 100 percent commercialization 0.8 0.8 0.8 0.4 0.8 1.2 0.8 0.8 0.8 50 percent pnivatzabon and 1.2 2.4 4.3 1.9 2.4 3.0 2.6 2.4 2.3 50 percent commercializabon a. Increases in savings include the interaction of changes in productivity and changes in investment. b. Percentage of net fixed assets. c. Annual growth rates of productivty under privatization. The corresponding rates under commercialization are 0.5 percent, 1 percent and 1.5 percent, respectively. Source: Calculated from CAPMAS data (various issues). 56 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH TABLE 6.5 Social insurance system indicators (percentage of GDP) Transfers from Annual surplus Accumulated surplus Year Contributrion Benefits Treasury 1985/86 5.1 2.5 1.2 5.8 38.2 1986/87 4.4 2.3 1.0 5.1 36.6 1987/88 4.3 2.3 0.9 5.6 36.2 1988/89 4.0 2.2 1.0 4.8 33.9 1989/90 3.6 2.0 0.9 4.6 31.7 1990/91 3.5 2.1 1.0 4.5 31.9 1991/92 3.1 2.1 1.1 3.6 29.0 1992/93 3.3 2.2 1.3 4.5 30.2 1993/94 3.5 2.5 1.5 5.4 32.5 1994/95 3.5 2.5 1.5 5.3 33.1 Sofurce: Staff calculations based on data frorm Ministry of Social Insurance. The saving effect of a mandatory scheme is comparative public pension scheme and therefore offset by increased government spending. demographic indicators. On the other hand, a truly fully-funded system that Contributions. The SIS reaches very high invests in financial instruments at market rates has contribution rates on (basic) taxable wages relative the potential of developing financial markets -even to benefits. - Social security contributions must be if the system invests in government securities, paid on workers' basic and variable wages, with a government borrowing becomes a transparent maximum taxable amount for each category of process. Funded systems that strengthen the link wages (LE 450 per month for basic and LE 500 per between benefits and contributions (such as defined month for variable). The average total taxable wage contribution plans) eliminate many of the in 1994/95 was LE 267 per month for civil service clistortions of a pay-as-you-go system. employees and LE 149 per month for noncivil SIS provides penision benefits and insurance service employees, far below the maximum taxable against disability, death, and loss of earnings due to amounts. In 1994/95, basic wage was 42 percent of unemployment or illness. The SIS covers a high total taxable wage for civil service employees and proportion of the work force,7 about 83 percent in 46 percent for noncivil service employees. 1994.8 There are more pensioners than persons For those covered under the main program over the age of 60- a ratio of 146 percent - which is (Law 79/47), total contribution rates9 on basic out of line compared with other regions, including wages are 41 percent for private sector employees, the OECD; this indicates a system that is quite 39 percent for public enterprise employees, and 36 generous or lax in its eligibility requirements. The percent for government workers. Workers ratio of pensioners to contributors (the system contribute 14 percent, the Treasury 1 percent, and dependency ratio) is high relative to other the employer pays the remainder. The contribution developing countries, and to the ratio of population rates on variable wages are lower, since no over 60 to that aged 20-59 years (demographic contribution is assessed on job exit indemnity. dependency ratio). Table 6.6 gives some Nonetheless, the contribution rates are too high in TABLE 6.6 Comparative public pension schemes and demographic indicators, using most recent data (population ratios in percentage) Contributors to Pensioners to contributors Pensioners to Population over 60 to Region work force population over 60 population 20-59 OECD 93.9 39.2 84.1 34.0 Latin America 38.3 21.0 30.8 18.0 MiddleEastandNorthAfrca 41.3 27.5 57.5 13.5 Asia 23.5 11.4 22.3 13.5 Afrca 6.4 8.5 24.0 12.5 Egypt (1995) 83.1 37.7 146.3 14.4 Source: Staff calculations based on data provided by Ministry of Social Affairs; OECD (1994); World Bank staff estimates. INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 57 relation to the benefits. Table 6.7 provides the pension for those with a certain number of years' contribution rates for both basic and variable wages contribution. for different types of workers covered under Law Benefits. Pensions on basic wages are fully 79/47 adjusted, while those on variable wages are not. Eligibility criteria. The eligibility criteria for The ratio of average monthly pensions to average retirement constitute a major variable in covered monthly wages (replacement rate) determining the financial viability of any defined indicates that social insurance provides monthly benefit plan. The normal retirement age for Egypt benefits that represent a high percentage of average (age 60 for both men and women, under the major taxable wages, 102 percent for civil service programs of Law 79/47) is lower than that of employees and 147 percent for noncivil service OECD countries (whose average retirement age is employees in 1995. In 1986, the replacement rates 64.4 years for men and 62.9 years for women), but is were 89 percent and 103 percent respectively. in line with many developing countries. Given Inflation adjustments on pensions have been increasingly productive life spans, many countries greater than the growth of average wages of are improving the financial viability of their contributors, with the differential greater for pension systems by raising the retirement age. noncivil service workers. Redistribution occurs in two main areas. First, The determination of the pension amount at pensioners from the agricultural sector-about 45 retirement depends critically on the treatment of percent of total pensioners in 1995-are provided wage and price inflation. For variable wages, the the equivalent of minimum wages (LE 45 per method of computing for the pensionable amount month). Given the very low flat contributions by is particularly sensitive to the inflation rate, since agricultural workers and farmers (currently LE 1 the basis used is the average wage during the per month), the benefits are higher than would be covered period adjusted by an annual inflation afforded by the contributions. Second, within Law factor of 2 percent. At a 10 percent annual inflation 79/47, which covers civil service employees and the rate, the pensionable variable wage for a 30-year formal sector, the pension formula sets a minimum contribution period would only be 55 percent of real wages. TABLE 6.7 Contribution rates for social insurance (percentage) Basic wage Variab,e wage (up to LE 450/month) (up to LE 500/month) Program Worker Employer Govemment Total Worker Employer Govemment Total Prvate sector enterprises 14 26 1 41 11 24 1 36 Public sector enterprses 14 24 1 39 1 1 22 1 34 Governmentoffices 14 21 1 36 11 19 f 31 Source: From data provided by Ministry of Social Affairs. TABLE 6.8 Public pension spending as shares of most recently published indicators (percentage) Share of receipts from Public pension Public pension Region spending to GDP receipts to GDP Wage taxes Investment income General revenues OECD 9.2 9.1 57.4 11.0 35.1 Latin America 2.0 2.4 63.8 23.0 13.0 ECA 8.0 7.9 68.6 0.2 16.3 Middle East and North Africa 2.8 4.4 63.1 17.5 19.4 Africa 0.5 0.7 77.8 20.3 1.5 Asia 1,9 5.2 61.3 24.2 14.1 Egypt 1995 2.5 7.7 45.3 35.6 19.1 Note: Regional numbers are simple averages of sample country data. Source: OECD 1994 and estimates by Word Bank staff. 58 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH In addition, there is rno automatic indexation of retum, they would have increased to a figure 60 benefit payments during retirement to protect the percent higher than the sum they reached in 1995. value of benefits from inflation. Prior to 1987, the In effect the reduction in value of reserves over the purchasing power of pensions declined 10-year period between 1980 and 1990 is equivalent significantly, because the government did not raise to more than seven years of (1995) benefit basic pensions regularly. However, over the past 10 payments. This represents a significant erosion in years, annual basic pension adjustments were made the real purchasing power of the reserves and a net to prevent the decline of basic pension benefits in subsidy to NIB. real terms. Over the period 1987-96, the legislature- In July 1992, NIB raised the interest rate on mandated adjustments preserved the purchasing incremental social security funds (including power of the basic pensions for all but three of the reinvested reserves) to 13 percent, which is the past 10 years. However, pensions on variable wages are current rate. This rate is higher than current bank not automatically indiexed or adjusted by the legislature. term deposit rates (12 percent) but lower than Thus, in addition to the adverse impact of inflation interest on NIB investment certificates (17 percent). on the computation of the pensionable variable Average inflation during the period 1992-96 was wage on which the initial pension benefits are about 10 percent, providing a positive real return based, the resulting variable wage pensions are not on incremental and reinvested funds. protected from inflation during retirement. Financial conditions. During the period 1985-95, the SIS has been producing operating surplus NIB is responsible for evaluating and financing (contributions less outlays) due to the high ratio of the government investment program. Funds are contributors to pensioners. Because the inflation disbursed to various public sector entities, adjustments on basic pensions approved by including central and local governments, service Parliament are financed from general revenues, agencies such as hospitals and universities, and total receipts by the SIS come from three sources: economic agencies such as the public utilities. In the wage taxes, investment income (fiscal transfers), past, NIB also financed the PEs, but since the and general revenues. Table 6.8 shows the shares of adoption of Law 203, NIB's exposure to the PEs has the different sources of financing for the SIS. gone down to almost zero. NIB is the effect of using Among other things, Egypt also has the biggest pension funds to provides long-term financing to differential between public pension spending to public investment* projects approved by the GDP and public pension receipts to GDP. parliament, and charges interest to recover As noted above, operating surpluses of the operating costs. In the 1980s, interest rates charged insurance funds are invested by the SIS in the to government projects and PEs were negative in National Investment Bank. During the period 1980- real terms, because funds available through the SIS 90, NIB paid interest to SIS on the funds at 5 to 6 were cheap. However, with the increase in interest percent per year. This amounted to a negative real rates on social insurance funds to positive real rates rate of return since the C:PI was increasing by about since 1992, the NIB has also increased interest rates 18 percent per year during the same period. Had on its lending, thus raising the hurdle rates for the insurance reserves been earning even a zero real investment projects. Currently, interest rates paid TABLE 6.9 NIB funding sources as percentage of total (LE million, in percent) 1990/91 1991/92 1992/93 1993/94 1994195 Total Social insurance fund 67 64 67 53 45 56 Postal savings fund 2 2 2 3 3 3 Investment certificates 11 3 23 33 29 23 Bank's surplus 14 19 1 7 17 12 Credit 4 10 7 4 4 5 Others 2 2 1 1 2 1 Total 6,477.4 8,203.3 9,555.4 14,365.3 20,548.2 59,149.6 Source: From data provided by National Investment Bank. INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 59 by NIB for social insurance funds and postal governed by Act No. 54 (1975) and Executive savings funds are 13 percent and 13.25 percent, Regulations Decree 78 (1977), and are under the respectively. supervision of the Egyptian Insurance Supervision The SIS is the main source of funds for NIB. As Authority (EISA). Efforts are under way to update of June 1995, SIS reserves in NIB were LE 67 billion, the law and introduce appropriate regulatory and about 33 percent of GDP. Social insurance funds supervisory arrangements. (new and reinvested) accounted for 68 percent of The number of private pension plans has been the fund sources of NIB during the past five years. increasing significantly-as of June 30, 1995, there Investment certificates (10 years with 6-month were 504 plans, compared with 330 in 1991. The coupons) issued to the public made up another 29 reserves held by these funds (LE 3.3 billion as of percent of funding sources, while deposits of postal June 30, 1995), while representing only 1.6 percent savings funds contributed 3 percent (table 6.9). of GDP, have been growing by about 30 percent per Over the past 10 years, SIS funds available for year over a five-year period. The number of lending averaged 4.1 percent of GDP a year, employees covered more than doubled during the making SIS a major financier of public investment. period 1990-95, to almost 0.5 million. Contributions With a policy objective increasing the share of to the funds in 1994/95 were LE 600 million, less private sector in total investment, the role of the than 1 percent of GDP, but with an annual growth NIB and the utilization of SIS funds need to be rate of more than 30 percent over a five-year reviewed. period. Table 6.10 provides data on the growth of What is the effect of using pension funds to private funds. finance government investment? The privileged A majority of these funds were established by access to public pension funds is a less transparent public sector organizations, although a recent way of financing government projects and lacks the decree forbids contributions by government disciplining effect of capital markets. The negative organizations to these funds. Less than 10 percent real interest rates paid to the SIS during the 1980s were set up by private sector companies. Nearly all imposed a hidden tax on contributing workers and of the private pension plans operate on a defined probably encouraged more public investments than benefit principle, where the majority of the plans market-based rates would have induced. In many provide salary-related benefits in return for salary- countries, publicly managed funds required to related contributions. invest a major portion of their portfolios in About 48 percent of the assets of the private government securities (including lending to PEs) funds are in fixed bank deposits, while another 42 tend to charge below-market rates. Privately- percent are invested in government bonds. Only managed funds, however, tend to achieve higher about 7 percent are invested in equities and real real rates of return. Figure 6.6 shows comparative estate. Lack of professional investment returns for selected pension funds during the 1986. management capacity, the dearth of financial Private pension plans. To complement the social instruments, and the risk-averse nature of these insurance system, voluntary pension plans have funds have been cited as the main reasons for the emerged in Egypt. These plans are typically set up concentration of investments in bank deposits and by employers on a defined benefit basis, with government paper. contributions made by both employers and Private funds are covered by Law 54 (1975) and employees. Private pension plans in Egypt are regulated by Decree No 78 (1977). Private pension TABLE 6.10 Growth of private funds, 1991-95 1990/91 1991/92 1992/93 1993/94 1994/95 Number 330 376 408 471 504 Contributions (LE 000) 256,662 369,511 380,310 585,333 602,063 Reserve fund (LE 000) 1,379,768 1,717,928 2,129,265 2,727,855 3,300,921 Coverage 203,201 216,885 292,403 408,421 496,386 Souse: Egyptian Insurance Supervision Authority annual reports. 60 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH funds must be registered with the EISA, which auditors, and actuaries. Prudential guidelines on requires that each fund submit annually a financial investment should be developed, consistent with statement audited by an extemal auditor, and every the development of capital markets and financial five years a financial statement prepared by an infrastructure. The regulations should deal with actuary registered with the EISA, which may pricing (fee structure), portability, and marketing request an external actuary to review the issues. Also, a decision on guarantee arrangements submissions. Investment regulations prescribe would be necessary. minimum and maximum investments in different Reforming the social insurance system- types of investment vehicles. short- to medium-term measures To deal with the rapid growth of private pension funds, and their likely changes in There are several reform initiatives that could investment strategies in response to developments be undertaken in the short- to medium-terms to in the capital market, the legal and regulatory improve the efficiency and solvency of the current framework would have to be revised, and the system. These reforms focus on: (1) improving the supervisory capacity of EISA developed. In transparency of govermunent uti(ization of SIS particular, thenewlawnd regulations should deal resources to ensure a neutral impact on with the emergence of defined contribution plans, government spending decisions; (2) developing a individualized accounts, professional fund portfolio and investment strategy that supports managers, fund administrators, custodians, capital market development, without FIGURE 6.6 Comparative performance of selected pension funds EDw '-__19ett ,~~~~~~~~~~~(9" pmum TK(alcey - 2. 6 1344 -~~~~~ 41tt4 136018) Egm)t da~ Ni&m1aid(-Qonq~Wu) Prvatdynuiaged LLK (ocampdIaid) Chle.(DIs) 40.0 J.I0 -30. -O -210 -14.0 10.0 40 0.0 60 10i.0 160 PvdtageraL edrai Ow lrVtlMn Soure: World Bank staff estimates. INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 61 compromising safety objectives; and (3) correcting wages during the worker's entire career, adjusted at certain design deficiencies to improve efficiency 2 percent per year for inflation, results in a and financial sustainability of the SIS. This section defective pensionable wage. On the other hand, focuses on these initiatives, while a following using the average of the last two years' basic wage section gives the longer-term reform does not take inflation into account, and also recommendations for the pension system. These introduces an incentive for manipulation (for short- to medium-term reforms would serve as a example, raising wages sharply right before foundation for the longer-term reforms described retirement). One solution to consider is a formula below (Table 6.11). that uses the average career earnings adjusted for The most critical reform initiative in the short- wage inflation, although this requires a better to medium-term should be to improve the information system. Pension benefits should be management of social security funds, to achieve adjusted for inflation automatically, using a both rate of return and security objectives. This formula that takes into account wage inflation, would entail the elimination of the special access of rather than awaiting legislative action. The amount the NIB to SIS funds, and the establishment within of wages that would be subject to the contribution SIS of an investment management capability. The rates should also be automatically adjusted. SIS already has plans to develop portfolio Finally, the contribution rates should be management capability, and has requested reviewed. Improved returns on reserves and less technical assistance from the World Bank. In generous retirement (eligibility) provisions should addition to the hiring and training of personnel, result in lower contribution rates, although the some of the tasks necessary to ensure proper impact of revising the pensionable wage management of the reserves include development computation to better account for inflation would of investment objectives, designing an investment result in higher costs. the net impact of alI the strategy by targeting a certain portfolio mix, above reforms on the contribution rates should be identifying investment vehicles and participating determined. The amount of government financial intermediaries, and putting in place a contributions to fund redistributioin programs control system. NIB would have to strengthen its should also be reviewed. competition for the SIS funds by paying market rates (that is, rates paid by the NIB certificates of Reforming the social insurance system- deposit). A transition plan would have to be put in longer-term proposals place to reduce NIB's existing holdings of social security funds. A spillover benefit of this reform A country's social security system typically has would be the increased supply of long-term savings three major objectives: first, to enable the to be intermediated by the capital market and population to shift some income from working others to the private sector. The SIS should pursue years to old age (saving or wage replacement); technical assistance in this area. second, to protect those with low incomes by Another area of reform is retirement provisions. providing a basic income floor during old age First, the normal retirement age of 60 should be (redistributive or poverty alleviation); and third, to increased over time to 65. Given the present trend insure against certain types of risks, such as of improved mortality rates, the current retirement disability, longevity, and inflation (insurance). In age implies an increasing dependency ratio, thus order to achieve all three objectives, a combination increasing costs to the system. Second, the early of systems (the multipillar system) is retirement provisions should be revised by raising recommended, since one system cannot efficiently the early retirement age to 60. Workers who elect to achieve all objectives. receive pensions between the ages of 60 and 64 7he multipillar approach. The reform of the should receive benefits that are actuarially fair, pension system in Egypt should move to establish relative to the full benefit available at normal three pillars to assure adequate retirement incomes: retirement age. first, a fully-funded mandatory defined benefit A third area of reform is the treatment of (DB) public pillar that insures workers' earnings up inflation. The current method of using variable to a certain level; second, a mandatory defined 62 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH contribution (DC) private pillar that insures Redistribution is achieved by introducing a workers' wages above a certain level; and third, a minimum basic pension to those with low incomes. purely voluntary scheme that could supplement the The current minimum is 50 percent of reference first two pillars. In addition, the development of a wage, assuming a minimum number of 20 years' competitive and stable insurance industry would contribution; the minimum pension would be provide many accompanying services, such as life correspondingly lower if the number of years of and disability insurance and annuity products. contribution is lower. It may be prudent to review The public pillar would provide a minimum whether this formula achieves the safety net retirement income, while the compulsory and objective. voluntary private systems would enable workers to Mandatory private schemes. The second pillar supplement their public pensions. The three would be a privately-managed defined contribu- schemes should be portable across employers, and tion scheme, involving compulsory contributions vesting should be immediate for the DC private from earnings in excess of the public pensionable pensions, while the ]DB public scheme would wage but below some maximum. The mandatory require a minimum number of years of private pillar effectively replaces the variable contribution. The public pillar would achieve the pension scheme of the social insurance system. The objective of dealing with old-age poverty, which contribution rate should allow the attainment of a has elements of income redistribution. The private certain replacement target, say, 70 percent of pillars have the advantage of closely linking pensionable wages. Under a DC scheme, the benefits to contributions, thus minimizing the determination of such a contribution rate would problems of evasion and manipulation. At the same largely depend on the real returns on the time, as experienced in other countries, the private contributions. Disability and survivors' benefits schemes should improve capital accumulation and could be purchased from insurance companies, and financial market development. would have to be financed from alt additional The public pillar. The public pillar is contribution, (about 3 percent in many countries). recommended to be a filly-funded DB scheme with The contribution rate in relation to the target a required contribution from employees and replacement rate should be much lower than is employers. In order to make a smooth transition to currently the case for variable pensions. A the new system, the current basic pension scheme contribution rate of 10 percent (plus 3 percent for could be modified to form the public pillar. Under disability and death insurance, and 1 to 2 percent this plan, the variable pension scheme would be for management) to a fund that earns 5 percent in replaced by the mandatory private pillar discussed real terms (that is, 4 percent over the real wage below. Thus, the public pillar would be built on the growth rate), would achieve a replacement rate of current basic wage pension scheme, which would 70 percent of wages over the retirement period of be modified by reviewing contribution rates, 16 years (indexed to wage inflation), assuming that maximum taxable amounts, redistribution the pensioner contributed for 32 years. objectives, automatic adjustment for inflation, and The contribution of the employers to the the minimization of fiscal transfers. The SIS should variable pension scheme could be merged as part of seek technical assistance to review the current the compensation of the employees, and, to the system and develop a short- and medium-term extent that the required contributions by the reform plan in the context of the longer-term employees are less in the new system, workers design. The contribution rate for the public scheme would effectively get a pay increase. Past would depend on the average replacement ratio contributions to the variable pension scheme of the (average pension payments to average covered SIS could be converted into a bond carrying a wages), the dependency ratio (the ratio of market interest rate, which would mature when the pensioners to active workers), mortality rates, worker retires. Transition issues would have to be disability rates, the level of desired funding, and reviewed carefully. the rate of return on accumulated reserves. An Under a private system, participating private actuarial review would be necessary. pension funds and fund management companies would have to be licensed and regulated. Workers INCREASING LONG-TERM SAVIINGS TO BUILD THE BASIS FOR GROWTH 63 could choose among the licensed funds managed would be tax exempt, while pensions would be by professional management companies, and taxed like any other source of income; or mandatory contributions would be automatically contributions would not be deductible, but both withheld from wages by employers and placed in investment returns and pension benefits would be individual accounts. Workers could change tax exempt. The latter approach provides cash flow employers without any impact on past advantages for the budget, since no tax income is contributions, thus improving labor mobility. lost up front, but provides weaker incentives to Workers should also be able to move their accounts workers to participate in voluntary pension funds. from one fund to another with minimal cost, thus A third alternative, currently used in the Czech ensuring competition among the funds. Because the Republic and Australia, would be to offer a system is susceptible to fraud and mismanagement, government contribution (credit transfer) to appropriate regulatory and supervisory systems pension members, instead of a tax credit or should be in place, including good information exemption. This alternative would be more flow to participants. redistributive than the other approaches, since it As recommended above, given that that there is would also benefit nontaxpayers. In addition, it a growing number of private pension finds, EISA would offer a strong incentive to low- and middle- should recommend the replacement of the 1975 income workers, irrespective of whether they pay Law on Private Insurance Funds, and adopt income tax, to save for their retirement. The credit appropriate prudential regulations to cover the transfer could be limited to active workers, and development of individual accounts under DC could be paid only to those workers who save a schemes managed by licensed fund professionals. specified percentage of their income and do not This would provide the foundation for the withdraw their balances until they retire. As the development of a mandatory private pension credit transfer would be added to the individual scheme managed by the private sector. Since the retirement saving account of each worker, this transition to a mandatory private system would approach would generate a higher level of loig- probably take some time, the development and term financial resources than a tax treatmrent based experience of current regulatory efforts and private on deductibility. fund management constitute a pilot from which Currently, the Egyptian tax treatment provides lessons could be learned, allowing adjustments to for tax deductibility of contributions and tax be made before the mandatory private system is exemption of pension-fund investment income and put in place. Furthermore, capital market pension benefits. A review of the issues of tax development would have to advance, creating a treatment should be made. more liquid and deeper financial market. Voluntary Private Funds. Under the third pillar, n ty workers would be able to make voluntary The insurance sector can play a very important contributions with a cap, in addition to the part in the development of the private sector, the mandatory contributions. Upon retirement, emergence of a private pension system, and the workers would be able to combine their modernization of the securities markets. By accumulated funds with their pension accounts, covering certain economic and financial risks, it increasing the size of their pensions. This would enables enterprises to better manage their financial allow firms to offer pension plans in excess of the affairs, and protects households from financial mandatory ones, as they already do. These funds losses arising from accidents or injuries. In would be subject to the same regulatory framework addition, the industry, especially the life insurance as those in the mandatory schemes, and may in fact sector, mobilizes long-term savings that can be one and the same fund. facilitate the financing of both enterprises and Tax treatment. The consumption tax principle households with resources that have a much longer should be fully applied to this as to all types of maturity than traditional loans from the banking contractual savings. This would imply one of two sector. In most developed countries, the insurance things. Either contributions to contractual savings industry is a significant component of the economy; would be fully deductible and investment returns life insurance companies' reserves to GDP range 64 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH from 13 percent to 34 percent, and premiums to Another 18 percent was invested in corporate GDP range from 3.0 percent to 10.1 percent. paper. The rest was used to purchase real estate Egypt's insurance industry. The insurance and provide loans to policy holders. Conservative industry in Egypt is underdeveloped-life investment policies and lack of financial insurance premiums to GDP were an insignificant instruments have led to the concentration of 0.2 percent in 1995, compared with 6 percent for a investment in bank deposits and government sample of developed economies. Total assets to paper. GDP of all insurance companies (life and nonlife) in Legal and regulatory framework. In 1995, a new Egypt were about 4 percent in 1995, while life law on insurance was passed, and in June 1996, a insurance assets alone were 38 percent of GDP for new set of regulations was issued by the EISA. In the developed economies sample. There are 10 addition to solvency requirements, the regulations insurance companies in Egypt, of which eight impose certain guidelines on investment by transact all classes of insurance and business, and insurance companies, making a distinction between two transact only nonlife. All are publicly quoted reserves from the life insurance business and joint stock companies. Two have been set up as reserves front the nonlife segment. The law requires joint ventures with foreign investors to operate as separation of the reserves between the two businesses exclusively in Egypt's export processing businesses in companies that operate in both free zones and are not allowed to offer their markets. The new regulations also deregulated the services to the rest of the market. pricing of most insurance products, replacing price The industry is highly concentrated. The largest control with price reporting. The only exceptions company controls 50 percent of both life and are in the fire and motor vehicle insurance lines, nonlife business, and tIhree companies account for which will be deregulated in 1999. The 93 percent of life and 89 percent of nonlife markets. deregulation of most inLsurance products shifts the The three largest insurance companies and the sole focus of supervision to solveincy monitoring. The re-insurance company are state owned, thus regulations are basically in line with international making the sector virtuallyv under state control. The (especially EU) practices and defirntions. However, state owned insurance companies also own shares solvency monitoring requires good information and in five of the private insurance companies. In the technical capability on the part of the supervisor. past, direct foreign ownership was only allowed in Reform proposals. With the changes in the legal those companies operating in the free zones and regulatory framework and the ongoing (Egypt's free trade, or export processing, zones). institutional development of supervisory capacity, The exception was granted under the Investment the next generation of reform efforts should focus Law, which allowed for the creation of companies on the issues of competition and ownership. As as joint ventures, to encourage companies to mentioned earlier, there is a high concentration operate in the free zones. Currently, regulations level in the industry, which is indicative of place a 49 percent limit on foreign ownership of problems of competition. To encourage direct insurance companies and no restrictions on competition, EISA should allow the entry of new foreign ownership of reinsurance companies. firms-including foreign insurance companies-as Investment. Total investment of the insurance long as they meet the licensing criteria. This means industry as of June 30, 1995 was LE 5.4 billion, that the 49-percent maximum ownership by foreign representing 2.6 percent of GDP. Over the period firms should be abolished. EISA should also ensure 1990/91 to 1994/95, investment grew by 18 percent a level treatment of both state owned and private per year. The state owned insurance companies insurance companies. Finally, the state owned accounted for 91 percent of investment. The insurance companies should be included in the reserves of nonlife business accounted for 60 current privatization program (Table 6.12). percent of total reserves in 1995, compared with 68 On the regulatory aspects, to complement percent in 1991. liberalization of pricing of products and The insurance companies invested the bulk of commissions, EISA should focus on disclosure their funds in fixed-term bank deposits (39 percent requirements to the public of prices and of total) and governrment bonds (38 percent). commissions. The obligatory ceding requirements INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 65 and price controls on reinsurance should be when they do, liquid capital markets allow them to eliminated. Tight regulations on employment of divest quickly and inexpensively. foreigners should also be relaxed to enable In several countries, securities markets have insurance companies to acquire needed expertise developed in parallel with-and have supported- quickly. Finally, to improve the transparency of the two initiatives that have an important impact on sector, financial statements of insurance companies private saving: one is pension reform (such as the should be available to the public, and these transformation of pay-as-you-go to fully-funded statements should be audited by qualified and systems), and the other is privatization of state independent auditors. Accounting standards and owned enterprises. To the extent that pension auditing guidelines for insurance companies should reform and privatization programs increase be provided by EISA. household and business saving, respectively, securities market development has an impact on The capital market and its link with saving the level of private saving. In the case of Egypt, the development of capital Capital markets affect economic activity markets both supports and is supported by the through the creation of liquidity and the reduction development of contractual saving institutions. As of transaction costs. From the point of view of the discussed in the previous sections, investment by investor, liquid securities markets allow the private pension funds and insurance companies has acquisition of assets that can be sold quickly in case been mainly in government securities and bank of a need to access savings or alter a portfolio. As term deposits. Capital markets would allow greater for the corporation issuing long-term securities, it diversification, and perhaps higher yields, for these has access to a larger pool of funds and has better investments, therebv improving the financial information about the relative cost of different. performance of contractual saving institutions; this ways of financing an investment. Thus, corpora- should result in greater benefits to savers in the tions have a wider range of instruments to finance form of lower contribution rates to pensions investment, and savers have more alternatives than schemes and lower premiums for insurance. At the bank deposits; precious metals, or real estate. same time, the existence of pools of funds from Many studies conclude that the impact of stock contractual saving institutions could be tapped markets on the level or rate of domestic saving is through capital markets to finance investments. ambiguous - savers may merely shift funds from In addition, active capital markets provide an one saving instrument (such as bank deposits) to enabling environment for attracting foreign securities. However, some studies have shown that savings. The existence of liquid capital markets there is a positive relationship between private gives a foreign investor better exit options, thus saving as percent of GDP and financial sector encouraging more foreign direct investment development, which includes capital market Foreign portfolio investors would focus on actively development, although the channels through which traded securities in the stock market. With private this relationship is defined are numerous. For capital dominating the total capital flows to example, stock markets are seen to increase developing countries, and an increasing shift investment, thereby increasing national income, toward equity financing, the development of and thus increasing the level of domestic saving. capital markets becomes essential in attracting But what is unambiguous is that the private foreign capital. But the risks of foreign composition of saving is improved by the savings would be kept to a minimum if they introduction of liquid capital markets. Savers augment, rather than replace, domestic savings. purchase long-term securities, which offer higher The experiences of two regions that attracted the expected returns and enable risk diversification. In greatest shares of private capital flows had two the process, more financing opportunities become different outcomes-foreign savings replaced available to corporations to implement projects domestic savings in Latin America and the with long-term pay-offs. Long-term investors need Caribbean, but augmented domestic savings in East not relinquish their saving for long periods, but Asia. The positive experience of Asia is attributable 66 EGYPT IN THE GLOBAL ECONOMY: STRATEGIC CHOICES FOR SAVINGS, INVESTMENTS, AND LONG-TERM GROWTH to macroeconomic policies and institutions that Statistics (CAPMAS) attributes to liquidation and encouraged domestic saving and investment. privatization. Finally, the development of capital markets and 4. Excluding 1992/93 because the reported data the process of privatization are mutually show a sharp drop in gross fixed assets. reinforcing. Capital markets provide more options 5. Returns to capital are measured using three for divestiture, while privatization increases the indicators: (1) the ratio of operating surplus to supply of securities in the market, thus providing capital employed, which measures the retums to all the securities market with more depth. The contributors (the government as equity holder, deepening of capital markets-as reflected in recipient of taxes, and creditors), (2) the ratio of increased market capitalization to GDP, greater profit before taxes and other transfers to or from liquidity (higher turnover to market capitalization), government to net worth, which reflects the retums and less concentration of market activity on a few to the government, as if it were a private owner, stocks-would enable capital markets to absorb the and (3) the ratio of current surplus before taxes to expected increase in portfolio investments from revalued capital employed, where capital is both domestic and foreign sources, and mitigate revalued using the perpetual inventory against the extreme movements of asset prices. methodology. 6. WVhere the budgetary impact of privatization is Notes the main concern, it is important that all flows to and from the treasury are taken into account. In 1. From a welfare perspective, it has been argued particular, two flows of funds have to be compared: that $1 in the hands of government is worth less (1) the flow of funds from the private sector to the than $1 in the hands of the private sector, because government (in the form of sale price and taxes raising $1 by government through taxation is from privatized firms, minus the cost of distortionary. For further discussions of this point. privatizing), and (2) the flow of funids the see lones, Tandon, and Viogelsang (1990). government gives up by privatizing (including the 2. Privatization refers to the transfer of ownership taxes and dividends from PEs minus the subsidies and/or control to the private sector. and other transfers made to PEs). Commercialization refers to a package of reforms: 7. Work force includes Egyptians working abroad, increased competition, hard budget constraints, which in 1995 numbered 2 7 million out of a total regulation of monopolies, financial market reforms, work force of 19.1 million. and incentives to managers to perform efficiently. 8. Contributors to the social insurance svstem Details on methodology and key assumptions are during 1994/95 to labor force in 1995. provided in Galal (1996). 9. Different contribution rates are assessed for 3. The number of PEs in the sample declined from different types of benefits, such as old age pensions, 364 in 1991/92 to 356 in 1992/93, which Egypt's disability, death, unemployment, and end of Central Authority for Public Mobilization and service indemnity. INCREASING LONG-TERM SAVINGS TO BUILD THE BASIS FOR GROWTH 67 TABLE 6.11 Action plan for social insurance system reform Area of reform Short- to medium-term actions Medium- to long-term actions Improve retums on surplus * Develop portfolio management capability * manage all SIS funds * Develop plan to place funds currently with NIB under the management of SIS * Develop an investment strategy, focusing on the identficaton of investment obiectives Adjust benefits for inflation * Review formula for treatrnent of inflaton in determining inital benefits for both basic and variable pensions * Index benefits automaUcally to wage inflabon * Review how to adjust maximum taxable wage automatbcally Reduce contribution rates * Review actuarial assumptions and determine whether there is scope for reducing contribution rates for both basic and variable pensions Introduce mandatory private pillar * Develop infrastructure for mandatory private pillar by * convert varable pension scheme to strengthening legal, regulatory, and supervisory framework mandatory defined contribution plan managed by for voluntary private pension schemes, strengthening the the private sector insurance industry, and developing capital markets Develop new legal framework * Introduce new law that allows for defined benefit individual accounts and sets a flexible framework for the regulation Strengthen regulatory framework * develop and issue new regulations to include coverage * 3djust regulabons as necessary of fund managers, administrators, custodians, auditors, and actuaries Strengthen supervision capacity * implement institutional development of EISA TABLE 6.12 Action plan for insurance industry reform Area of reform Short- to medium-term actions Medium - to long-term actions Improve structure and competitive conditions * privatze one or two insurance companies * privatize the other state-owned insurance companies * allow more entry, including foreign firms Deregulate prices * allow competitive pricing of fire and motor vehide TPL insurance Improve supervisory capacity * implement recommendatons from intemational consultants (Coopers and Lybrand) Ensure neutrality of tax treatment on saving * Eliminate stamp duty for life insurance and reduce * Review income tax rates of insurance stamp duty for nonlife insurance companies in the context of an overall tax review Increase supply of listed securities * Contnue privatizabon process Improve financial infrastructure * Develop custodial depository and improve payments and settiement services under private sector initiative Improve Information quality and access * Ensure proper accountng and auditing of financial accounts * Automate informabon on listed companies Develop prudential regulation and * Coordinate regulabon and supervision of investment strengthen supervisory capacity managers with EISA 68 Selected bibliography Anand, Ritu, and Sweder van Wijinbergen. 1989. Galal, Ahmed. 1996. "Savings and Privatization." "Inflation and the Financing of Government Working Paper No. 8. The Egyptian Center for Expenditure: An Introductory Analysis with an Economic Studies, Cairo, Egypt. Application to Turkey." World Bank Economic Harrod, R. F. 1959. "Domar and Dynamic Review 3 (anuary): 17-38. Economics." Economic Journal 69 (275): 451-64. CAPMAS (Central Authority for Public Hoekman, Bernard. 1996. "Trade and Investment Mobilization and Statistics). Various issues. Liberalization: Issues and Options for Egypt." Financial and Economic Statistics of Public Working paper. World Bank, Washington, D.C. Companies. Cairo, Egypt. Unpublished. Deaton, Angus. 1995. "Growth and Saving: What IMF (International Monetary Fund). 1996. Direction Do We Need to Know, and What Might We of Trade Statistics Yearbook. Washington, D.C. Learn." Policy Research Department. World Levine, Ross and David Renelt. 1993. "A Sensitivity Bank, Washington, D.C. Unpublished. Analysis of Cross Country Growth Dollar, David. 1992. "Outward-Oriented Regressions." American Economic Review. Developing Economies Really Do Grow More September. Rapidly: Evidence from 95 LDCs, 1976-85" Nathan Associates Inc. 1996a. "Egypt: Options for Economic Development and Cultural Change 40 (3): Increasing Market Competition in Maritime 523-44. Port Services." Consultant study funded by _ 1996. "Growth and Savings in Egypt: USAID. Cairo, Egypt. Lessons from the Empirical Growth Literature." 1996b. "The Quality Control System in Working Paper. World Bank, Washington, D.C. Egypt." Consultant study funded by USAID. Unpublished. Cairo, Egypt. Easterly, William R., and Sergio T. Rebelo. 1993. OECD (Organization for Economic Cooperation "Fiscal Policy and Economic Growth: An and Development). 1994. Taxation and Household Empirical Investigation." Journal of Monetary Saving. Paris. Economics 32 (3): 417-58. . 1996. Energy Prices and Taxes. Paris. Edwards, Sebastian. 1995. "Why Are Saving Rates Psacharopoulos, George. 1994. "Returns to So Different Across Countries? An International Investment in Education: A Global Update." Comparative Analysis." NBER Working Paper World Development 22 (September): 1325-43. 5097. National Bureau of Economic Research, Poterba, James M. (ed.). 1994. Public Policies and Cambridge, Mass. Household Saving. NBER Project Report. Feldstein, Martin, and Charles Horioka. 1980. Chicago: University of Chicago Press. "Domestic Saving and International Capital Sachs, Jeffrey D., and Andrew Warner. 1995. Flows." Economic Journal 90 (358): 314-29. "Economic Reform and the Process of Global Fischer, Stanley. 1993. "The Role of Macroeconomic Integration." Brookings Papers on Economic Factors in Growth." Journal of Monetary Activity No. 1:1-118. Economics 32 (3): 485-512. Sachs, Jeffrey D. 1996. "Achieving Rapid Growth: Fischer, Stanley, and Easterly, William. 1990. "The The Road Ahead for Egypt" The Egyptian Economics of the Government Budget Center for Economic Studies, Distinguished Constraint." The World Bank Research Observer 2: Lecture Series III. 127-42. Shi, Anching, and Chang-Po Yang. 1996. "Egypt: Galal, Ahmed, Leroy Jones, Pankaj Tandon, and Long-Term Demographic Trend, and its Ingo Vogelsang. 1994. Welfare Consequences of Implications for Savings and Education Selling Public Enterprises: An Empirical Analysis. Expenditure." Working Paper. World Bank, New York: Oxford University Press. Washington, D.C.. Unpublished. 69 SRI International. 1995. "Achieving Egyptian . 1995. World Development Report: Workers in an Export Growth." Consultant study funded by Integrating World. New York: Oxford University USAID. Cairo, Egypt. Press. UNCTAD. 1987. "Trade Analysis and Information . 1995. Bureaucrats in Business: The Economics System Data." CD ROM. Geneva, Switzerland. and Politics of Government Ownership. New York: World Bank. 1987. "Egypt: Review of the Finances Oxford University Press. of the Decentralized Public Sector." Report No. . 1996a. World Development Report: Economy in 6421. Middle East North Africa Region. Transition. New York: Oxford University Press. Washington, D.C. . 1996b. "Maximizing the Benefits of Free . 1993a. The East Asian Miracle: Economic Trade with the European Union-Challenges Growth and Public Policy. New York: Oxford and Options for Egypt." Working paper. University Press. Washington, D.C. Unpublished. ___.1993b. Latin America and the Caribbean: A . 1997. "Expanding the Measure of Wealth: Decade After the Debt Crisis. Washington, D.C. Indicators of Environmentally Sustainable ____ .1994. World Development Report: Infrastructure Development." Environmentally Sustainable for Development. New York: Oxford University Development Studies and Monographs No. 17. Press. Washington, D.C. 70 Statistical Appendix TABLE 1 National accounts (LE million) Second five-year plan period: actual Third plan period: actual | Estimate 1988 1989 1990 1991 1992 1993 1994 1995 1996 A. In current prices (mil LE) GDP at market prices 61,600.0 76,800.0 96,100.0 111,200.0 139,100.0 157,300.0 175,000.0 205,000.0 230,958.3 Net indirect taxes 2,970.0 3,630.0 4,525.0 2,460.0 8,043.0 11,140.0 10,608.0 11,873.0 12,970.1 GDP atfactor cost 58,630.0 73,170.0 91,575.0 108,740.0 131,057.0 146,160.0 164,392.0 193,127.0 217,988.2 Agriculture 11,116.0 14,395.0 17,735.0 19,110.0 21,680.0 24,427.0 27,500.0 32,050.0 35,419.9 Industry 16,909.0 20,474.0 26,255.0 36,150.0 43,693.0 48,340.0 53,360.0 61,700.0 69,579.1 of which manufacturng 14,320.0 18,091.0 22,349.0 25,151.0 30,685.0 34,441.0 39,981.0 46,580.0 53,228.5 Services 30,605.0 38,301.0 47,585.0 53,480.0 65,684.0 73,393.0 83,512.0 99,377.0 112,989.2 Resource balance (6,913.5) (7,269.8) (10,171.7) (7,680.5) (6,873.6) (5,742.9) (9,798.8) (9,423.4) (8,328.5) Exports (GNFS) 15,067.5 18,317.9 27,239.4 37,386.2 40,414.0 42,762.7 41,079.0 44,578.2 51,400.8 Imports (GNFS) 21,981.0 25,587.6 37,411.2 45,066.7 47,287.6 48,505.6 50,877.8 54,001.5 59,729.3 Total expenditures 68,513.5 84,069.8 106,271.7 118,880.5 145,973.6 163,042.9 184,798.8 214,423.4 239,286.8 Consumpton expenditures 48,063.5 60,069.8 77,971.7 92,230.5 118,473.6 137,542.9 147,853.3 172,075.5 192,132.5 Govemment 8,437.6 9,690.2 11,178.0 12,769.0 14,645.0 17,719.0 19,826.0 21,915.0 24,213.0 Private 39,625.9 50,379.6 66,793.7 79,461.5 103,828.6 119,623.9 128,027.3 150,160.5 167,919.5 Gross domestic investment 20,450.0 24,000.0 28,300.0 26,650.0 27,500.0 25,500.0 36,945.5 42,347.9 47,154.4 Govemment 11,022.0 11,480.0 14,251.0 10,178.0 12,346.0 10,987.0 10,659.0 11,299.0 12,581.0 Private 9,128.0 11,620.0 12,249.0 17,672.0 16,354.0 14,513.0 26,286.5 31,048.9 34,573.4 Total fixed investment 20,150.0 23,100.0 26,500.0 27.850.0 28,700.0 25,500.0 36,945.5 42,347.9 47,154.4 Total investment in stocks 300.0 900.0 1,800.0 (1,200.0) (1,200.0) 0.0 0.0 0.0 0.0 Domestic saving 13,536.5 16,730.2 18,128.3 18,969.5 20,626.4 19,757.1 27,146.7 32,924.5 38,825.9 + Net factor income (NFY) (1,052.7) (1,536.5) (3,501.1) (3,309.0) (2,408.5) (9,968.1) (3,202.8) (2,683.4) (2,783.4) + Net current transfers (NCT) 5,955.7 6,852.5 9,749.5 11,285.6 18,203.1 16,526.7 10,902.9 11,128.9 11,309.2 = National saving 18,439.6 22,046.2 24,376.6 26.946.1 36,420.9 26,315.7 34,846.8 41,370.1 47,351.7 Gross national product 60,547.3 75,263.5 92,598.9 107,891.0 136,691.5 147,331.9 171,797.2 202,316.6 228,174.9 Gross national disposable income 66,503.0 82,116.0 102,348.4 119,176.6 154,894.6 163,858.6 182,700.1 213,445.5 239,484.2 B. In constant 1992 prices GDP at market prices 119,626.9 125,727.9 131,762.9 136,506.4 139,100.0 143,307.7 148,760.0 155,540.0 163,161.5 Resourcebalance (13,232.9) (10,879.1) (13,823.2) (9,934.9) (6,922.1) (4,550.1) (7,462.0) (7.496.0) (6,174.3) Exports (GNFS) 32,677.5 35,658.5 36,272.2 40,996.9 40,414.0 43,253.5 41,207.4 41,763.7 45,918.5 Imports (GNFS) 45,910.4 46,537.6 50,095.5 50,931.8 47,336.1 47,803.7 48,669.4 49,259.7 52,092.8 Total expenditures 122,027.0 126,536.8 135,945.5 141,255.1 147,173.6 140,969.4 156,222.0 163,036.0 169,335.7 Consumption expenditures 89,813.5 96,182.9 104,602.4 110,272.1 118,473.6 112,969.4 124,022.0 129,336.0 134,108.0 Govemment 15,766.9 15,515.8 14,995.8 15,266.8 14,645.0 14,553.3 16,630.4 16,471.8 16,900.6 Private 74,046.6 80,667.1 89,606.6 95,005.3 103,828.6 98,416.1 107,391.6 112,864.2 117,207.4 Gross domestic investment 32,693.1 31,536.5 33,472.1 29,648.1 27,500.0 28,000.0 32,200.0 33,700.0 35,227.7 Govemment 17,620.7 15,084.9 16,855.5 11,323.0 12,346.0 12,064.2 9,289.9 8,991.6 9,398.9 Private 14,592.8 15,268.9 14,487.6 19,660.1 16,354.0 15,935.8 22,910.1 24,708.4 25,828.8 Total fixed investment 32,213.5 30,353.9 31,343.1 30,983.1 28,700.0 28,000.0 32,200.0 33,700.0 35,227.7 Total investment in stocks 479.6 1,182.6 2,129.0 (1,335.0) (1,200.0) 0.0 0.0 0.0 0.0 Terms of trade (TT) effect (1,206.8) (2,342.8) 202.7 1,254.9 41.5 (1,109.7) (1,911.4) (1,099.9) (1,089.4) Gross domestic income 117,553.1 122,322.3 131,975.9 134,449.7 139,141.5 142,198.0 146,848.6 154,440.1 162,072.0 Domestic saving (TT adjusted) 27,739.6 26,139.4 27,373.5 24,177.6 20,667.8 29,228.7 22,826.6 25,104.1 27,964.0 Source: Govemment of Egypt. 72 TABLE 2 National accounts (LE million) Second five-year plan period: actual Third plan period: actual Estimate 1988 1989 1990 1991 1992 1993 1994 1995 1996 GDP at factor cost (at constant 1992 prices) 113,141.3 118,351.8 123,607.0 127,891.3 131,054.2 134,335.0 139,622.0 146,131.0 153,369.0 Commodity sectors 57,122.3 59,681.5 61,795.0 64,252.6 65,372.2 66,886.0 70,173.0 73,203.0 76,361.0 Agriculture and irrigation 19,623.4 20,196.6 20,756.6 21,264.2 21,680.0 22,220.0 23,072.0 23,741.0 24,470.0 Manufacturng & mining 17,720.8 18,939.8 20,225.7 21,406.3 21,728.3 22,360.0 23,295.0 25,087.0 26,970.0 Petroleum & products 12,293.8 12,597.1 12,442.0 12,772.3 13,008.2 13,210.0 14,345.0 14,365.0 14,365.0 Electricity & energy 1,781.1 1,891.6 2,005.3 2,122.2 2,220.1 2,296.0 2,382.0 2,525.0 2,658.0 Construction 5,703.3 6,056.4 6,365.3 6,687.7 6,735.7 6,800.0 7,079.0 7,485.0 7,898.0 Productive services sectors 37,629.8 39,595.6 41,902.4 42,848.9 43,605.7 44,494.0 45,592.0 47,860.0 50,674.0 Transportabon & communicabon 7,726.0 8,107.2 8,655.9 8,541.1 8,708.7 9,060.0 9,334.0 9,875.0 10,495.0 Suez Canal 5,299.7 5,572.7 5,851.9 6,124.9 6,124.9 5,800.0 5,778.0 5,516.0 5,621.0 Trade 18,852.6 19,652.0 20,474.0 21,341.2 21,731.6 22,350.0 21,345.0 24,632.0 25,936.0 Finance 4,056.7 4,146.5 4,266.7 4,469.6 4,544.9 4,680.0 1,520.0 5,435.0 5,909.0 Insurance 64.1 71.3 71.3 73.6 76.0 79.0 85.0 92.0 104.0 Tourism 1,630.6 2,046.1 2,582.7 2,298.6 2,419.6 2,525.0 2,055.0 2,310.0 2,609.0 Social services sectors 18,389.1 19,074.7 19,909.5 20,789.8 22,076.3 22,955.0 23,857.0 25,068.0 26,334.0 Housing 1,279.6 1,375.8 1,462.8 1,555.9 2,349.0 2,452.0 2,568.0 2,712.0 2,819.0 Public utilities 336.3 353.4 374.3 397.1 400.9 426.0 459.0 495.0 532.0 Social & personal services 8,683.7 9,006.8 9,388.6 9,780.2 9,893.8 10,245.0 10,613.0 11,194.0 11,039.0 Social security 72.8 78.1 81.7 85.2 87.0 92.0 97.0 102.0 111.0 Governmental services 8,016.7 8,260.5 8,602.2 8,971.3 9,345.6 9,740.0 10,120.0 10,565.0 11,833.0 Source: Government of Egypt. 73 TABLE 3 Merchandise trade (US$ million) Second five-year plan period: actual Third plan period: actual EsUmab 1988 1989 1990 1991 1992 1993 1994 1995 1996 A. Value in current prices (USS mil.) Total merchandise exports 4,572.5 3,875.5 4,374.2 5,709.7 4,790.8 6,301.9 4,573.5 4,854.0 5,438.0 Primary products 3,359.7 2,657.9 2,865.2 4,019.6 3.065.9 4,886.9 3,340.3 2,652.0 2,696.1 of which petroleum' 2,861.5 2,244.8 2,458.0 3,793.6 2,808.4 4,687.5 3,065.2 2,036.5 1,998.9 of which cotton 354.2 298.6 220.0 83.2 35.4 36.8 84.0 306.4 327.5 of which otheragriculture 144.0 114.5 187.2 142.8 222.1 162.6 191.1 309.1 389.7 Manufactured goods 1,212.8 1,217.6 1,509.0 1,690.1 1,724.9 1,415.0 1,233.2 2,202.0 2,741.9 of which textiles 504.4 446.1 635.1 528.9 575.4 450.9 569.3 1,077.3 1,335.1 of which othermanufactured 708.4 771.5 873.9 1,161.2 1,149.5 964.1 663.9 1,124.7 1,406.8 Total non-factor service receipts 3,988.6 5,566.7 6,082.4 6,715.1 7,371.1 6,532.0 7,605.3 8,280.4 9,679.5 of which tourism 885.9 900.6 1,071.8 930.7 1,727.2 1,571.0 1,779.3 2,298.9 3,202.0 of which Suez Canal 1,268.7 1,306.7 1,471.8 1,661.9 1,950.2 1,941.1 1,990.3 2,058.4 2,160.0 Total merchandise imports 9,891.7 10,360.6 11,441.1 11,424.5 10,039.5 10,728.2 8,4884 11,279.9 12,454.0 Food 1,826.9 2,601.5 2,516.4 2,074.7 2,206.2 2,354.0 1,982.0 2,759.8 3,044.6 Other consumer goods 1,322.8 1,340.2 868.9 850.6 547.2 584.3 371.1 478.7 516.5 POL and other energy 209.4 266.8 406.1 594.9 584.6 623.8 393.7 721.4 800.9 Intermediate goods 4,319.2 4,102.5 4,743.1 4,868.9 4,085.0 4,358.7 3,392.2 4,212.4 4,687.8 Capital goods 2,213.4 2,049.6 2,906.6 3,035.4 2,631.1 2,807.4 2,349.4 3,107.6 3,404.3 Total non-factor service paymentsa 2,597.5 2,828.9 2,920.2 3,552.8 4,190.9 3,829.3 6,595.4 4,631.0 5,113.0 B. Value in constant 1992 prices (USS mil.) Total merchandise exports 5,309.7 4,610.0 4,388.8 5,401.7 4,790.8 6,610.2 5,064.7 4,892.9 5,182.8 Petroleum* 3,423.6 2,882.2 2,408.4 3,447.0 2,808.4 5,018.3 3,628.5 2,385.8 2,212.7 Cotton 378.1 287.9 186.6 70.4 35.4 42.6 81.8 233.1 244.8 Other agriculture 132.4 101.0 174.5 138.8 222.1 161.6 164.9 232.9 279.1 Textiles 572.1 490.5 681.5 546.3 575.4 442.2 549.1 998.6 1,191.1 Othermanufactures 803.5 848.3 937.7 1,199.3 1,149.5 945.5 640.4 1,042.5 1,255.1 Total non-factor service receipts 4,524.0 6,120.8 6,526.7 6,935.6 7,371.1 6,406.2 7,335.9 7,675.2 8.635.6 of which tourism 1,004.8 990.3 1,150.1 961.3 1,727.2 1,540.8 1,716.3 2,130.9 2,856.7 of which Suez Canal 1,439.0 1,436.8 1,579.3 1,716.5 1,950.2 1,903.7 1,919.8 1,908.0 1,927.0 Totalmerchandiseimports 10,869.8 10,894.2 11,941.8 11,657.6 10,054.1 10,630.1 8,284.4 10,531.4 11,114.9 Food 1,709.3 2,313.5 2,403.0 2,074.7 2,206.2 2,361.1 1,922.2 2,457.5 2,548.2 Other consumer goods 1,500.4 1,473.6 932.4 878.5 547.2 573.1 358.0 443.7 460.8 POL and other energy 250.5 342.6 397.9 540.5 584.6 667.8 466.1 845.1 888.5 Intermediate goods n.e.i. 4,899.0 4,510.9 5,089.6 5,028.8 4,085.0 4,274.8 3,272.0 3,904.5 4,182.2 Capital goods 2,510.5 2,253.6 3,118.9 3,135.1 2,631.1 2,753.3 2,266.2 2,880.5 3,037.2 Total non-factor service payments- 2,940.2 3,110.5 3,133.5 3,669.5 4,190.9 3,755.6 6,361.8 4,292.5 4,561.6 Memorandum items Export volume growth rate 35.6% -13.2% -4.8% 23.1% -11.3% 38.0% -23.4% -3.4% 5.9% Import volume growth rate 20.5% 0.2% 9.6% -2.4% -13.8% 5.7% -22.1% 27.1% 5.5% 74 TABLE 3 (contd) Merchandise trade (US$ million) Second five-year plan period: actual Third plan period: actual Estimate 1988 1989 1990 1991 1992 1993 1994 199 | 1996 C. Price indices (1992 = 100) Merchandise exports 86.1 84.1 99.7 105.7 100.0 95.3 90.3 99.2 104.9 Merchandiseimports 91.0 95.1 95.8 98.0 99.9 100.9 102.5 107.1 112.0 Merchandise terms of trade 94.6 88.4 104.0 107.9 100.1 94.5 88.1 92.6 93.6 D. Non-factor service indices (1992 = 100) Exports of NFS - volume index 61.4 83.0 88.5 94.1 100.0 86.9 99.5 104.1 117.2 Exports of NFS - price index 88.2 90.9 93.2 96.8 100.0 102.0 103.7 107.9 112.1 ImportsofNFS-volumeindex 70.3 74.2 74.8 87.8 100.0 89.6 151.8 102.4 108.8 Imports of NFS-price index 88.2 90.9 93.2 96.8 100.0 102.0 103.7 107.9 112.1 ' Includes foreign partners share. '' Includes payments in return for foreign partner's investment Source: Govemment of Egypt. 75 TABLE 4 Balance of payments (US$ million) Second five-year plan period: actual Third plan period: actual Estimate 1988 1989 1990 1991 1992 1993 1994 1995 1996 TotalexportsofGNFS 8,561.1 9,442.2 10,456.6 12,424.8 12,161.9 12,833.9 12,178.8 13,134A4 15,117.5 Merchandise 4,572.5 3,875.5 4,374.2 5,709.7 4,790.8 6,301.9 4,573.5 4,854.0 5,438.0 Non-factor services 3,988.6 5,566.7 6,082.4 6,715.1 7,371.1 6,532.0 7,605.3 8,280.4 9,679.5 Total imports of GNFS 12,489.2 13,189.5 14,361.3 14,977.3 14,230.4 14,557.5 15,083.8 15,910.9 17,567.0 Merchandise 9,891.7 10,360.6 11,441.1 11,424.5 10,039.5 10,728.2 8,488.4 11,279.9 12,454.0 Non-factor services 2,597.5 2,828.9 2,920.2 3,552.8 4,190.9 3,829.3 6,595.4 4,631.0 5,113.0 Resource balance (3,928.1) (3,747.3) (3,904.7) (2,552.5) (2,068.5) (1,723.6) (2,905.1) (2,776.5) (2,449.5) Netfactorincome (598.1) (792.0) (1,344.0) (1,099.7) (724.8) (2,991.6) (949.5) (790.6) (818.6) Factor receipts 624.1 734.0 776.9 1,049.4 1,080.2 1,258.0 853.5 1,625.5 1,755.5 Factor payments 1,222.2 1,526.0 2,120.9 2,149.1 1,805.0 4,249.6 1,803.0 2,416.1 2,574.2 Interest 741.4 1,054.0 1,805.8 1,238.5 940.1 1,236.6 1,211.8 1,327.7 1,452.1 Otherfactorpayments 480.8 472.0 315.1 910.6 864.9 3,013.0 591.2 1,088.4 1,122.0 Net private current transfers 3,383.9 3,532.2 3,742.6 3,750.6 5,477.9 4,960.0 3,232.4 3,279.0 3,326.2 of which workers remittances 3,383.9 3,532.2 3,742.6 3,750.6 5,477.9 4,960.0 3,232.4 3,279.0 3,326.2 Net official current transfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Currentaccountbalance (1,142.3) (1,179.9) (1,727.7) (113.7) 2,697.9 208.5 (622.2) (288.1) 58.0 Official capital grants 697.6 711.2 1,093.7 1,486.9 1,039.3 1,357.0 813.6 918.6 964.5 Private investment (net) 124.0 124.0 136.4 140.5 358.7 453.0 1,287.4 680.6 535.0 Direct foreign investments 124.0 124.0 136.4 140.5 358.7 453.0 1,284.9 676.5 500.0 Portfolio investments 2.5 4.1 35.0 Net foreign lending 1,452.3 1,366.9 1,189.7 (143.3) 75.1 220.9 75.0 295.1 560.4 Disbursements 2,347.9 2,621.0 3,186.9 1,999.0 1,730.3 1,405.4 1,018.5 1,133.9 1,668.9 Repayments 895.5 1,254.1 1,997.2 2,142.4 1,655.2 1,184.5 943.5 838.8 1,108.5 Other capital flows, n.e.i. 597.2 (404.8) (55.6) 5,618.9 971.0 1,433.9 992.8 (51.7) 189.8 Change, net intemational reserves 1,728.8 617.4 636.5 6,989.3 5,142.0 3,673.3 2,544.1 1,550.4 2,530.4 [plus indicates increase in assets] Memorandum items: Net international reserves (NIR) 6,975.7 7,593.1 8,229.6 15,218.9 20,360.9 24,034.2 26,578.2 28,128.6 30,659.1 NIR, in months of imports 6.3 6.3 6.6 12.8 16.8 19.1 20.0 19.2 19.9 Exchange rates Annual average (LE/US$) 1.8 1.9 2.6 3.0 3.3 3.3 3.4 3.4 3.4 At end-year (LE/US$) 2.3 2.6 2.7 3.3 3.3 3.3 3.4 3.4 3.4 Index real avg. X-rate (1990 = 100) 92.3 89.3 102.4 106.0 99.9 92.4 88.9 83.2 81.0 (decrease is real appreciation) Current account balance as % GDP -1.9% -1.5% -1.8% -0.1% 1.9% 0.1% -1.2% -0.5% 0.1% Source: Government of Egypt. 76 TABLE 5 External debt, stocks and flows (US$ million) Second five-year plan period: actual Third plan period: actual Estimate _______________________ 1988 1989 1990 1991 1992 1993 1994 1995 1996 A. Gross disbursements Publicand publicly guaranteed 1,945.7 2,441.0 3,044.9 1,825.7 1,590.4 1,385.4 958.5 1,133.9 1,068.9 Official multilateral 412.5 233.7 416.3 238.6 266.0 743.7 481.9 637.9 503.8 of which IDA 22.9 18.0 11.1 4.1 3.3 17.4 28.8 51.8 70.8 of which IBRD 140.6 98.8 94.8 101.2 137.6 214.5 154.7 88.3 31.8 Official bilateral 671.7 1,028.8 1,333.5 911.7 745.4 435.3 321.6 375.7 378.0 Private creditors (guaranteed) 861.5 1,178.6 1,295.1 675.4 579.0 206.4 155.0 120.3 187.1 of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Private creditors non-guaranteed 245.0 180.0 142.0 90.0 20.0 20.0 60.0 0.0 200.0 Total LT loan disbursements 2,190.7 2,621.0 3,186.9 1,915.7 1,610.4 1,405.4 1,018.5 1,133.9 1,268.9 Drawings from IMF 157.2 0.0 0.0 83.3 119.9 0.0 0.0 0.0 0.0 Total disbursements 2,347.9 2,621.0 3,186.9 1,999.0 1,730.3 1,405.4 1,018.5 1,133.9 1,668.9 B. Amortization Public and publicly guaranteed 679.0 1,049.8 1,775.0 1,738.5 1,305.4 1,064.5 758.5 769.4 1,062.5 Official multilateral 153.6 176.6 238.0 370.6 385.6 294.0 292.9 334.3 382.5 of which IDA 3.8 4.2 6.1 8.4 10.9 11.0 12.1 13.1 14.0 of which IBRD 120.5 138.8 169.3 194.8 189.8 187.6 187.3 201.8 203.0 Official bilateral 152.2 322.2 692.2 590.4 257.7 123.0 95.4 154.2 348.6 Private creditors (guaranteed) 373.1 550.9 844.8 777.5 662.2 647.5 370.2 281.0 331.3 of which bonds 0.8 0.8 50.8 0.8 0.0 0.0 0.0 0.0 0.0 Private creditors non-guaranteed 150.0 147.0 192.0 321.0 270.0 120.0 185.0 0.0 0.0 Total LT loan net disbursements 829.0 1,196.8 1,967.0 2,059.5 1,575.4 1,184.5 943.5 769.4 1,062.5 Net credit from IMF 66.5 57.3 30.3 82.8 79.8 0.0 0.0 69.3 46.0 Total repayments 895.5 1,254.1 1,997.2 2,142.4 1,655.2 1,184.5 943.5 838.8 1,108.5 C. Net disbursements Public and publically guaranteed 1,266.7 1,391.2 1,269.9 87.2 285.0 320.9 200.0 364.5 6.5 Official multilateral 258.9 57.0 178.3 -132.0 -119.6 449.6 189.0 303.6 121.3 of which IDA 19.1 13.9 4.9 -4.3 -7.6 6.4 16.7 38.7 56.8 of which IBRD 20.2 -40.0 -74.5 -93.5 -52.2 26.9 -32.6 -113.5 -171.2 Official bilateral 519.4 706.6 641.3 321.3 487.7 312.3 226.2 221.5 29.3 Private creditors (guaranteed) 488.3 627.6 450.3 -102.1 -83.2 -441.1 -215.2 -160.7 -144.2 of which bonds -0.8 -0.8 -50.8 -0.8 0.0 0.0 0.0 0.0 0.0 Private creditors non-guaranteed 95.0 33.0 -50.0 -231.0 -250.0 -100.0 -125.0 0.0 200.0 Total LT loan net disbursements 1,361.7 1,424.2 1,219.9 -143.8 35.0 220.9 75.0 364.5 206.5 Net credit from IMF 90.7 -57.3 -30.3 0.5 40.2 0.0 0.0 -69.3 -46.0 Total net disbursements 1,452.3 1,366.9 1,189.7 -143.3 75.1 220.9 75.0 295.1 560.4 77 TABLE 5 (cont'd) External debt, stocks and flows (US$ million) Second five-year plan period: actual Third plan period: actual Estimate 1988 1989 1990 1991 1992 1993 1994 1995 1996 D. Interest and charges Publicand publically guaranteed 358.4 644.7 1,232.8 850.1 713.3 1,021.0 1,018.7 1,236.8 1,398.8 Official multilateral 175.7 159.8 190.7 212.9 189.2 192.0 214.3 232.6 258.0 of which IDA 7.0 7.4 6.2 7.1 7.3 6.8 6.8 7.1 8.0 of which IBRD 141.4 124.7 131.7 144.0 116.2 117.2 113.7 116.9 119.0 Official bilateral 83.8 340.8 781.9 418.4 363.4 684.6 696.7 898.4 1,036.7 Private creditors (guaranteed) 99.0 144.1 260.2 218.7 160.7 144.4 107.8 105.8 104.0 of which bonds 3.9 4.3 4.8 0.1 0.0 0.0 0.0 0.0 0.0 Private creditors non-guaranteed 90.0 104.3 107.4 123.8 54.9 41.4 38.5 17.5 8.5 Total interest on LT loans 448.4 749.0 1,340.2 973.9 768.1 1,062.4 1,057.2 1,254.3 1,430.4 Interest on short-term credit 293.0 305.0 465.5 264.6 172.0 174.2 154.6 73.3 10.1 Interest on IMF drawings 6.6 10.1 20.4 12.4 12.7 13.2 10.9 11.4 1.6 Total interest (LT+ST+IMF) 741.4 1,054.0 1,805.8 1,238.5 940.1 1,236.6 1,211.8 1,327.7 1,452.1 E. External debt (DOD) Public and publicaliy guaranteed 29,927.8 28,844.2 29,024.6 21,688.5 29,241.3 28,748.1 29,964.0 32,858.5 32,949.2 Official multlateral 3,176.3 2,952.3 3,401.8 3,220.7 3,333.8 3,717.8 4,040.6 4,635.1 4,750.7 of which IDA 887.3 892.7 908.1 902.4 910.6 912.8 938.2 998.6 1,055.4 of which IBRD 1,519.2 1,371.1 1,416.0 1,298.5 1,369.7 1,394.0 1,443.2 1,493.9 1,322.6 Official bilateral 22,344.0 21,371.0 21,271.3 14,578.9 22,164.4 22,338.3 23,675.4 26,250.0 26,525.3 Private creditors (guaranteed) 4,407.6 4,520.9 4,351.5 3,888.9 3,743.0 2,692.0 2,248.0 1,973.4 1,673.2 of which bonds 52.3 51.5 0.8 0.0 0.0 0.0 0.0 0.0 0.0 Prvate creditors non-guaranteed 1,098.0 1,131.0 1,081.0 850.0 600.0 500.0 375.0 375.0 200.0 Total LT DOD 31,025.8 29,975.2 30,105.6 22,538.5 29,841.3 29,248.1 30,339.0 33,233.5 33,149.2 Short-term debt 6,360.0 6,871.0 7,133.0 4,565.5 2,335.4 2,052.4 2,042.5 1,932.9 2,332.9 Use of IMF credit 242.3 175.8 155.7 155.1 210.7 206.6 213.2 109.0 63.0 Total DOD (ST+LT+IMF) of which: 35,737.1 34,551.0 34,024.3 25,705.6 32,386.0 31,505.8 32,593.2 35,272.5 35,542.2 F. Debt & debt burden indicators Total debt service (mil US$) 1,637.0 2,308.1 3,803.0 3,380.9 2,595.3 2,421.1 2,155.3 2,166.5 2,560.6 Interest (LT+ST+IMF) 741.4 1,054.0 1,805.8 1,238.5 940.1 1,236.6 1,211.8 1,327.7 1,452.1 Principal (LT+IMF) 895.5 1,254.1 1,997.2 2,142.4 1,655.2 1,184.5 943.5 838.8 1,108.5 Total debt (DOD), total debt service (TDS): DOD/exports(GNFS+WR)rato 284.3% 252.0% 227.2% 149.2% 173.0% 165.4% 200.4% 195.5% 176.0% DOD I GDP ratio 102.1% 87.3% 92.2% 69.6% 77.4% 66.7% 62.8% 58.4% 52.3% MLT DOD (public+pub. guar.) / GDP ratio 85.5% 72.9% 78.7% 58.7% 69.9% 60.9% 57.8% 54.4% 48.5% TDS Iexports (GNFS+WR) rabo 13.0% 16.8% 25.4% 19.6% 13.9% 12.7% 13.3% 12.0% 12.7% Source: Central Bank of Egypt and World Bank. 78 TABLE 6 Fiscal accounts (LE million) Second five-year plan period: actual Third plan period: actual EstImate 1988 1989 1990 1991 1992 1993 1994 1995 1996 Govemment budiget (mit LCUs) Total current revenues 12,4117 14,791.9 17,047.0 25,608.0 37.834.0 43,503.0 49,418.0 52,925.0 57,708.0 Direct taxes 2,805.5 3,414.6 4,247.0 6,408.0 10,001.0 11,120.0 12,015.0 12,156.0 13,731.0 Indirecttaxes 5,337.4 6,461.8 7,496.0 9,095.0 14,285.0 16,182.0 19,358.0 22,123.0 24,518.0 On domestic goods and services 2,959.7 3,613.9 4,579.0 5,828.0 9,697.0 11,166.0 13,238.0 15,1060 16,607.0 On intematonal trade 2,377.7 2,847.9 2,917.0 3,267.0 4,588.0 5,016.0 6,120.0 7,017.0 7,911.0 Non-tax receipts 4,268.8 4,915.5 5,304.0 10,105.0 13,548 0 16,201.0 18.0450 18,6460 19,459.0 Total currentexpenditures 15,819.9 18,588.7 22,446.0 29,679.0 36,1980 40,886.0 46,097.0 47,633.0 51,967.0 Interest on extemal debt 377.9 539.1 687.0 2,870.0 3,151.0 3,994.0 4,682.0 3,613.0 3,796.0 Interestondomestcdebt 1,926.4 2,471.9 2,969.0 4.1760 6,359.0 9,295.0 11,816.0 11,178.0 12,231.0 Transfers to pnvate sector 674.3 1,002.3 1,985.0 -1,735.0 -650.0 1,591.0 1,176.0 498.0 -76.9 Transfers to other NFPS 2,036.3 2,053.4 2,656.0 4,964.0 6,451.0 3,245.0 -153.0 179.0 256.0 Subsidies 2,367.4 2,831.8 2,971.0 6,635.0 6,242.0 5,042.0 8,750.0 10,250.0 11,547 9 Consumption 8,437.6 9,690.2 11,178.0 12,769.0 14,645.0 17,719.0 19,826.0 21,915.0 24,213 0 Wages and salares 4,5701 5,224.9 6,064.0 7,118.0 8,029.0 9,771.0 11,096.0 12,519.0 14,045.0 Otherconsumption 3,867.5 4,465.3 5,114.0 5,651.0 6,616.0 7,948.0 8,730.0 9,396.0 10,168.0 Budgetary savings -3,408.2 -3,796.8 -5,399.0 -4,071.0 1,636.0 2,617.0 3,3210 5,292.0 5,741.0 Capital revenues 3,571.4 3,515.4 4,829 0 2,951.0 3,572.0 2,998.0 3,149.0 2,794.0 3,185.0 Total capital expenditures 11,012.5 11,565.8 13,947.0 15,831.0 11,365.0 10,927.0 10,167.0 10,624.0 11,922.0 Capital transfers -9.5 85.8 -304.0 5,653.0 -981.0 -80.0 492.0 -675.0 -659.0 Budgetaryfixed investment 11,022.0 11,480.0 14,251.0 10,178.0 12,346.0 10,987.0 10,659.0 11,299.0 12,581.0 Overall balance (minus = defict) -10,849.3 -11,847.2 -14,517 0 -16,951.0 -6.157.0 -5,312.0 -3,697.0 -2,538.0 -2,996.0 Sources of 6nancing 10,849.3 11,847.2 14,517.0 16,951.0 6,157.0 5,312.0 3,697.0 2.538.0 2,996.0 Foreign finaning 2,499.0 2,963.0 3,248.0 13,512.0 1,783.0 64.0 464.6 42.2 -385.5 Monetary system credit 3,713.0 4,984.0 7,696.0 1,635.0 -3,456.0 -3,202.0 -211.4 -1,053.2 4,336.0 Other domestc financing 3,687.0 3,771.0 3,527.0 3,956.0 7,678.0 8,450.0 3,443.8 3,548 9 3,653.0 Residual sources and discrepancies 950.3 129.2 46.0 -2,152.0 152.0 0.0 0.0 0.0 0.0 Shares of GDP at current prices Currentrevenues 20.1% 19.3% 17.7% 23.0% 27.2% 27.7% 28.2% 25.8% 25.0% Current expenditures 25.7% 24.2% 23.4% 26.7% 26.0% 26.0% 26.3% 23.2% 22.5% Budgetary savings -5.5% 4.9% -5.6% -3.7% 1.2% 1.7% 1.9% 2.6% 2.5% Capital revenues 5.8% 4.6% 5.0% 2.7% 2.6% 1.9% 1.8% 1.4% 1.4% Capital expenditures 17.9% 15.1% 14.5% 14.2% 8.2% 6.9% 5.8% 5.2% 5.2% Overall balance (minus = deficit) -17.6% -15.4% -15.1% -15.2% 4.4% -3.4% -2.1% -1.2% -1.3% Foreign financing 4.1% 3.9% 3.4% 12.2% 1.3% 0.0% 0.3% 0.0% -0.2% Monetary system credit 6.0% 6.5% 8.0% 1.5% -2.5% -2.0% -0.1% -0.5% 1.9% OtherdomesUcfinancing 6.0% 4.9% 3.7% 3.6% 5.5% 5.4% 2.0% 1.7% 1.6% Govemment debt (DOD, end of year) Extemal debt (LE mil) 49,333.3 52,394.8 55,004.9 47,228.7 79,694.0 79,665.8 84,783.4 92,664.3 92,730.1 Extemal debt (USS mil) 21,449.3 20,229.7 20,297.0 14,454.1 23,992.7 23,805.7 24,987.7 27,294.3 27,461.8 Debt to monetary system (LE mil) 26,640.0 31,925.0 43,072.0 53,723.0 52,308.0 47,765.0 47,553.6 46,500.4 46,228.8 Other domestc debt (LE nil) 11,818.2 15,589.2 19,116.2 23,072.2 30,750.2 39,200.2 42,644.0 46,192.9 49,846.0 Total govemment debt (LE mil) 87,791.5 99,909.0 117,193.1 124,023.9 162,752.2 166,631.0 174,981.0 185,357.6 188,804.9 Total govemmentdebtas percentGDP 142.5% 130.1% 121.9% 111.5% 117.0% 105.9% 100.0% 90.4% 81.7% Tax burden indicators (%) Dirct taxesIGOP 4.6% 4.4% 4.4% 5.8% 7.2% 7.1% 6.9% 5.9% 5.9% Indir. taxes on domestic G&S l GDP 4.8% 4.7% 4.8% 5.2% 7.0% 7.1% 7.6% 7.4% 7.2% Indir. taxes dom G&S I pdv. consum. 7.5% 7.2% 6.9% 7.3% 9.3% 9.3% 10.3% 10.1% 9.9% Taxes intl trade/merch. imports 13.7% 14.2% 9.8% 9.5% 13.8% 14.0% 21.4% 18.3% 18.7% Source: Govemment of Egypt 79 TABLE 7 Monetary survey (LE million) Second five-year plan period: actual Third plan period: actual Estimate 1988 1989 1990 1991 1992 1993 1994 1995 | 1996 A. Annual flows during the year Netforeign assets 1,040.0 -1,003.0 -4,487.0 11,265.0 14,475.0 17,153.0 8,276.0 -846.9 13,886.5 Domesic credit 8,785.0 10,280.0 17,662.0 18,328.0 1,488.0 5,008.0 12,054.6 15,707.8 18,611.8 Netclaimsongovemment 3,537.0 5,285.0 11,147.0 10,651.0 -1,415.0 -4,543.0 -211.4 -1,053.2 4,336.0 Claims on private sector 3,358.0 3,504.0 3,675.0 4,605.0 1,618.0 7,194.0 6,738.0 16,045.0 18,076.7 Claims on PE sector 1,890.0 1,491.0 2,540.0 3,072.0 1,285.0 2,357.0 5,528.0 716.0 806.7 Total assets = liabilities 9,825.0 9,277.0 13,175.0 29,593.0 15,963.0 22,161.0 20,330.6 14,860.9 32,498.3 Moneyandquasimoney 11,649.0 8,905.0 11,841.0 19,740.0 13,065.0 17,174.0 15,102.0 15,163.0 19,793.4 Other liabilities (net) -1,824.0 372.0 1,334.0 9,853.0 2,898.0 4,987.0 5,228.6 -302.1 12,704.9 B. End-of-year stock Net foreign assets 1,461.0 458.0 -4,029.0 7,236.0 21,711.0 38,864.0 47,140.0 46,293.1 60,179.6 Domesticcredit 54,170.0 64,450.0 82,112.0 100,440.0 101,928.0 106,936.0 118,990.6 134,698.4 153,310.2 Net claims on govemment 26,640.0 31.925.0 43,072.0 53,723.0 52,308.0 47,765.0 47,553.6 46,500.4 46,228.8 Credit to private sector 20,017.0 23,521.0 27,196.0 31,801.0 33419.0 40,613.0 47,351.0 63,396.0 81,472.7 Credit to PE sector 7,513.0 9,004.0 11,844.0 14,916.0 16,201.0 18,558.0 24,086.0 24,802.0 25,608.7 Total assets = liabilities 55,631.0 64,908.0 78,083.0 107,676.0 123,639.0 145,800.0 166,130.6 180,991.5 213,489.8 Money and quasimoney 51,067.0 59,972.0 71,813.0 91,553.0 104,618.0 121,792.0 136,894.0 152,057.0 171,850.4 Other liabilities (net) 4,564.0 4,936.0 6,270.0 16,123.0 19,021.0 24,008.0 29,236.6 28,934.5 41.639.4 C. Factors accounting for monetary expansion (as % MOM) Net foreign assets 2.9% 0.8% -5.6% 7.9% 20.8% 31.9% 34.4% 30.4% 35.0% Net credit to govemment 52.2% 53.2% 60.0% 58.7% 50.0% 39.2% 34.7% 30.6% 26.9% Credit to private sector 39.2% 39.2% 37.9% 34.7% 31.9% 33.3% 34.6% 41.7% 47.4% Credit to PE sector 14.7% 15.0% 16.5% 16.3% 15.5% 15.2% 17.6% 16.3% 14.9% Other liabilities (net)(-) 8.9% 8.2% 8.7% 17.6% 18.2% 19.7% 21.4% 19.0% 24.2% Total money and quasi-money 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% D. Memorandum items Net intl. reserves (US$ mil.) Monetary system, flow 1,728.8 617.4 636.5 6,989.3 5,142.0 3,673.3 2,544.1 1,550.4 2,530.4 Monetary system, stock 6,975.7 7,593.1 8,229.6 15,218.9 20,360.9 24,034.2 26,578.2 28,128.6 30,659.1 in months of imports 6.3 6.3 6.6 12.8 16.8 19.1 20.0 19.2 19.9 E. Money, credit and prices M2 / GOP 82.9% 78.1% 74.7% 82.3% 75.2% 77.4% 78.2% 74.2% 74.4% Annual growth rate M2 29.6% 17A% 19.7% 27.5% 14.3% 16.4% 12.4% 11.1% 13.0% Annual growth private credit 20.2% 17.5% 15.6% 16.9% 5.1% 21.5% 16.6% 33.9% 28.5% GDP deflator, growth rate 13.4% 18.8% 18.4% 14.5% 19.8% 9.8% 7.2% 12.0% 7.4% Govemment of Egypt. 80 TABLE 8 National accounts (LE million) Actual Estimate Projection: base case scenario 1996 1996 1997 1998 1999 2000 2001 2002 A. In current prices (mil LE) GDP at marketl rpces 205,000.0 230,958.3 253,9040 278,331.6 304,818.2 333,505.3 364,540.6 398,078.4 Net indirect taxes 11,873.0 12,970.1 13,779.8 14,033.8 15,607.6 16,399.2 17,193.0 17,972.0 GDP atfactorcost 193,127.0 217,988.2 240,124.2 264,297.8 289,210.6 317,106.1 347,3476 380,106.3 Agriculture 32,050.0 35,419.9 38,370.3 41,477.2 44,718.5 48,163.4 51,833.9 55,691.5 Industry 61,700.0 69,579.1 76,913.0 84,837.5 93,334.0 102,575.6 112,645.8 123,499.0 of which mariufacturng 46,580.0 53,228.5 60,787.4 68,896.1 75,411.7 83,334.3 92,087.0 101,651.7 Services 99,377.0 112,989.2 124,841.0 137,983.2 151,158.2 166,367.0 182,867.9 200,915.8 Resource balance (9,423.4) (8,328.5) (8,363.6) (8,766.9) (10,647.3) (10.795.6) (10,852.1) (10,738.2) Exports (GNFS) 44,578.2 51,400.8 53,762.4 57,745.0 68,037.4 74,472.4 81,430.2 88,879.7 Imports (GNFSI 54,001.5 59,729.3 62,126.0 66,511.8 78,684.7 85,268.0 92,282.3 99,617.9 Total expenditures 214,423.4 239,286.8 262,267.6 287,098.5 315,465.5 344,300.8 375,392.7 408,816.5 Consumption expenditures 172,075.5 192,132.5 211,884.4 233,069.2 256,432.7 281,028.9 307,639.9 336,391.6 Govemment 21,915.0 24,213.0 25.736.7 27,358.2 29,083.8 30,920.4 32,875.2 34,955.9 Private 150,160.5 167,919.5 186,147.8 205,711.1 227,346.9 250,108.6 274,764.8 301,435.7 Gross domestc investment 42,347.9 47,154.4 50.383.2 54,029.3 59.032.8 63,271.9 67,752.8 72,424.9 Govemment 11,299.0 12,581.0 14,021.0 15,447.4 16,8564 18,509.5 20.487.2 22,610.9 Pnvate 31,048.9 34,573.4 36,362.2 38,581.9 42,176.4 44,762.4 47.265.6 49.814.1 Total fixed investment 42,347.9 47,154.4 50,383.2 54,029.3 59,032.8 63,271.9 67,752.8 72,424.9 Total investment in stocks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Domestic saving 32,924.5 38,825.9 42,019.6 45,262.4 48,385.6 52,476.4 56,900.7 61,686.8 + Netfactorincome(NFY) (2,683.4) (2,783.4) (2,606.0) (2,495.7) (2,761.7) (2,880.1) (3,027.0) (3,158.5) + Net current transfers (NCT) 11.128.9 11,309.2 11,320.9 11,650.8 13,037.4 13,512.4 13,994.9 14,473.6 = National saving 41,370.1 47,351.7 50,734.5 54,417.4 58,661.2 63.108.7 67,868.6 73,001.8 Gross nabonal product 202,316.6 228,174.9 251,298.0 275,835.9 302,056.5 330,625.2 361,513.6 394,919.8 Gross natonal disposable income 213,445.5 239,484.2 262,619.0 287,486.7 315,093.8 344,137.6 375,508.6 409,393.4 B. Shares of GCP (current pnces) Gross domestc product 100.0° 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Net indirect taxes 5.8% 5.6% 5.4% 5.0% 5.1% 4.9% 4.7% 4.5% Agriculture value added 15.6% 15.3% 15.1% 14.9% 14.7% 14.4% 14.2% 14.0% Industry value zidded 30.1% 30.1% 30.3% 30.5% 30.6% 30.8% 30.9% 31.0% of which manufacturng 22.7% 23.0% 23.9% 24.8% 24.7% 25.0% 25.3% 25.5% Services value added 48.5% 48.9% 49.2% 49.6% 49.6% 49.9% 50.2% 50.5% Resource balance (X-M) -4.6% -3.6% -3.3% -3.1% -3.5% -3.2% -3.0% -2.7% Exports (GNFSI 21.7% 22.3% 21.2% 20.7% 22.3% 22.3% 22.3% 22.3% Imports (GNFS) 26.3% 25.9% 24.5% 23.9% 25.8% 25.6% 25.3% 25.0% Total expenditures 104.6% 103.6% 103.3% 103.1% 103.5% 103.2% 103.0% 102.7% Govemmentconsumpbon 10.7% 10.5% 10.1% 9.8% 9.5% 9.3% 9.0% 8.8% Private consumpton 73.2% 72.7% 73.3% 73.9% 74.6% 75.0% 75.4% 75.7% Govemment investment 5.5% 5.4% 5.5% 5.6% 5.5% 5.6% 5.6% 5.7% Private investment 15.1% 15.0% 14.3% 13.9% 13.8% 13.4% 13.0% 12.5% Gross domestc saving 16.1% 16.8% 16.5% 16.3% 15.9% 15.7% 15.6% 15.5% Gross national saving 20.2% 20.5% 20.0% 19.6% 19.2% 18.9% 18.6% 18.3% Memorandum items: GDP deflator (% change) 12.0% 7.4% 5.3% 5.1% 4.8% 4.7% 4.6% 4.4% Consumer prce index (% change) 12.0% 7.4% 5.3% 5.1% 4.8% 4.7% 4.6% 4.4% Total GDP (million current USS) 60,400.7 67,927.2 75,717.6 81,862.2 81,319.2 87,132.2 93,335.9 100,030.6 Conversion factor used (LEAIS$) 3.4 3.4 3.4 3.4 3.7 3.8 3.9 4.0 Per capita gross nabonal product 940.0 1,050.0 1,170.0 1,270.0 1,320.0 1,350.0 1,390.0 1,470.0 [AUas method: in Constant USS] 81 TABLE 8 (cont' d) National accounts (LE million) Actual Estimate Projection: base case scenario 1995 1996 1997 1998 1999 2000 2001 2002 C. In constant 1992 prices GOP at market prices 155.540.0 163,161.5 170,381.3 177,793.5 185,836.8 194,257.8 203,020.7 212,326.2 Resource balance (7.496.0) (6,174.3) (6.077.0) (6,461.9) (7,187.4) (7,003.2) (6,727.4) (6,325.9) Exports (GNFS) 41,763.7 45,916.5 47,846.4 49,883.3 52,036.3 54,313.2 56,722.0 59,271.5 Imports (GNFS) 49,259.7 52,092.8 53,923.4 56,345.2 59,223.7 61,316.4 63,449.4 65,597.5 Total expenditures 163,036.0 169,335.7 176,458,3 184,255.5 193,024.2 201,261.0 209.748.1 218,652.2 Consumpton expenditures 129,336.0 134,108.0 140,349,9 147,244.4 155,087.8 162,376.2 169,891.2 177,798.8 Govemment 16,471.8 16,900.6 17,047.7 17,283.9 17,589.6 17,865.5 18,155.0 18,475.8 Private 112,864.2 117,207.4 123,302.2 129,960.5 137,498.2 144,510.6 151,736.2 159,323.0 Gross domestc investment 33,700.0 35,227.7 36,108.4 37,011.1 37,936.4 38,884.8 39,856.9 40,853.3 Govemment 8,991.6 9,398.9 10,048.5 10,581.8 10,832.5 11,375.3 12,052.0 12,754.3 Private 24,708.4 25,828.8 26,059.9 26,429.3 27,103.9 27,509.4 27,804.9 28,099.0 Total tixed investment 33,700.0 35,227.7 36,108.4 37,011.1 37,936.4 38,884.8 39,856.9 40,853.3 Total investment in stocks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Terms of trade (TT) effect (1,099.9) (1,089.4) (1,182.3) (964.9) (826.5) (759.9) (734.0) (745.0) Gross domestc income 154,440.1 162,072.0 169,199.0 176,828.7 185,010.3 193,497.8 202,286.6 211,581.2 Domestic saving (TT adjusted) 25,104.1 27,964.0 28,849.1 29,534.3 29,922.5 31,121.7 32,395.5 33,782.3 D. Annual growth rates (1992 prices) GDP at market prices 4.6% 4.9% 4.4% 4.4% 4.5% 4.5% 4.5% 4.6% Exports (GNFS) 1.3% 9.9% 4.2% 4.3% 4.3% 4.4% 4.4% 4.5% Imports (GNFS) 1.2% 5.8% 3.5% 4.5% 5.1% 3.5% 3.5% 3.4% Total expenditures 4.4% 3.9% 4.2% 4.4% 4.8% 4.3% 4.2% 4.2% Consumption 4.3% 3.7% 4.7% 4.9% 5.3% 4.7% 4.6% 4.7% Investment 4.7% 4.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Gross domestc income 5.2% 4.9% 4.4% 4.5% 4.6% 4.6% 4.5% 4.6% Gross domestc savings 10.0% 11.4% 3.2% 2.5% 1.1% 4.0% 4.1% 4.3% Per capita growth rates: Per capita GDP (mp) 2.2% 2.7% 2.2% 2.2% 2.4% 2.4% 2.4% 2.5% Per capita total consumption 2.0% 1.5% 2.5% 2.7% 3.2% 2.6% 2.5% 2.6% Per capita private consumpton 2.8% 1.7% 3.0% 3.2% 3.6% 3.0% 2.9% 2.9% Source: WVord Bank. 82 TABLE 9 Merchandise trade (USS million) Actual Estimate Projection: base case scenario 1995 1996 1997 1998 1999 2000 2001 2002 A. Value in current pnces (US$ mil.) Total merchandise exports 4,854.0 5,438.0 5,627 5 5,830.6 6,177.7 6,597.0 7,035.5 7,493.8 Prmary products 2,652.0 2,696.1 2,666 3 2,643.9 2,745.8 2,902.0 3,059.6 3,218.3 of which petroleum' 2,036.5 1,998.9 1,998.9 1,948.9 1,987.4 2,089.6 2,188.0 2,282.0 of which cotton 306.4 327.5 305.8 319.4 343.8 3625 382.3 403.3 of which other agriculture 309.1 369.7 361.6 375.6 414.5 449.9 489.3 533.1 Manufacturedgoodts 2,202.0 2,741.9 2,9613 3,186.7 3,431.9 3,695.0 3,975.8 4,275.4 ofwhichTextiles 1,0773 1,3351 1,441.9 1,551.6 1,671.0 1,7991 1,935.9 2,081.8 of which other manufactured 1,124 7 1,406.8 1,519.4 1,635.0 1,760.9 1,895.9 2,040.0 2,193.7 Total non-factor service receipts 8,280.4 9,679.5 10,405.1 11,153.3 11,973.3 12,859.8 13,813.7 14,840.2 of which oursm 2,298.9 3,202.0 3,557.0 3,937.1 4,361.2 4,829.7 5,345.3 5,912.3 of which Suez Canal 2,058.4 2,160.0 2,243.9 2,322.7 2,406.2 2,492.0 2,579.2 2,667.9 Total merchandise imports 11,279.9 12,454.0 13,134.5 13,868.6 14,8817 15,793.3 16,750.7 17,746.5 Food 2,759.8 3,044.6 3,109.5 3,175.2 3,241 5 3,308.5 3,378.1 3,444.4 Other consumer goods 478.7 516.5 558.9 603.7 655.1 706.0 759.7 816.9 POLandotherenergy 721.4 800.9 819.9 817.8 854.6 920.8 987.9 1,056.5 Intermediate goods 4,212.4 4,687.8 5,008.8 5,371.2 5,868.6 6,290,1 6,735.5 7,200.0 Capital goods 3,107.6 3,404.3 3,637.4 3,900.7 4,261.9 4,567.9 4,891.4 5,228.7 Total non-factor service payments- 4,631.0 5,113.0 5,392 4 5,693.8 6,109.7 6,484.0 6,877.0 7,285.8 B. Value in constant 1992 pnces (US5 mll.) Total merchandise exports 4,892.9 5,182.8 5,373.5 5,572.4 5,779.9 5,996.4 6,222.4 6,458.3 Petroleum' 2,385 8 2,212.7 2,257.0 2,302.1 2,348.2 2,395.1 2,443.0 2,491.9 Cotton 233,1 244.8 252.1 259.7 267.5 275.5 283.8 292.3 Otheragnculture 232.9 279.1 295.9 313.6 332.4 352.4 373.5 395.9 Textiles 998.6 1,191.1 1,250.6 1,313.2 1,378.8 1,447.8 1,520.1 1,596.2 Othermanufactures 1,042.5 1,255.1 1,317.9 1,383.8 1,452.9 1.525.6 1,601.9 1,682.0 Total non-factor service receipts 7,675.2 8,635.6 9,025.1 9,439.1 9,879.6 10,348.2 10,847.1 11,378.5 of which tourism 2,130.9 2,856.7 3,085.2 3,332.0 3,598.6 3,886.5 4,197.4 4,533.2 of which Suez Canal 1,908.0 1,927.0 1,946.3 1,965.8 1,985.4 2,005.3 2,025.3 2,045.6 Totalmerchandiseimports 10,531.4 11,114.9 11,550.2 12,137.4 12,781.0 13.234.5 13,693.9 14,154.1 Food 2,457.5 2,848.2 2,640.3 2,813.6 2,871.7 2,873.5 2,864.2 2,844.6 Otherconsumergoods 443.7 460.8 484.7 510.9 #40.6 568.1 596.5 626.4 POL and other enerqy 845.1 886.5 925.8 966.0 1.009.7 1,055.5 1,103.1 1,153.7 Intermediate goods r.e.i. 3,904.5 4,182.2 4,344.4 4,545.7 4,842.4 5,061.6 5,289.0 5,520.5 Capital goods 2,880.5 3,037.2 3,155.0 3,301.2 3,516.6 3,675.8 3,841.0 4,009.0 Total non-factor service payments- 4,292.5 4,561.6 4,677.1 4,818.7 5,041.3 5,217.6 5,400.1 5,586.3 Memorandum tems Export volume growth rate -3.4% 5.9% 3.7% 3.7% 3.7% 3.7% 3.8% 3.8% Import volume growth rate 27.1% 5.5% 3.9% 5.1% 5.3% 3.5% 3.5% 3.4% C. Prce Indices (1992 = 100) Merchandise exports 99.2 104.9 104.7 104.6 106.9 110.0 113.1 116.0 Merchandise imports 107.1 112.0 113.7 114.3 116.4 119.3 122.3 125.4 Merchandise terms of trade 92.6 93.6 92.1 91.6 91.8 92.2 92.4 92.5 D. Non-factor service indices (1992 =100) ExportsofNFS-volurneindex 104.1 117.2 122.4 128.1 134.0 140.4 147.2 154.4 ExportsofNFS-pnpceindex 107.9 112.1 115.3 118.2 121.2 124.3 127.3 130.4 ImportsofNFS-volumeindex 102.4 108.8 111.6 115.0 120.3 124.5 128.9 133,3 ImportsofNFS-priceindex 107.9 112.1 115.3 118.2 121.2 124.3 127.3 130.4 Includes foreign partner's share. - Includes payments in retum forforeign partner's invest ent Source: Woodd Bank. 83 TABLE 1 0 Balance of payments (US$ million) Actual Estimate Projection: base case scenario 1995 1996 1997 1998 1999 2000 2001 2002 TotalexportsofGNFS 13,134.4 15,117.5 16,032.7 16,983.8 18,151.0 19,456.8 20,849.1 22,334.0 Merchandise 4,854.0 5,438.0 5,627.5 5,830.6 6,177.7 6,597.0 7,035.5 7,493.8 Non-factor services 8,280.4 9,679.5 10,405.1 11,153.3 11,973.3 12,859.8 13,813.7 14,840.2 Tota! imports ofGNFS 15,910.9 17,567.0 18,526.8 19,562.3 20,991.5 22,277.3 23,627.7 25,032.3 Merchandise 11,279.9 12,454.0 13,134.5 13,868.6 14,881.7 15,793.3 16,750.7 17,746.5 Non-factor services 4,631.0 5,113.0 5,392.4 5,693.8 6,109.7 6,484.0 6,877.0 7,285.8 Resource balance (2,776.5) (2,449.5) (2,494.1) (2,578.5) (2,840.5) (2,820.5) (2,778.5) (2,698.3) Net factor income (790.6) (818.6) (777.1) (734.0) (736.8) (752.5) (775.0) (793.7) Factor receipts 1,625.5 1,755.5 1,896.0 2,047.7 2,211.5 2,388.4 2,579.5 2,785.8 Factorpayments 2,416.1 2,574.2 2,673.1 2,781.7 2.948.3 3,140.8 3,354.5 3,579.5 Interest 1,327.7 1,452.1 1,502.1 1,5483 1,608.5 1,649.0 1,698.2 1,752.2 Other factor payments 1,088.4 1,122.0 1,171.0 1,233.4 1,339.8 1,491.8 1,656.3 1,827.3 Net prvate cunrent transfers 3,279.0 3,326.2 3,376.1 3,426.7 3,478.1 3,530.3 3,583.2 3,637.0 of which workers remittances 3,279.0 3,326.2 3,376.1 3,426.7 3,478.1 3,530.3 3,583.2 3.637.0 Net official current transfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Current account balance (288.1) 58.0 104.8 114.2 (99.1) (42.7) 29.7 145.0 Ofricial capital grants 918.6 964.5 945.2 926.3 907.8 889.7 871.9 854.4 Pnvate investment (net) 680.6 762.3 1,697.0 2.067.9 2,275.1 2,514.2 2,774.6 3,057.0 Directforeign investments 676.5 757.7 1,497.0 1,847.9 2,033.1 2,248.0 2,481.8 2,734.9 Portfolio investments 4.1 4.6 200.0 220.0 242.0 266.2 292.8 322.1 Net foreign lending 295.1 660.4 719.3 876.9 936.5 1,027.3 1.212.5 1,287.2 Disbursements 1,133.9 1,668.9 1.807.8 1,890.2 2,095.0 2,308.7 2,527.6 2,737.3 Repayments 838.8 1,108.5 1,088.5 1,013.3 1,158.5 1,281.4 1,315.1 1,450.1 Other capital flows. n.e.i. (51.7) 189.8 221.0 (680.4) (856.3) (479.3) (521.9) (565.7) Change, net intemational reserves 1,550.4 2,530.4 3,487.3 3,084.9 2.922.0 3,643.0 4,073.9 4,455.8 [plus indicates increase in assets] Memorandum items: Net intematonal reserves (NIR) 28,128.6 30,659.1 34,146.4 37,231.3 40,153.2 43,796.2 47,870.1 52,325.9 NIR, in months of imports 19.2 19.9 20.9 21.3 21.6 22.2 22.9 23.7 Exchange rates Annual average (LEIUSS) 3.4 3.4 3.4 3.4 3.7 3.8 3.9 4.0 At end-year (LEAJSS) 3.4 3.4 3.4 3.6 3.8 3.9 3.9 4.0 Index real avg. X-rate (1990 = 100) 83.2 81.0 77.3 75.4 81.0 81.0 81.0 81.0 (decrease is real appreciabon) Currentaccountbalanceas%GDP -0.5% 0.1% 0.1% 0.1% -0.1% 0.0% 0.0% 0.1% Source: World Bank. 84 TABLE 1 1 External debt, stocks and flows (US$ million) Actual Estimate Projection: base case scenario 1995 1996 1997 1998 1999 2000 2001 2002 A. Gross disbursements Public and publicly guaranteed 1,133.9 1,068.9 1,167.8 1,182.2 1,311.7 1,442.1 1,568.7 1.676.2 Official multlateral 637.9 503.8 491.4 456.1 489.2 546.2 607.2 635.3 of which IDA 51.8 70.8 102.9 97.8 89.8 73.9 54.4 36.0 ofwhich IBRD 88.3 31.8 45.0 79.2 127.8 185.4 245.1 281.8 Official bilateral 375.7 378.0 340.4 378.6 444.7 474.2 489.5 512.3 Private creditors (guaranteed) 120.3 187.1 336.0 347.5 377.8 421.8 472.1 528.7 of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Private creditors non-guuiranteed 0.0 200.0 200.0 224.0 250.9 281.0 314.7 352.5 Total LT loan disbursements 1,133.9 1,268.9 1,367.8 1,406.2 1,562.6 1,723.1 1,883.4 2,028.7 Short-term credit (net) 0.0 400.0 440.0 484.0 532.4 585.6 644.2 708.6 Drawings from IMF 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total disbursements 1,133.9 1,668.9 1,807.8 1,890.2 2,095.0 2,308.7 2,527.6 2,737.3 8. Amortizabon Public and publicly guaranteed 769.4 1,062.5 1,034.0 1,013.3 1,110.0 1,201.4 1,190.3 1,275.2 Offidal mulilateral 334.3 382.5 421.2 391.0 381.3 370.7 340.8 341.8 of which IDA 13.1 14.0 15.0 16.1 17.8 19.9 23.1 32.0 of which IBRD 201.8 203.0 215.8 198.8 173.5 146.4 123.6 116.3 Offiaat bilateral 154.2 348.6 348.1 395.0 497.9 624.8 730.1 789.1 Pnvate creditors (guararneed) 281.0 331.3 264.8 227.3 230.8 205.9 119.4 144.2 of which bonds 0.0 0 0 0.0 0.0 0.0 0.0 0.0 0.0 Prvate creditors non-guaranteed 0.0 0.0 0.0 0.0 40.0 80.0 124.8 175.0 Total LT loan net disbursements 769.4 1,062.5 1,034.0 1,013.3 1,150.0 1,281.4 1,315.1 1,450.1 Net credit from IMF 69.3 46.0 54.5 0.0 8.5 0.0 0.0 0.0 Total repayments 838.8 1,108.5 1,088.5 1,013.3 1,158.5 1,281.4 1,315.1 1,450.1 C. Net disbursements Public and publicallyguaranteed 364.5 6.5 133.8 168.9 201.7 240.7 378.4 401.1 Official multilateral 303.6 121.3 703 65.1 107.9 175.5 266.3 293.4 of which IDA 38.7 56.8 88.0 81.6 72.0 54 0 31.3 4.0 of which IBRO (113.5) (171.2) (170.7) (119.6) (45.7) 38.9 121.6 165.5 Official bilateral 221.5 29.3 (7.7) (16.4) (53.2) (150.6) (240.6) (276.8) Private creditors (guaranteed) (160.7) (144.2) 71.2 120.2 147.0 215.8 352.7 384.5 of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Prvate creditors non-guaranteed 0.0 200.0 200.0 224.0 210.9 201.0 189.9 177.5 Total LT loan net disbursements 364.5 206.5 333.8 392.9 412.6 441.7 568.3 578.6 Short-term credit (net) 0.0 400.0 40.0 44.0 48.4 53.2 58.6 64.4 Net credit from IMF (69.3) (46.0) (54.5) 0.0 (8.5) 0.0 0.0 0.0 Total net disbursements 295.1 560.4 719.3 875.9 936.5 1,027.3 1,212.5 1,287 2 85 TABLE 11 (cont'd) Extemal debt, stocks and flows (US$ million) Actual Estimate Projection: base case scenario 1995 1996 1997 1998 1999 2000 2001 2002 D. Interest and charges Public and publically guaranteed 1,236.8 1,398.8 1,412.4 1,436.2 1,472.8 1,490.5 1,518.0 1,551.8 Oficial mulblateral 232.6 258.0 269.8 286.5 305.5 323.7 345.4 371.7 of which IDA 7.1 8.0 8.9 9.7 10.5 10.8 10.8 10.7 ofwhich IBRD 116.9 119.0 116.3 120.5 128.0 138.5 153.8 172.4 Official bilateral 898.4 1,036.7 1,047.0 1,055.9 1,072.5 1,069.5 1,064.6 1,055.7 Private creditors (guaranteed) 105.8 104.0 95.6 93.8 94.9 97.3 108.0 124.4 of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Pnvate creditors non-guaranteed 17.5 8.5 25.5 43.5 62.0 79.5 96.1 111.7 Total intereston long-term loans 1,254.3 1,430.4 1,478.2 1,523.9 1.581.5 1,619.5 1,665.6 1,716.4 Interest on short-term credit 73.3 10.1 21.2 23.3 25.7 28.2 31.1 34.2 InterestonlMFdrawings 11.4 1.6 1.7 0.0 0.1 0.0 0.0 0.0 Total interest(LT+ST+IMF) 1,327.7 1,452.1 1,502.1 1,548.3 1,608.5 1,649.0 1,698.2 1,752.2 E. External debt (DOD) Public and publically guaranteed 32,858.5 32,949.2 32,961.1 33,188.2 33,421.3 33,665.8 34,060.6 34,459.1 Official mulblateral 4,635.1 4,750.7 4,820.9 4,886.0 4,993.9 5,169.4 5,435.8 5,729.2 of which IDA 998.6 1,055.4 1,143.4 1,225.0 1,297.0 1,351.0 1,382.3 1,386.3 of which IBRD 1,493.9 1,322.6 1,151.9 1,032.3 986.7 1,025.6 1,147.1 1,312.6 Offirial bilateral 26,250.0 26,525.3 26,517.7 26,625.2 26,616.8 26,583.2 26,360.4 26,082.1 Pnvate creditors (guaranteed) 1,973.4 1,673.2 1,622.5 1,676.9 1,810.5 1,913.2 2,264.5 2,647.7 of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Private creditors non-guaranteed 375.0 200.0 400.0 624.0 834.9 1,035.9 1,225.8 1,403.3 Total LTDOD 33,233.5 33,149.2 33,361.1 33,812.2 34,256.2 34,701.7 35,286.4 35,862.3 Short-term debt 1,932.9 2,332.9 2,372.9 2,416.9 2,465.3 2,518.5 2,577.1 2,641.5 UseoftMFcredit 109.0 63.0 8.5 8.5 0.0 0.0 0.0 0.0 Total DOD (ST+LT+IMF) of which: 35,272.5 35,542.2 35,339.6 35,794.7 36,234.6 36,684.9 37,275.0 37,856.7 F. Debt & debt burden indicators Total debt service (mil USS) 2,1665 2,560.6 2,590.6 2,561.6 2,767.0 2,930.5 3,013.2 3,202.3 Interest(LT+ST+IMF) 1,327.7 1,452.1 1,502.1 1,548.3 1,608.5 1,649.0 1,698.2 1,752.2 Principal(LT+IMF) 838.8 1,108.5 1,086.5 1,013.3 1,158.5 1,281.4 1,315.1 1,450.1 Total debt (DOD), total debt service (TDS): DOD/exports (GNFS+WR) rabo 195.5% 176.0% 165.9% 159.4% 152.0% 144.6% 138.0% 131.6% DOD /GDP rato 58.4% 52.3% 46.7% 43.7% 44.6% 42.1% 39.9% 37.8% MLT DOD (public-pub. guar.)IGDP rato 54.4% 48.5% 43.5% 40.5% 41.1% 38.6% 36.5% 34.4% TDS/exports(GNFS+WR)rato 12.0% 12.7% 12.2% 11.4% 11.6% 11.5% 11.2% 11.1% Source: World Bank. 86 TABLE 12 Fiscal accounts (LE million) Actual Estimate Projection: base case scenario 1995 1996 1997 1998 1999 2000 2001 2002 Government budget (mit LCUs) Total currentrevenues 52,925.0 57,708.0 61,689.0 65,477.7 72,612.3 78,485.7 84,715.3 91,283.7 Directtaxes 12,156.0 13,731.0 14,760.0 15,800.0 17,655.1 19,267.1 20,990.4 22,822.6 Indirect taxes 22,123.0 24,518.0 26,475.0 27,950.4 30,848.5 33,074.5 35,420.0 37,875.9 On domestc goods and services 15,106.0 16,607.0 17,845.0 19,604.3 21,532.8 23,583.8 25,802.9 28,200.5 On internabonal trade 7,017.0 7,911.0 8,630.0 8,346.1 9,315.7 9,490.7 9,617.2 9,675.4 Non-tax receipts 18,646.0 19,459.0 20,454.0 21,727.3 24,108.7 26,144.1 28,304.9 30,585.1 Total current expenditures 47,633.0 51,967.0 54,181.7 58,128.7 61,721.7 65,253.8 69,123.3 73,568.6 Interest on external debt 3,613.0 3,796.0 3,963.0 4,045.1 4,522.3 4,619.1 4,719.5 4,819.1 Interest on domestc debt 11,178.0 12,231.0 12,354.0 13,715.4 14,297.9 14,893.8 15,501.4 16,473.9 Transfers to pnvrate sector 498.0 (76.9) (567.2) (906.5) (1,423.2) (1,854.6) (2,199.9) (2,584.2) Transfers to other NFPS 179.0 256.0 0.0 0.0 0.0 0.0 0.0 0.0 Subsidies 10,250.0 11,547.9 12,695.2 13,916.6 15,240.9 16,675.3 18,227.0 19,903,9 Consumpbon 21,915.0 24,213.0 25,736.7 27,358.2 29,083.8 30,920.4 32,875.2 34,955.9 Wages and salaries 12,519.0 14,045.0 15,028.2 16,080.1 17,205.7 18,410.1 19,698.8 21,077.8 Other consumption 9,396.0 10,168.0 10,708.5 11,278.0 11,878.0 12,510.2 13,176.3 13,878.1 Budgetary savings 5,292.0 5,741.0 7,507.3 7,349.0 10,890.6 13,231.9 15,592.0 17,715.1 Capital revenues 2,794.0 3,185.0 3,634.0 3,952.3 4,292.6 4,659.9 5,129.0 5,602.4 Total capital expenditures 10,624.0 11,922.0 13,417.0 14,835.1 16,246.8 17,875.9 19,831.0 21,973.9 Capital transfers (675.0) (659.0) (604.0) (612.3) (609.6) (633.7) (656.2) (636.9) Budgetary fixed inivestment 11,299.0 12,581.0 14,021.0 15,447.4 16,856.4 18,509.5 20,487.2 22,610.9 Overall balance (minus = deficit) (2,538.0) (2.996.0) (2,275.7) (3,533.8) (1,063.6) 15.9 890.0 1,343.5 Sources of finanding 2,538.0 2,996.0 2,275.7 3,533.8 1,063.6 (15.9) (890.0) (1.343.5) Foreign financing 42.2 (385.5) (530.0) (387.8) (280.3) (590.2) (432.3) (502.5) Monetary system credit (1,053.2) 4,336.0 4,257.0 1,063.5 (1,501.5) (2,238.1) (3,229.9) (3,564.7) Otherdomestccfinancing 3,548.9 3,653.0 3,753.9 3,849.2 3,936.6 4,013.8 4,094.9 4,180.0 Residual sources and discrepancies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Shares of GDP at c urrent prces Current revenues 25.8% 25.0% 24.3% 23.5% 23.8% 23.5% 23.2% 22.9% Currentexpenditurets 23.2% 22.5% 21.3% 20.9% 20.2% 19.6% 19.0% 18.5% Budgetary savings 2.6% 2.5% 3.0% 2.6% 3.6% 4.0% 4.3% 4.5% Capital revenues 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% Capital expenditures 5.2% 5.2% 5.3% 5.3% 5.3% 5.4% 5.4% 5.5% Overall balance (minus = deficit) -1.2% -1.3% -0.9% -1.3% -0.3% 0.0% 0.2% 0.3% Foreign financing 0.0% -0.2% -0.2% -0.1% -0.1% -0.2% -0.1% -0.1% Monetary system credit -0.5% 1.9% 1.7% 0.4% -0.5% -0.7% -0.9% -0.9% Otherdomesticfinancing 1.7% 1.6% 1.5% 1.4% 1.3% 1.2% 1.1% 1.1% Government debt (000, end of year) Extemal debt (LE mil) 92,664.3 92,730.1 92,046.2 97,334.0 103,057.8 104,702.6 106,404.2 107,904.8 Extemal debt (USS mil) 27,294.3 27,461.8 27,259.6 27,232.3 27,206.4 27,078.5 26,988.1 26.861.7 Debt to monetary system (LE mil) 46,500.4 46,228.8 45.280e7 45,353.1 42,760.3 39,320.8 34,768.2 29,747.1 Other domestc debt (LE mil) 46,192.9 49,846.0 53,599.9 57,449.1 61,385.7 65,399.6 69,494.5 73,674.5 Total govemment debt (LE mil) 185,357.6 188,804.9 190,926.7 200,136.1 207,203.9 209,423.0 210,666.8 211,326.5 Total government debt as percent GDP 90.4% 81.7% 75.2% 71.9% 68.0% 62.8% 57.8% 53.1% Tax burden indicators (%) Direct taxes /GDP 5.9% 5.9% 5.8% 5.7% 5.8% 5.8% 5.8% 5.7% lndir.taxesondomestecG&S/GDP 7.4% 7.2% 7.0% 7.0% 7.1% 7.1% 7.1% 7.1% Indir. taxes dom G&S / priv. consum. 10.1% 9.9% 9.6% 9.5% 9.5% 9.4% 9.4% 9.4% Taxes intitradel merch. imports 18.3% 18.7% 19.6% 17.7% 16.7% 15.7% 14.7% 13.7% Source: World Bank. 87 TABLE 13 Monetary Survey (LE million) Actual Estimate Projection: base case scenario 1995 1996 1997 1998 1999 2000 2001 2002 A. Annual flows dunng the year Nettoreign assets (846.9) 13,886.5 10,302.1 16,041.4 17.126.3 15,329.4 17,415.6 19,431.2 Domestccredit 15,707.8 18,611.8 19.811.3 22,829.1 22,329.5 23,828.2 25,252.6 27,526.2 Net claims on govemment (1,053.2) 4,336.0 4,257.0 1,063.5 (1.501.5) (2,238.1) (3,229.9) (3,564.7) Claims on pnvate sector 16,045.0 18,076.7 19,872.6 21,784.5 23,857.6 26,102.9 28,532.0 31,156.9 Claims on PE sector 716.0 806.7 886.8 972.1 1,064.6 1,164.8 1,273.2 1,390.4 Total assets = liabilites 14,860.9 32,498.3 30.113.4 38,870.5 39,455.8 39,157.6 42,668.2 46,957.4 Money and quasimoney 15,163.0 19,793.4 17.241.9 18,382.7 19,938.5 21,591.5 23,355.1 25,234.1 Other liabilities (net) (302.1) 12,704.9 12,871.5 20,487.8 19,517.4 17,586.1 19,313.0 21,723.4 B. End-ot-year stock Net foreign assets 46,293.1 60,179.6 70,481.7 86,523.1 103,649.4 118,978.8 136,394.4 155,825.6 Domesticcredit 134,698.4 153,310.2 173,121.5 195,950.6 218,280.1 242,108.3 267.360.9 294,887.1 Net cdaims on govemment 46,500.4 46,228.8 45,280.7 45,353.1 42,760.3 39,320.8 34,768.2 29,747.1 Credit to private sector 63,396.0 81,472.7 101,345.3 123,129.9 146,987.5 173,090.4 201,622.4 232,779.3 Credit to PE sector 24,802.0 25,608.7 26,495.5 27,467.6 28,532.2 29,697.1 30,970.3 32,360.6 Total assets= liabilities 180,991.5 213,489.8 243,603.2 282,473.6 321,929.5 361,087.1 403,755.2 450,712.6 Money and quasimoney 152,057.0 171,850.4 189,092.2 207,474.9 227,413.4 249,004.9 272.360.0 297,594.0 Otherliabilites (net) 28,934.5 41,639.4 54,510.9 74,998.7 94,516.1 112,082.2 131,395.3 153,118.6 C. Factors accounting for monetary expansion (as % MQM) Net foreign assets 30.4% 35.0% 37.3% 41.7% 45.6% 47.8% 50.1% 52.4% Net credit to govemment 30.6% 26.9% 23.9% 21.9% 18.8% 15.8% 12.8% 10.0% Credit to pnvate sector 41.7% 47.4% 53.6% 59.3% 64.6% 69.5% 74.0% 78.2% CredtitoPEsector 16.3% 14.9% 14.0% 13.2% 12.5% 11.9% 11.4% 10.9% Other liabilibies (net)(-) 19.0% 24.2% 28.8% 36.1% 41.6% 45.0% 48.2% 51.5% Total money and quasi-money 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% D. Memorandum items Net intl. reserves (USS mil.) Monetary system, flow 1,550.4 2,530.4 3,487.3 3,084.9 2,922.0 3.643.0 4,073.9 4,455.8 Monetary system, stock 28,128.8 30,659.1 34,146.4 37,231.3 40,153.2 43.796.2 47,870.1 52,325.9 in months of imports 19.2 19.9 20.9 21.3 21.6 22.2 22.9 23.7 E. Money, credit and pnrces M2 I GOP 74.2% 74.4% 74.5% 74.5% 74.6% 74.7% 74.7% 74.8% Annual growth rate M2 11.1% 13.0% 10.0% 9.7% 9.6% 9.5% 9.4% 9.3% Annual growth pnivate credit 33.9% 28.5% 24.4% 21.5% 19.4% 17.8% 16.5% 15.5% GDP Deflator, growth rate 12.0% 7.4% 5.3% 5.1% 4.8% 4.7% 4.6% 4.4% Source: Vorld Bank. 88 TABLE 14 National accounts (LE million) Actual Estimate Projection: high case scenario 1995 1996 11997 1998 1999 2000 2001 2002 A. In current pnces (mil LE) GOP at market prices 205,000.0 230,958.3 261,211.6 295,433.4 334,457.8 378,994.2 429,458.8 Net indirecttaxes 11,873.0 12,970.1 13,414.4 15,157.0 18,113.7 19,630.1 21,162.0 22,704.7 GOP atfactor cost 193,127.0 217,988.2 247,797.1 280,276.4 316,344.1 359,3641 408,296.8 464,3875 Agrculture 32,050.0 35,4199 38,996.3 42,7970 46,899.2 51,329.7 56,058.2 61,116.8 Industry 61,700.0 69,579.1 78,167.9 87,5371 97,885.4 109,318.9 121,825.9 135,529 9 of which minufactunng 46,580.0 53,228.5 61,797.4 71,595.7 79,192.1 88,942.7 99,747.7 111,734.5 Senrices 993770 1129892 130633.0 149942.3 1715596 198715.5 2304128 267740.8 Resourcebalarice -9423.4 (8,328.5) (14,298.3) (13,711.1) (18.767.1) (18,602.3) (17,708.2) (15,8767) Exports (GNFS) 44,578.2 51,400.8 58,105.1 65,548.0 85,997.7 102,144.9 121,196.0 143,729.5 Imports (GNFS) 54,001.5 59,729.3 72,403.4 79,259.1 104,764.8 120,747.2 138,904.2 159,606.3 Total expenditures 214423.4 239286.8 275509.8 309144.5 353224.9 397596.5 447167.0 502968.9 Consumption expenditures 172,0755 192,132.5 220,834.1 245,842.5 274,5955 305,662.1 339,912.0 378,058.6 Govemment 21,915.0 24,213.0 25,907.9 27,203.3 28,5635 29,991.6 31,491.2 33,0658 Prvate 150,160.5 167.919.5 194,926.2 218,639.2 246,032.0 275,670.4 308,420.7 344,992.8 Gross domestic investment 42,347.9 47,154.4 54,675.7 63,302.0 78,629.4 91,934.5 107,255.0 124,910.3 Govemment 11,299.0 12,581.0 14,021.0 16,396.6 18,495.5 21,034.2 24,1356 27,666.8 Pnvate 31,048.9 34,573.4 40,654.7 46,905 4 60,133.9 70,900.3 83,119.5 97,243.4 Total fixed investment 42,347.9 47,154.4 54,675.7 63,302.0 78,629.4 91,9345 107,255.0 124,910.3 Total investment in stocks 0.0 0.0 0.0 0.0 0.0 0.0 0 0 0.0 Domestc saving 32,924.5 38,825.9 40,377.4 49,590.9 59,862.3 73,332.1 89,546.8 109,033.5 . Net factor income (NFY) -2683.4 -2783.4 -2805.3 -2817.6 (3,447 4) (3,907.6) (4,450.0) (5,036 4) + Netcurrenttransfers(NCT) 11,128.9 11,309.2 11,492.8 11,650.8 13,598.2 14,309.4 15,029.2 15,764.1 =National saving 41,370.1 47,351.7 49,065.0 58,424.1 70,013.1 83,733.9 100,126.0 119,761.3 Gross nabonal product 202,316.6 228,174.9 258,406.3 292,615.8 331,010.4 375,086 6 425,008.8 482,055.7 Gross natonal disposable income 213,445.5 239,484.2 269,899.1 304,266.6 344,608.6 389,396.0 440,038 0 497,819.9 B. Shares of GDP (current prces) Gross domestic product 100.0% 100.0% 100.0% 100.0% 100 0% 100.0% 100 0% 100.0% Netindirecttaxes 5.8% 5.6% 5.1% 5.1% 5.4% 5.2% 4.9% 4.7% Agriculture value added 15.6% 15.3% 14.9% 14.5% 14.0% 13.5% 13.1% 12.5% Industry value added 0.3 30.1% 29.9% 29.6% 29.3% 28.8% 28.4% 27.8% ofwhichmanufactunng 22.7% 23.0% 23.7% 24.2% 237% 23.5% 23.2% 22.9% Services value added 48.5% 48.9% 50.0% 50.8% 51.3% 52.4% 53.7% 55.0% Resource balance (X-M) 4.6% -3.6% -5.5% -4.6% -5.6% -4.9% 4.1% -3.3% Exports (GNFS) 21.7% 22.3% 22.2% 22.2% 25.7% 27.0% 28.2% 29.5% Imports (GNFS) 26.3% 25.9% 27.7% 26.8% 31 3% 31.9% 32.3% 32.8% Total expenditures 104.6% 103.6% 105.5% 104.6% 105.6% 104.9% 104.1% 103.3% Govemment consumpton 10.7% 10.5% 9.9% 9.2% 8.5% 7.9% 7.3% 68% Private consumpbon 73.2% 72.7% 74.6% 74.0% 73.6% 72,7% 71.8% 7.1% Govemment investment 5.5% 5.4% 5.4% 5.6% 5.5% 56% 5.6% 5.7% Privateinvestment 15.1% 15.0% 15.6% 159% 18.0% 18.7% 19.4% 200% Grossdomestcsaving 16.1% 16.8% 15.5% 16.8% 17.9% 19.3% 20.9% 22.4% Gross national saving 20.2% 20.5% 18.8% 19.8% 20.9% 22.1% 23.3% 24.6% Memorandum items: GDP deflator (% change) 12.0% 7.4% 7.0% 6.7% 6.5% 6.4% 6.1% 6.0% Consumer prce index (%change) 12.0% 7.4% 7.0% 6.7% 6.5% 6.4% 6.1% 6.0% Total GOP (million current US$) 60,400.7 67,927.2 76,731.7 86,892.2 85,546.3 93,501.8 102,390.2 112,378.0 Conversion factor used (LEIUS$) 34 3.4 3.4 3.4 3.9 4.1 4.2 4.3 Percapita gross nabonal product 940.0 1,050.0 1,180.0 1,320.0 1,400.0 1,460.0 1,520.0 1,640.0 [Atias method: in constant US$] 89 TABLE 14 (con't) National accounts (LE million) Actual Estimate Projection: high case scenario 1995 1996 1997 1998 1999 2000 2001 2002 C. In constant 1992 prces GDPatmarketpnces 155,540.0 163,161.5 172,471.0 182,897.9 194,425.8 207,136.8 221,152.2 236,741.6 Resource balance (7,496.0) (6,174.3) (10,923.6) (10,363.7) (12,256.3) (11,318.9) (9,963.1) (8,128.3) Exports(GNFS) 41,763.7 45,918.5 50,911.4 56,551.5 62,930.8 70,154.7 78,344.9 87,641.5 Imports (GNFS) 49,259.7 52,092.8 61,835.0 66,915.2 75,187.1 81,473.6 88,306.0 95,769.7 Total expenditures 163,036.0 169,335.7 183,394.6 193,261.6 206,682.1 218,455.6 231,115.2 244,869.8 Consumption expenditures 129,336.0 134,108.0 143,939.6 149,861.1 157,639.5 164,508.8 171,773.7 179,594.1 Govemment 16,471.8 16,900.6 16,886.8 16,582.6 16,397.7 16,141.6 15,914.0 15,707.7 Pnvate 112,864.2 117,207.4 127,052.8 133,278.4 141,241.8 148,367.1 155,859.7 163,886.5 Gross domestic investment 33,700.0 35,227.7 39,455.0 43,400.5 49,042.6 53,946.9 59,341.5 65,275.7 Govemment 8,991.6 9,398.9 10,117.8 11,241.7 11,536.0 12,342.8 13,353.6 14,458.2 Private 24,708.4 25,828.8 29,337.2 32,158.9 37,506.6 41,604.1 45,987.9 50,817.5 Total fixed investment 33,700.0 35,227.7 39,455.0 43,400.5 49,042.6 53,946.9 59,341.5 65,275.7 Total investment in stocks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Termsoftrade(TT)effect (1,099.9) (1,089.4) (1,287.6) (1,212.0) (1,212.4) (1,233.0) (1,294.9) (1,398.4) GrossdomesUcincome 154,440.1 162,072.0 171,183.4 181,685.9 193,213.4 205,903.8 219,857.3 235.343.2 Domestic saving (TT adjusted) 25,104.1 27,964.0 27,243,8 31,824.8 35,573.9 41,395.0 48,083.6 55,749.1 D. Annual growth rates (1992 prices) GOP at market prices 4.6% 4.9% 5.7% 6.0% 6.3% 6.5% 6.8% 7.0% Exports(GNFS) 1.3% 9.9% 10.9% 11.1% 11.3% 11.5% 11.7% 11.9% Imports (GNFS) 1.2% 5.8% 18.7% 8.2% 12.4% 8.4% 8.4% 8.4% Total expenditures 4.4% 3.9% 8.3% 5.4% 6.9% 5.7% 5.8% 6.0% Consumpton 4.3% 3.7% 7.3% 4.1% 5.2% 4.4% 4.4% 4.6% Investment 4.7% 4.5% 12.0% 10.0% 0.1 0.1 0.1 10.0% Gross domesfc income 5.2% 4.9% 5.6% 6.1% 0.1 6.6% 6.8% 7.0% Gross domestic savings 10.0% 11.4% -2.6% 16.8% 11.8% 16.4% 16.2% 15.9% Per capita growth rates: PercapitaGDP(mp) 2.2% 2.7% 3.5% 3.9% 4.1% 4.4% 46% 4.9% Per capita total consumption 2.0% 1.5% 5.1% 2.0% 3.0% 2.2% 2.3% 2.5% Percapitapnvateconsumption 2.8% 1.7% 6.1% 2.7% 3.8% 2.9% 2.9% 3.1% Source: Worid Bank. 90 TABLE 15 Merchandise Trade (US$ million) Actual Estimate Projection: high case scenario 1995 1996 1997 1998 1999 2000 2001 2002 A. Value in current prices (USS mil.) Total merchandise exports 4,854.0 5,4380 6,128.8 6,9432 8,058.8 9,4388 11,0626 12,9755 Pnmary products 2,652.0 2,6961 2,800.9 2,918 7 3,187.9 3,545 2 3,935.8 4,362.8 of which petroleum* 2,036.5 1,998.9 2,096.9 2,1447 2,294.3 2,5304 2,779.5 3,0410 of which cotton 306.4 327.5 3118 3319 364.2 391.5 420.9 452.6 of which other agnculture 3091 369.7 3923 442.1 529.4 6232 735.4 8692 Manufactured goods 2,202 0 2,741.9 3,327.9 4,024.6 4,870.9 5,893.7 7,126.8 8,612.6 of which textiles 1,077.3 1,335.1 1,620.4 1,959.6 2,371.7 2,869.7 3,470.1 4,193.6 of which other manufactured 1,124.7 1,406.8 1,707.5 2,065.0 2,499.2 3,024.0 3,656.7 4,419.0 Total non-factor service receipts 8,2804 9,679.5 10,9398 12,335.6 13,937.4 15,761.4 17,8326 20,184.6 of which tounsm 2,298.9 3,202.0 3,688 7 4,234 1 4,863.9 5,586.0 6,411.3 7,354 0 of whichSuezCanal 2,058.4 2,160.0 2,277.3 2,392.2 2,515.0 2,643.3 2,776.5 2,914.7 Totalmerchandiseimports 11,279.9 12,454.0 15,078.3 16,526.5 18,997.1 21.119.1 23,478.1 26,105.4 Food 2,759.8 3,044.6 3,109.5 3,175.2 3,241.5 3,308.5 3,376.1 3,444.4 Other consumer goods 478.7 516.5 566.9 603.8 648.9 692.3 738.1 787.0 POLandothereenergy 721.4 800.9 830.0 841.3 8941 981.9 1,076.2 1,178.0 Intermediate goods 4,212.4 4,687.8 5,285.9 5,9531 7,106.3 8,068.2 9,143.9 10,348.0 Capital goods 3,107 6 3,404.3 5,285.9 5,953.1 7,106.3 8,068.2 9,143.9 10,348.0 Total non-factor service payments- 4,631.0 5,113.0 6,190.4 6,785.0 7.799 3 8,670.5 9,639 0 10,717.6 B. Value in constant 1992 prces (US$ mul.) Total merchandise exports 4,892 9 5,182 8 5,832.2 6,578.5 7,437.7 8,428 8 9,573.6 10,898.0 Petroleum' 2,385.8 2,212.7 2,367.6 2,533.4 2,710.7 2,900 5 3,103.5 3,320.7 Cotton 233.1 244.8 257.0 269.9 283.4 297.6 312.4 328.1 Otheragnculture 232.9 279.1 321.0 369.1 424.5 4882 561.4 645.6 Textles 998.6 1,191.1 1,405.5 1,558.5 1,957.0 2,309.2 2,724.9 3,215.4 Othermanufactures 1,042.5 1,255.1 1,481.0 1,747.6 2,062.2 2,433.4 2,871.4 3,388.2 Total non-factor service receipts 7,675.2 8,635.6 9,488.8 10,439.8 11,500.2 12,683.1 14,003.0 15,476.2 of which tounsm 2,130.9 2,856.7 3,199.5 3,583.4 4,013.4 4,495.0 5,034.4 5,638 5 of whichSuezCanal 1,908.0 1,927.0 1,975.2 2,024.6 2,0752 2,127.1 2,180.3 2,234.8 Total merchandise imports 10,531.4 11,114.9 13,238.8 14394.8 16,190.8 17,541.0 19,005.8 20,602.7 Food 2,457.5 2,548.2 2,640.3 2,813.6 2,871.7 2,873.5 2,864.2 2,844.6 Other consumer goods 443.7 460.8 491.8 511.0 535.5 557.1 579.6 603.4 POL and other energy 845.1 886.5 937.1 993.8 1,056.4 1,125.5 1,201.6 1,286.3 Intemnediate goods n.e i. 3,904.5 4,182.2 4,584.8 5,038.2 5,863.6 6,492.5 7,180.2 7,934.2 Capital goocis 2,880.5 3,037.2 4,584.8 5,038.2 5,863.6 6,492.5 7,180.2 7.934.2 Total non-factor service payments" 4,292.5 4,561.6 5,369.3 5,742.2 6,435.4 6,977.1 7,569.0 8,217.5 Memorandurrl items Export volumne grwth rate -3.4% 5.9% 12.5% 12.8% 13.1% 133% 13.6% 13.8% Import volume growth rate 27.1% 5.5% 19.1% 8.7% 12.5% 8.3% 8.4% 84% C Price indices (1992 = 100) Merchandise exports 99.2 104.9 105.1 105.5 108.3 112.0 115.6 119.1 Merchandise imports 107 1 112.0 113.9 114.8 117.3 120.4 123.5 126.7 Merchandise terms of trade 92.6 93.6 92.3 91 9 92.3 93.0 93.5 94.0 D Non-factor service indices (1992 = 100 Exports ofNFS - volume index 104.1 117.2 128.7 141.6 1580 172.1 190.0 2100 Exports of NFS-priceindex 107.9 1121 115.3 118.2 1212 124.3 127.3 130.4 Imports of NFS - volume index 102.4 108.8 1281 137.0 153.6 156.5 180.6 196.1 ImportsofNFS-pnceindex 107.9 112.1 115.3 118.2 121.2 124.3 127.3 130.4 Includes foreign partners share. I' ncludes payments in return for foreign partners investment Source: World Bank. 91 TABLE 16 Balance of payments (US$ million) Actual Estimate Projection: high case scenario 1995 1996 1997 1998 1999 2000 2001 2002 TotalexportsofGNFS 13,134.4 15,117.5 17,068.5 19,278.8 21,996.2 25,200.2 28,895.2 33,180.1 Merchandise 4,854.0 5,438.0 6,128.8 6,943.2 8,058.8 9,438.8 11t062.6 12,975.5 Non-factor services 8,280.4 9,679.5 10,939.8 12,335.6 13,937.4 15,761.4 17,832.6 20,184.6 Total imports of GNFS 15,910.9 17,567.0 21,268.7 23,311.5 26,796.3 29,789.6 33,117.1 36,823.0 Merchandise 11,279.9 12,454.0 15,078.3 16,526.5 18,997.1 21,119.1 23,478.1 26,105.4 Non-factorservices 4,631.0 5,113.0 6,190.4 6,785.0 7,799.3 8,670.5 9,639.0 10,717.6 Resource balance (2,776.5) (2,449.5) (4,200.2) (4,032.7) (4,800.2) (4,589.4) (4.221.9) (3,662.9) Net factor income (790.6) (818.6) (824.1) (828.7) (881.8) (964.0) (1,061.0) (1,162.0) Factor receipts 1,625.5 1,755.5 1,696.0 2,047.7 2,211.5 2,388.4 2,579.5 2,785.8 Factor payments 2,416.1 2,574.2 2,720.0 2,876.4 3,093.2 3,352.4 3,640.4 3,947.8 Interest 1,327.7 1,452.1 1,502.1 1,548.3 1,608.5 1,649.0 1,698.2 1,752.2 Otherfactorpayments 1,088.4 1,122.0 1,217.9 1,328.1 1,484.7 1,703.4 1,942.3 2,195.6 Net prvate current transfers 3,279.0 3,326.2 3,376.1 3,426.7 3,478.1 3,530.3 3,583.2 3,637.0 of which workers remittances 3,279.0 3,326.2 3,376.1 3,426.7 3,478.1 3,530.3 3,583.2 3,637.0 Net official current transfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Current account balance (288.1) 58.0 (1,648.2) (1,434.7) (2,203.8) (2,023.2) (1,699.7) (1.187.9) Official capital grants 918.6 964.5 945.2 926.3 907.8 889.7 871.9 854.4 Pnvate investment (net) 680.6 762.3 1,697.0 2,067.9 2,275.1 2,514.2 2,774.6 3,057.0 Direct foreign investments 676.5 757.7 1,497.0 1,847.9 2,033.1 2,248.0 2,481.8 2,734.9 Portfolio investments 4.1 4.6 200.0 220.0 242.0 266.2 292.8 322.1 Netforeign lending 295.1 560.4 719.3 876.9 936.5 1,027.3 1,212.5 1,287.2 Disbursements 1,133.9 1,668.9 1,807.8 1,890.2 2,095.0 2,308.7 2,527.6 2,737.3 Repayments 838.8 1,108.5 1,088.5 1,013.3 1,158.5 1,281.4 1,315.1 1,450.1 Othercapital flows, n.e.i. (51.7) 99.2 218.3 (854.8) (1.161.8) (648.4) (688.7) (728.6) Change, netintemational reserves 1,550.4 2,439.8 1,731.6 1,361.6 511.7 1,493.4 2,179.8 2,960.0 [plus indicates increase in assets] Memorandum items: Net intemational reserves (NIR) 28,128.6 30,588.5 32,300.1 33,681.7 34,173.5 35,668.9 37,846.7 40,806.6 NIR, in months of imports 19.2 17.2 16.6 15.1 13.8 12.9 12.3 12.2 Exchange rates Annual average (LEIUSS) 3.4 3.4 3.4 3.4 3.9 4.1 4.2 4.3 At end-year (LE/US$) 3.4 3.4 3.4 3.7 4.0 4.1 4.3 4.4 Indexrealavg.X-rate(1990=100) 83.2 81.0 77.3 73.3 81.0 81.0 81.0 81.0 (decrease is real appreciation) Current account balance as % GDP -0.5% 0.1% -2.1% -1.7% -2.6% -2.2% -1.7% -1.1% Source: Worid Bank. 92 TABLE 17 Extemal debt, stocks and flows (US$ million) Actual Estimate Projection: high case scenario 1995 1996 1997 1998 1999 2000 2001 2002 A. Gross disbursements Publicanclpublirlyguaranteed 1.133.9 1,068.9 1,167.8 1,182.2 1,311.7 1,442.1 1,568.7 1,6762 Official multilateral 637.9 503.8 491.4 456.1 489.2 546.2 607.2 635 3 of which IDA 51.8 70.8 102.9 97.8 89.8 73.9 54.4 36.0 of which IBRD 88.3 31.8 45.0 79.2 127.8 185.4 245.1 281.8 Offioal bilateral 375.7 378.0 340.4 378.6 444.7 474.2 489.5 512.3 Pivate creditors (guaranteed) 120.3 187.1 336.0 347.5 377.8 421.8 472.1 528.7 of which bonds 0.0 0.0 0.0 0 0 0.0 0.0 0.0 0.0 Pnvate creditors non-guaranteed 0.0 200.0 200.0 224.0 250.9 281.0 314.7 352.5 Total LT loan disbursements 1,133.9 1,268.9 1,367.8 1,406.2 1,562.6 1,723.1 1,883.4 2,028.7 DrawingsiromIMF 0.0 0.0 0.0 0.0 0.0 0.0 0.0 00 Total disbursements 1,133.9 1,668.9 1,807.8 1,890.2 2,095.0 2,308.7 2,527.6 2,737.3 B. Amorlizabon Publicand publidy guaranteed 769.4 1,062.5 1,034.0 1,013.3 1,110.0 1,201.4 1,190.3 1,275.2 Official mulblateral 334.3 382.5 421.2 391.0 381.3 370.7 340.8 341.8 of which IDA 13.1 14.0 15.0 16.1 17.8 19.9 23.1 32.0 of which IBRD 201.8 2030 215.8 198.8 173.5 146.4 123.6 116.3 Official bilateral 154.2 348.6 348.1 395.0 497.9 624.8 730.1 789.1 Pnvate creditors (guaranteed) 281.0 331.3 264.8 227.3 230.8 205.9 119.4 144.2 of which bonds 0.0 0.0 0 0 0.0 0.0 0.0 0.0 0.0 Prvate creditors non-guaranteed 0.0 0.0 0.0 0.0 40.0 80.0 124.8 175.0 Total LT loan net disbursements 769.4 1,062.5 1.034.0 1,013.3 1,1500 1,281.4 1,315.1 1,4501 Net credit orm IMF 69.3 46.0 54.5 0.0 8.5 0.0 0.0 0.0 Total repayments 838.8 1,108.5 1,088.5 1,013.3 1,158.5 1,281.4 1,315.1 1,4501 C. Net disbursements Public and publically guaranteed 364.5 6.5 133.8 168.9 201.7 2407 378.4 401.1 Offlialmulblateral 303.6 121.3 70.3 65.1 107.9 175.5 2663 2934 of which IDA 38.7 56.8 88.0 81.6 72.0 54.0 31.3 4.0 of which IBRD (113.5) (171.2) (170.7) (119.6) (45.7) 38.9 121.6 165.5 Official bilateral 221.5 29.3 (7.7) (16.4) (53.2) (150.6) (240.6) (276.8) Prvate creditors (guaranteed) (160.7) (144.2) 71.2 120.2 147.0 215.8 352.7 384.5 of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Private creditors non-guaranteed 0.0 200.0 200.0 224.0 210.9 201.0 189.9 177.5 Total LT loan net disbursements 364.5 206.5 333.8 392.9 412.6 441.7 568.3 578.6 Net credit from IMF (69.3) (46.0) (54.5) 0.0 (8.5) 0.0 0.0 0.0 Total net disbursements 295.1 560.4 719.3 876.9 936.5 1,027.3 1,212.5 1,287.2 D. Interest and charges Publicand publically guaranteed 1.236.8 1,398.8 1,412.4 1,436.2 1,472.8 1,490.5 1,518.0 1,551.8 Official multilateral 232.6 258.0 269.8 286.5 305.5 323.7 345.4 371.7 of which IDA 71 8.0 8.9 9.7 10.5 10.8 10.8 10.7 of which IBRD 116.9 119.0 116.3 120.5 128.0 138.5 153.8 172.4 Official bilateral 898.4 1,036.7 1,047.0 1,055.9 1,072.5 1,069.5 1,064.6 1,055.7 Prvate creditors (guaranteed) 105.8 104.0 95.6 93.8 94.9 97.3 108.0 124.4 of which bonds 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Prvate creditors non-guaranteed 17.5 8.5 25.5 43.5 62.0 79.5 96.1 111.7 Total intereston LTloans 1,254.3 1,430.4 1,478.2 1,523.9 1,581.5 1,619.5 1,665.6 1,716.4 Interest on short-term credit 73.3 10.1 21.2 23.3 25.7 28.2 31.1 34.2 Interest on IMF drawings 11.4 1.6 1.7 00 0.1 0.0 0.0 0.0 Total interest (LT+STvIMF) 1,327.7 1,452.1 1,502.1 1.548.3 1,608.5 1,649.0 1,698.2 1,752.2 93 TABLE 17 (cont'd) External Debt, Stocks and Flows (US$ million) Actual Estimate| Projection: high case scenario _ 1995 1996 1 1997 1998 1999 2000 2001 2002 E. Extemal debt (DOD) Public and publically guaranteed 32,858.5 32,949.2 32,961.1 33,188.2 33,421.3 33,665.8 34,060.6 34,459.1 Official multilateral 4,6351 4,750.7 4,820.9 4,886.0 4,993.9 5,169.4 5,435.8 5,729.2 of which IDA 998.6 1,055.4 1,143.4 1,225.0 1,297.0 1,351.0 1,382.3 1,386.3 of which IBRD 1,493.9 1,322.6 1,151.9 1,032.3 986.7 1,025.6 1,147.1 1,312.6 Official bilateral 26,250.0 26,525.3 26,517.7 26,625.2 26,616.8 26,583.2 26,360.4 26,082.1 Prvate creditors (guaranteed) 1,973.4 1,673.2 1,622.5 1,676.9 1,810.5 1,913.2 2.264.5 2,647.7 of wthich bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Private creditors non-guaranteed 375.0 200.0 400.0 624.0 834.9 1,035.9 1,225.8 1,403.3 Total LT DOD 33,233.5 33,149.2 33,361.1 33,812.2 34256.2 34,701.7 35,286.4 35,862.3 Short-term debt 1,932.9 2,332.9 2,372.9 2,416.9 2.465.3 2,518.5 2,577.1 2,641.5 Use of IMF credit 109.0 63.0 8.5 8.5 0.0 0.0 0.0 0.0 Total DOD (ST-LT+IMF) of which: 35,272.5 35,542.2 35,339.6 35,794.7 36,234.6 36,684.9 37,275.0 37,856.7 F. Debt & debt burden indicators Total debt service (mil USS) 2,166.5 2,560.6 2,590.6 2,561.6 2,767.0 2,930.5 3,013.2 3,202.3 Interest (LTvST-IMF) 1,327.7 1,452.1 1,502.1 1,548.3 1,608.5 1,649.0 1,698.2 1,752.2 Pnncipal (LT-IMF) 838.8 1,108.5 1,088.5 1,0133 1,158.5 1,281.4 1,315.1 1,450.1 Total debt (DOD), total debt service (TDS): DOD/exports(GNFS-VVR)ratio 195.5% 176.0% 158.2% 144.6% 130.9% 117.9% 106.3% 95.6% DOD/GDPratio 58.4% 52.3% 46.1% 41.2% 42.4% 39.2% 36.4% 33.7% MLT DOD (publicvpub. guar.) / GDP ratio 54.4% 48.5% 43.0% 38.2% 39.1% 36.0% 33.3% 30.7% TDS/exports(GNFSvWR)ratio 12.0% 12.7% 11.6% 10.3% 10.0% 9.4% 8.6% 8.1% Source: World Bank. 94 TABLE 18 Fiscal accounts (LE million) Actual Estimate Projection: high case scenario 1995 1996 1997 1998 1999 2000 2001 2002 Govemment budget (mil LCUs) Totalcurrentrevenues 52,9250 57,708.0 61,689.0 68,614.9 80,451.4 90,5255 101,726.0 114,2567 Directtaxes 12,156.0 13,7310 14,760.0 16,323.5 19,364.9 22.173.0 25,3547 28,979.0 Indirecttaxes 22,123.0 24,5180 26,475.0 29,928.7 34,836.5 38,579.8 42,634.9 47,0590 On domesticgoods and services 15,106.0 16,607.0 17,845.0 19,983.0 22,433.1 25,140.2 28,159.1 31,557.5 On intemational trade 7,017.0 7,911.0 8,630.0 9,9457 12,403.5 13,4397 14,475.8 15,5018 Non-tax receipts 18,646.0 19,459.0 20,4540 22,362.8 26,250.0 29,772 7 33,736 3 38,2184 Total current expenditures 47,633.0 51,967.0 54,352.9 58,731.5 62,673.4 66,526 3 70,821.2 75,828 9 Interestonextemaldebt 3613.0 3,796.0 3,963.0 4,045.1 4,7168 4,891.5 5,068.3 5,248.8 Interest on domestic debt 11,178.0 12,231.0 12,354.0 13,715.4 14,297.9 14,893.8 15,501.4 16,473.9 Transfers to prvate sector 498.0 (76.9) (9326) (1,0040) (1,627.8) (2,200.4) (2,712.7) (3,314 2) TransferstootherNFPS 179.0 256.0 0.0 0.0 0.0 0.0 00 0.0 Subsidies 10250.0 11547.9 13060.6 14771.7 16722.9 18949.7 21472.9 243546 Consumpbon 21,915.0 24,213.0 25,907.9 27,203 3 28,563.5 29,991.6 31,4912 33,065.8 Wages and salanes 12,519.0 14,045.0 15,028.2 15,779.6 16,568 5 17,397.0 18,266.8 19,180.2 Other consumption 9,396.0 10,168.0 10,879.8 11,423.7 11,994.9 12,594.7 13,224.4 13,885.6 Budgetary savings 5,292.0 5,741.0 7,336.1 9,883.4 17,778.1 23,999.2 30,904.7 38,427 8 Capital revenues 2,794.0 3,185 0 3,634.0 4,150.7 4,636.4 5,187.6 5,896 1 6.661.6 Totalcapitalexperuditures 10,624.0 11,922.0 13,417.0 15,7466 17,826.6 20,314.1 23,362.6 26,887.5 Capital transfers (675.0) (659.0) (604.0) (650 0) (668.9) (720.1) (773.0) (779.3) Budgetary fixed lirvestment 11,299.0 12,5810 14,021.0 16,396.6 18,495 5 21,034 2 24,1356 27,666.8 Overall balance (mrrinus = deficit) (2,538 0) (2,996.0) (2,446 9) (1,712 5) 4,587.9 8,872.7 13,437 2 18,201.9 Sources of financirig 2538.0 2996.0 2446.9 1712.5 (4,587.9) (8,8727) (13,4372) (18,201.9) Foreign financing 42.2 (385.5) (5381) (387.8) (292.3) (6251) (464.3) (547.3) Monetary system credit (1,053.2) 4,336 0 4,257.0 (775.9) (7,160.9) (11,082.0) (15,769.3) (20,404.9) Other domestc financing 3,548.9 3,653.0 3,753.9 3849.2 3,936.6 4,0138 4,094.9 4,180.0 Residual sources and discrepancies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Shares of GDP at current prices Current revenues 25.8% 25.0% 23.6% 232% 241% 23.9% 23 7% 23.5% Currentexpenditures 23.2% 22.5% 208% 19.9% 187% 17.6% 16.5% 15.6% Budgetary savings 2.6% 2.5% 2.8% 3.3% 5.3% 6.3% 7.2% 7.9% Capital revenues 1.4% 1.4% 1.4% 1.4% 14% 1.4% 1.4% 1.4% Capital expenditurns 5.2% 5.2% 5.1% 5.3% 53% 5.4% 54% 5.5% Overall balance (minus = deficit) -1.2% -1.3% -0.9% -0 6% 1.4% 2.3% 3.1% 3.7% Foreign financing 0.0% -0.2% -0.2% -0 1% -0.1% -0.2% -01% -0.1% Monetary system credit -0.5% 1.9% 1.6% -0 3% -2.1% -2.9% -3.7% -4.2% Otherdomesticfinancing 1.7% 1.6% 1.4% 13% 1.2% 1.1% 10% -0.9% Govemment debt (DOD, end of year) Extemal debt (LE rnil) 92,664.3 93,429.2 92,740.2 99,529.6 108,322.5 111,667.3 115,087.5 118,322.1 Extemal debt (US$ mil) 27,294.3 27,481.8 27,259.6 27,232.3 27,206 4 27,078.5 28,988.1 26,861.7 Debttomonetarysystem(LEmil) 46,500.4 46,228.8 45,459.9 43,711.0 35,4789 23,217.4 6,1495 (15,685.1) Other domestic debt (LE mil) 46,192.9 49,846.0 53,599.9 57,449 1 61,385.7 65,399.6 69,494.5 73,674.5 Total govemmentdebt(LE mil) 185,357.6 189,504.0 191,800.0 200,689.8 205,187.0 200,294.2 190,731.6 176,311.5 Total govemment debt as percent GDP 90.4% 82.1% 73.4% 67.9% 61.3% 52.8% 44.4% 36.2% Tax burden indicators (%) Direct taxes I GDP 5.9% 5.9% 5 7% 5 5% 5.8% 5.9% 5.9% 5.9% Indir. taxes on domestic G&S I GDP 7.4% 7 2% 6.8% 6.8% 6.7% 6.6% 6.6% 6.5% Indir. taxes dom G&S I prv. consum. 10.1% 9.9% 9.2% 9.1% 9.1% 9.1% 9.1% 9.1% Taxesint'ltradelnmerch.imports 18.3% 18.7% 168% 17.7% 16.7% 15.7% 14.7% 13.7% Source: World Bank. 95 TABLE 19 Monetary Survey (LE million) Actual Estimate Projection: high Case Scenario 1995 1996 1997 1998 1999 2000 2001 2002 A. Annual flows during the year Netforeign assets (846,9) 14,340.2 4,416.1 11,358.0 11,010.9 9,012.1 12,219.3 16,192.1 Domesficcredit 15,707.8 18,611.8 20.588.0 22,406.0 19,113.4 18,725.4 18,045.1 17,990.5 Net claims on govemment (1,053.2) 4,336.0 4,257.0 (775.9) (7,160.9) (11.082.0) (15,769.3) (20,404.9) Claims on prvate sector 16,045.0 18,076.7 20,444.6 23,123.1 26,177.4 29,663.2 33,613.0 36,123.9 Claims on PE sector 716.0 806.7 912.3 1,031.9 1,168.2 1,323.7 1,500.0 1,701.3 Total assets = liabilities 14,860.9 32,952.0 25,004.1 33,764.0 30,124.4 27,737.6 30,264.5 34,182.6 Money and quasimoney 15,163.0 19,793.4 22,684.1 25,688.5 29,303.4 33,441.9 37,894.2 43,276.2 Otherliabilibies (net) (302.1) 13,158.7 2,320.0 8,075.5 821.0 (5.704.3) (7,629.7) (9,093.6) B. End-of-year stock Net foreign assets 46,293.1 60,633.3 65,049.4 76,407.4 87,418.3 96,430.5 108,649.8 124,841.9 Domestic credit 134,698.4 153,310.2 173,898.2 196,304.2 215,417.7 234.143.1 252,186.2 270,178.7 Netclaims on govemment 46,500.4 46,228.8 45,459.9 43,711.0 35.478.9 23,217.4 6,149.5 (15,685.1) Credittoprivatesector 63,396.0 81,472.7 101,917.3 125,040.4 151,217.8 180,881.0 214,494.0 252,617.9 Credit to PE sector 24802.0 25608.7 26521.0 27552.8 28,721.0 30,044.7 31,544.7 33,245.9 Totel assets = liabilibes 180.991,5 213,943.5 238,947.6 272,711.6 302,836.0 330,573.6 360,838.1 395,020.7 Money and quasimoney 152,057.0 171,850.4 194,534.4 220,223.0 249,526.3 282,968.2 320,862.4 364,138.6 Otherliabilibes (net) 28,934.5 42,093.1 44,413.2 52,488.7 53,309.7 47,605.4 39,975.7 30,882.0 C. Factors accounting for monetary expansion (as % MQM) Net foreign assets 30.4% 35.3% 33.4% 34.7% 35.0% 34.1% 33.9% 34.3% Net credit to govemment 30.6% 26.9% 23.4% 19.8% 14.2% 8.2% 1.9% -4.3% Credit to private sector 41.7% 47.4% 52.4% 56.8% 60.6% 63.9% 66.8% 69.4% CredittoPEsector 16.3% 14.9% 13.6% 12.5% 11.5% 10.6% 9.8% 9.1% Other liabilities (net)(-) 19.0% 24.5% 22.8% 23.8% 21.4% 16.8% 12.5% 8.5% Total money and quasi-money 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% D. Memorandum items Net ing. reserves (USS mil.) Monetary system, flow 1,550.4 2,439.8 1,731.6 1,361.6 511.7 1.493.4 2,179.8 2,960.0 Monetary system, stock 28,126.6 30,568.5 32,300.1 33,661.7 34,173.5 35,666.9 37.843.7 40,806.6 inmonthsofimports 19.2 17.2 16.6 15.1 13.8 12.9 12.3 12.2 E. Money, credit and pnces M2 I GOP 74.2% 74.4% 74.5% 74.5% 74.6% 74.7% 74.7% 74.8% Annual growth rate M2 11.1% 13.0% 13.2% 13.2% 13.3% 13.4% 13.4% 13.5% Annual growth prvate credit 33.9% 28.5% 25.1% 22.7% 20.9% 19.6% 18.6% 17.8% GDP deflator, growth rate 12.0°h 7.4% 7.0% 6.7% 6.5% 6.4% 6.1% 6.0% Source: Word Bank. 96 Distributors of COLOMBIA GERMANY ISRAEL NEPAL PORTUGAL SWEDEN Invoenlace Ltda, UNO-Vedag Yozmot Lierature Ltd. Everest Media Intemational Services (P) Ltd. Livrada Portugal Wennergren-Williams AB W orld Bank Carrera6 No. 51-21 PoppelsdoderAlleeS5 PO. Box 56055 GPO Box 5443 Apartado2681, Rua Do Carmo 70-74 P0. Box 1305 Aparoado Aereo 34270 53115 Bonn 3 Yohanan HasandlarStreet Kathmandu 1200 Lisbon S-171 25 Solna Publications Santat6 de Bogot, D.C. Tel: (49 228) 949020 Tel Aviv 61560 Tel: (977 1)472 152 Tel: (1) 347-4992 Tel: (469)705-97-50 Prices and credit tcrms varyfrom Tel: (57 1) 285-2798 Fax: (49 228) 217492 Tel: (972 3) 5285-397 Fax: (977 1) 224 431 Fax: (1) 347-0264 Fax: (46 8) 27-00-71 colntry to country. Consnit your FPu: (571) 285-2798 URL: hotp://www.uno-verIag.de Fax: (972 3) 5285-397 E-mail: mail@wwi.se local dtstributor before placing anC E-mail: unovedag@aol.com ROY latematianal NETHERLANDS ROMAnIA order. ~~~~~COTE D'IVOIRE R.. neainlDe LindeboonVinlOr-Publikaties -Compaxi De Librarii Bacuresti S.A. SWITZERLAND order. Center d'Edition et de Diflusion Alricaines GREECE PO Box 13056 PO. Box 202, 7480 AE Haaksbergen Str. Lipscani no. 26, sector 3 Librairie Payot Service Institutionnel ARGENTINA (CEDA) PapasoliriuS.A. Tel Aviv 61130 Tel: (3153)574-0004 Bucharest Cdtes-de-Montbenon 30 Oficina del L .bro Intemacional 04 B.P 541 35, Staumam Str. Tel: (972 3) 5461423 Fax: (31 53) 572-9296 Tel: (40 1) 613 9645 1002 Lausanne OicisadelLvbrdlotemacaoxal AbidjanO4 106 82 Athens Fax: (9723)5461442 E-mail: lindeboo@worldonline.nl Fax: (40 1)312 4000 Tel: (41 21) 341-3229 1120 Buenos Aires Tel: (225) 24 6510;24 6511 Tel: (30 1)364-1828 E-mail: rxyil@netvision.net.il URL:http:/lwww.woxdonline.nP-Iindeboo Fax: (41 21) 341-3235 Tel: (54t1) 815-8354 Fax: (225) 25 0567 Fax: (301) 36448254 RUSSIAN FEDERATION Tel: (54 1(815-8354)Pus: (225) 25 0567 Pus: (301) 364254 Palestinian Authonty/Middle East NEW ZEALAND Isdatelstvo ADECO Van Dienmen EdAionsTechniques Fax: (541) 815-8156 CYPRUS HAITI Index Intormation Services EBSCO NZ Ltd. 9a, Kolpachniy Pereulok Ch. de Lacuez 41 AUSTRALIA, FIJI, PAPUA NEW GUINEA CentertorApplied Research CGuhureDiffusion PO.B.19502 Jerusalem Private Mail Bag 99914 Moscow 101831 CH1807Blonay SOLOMON ISLANDS, VANUATU, AND Cyprtos College 5, Rue Capois Tel: (9722(6271219 New Market Tel: (705)(9178749 Tel: (41 21) 943 2673 WESTERN SAMOA 6, Diogenes Street, Engomi C.P 257 Pus: (972 2(6271634 Auckland Fax: (7 095) 917 92 58 Fus: (41 21) 943 3605 O. Box 2006 Port-au-Prince Tel: (64 9) 524-8119 D.A. Ixtrmuthox SeRvices Nicosia Tel: (509) 23 9260 ITALY Fax: (64 9) 524-8067 SINGAPORE, TAIWAN, THAILAND 648 WtRitehsme Road Tel: (357 2) 44-1730 Fax: (509) 23 4858 Lioosa Commissionaria Sansoni SPA MYANMAR, BRUNEI Central Books Distribution Victoda Fax: (357 2) 46-2051 Via Duca Di Calabha, 1/1 NIGERIA Ashgate Publishing Asia Pacdic Pte. Ltd. 306 Silom Road Tel: (61(3 9210 7777 HONG KONG, MACAO Casella Postale 552 Univers4ty Press Limited 41 Kallang Pudding Road #04-03 Bangkok 10500 Pus: (61) 3 9210 7788 CZECH REPUBLIC Asia 2000 Ltd, 50125 Firenze Three Crowns Building Jericho Golden Wheel Building Tel: (66 2) 235-5400 E-mail: service@dadir3ct.com au National Intormation Center Sales & Circulation Department Tel: (55) 645-415 Private Mail Bag 5095 Singapore 349316 Fax: (66 2) 237-8321 URL: hilp:lwww .dadirect.com.au prodejna, Konviktska 5 Seabird House, unx 1101-02 Fax: (55) 641-257 Ibadan Tel: (65) 741-5166 UCS -113 57 Prague 1 22-28 Wyndham Street, Central E-mail: licosa@thbcc.8t Tel: (234 22) 41-1356 Fax: (65) 742-9356 TRINIDAD & TOBAGO AUSTRIA Tel: (42 2) 2422-9433 Hong Kong URL: httpJ/www .fthbc.iticosa Fax: (234 22) 41-2056 E-mail: ashgate@asianconnect.com AND THE CARRIBBEAN GervId axd Co. Fax: (42 2) 2422-1484 Tel: (852) 2530-1409 Systematirs Studies Ltd. Weihburggasse 26 URL: http./lwww .nis.czi Fax: (852) 2526-1107 JAMAICA NORWAY SLOVENIA St. Augustine Shopping Center A-loll Wien E-mail: sales@asia2000.com.hk Ian Randle Publishers Ld. NIC Info ANS Gospodarski Vestnik Publishing Group Eastem Main Road, St. Augustine Tel: (43 1)512-47-31 -0 DENMARK URL: httpi/www.asia2000.com.hk 206 Old Hope Road, Kingston 6 Book Department, Postboks 6512 Efterstad Dunajska cesta 5 Trinidad & Tobago, West Indies FPu: (43 1) 51247-31-29 SamfundsLiteratur Tel: 876-927-2085 N-0606 Oslo 1000 Ljubljana Tel: (868) 645-8466 URL:ah.(p:llww.geroId.cs/at.online Rosenoems Alil 11 HUNGARY Fax: 876-977-0243 Tel: (47 22) 97-4500 Tel: (38661)1338347; 1321230 Fax: (868) 645-8467 DK-1970 Frederiksberg C Eurol no Service E-mail: irpl@colis.com Fax: (47 22) 97-4545 Fax: (38661)1338030 E-mail: tobe@tdnidad.net BANGLADESH Tel: (45 31) 351942 Margntszgeti Europa Haz E-mail: repansekj @gvestnik.si Micmo lAdustde Developmext Fax: (45 31) 357822 H-1138 Budapest JAPAN PAKISTAN UGANDA Assiatance Society (MIDAS) URL: http://www.sl.cbs.tik Tel: (36 1)111 t061 Eastem Book Service Mirza Book Agency SOUTH AFRICA, BOTSWANA Gustro Ltd. HosaeS, Road 16 Fax: (36 1) 302 5035 3-13 Hongo 3-chome, Bunkyo-ku 65, Shahrah-e-Quaid-e-Azam For single tIles: PO Box 9997, Madhvani Building DhanmondiR/Area ECUADOR E-mail: euroinfo@mail.matavhu Tokyo 113 Lahore 54000 Oxford University Press Southem Africa Plct 16/4 Jinja Rd. Dhanmondi9 Libd Mundi Tel: (81 3) 3818-0861 Tel: (92 42) 735 3601 Vasco Boulevard, Goodwoad Kampala Tea (8802)326427 Librenalntemacional INDIA Fax: (81 3)3018-0864 Fax: (92 42) 576 3714 PO. Box 12119, Ni City 7463 Tel: (256 41) 251 467 Tel: (8802)321164 PO. Box 17-01-3029 Allied Publishers Ltd. E-mail: orders@svt-ebs.co.jp Cape Town Fax: (256 41) 251 468 Pus: (880 2) 811189 Juan Leon Mera 851 751 Mount Road URL: httpi/www.bekkoame.orjp/-svt-ebs Oxtord University Press Tel: (27 21) 595 4400 E-mail: gus@swittuganda.com BELGIUM Quto Madras - 600 002 5 Bangalore Town Fax: (27 21) 595 4430 Jean Do L Tel: (593 2) 521-606; (593 2) 544-185 Tel: (91 44) 852-3938 KENYA Sharae Faisal E-mail: oxtord@oup.co.za UNITED KINGDOM an Du Lannoy Fax: (593 2) 504-209 Fax: (91 44) 852-0649 Atrica Book Service (E.A.) Ltd. PO Box 13033 Micnoinfo Ltd. An du russ02 E-mail: librimull@libhmuundi.com.ec Quaran House, Mtangano Street Karachi-75350 For subscription orders: PO. Box 3, Alon, Hampshire GU34 2PG Tel: (322)538-5169 E-mail: librimu2 @libnmundi.com.ec INDONESIA PO. Box 45245 Tel: (92 21) 446307 Intemational Subscription Service England Pus: (322) 538-841 Pt. Indira Limfted Nairobi Fax: (92 21) 4547640 PO. Box 41095 Tel: (44 1420) 86848 EGYPT, ARAB REPUBLIC OF Jalan Borobudur 20 Tel: (254 2) 223 641 E-mail: ouppak@TheOhfice.net Craighall Fax: (44 1420) 89889 BRAZIL Al Ahram Distdbution Agency PO. Box 181 Fax: (254 2) 330 272 Johannesburg 2024 E-mail: wbank@ukminfo.demon.co.uk Publicsc6es Tecnicas Intemacionais Ltda. AlGalaa Street Jakarta 10320 Pak Book Corporation Tel: (27 11) 880-1448 URL: hetp://www.microinfo.co.uk RuabPixoctoeGmTexa 20e9caas Is Cairo Tel: (62 21) 390-4200 KOREA, REPUBLIC OF Aziz Chambers 21, Queeexa Road Fax: (27 11) 880-6248 010a eixo alomie, Tel: (202)578-6083 Fax: (62 21) 390-4289 Daejon Trading Co.Ld. Lahore E-mail: iss@is.co.za VENEZUELA Tel: (55 11) 259-6644 Fax: (20 2) 578-6833 PO. Box 34, Youida, 706 Seoun Bldg Tel: (92 42) 636 3222; 636 0885 Tecni-Ciencia Libros, S.A. Fax: (55 11) 258-6990 ~~~~~~~~IRAN 44-6 Youido-Dong, Yeonngchexgpo-Ku Pus: (92 42) 636 2328 SPAIN Cextro Cuidad Comerciul Tamanoc uas: (55 11)258-6990 The Middle East Observer Ketab Sara Co. Publishers Seoul E-mail: pbc@brain.net.pk Mundi-PrensaLibros, S.A. Nivel C2, Caracas URL: hftp://www.uol.br 41, Sherd Street Khaled Eslamboli Ave., 6th Street Tel: (82 2) 785-1631/4 Castello 37 Tel: (58 2) 959 5547; 5035; 0016 Cairo Delafrooz Alley No. 8 Fax: (82 2) 784-0315 PERU 28001 Madrid Fax: (58 2) 959 5636 CANADA Tel: (20 2) 393-9732 PO. Box 15745-733 EdRorial Desarnollo SA Tel: (341) 431-3399 Renouf Publishing Co. Ltd. Fax: (20 2) 393-9732 Tehran 15117 MALAYSIA Apartado 3824, Lima 1 Fax: (341) 575-3998 ZAMBIA 5369 Caxotek Road Tel: (98 21) 8717819; 8716104 University oa Malaya Cooperative Tel: (51 14) 285380 E-mail: libreria@mundiprensa.es University Bookshop, University of Zambia Ottawa, Ontado K1J 9J3 FINLAND Fax: (98 21) 8712479 Bookshop, Limied Fax: (51 14) 286628 URL: ht1p://www .mundiprensa.es/ Great East Road Campus Tel: '613' 745K2665 Akateeminen Kirjakauppa E-mail: ketab-sara @neda.xet.ir PO. Box 1127 PO. Box 32379 Fax: (613) 745-660 P. Box 128 Jalan Pantali Bau PHILIPPINES Mundi-Prensa Barcelona Lusaka E-mail: order(.deptre6nofbooks.com FIN-00101 Helsinki Kowkab Publishers 59700 Kuala Lumpur Intemational Booksource Center lnc. Consell de Cent, 391 Tel: (260 1)252576 URL: http-Jwww.renoutbooks.com Tel: (3580) 121 4418 PO. Box 19575-511 Tel: (60 3(756-5000 1127-A Antipolo Si, Barangay,Venezuela 08009 Barcelana Fax: (2601)253952 Pus: (358 0) 121-4435 Tehran Pus: (60 3) 755-4424 Makati City Tel: (34 3) 488-3492 CHINA E-mail: akatilaus@stockrmann.fi Tel: (98 21) 258-3723 E-mail: umkoop@tm.net.my Tel: (63 2) 896 6501;6505; 6507 Fax: (34 3) 487-7659 China Financial & Economic URL: http://www .akateeminen.cortl Fax: (98 21) 258-3723 Fax: (63 2) 896 1741 E-mail: barcelona@mundiprensa.es Publishing Pause MEXICO 8, DsuPaiSi DHog Jie FRANCE IRELAND INFOTEC POLAND SRI LANKA, THE MALDIVES Beijing Wovd Bank Publications Govemment Supplies Agency Av. San Femando No. 37 Intemational Publishing Service Lake House Bookshop Tel: (0610)6333-8257 686, avenue d1Iena Odig an tSoldthair Col. Todello Guerra Ul. Piekna 31/37 100, Sir Chiampalam Gardiner Mawatha Fax: (86 10) 6401-7365 75116 Pads 4-5 Harcourt Road 14050 Mexico, D.F 00-677 Warzawa Colombo 2 Tel: (33 1) 40-69-30-56/57 Dublin 2 Tel: (525) 624-2800 Tel: (482) 628-6089 Tel: (94 1) 32105 Fax: (331) 40-69-30-68 Tel: (3531) 661-3111 Fax: (52 5) 624-2822 Fax: (48 2) 621-7255 Fax: (941) 432104 Fax: (353 1)475-2670 E-mail: infotec@rtn.net.mx E-mail: books%ips@ikp.atm.corv.pl E-mail: LHL@sd.lanka.net 100197 URL: http://rtnne.tmx URL: hUpl/www .ipscg.waw.pIips'expor/ THIE WORLD BAN K ] 8 1 1Street .X.\ UWISi;igtOIn 1).(C. 20433 (-SA IlpCIiPhOn: 202-477-1234 "I4cs;illic: 202-477-6391 1-clcx: MCi 6414.S WORI f)j1\\y .NICi 24tS41f2 3 NVORL)DANK .Aorld W'id, NXVh: httP://lvsss-X-Jdh k.org I-mail: hooks(a worldhank..,g)^ ISBN 0-821340662