Arab Republic of Egypt Economic Report

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No EGT Arab Republic of Egypt Economic Report March 22, 1977 Europe, Middle East and North Africa Region FOR OFFICIAL USE ONLY Document of the World Bank VI This document has a restricted distribution and may be used by recipients only in the pertormance of their otficial duties. its contents may not otherwise be disclosed without World Bank authorization

2 CURRENCY EQUIVALENTS Official Rate 1 Egyptian Pound (LE) US$2.56 or SDR US Dollar LE Parallel Market Rate From December 1, 1976: 1 Egyptian Pound (LE) US$ US Dollar LE 0.70 From May 21, 1976: 1 Egyptian Pound (LE) US$ US Dollar LE 0.68 From February to May 1976: 1 Egyptian Pound (LE) US$ US Dollar LE 0.64 Until February 1976: 1 Egyptian Pound (LE) US$ US Dollar LE 0.59 ABBREVIATIONS M&LT - Medium and Long Term Fiscal Year January 1 - December 31 WEIGHTS AND MEASURES 1 hectare = feddans 1 feddan = acres 1 acre = feddans 1 sq. kilometer = 238 feddans 1 ardeb (metric) = 198 liters = 160 kilograms (kg) of lentils = 157 kg of clover = 155 kg of beans, chick peas, lupine, fenugreek = 140 kg of maize, millet = 120 kg of cottonseed, barley, sesame = 60 kg of groundnuts 1 kantar = kg of seed cotton = 50 kg of cotton lint = 45 kg of onions, sugarcane

3 TABLE OF CONTENTS FOR OFFICIAL USE ONLY Page No. BASIC DAIA MAP I. RECENT ECONOMIC DEVELOPMENTS... I Background The "Open-Door" Policy National Income, Investment and Growth... 2 Public Finance... 4 Balance of Payments External Debt II. DEVELOPMENT OF MAJOR SECTORS Population, Employment, Urbanization Agricultiire Industry Petroleum The Suez Canal Tourism Infrastructure III. MANAGEMENT OF THE ECONOMY Medium-Term Planning Project Selection and Evaluation Efficiency Policies Domestic Resource Mobilization Foreign Trade External Debt Management IV. REQUIREMENTS FOR CAPITAL INFLOW Prospects for National Income and Investment, Foreign Aid Requirements, Medium-Term ( ) Outlook Conclusions STATISTICAL APPENDIX Table of Contents to the Statistical Appendix Tables This report is based on the findings of an economic mission which visited Egypt in October 1976 and an updating mission which visited the country in January The economic mission was composed of Messrs. Khalid Ikram (chief of mission), Shahid Amjad Chaudhry (general economist), Robert Mabro (industrial economist; consultant), Ms. IHalvina Pollock (debt specialist), and Ms. Laila Morcos (secretary). The updating mission comprised Messrs. Khalid Ikram (chief of mission) and Shahid Amja.d Chaudhry (general economist). This document has a restricte distribution and may be used by recipients only in the performance of their official duties. Its contentsi may not otherwise be disclosed without World Bank authorization.

4

5 COUNTRY DATA - EGYPT, ARAB REPUBLIC OF AREA POPULATION HEALTH (1973),002,000 km million (mid Estimated) Population per physician 1,700 Rate of Growth: 2.2% Population per hospital bed 435 Density: 36.3 per km 2 Over 1000 km 2 of inhabited area POPULATION CHARACTERISTICS (1971) DISTRIBUTION OF LAND OWNERSHIP Crude Birth Rate (per 1,000) 35.1 % owned by top 5.5% of oners 43% Crude Death Rate (per 1,000) 13.2 Infant Mortality (per 1,000 livebirths) (1970) INCOME DISTRIBUTION % of National Income, highest quintile 47.0% lowest quintile 4.2% NUTRITION EDUCATION Calorie intake as % of requirements % (1970) Adult literacy rate 4C% (1971) Per capita protein intake 83.5% (1969) Primary school enrollment 70% (1970) 7,IP PER CAPITA (1975)- US$310 GROSS NATIONAL PRODUCT (1975) ANNUAL RATE OF GROWTH (%, constant prices) US $ Mln. % GNP at Market Prices 12, i Gross Domestic Investment 2, Gross National Saving Current Account Balance -1, Exports of Goods, NFS 2, (2/) (2/) (2/) Imports of Goods, NFS 4, (2/) (2/) (2!) OUTPUT, LABOR FORCE, PRODUCTIVITY (1975) 4,/ Value Added Employment Value Added Per Worker US $ MLn. % MLn. % US S % Agriculture 3, Industry and Mining 2, , Electricity , Construction , Distribution Sector 1, , Services Sector 2, , Total/Average 11,801 LO , PUBLIC FINANCE US $ Million - Current Prices (Budgeted) Current Receipts 3,142 3,648 4,178 5,847 7,821 Current Expenditures 2,786 3,487 4,093 4,836 6,121 Budgetary Savings ,011 1,700 Public Sector Investment 1,141 1,446 2,209 2,130 3,502 DETAIL ON PUBLIC SECTOR INVESTMENT PROGRAM UNDER THE 1977 PLAN US $ Million % of Total Agriculture Industry and Mining Petroleum Electricity Transport and Communications 1, Other Total 3, / The Per Capita GNP estimate is at market prices, calculated by the same conversion technique as the 1976 World Bank Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 2/ Accurate constant price growth rates are not available due to insufficient information concerning trade deflators. 3/ Rate of growth of real GDP at factor cost. 4/ At current factor costs.

6 -ii- MONEY, CREDIT AND PRICES (Million LE Outstanding End of Period) Money and Quasi Money 1,166 1,345 1,637 2,120 2,566 Claims on Government 1,327 1,460 1,656 2,050 3,095 Claims on Non-Government Sector ,093 Consumer Price Index (1966/67-100) Money and Quasi Money as 8 of GDP Annual Percentage Changes in: (Percent) Consumer Price Index Claims on Government Claims on Non-Government MERCHANDISE EXPORTS (AVERAGE ) EXTERNAL DEBT, SEPTEMBER 30, 1976 US $ Mln. 2 US $ Mln Raw Cotton Public Debt Outstanding and Disbursed 5,670 Yarns and Textiles Rice / All other commodities DEBT SERVICE RATIO (1975)- Total 1, % Public Debt Outstanding and Disbursed 26.5 FINANCING THE EXTERNAL DEFICIT Actual Est SUMMARY OF BALANCE OF PAYMENTS Exports of Goods, f.o.b. 1,003 1,674 1,568 1,605 Imports of Goods, c.i.f -1,664-3,475-4,329-3,465 Trade Balance ,801-2,761-1,860 Service Receipts ,082 1,480 Service Payments Services Balance Deficit on Goods and Services ,632-2,480-1,390 Amortization of M&LT Debt (of which suppliers' credits) (277) (-285) (-280) (-300) Reduction of Short-Term Debt Reduction of Balance on Bilateral Agreements Foreign Exchange Requirements 1,174 2,291 3,553 2,135 Supply of Funds 1,290 2,119 3,573 2,135 Private unrequited transfers Official grants 725 1, Gulf Assoc. for Egyptian Development.. Other M&LT loans Suppliers' Credits M&LT Deposits/Loans CBE.. 5 1, Foreign Investment Short-term commercial bank credits, net Other Monetary Movements (net), and errors and omissions Change in Reserves RATE OF EXCHANGE Official Rate Parallel Market Rate Through January 1973 US$1.00 = LE From September 1973 LE US$1.70 LE 1.00 = US$2.30 From February 1975 LE US$1.55 Since February 1973 US$ LE From May 1976 LE 1.00 = US$1.46 LE 1.00 = US$2.56 US$1.00 = LE ! Due to non-availability of data on calendar year basis, figure refers to "fiscal" year 1970/71. 2/ Ratio of MLT Debt Service to Exports of Goods, Non-Factor Services and Worker's Remittances. EM1DA March 22, 1977

7 DAIIg~~~~~~~~ 1,1'z~~~~~~ '0 ~~~~~~ '0 IE7L# '>.. ~t.-e\ ' ' N i *oaa-lluv~~~~~~~~~' 2 -".,t 7 _27~ ~ ~~~-et.'., ~. ~ / /5 // 7' tau -I ' ' N,,o 1,'. Y a.m. K-,/. '' ~~~~~~~~~~~~~~~~~~~~~~ 2x~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~e ~ Sea fd =_ / o._,8xe ARAB REPUBL~~~~~~~~~~~~~~~~~/IC Ft'-,,& F ~.''& ~ ~ ~ dn'd ~ r ~ ~. DS a \ {' + Intmotleno GlrposI-. > g \l ; W trz, _In Elrot- mmdoly e ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ L _ wf..... ;.sw 41k4"5 "

8

9 CHAPTER I RECENT ECONOMIC DEVELOPMENTS Background 1.1 The Egyptian economy has been dominated by the public sector, which since 1961 has included most of the country's organized industrial capacity, domestic and foreign trade, the banks, and the utilities. Moreover, the existence of regulated prices and centralized control over all major production and investment decisions, including those of the agricultural sector, has further enhanced the influence of the central authorities. 1.2 This system functioned with varying degrees of success in the early sixties, but in the post-1967 period it came under increasing stress as a result of war, loss of revenues from the closure of the Suez Canal, the slowing down of tourism, and the virtual cessation of external assistance from western countries and international institutions. This situation was further worsened by increased expenditures (both in domestic and foreign currencies) for defense. While attempts were made to reduce both private and public consumption (excluding defense), the burden of adjustment fell mainly on investment expenditures. AE; a result, much of the existing facilities, of both infrastructure and procluctive capacity, were allowed to deteriorate. 1,3 The changed political situation after October 1973 laid the groundwork for a new "open-door" policy. In its essence this policy reflects a major effort to accelerate economic development by modernization and through changing Egypt's largely publicly owned and centrally controlled economy to a more market-oriented one, with greater decentralization of the public sector, more scope for the private sector, and a larger role for foreign investment. The provision of substantial amounts of external assistance by Arab and western countries and international institutions is helping to ease the transition. The "Open-Door" Policy 1.4 The policy of "al-infitah" or "opening up" was presented by President Sadat in his October Paper and approved subsequently both by the People's Assembly and by a national referendum in May The basic principles enunciated were (i) decentralization of decision-making of state-owned enterprises; (ii) allowing more scope for the private sector; (iii) the provision of incentives to stimulate and encourage private foreign investment; and (iv) expanded economic cooperation with Arab countries and the Ilest. Accordingly, since 1974 the Government has been taking measures to implement these principles, which are expected to lead to a significant change in the structure of the economy. In particular, steps were taken to decentralize public sector decision-making by abolishing the "general organizations" or public sector holding companies, remove some of the heavy restrictions on private business activities, encourage foreign private investment, expand foreign exchange transactions outside the official rate, and loosen many of the restraints on banking activities. It should be noted, moreover, that this policy of economic liberalization was

10 - 2 - pursued despite a generally unfavorable international environment. Defense expenditures were not curtailed, while both reconstruction and social welfare activities (including subsidies on the basic items of consumption) were undertaken at a time of rapidly rising import prices. Under these circumstances, the Government could make progress towards some of the objectives of the opendoor policy only through massive inflows of external assistance. National Income, Investment and Growth 1.5 The new economic policies adopted by the Government caused economic activity to accelerate in 1975, which was sustained in part through The primary impetus for this growth came from the greater availability of foreign assistance which allowed Egypt to increase its imports of intermediate goods during 1975 and led to greater utilization of productive capacity in both 1975 and It also enabled Egypt to sustain a much higher level of investment (including expenditures on the rehabilitation of the Suez Canal cities). Simultaneously, the recovery of the Sinai oil fields, the reopening of the Suez Canal and the revival of tourism led to a significant increase in foreign exchange earnings. 1.6 Preliminary national accounts data indicate that the Egyptian economy experienced substantial growth in GDP growth in real terms increased from 2.6 percent in 1973 to 3.2 percent in 1974 and an estimated 9.8 percent in 1975 '!. While national accounts estimates for 1976 are still under preparation, it appears that the economy managed to sustain a rate of growth of about 6.5 percent, despite the emergence, once again, of severe shortages of foreign exchange. Table 1.1: GROSS DOMESTIC PRODUCT AT CONSTANT 1970 PRICES (LE Million) /1 Agriculture Industry, Petroleum & Mining Construction Transport & Communications Trade & Finance Others 1, , ,138.9 GDP at Factor Cost 3, , ,484.5 Growth of GDP (%) /1 Ministry of Planning estimates. 1/ Ministry of Planning.

11 A review of the national income accounts indicates that the high rate of growth in 1975 estimated by the Ministry of Planning is in part due to the windfall gains accruing to the economy from the recovery of the Sinai oil fields (November 1975) and the reopening of the Suez Canal (June 1975). If their effect on growth of tlne gross domestic product is excluded, the overall growth rate is estimated by the Ministry of Planning to be about 8 percent. The industry and mining seclors (excluding petroleum) are estimated to have grown by about 10 percent (as aid-financed inputs increasingly became available). The petroleum sector grew by about 30 percent due to recovery in the production of the Red Sea oil fields and the reopening of the oil refinery at Suez. The reopening of the Suez Canal accelerated the growth of the transport and communications sector to about 34 percent (without Suez it was a still significant 10 percent). Construction activities, however, experienced the largest increase (54 percent) almost entirely due to reconstruction activities in the Canal Zone. Trade and finance experienced a growth of about 10 percent in almost entirely as a result of the country's increased import transactions during the period. 1.8 The growth of gross domestic product in 1974 and 1975 was reinforced by an increase in remittances from Egyptians working abroad. These quadrupled from an estimated LE 34 million in 1973 to about LE 143 million in 1975, and more than offset Egypt's increased factor service payments abroad (particularly interest on foreign debt). GNP per capita in 1975 was estimated to be LE 129 (at current prices, official exchange rates) or US$310 (World Bank Atlas methodology), 1.9 Egypt was also able to sustain a higher level of investment during 1974 and 1975 largely as a result of generous external assistance from Arab countries. Gross fixed investment expenditures increased from LE 462 million in 1973 (which was only marginally above the 1965/66 level in current prices), to LE 643 million in 1974 and to a preliminary estimate of LE 940 million in 1975 (current prices). 1/ There was also considerable replenishment of stocks, which had been drawn down in the pre-october 1973 period. The 1976 annual plan proposed an investment: program of LE 1340 million in tranche of LE 760 million and LE 580 million respectively (the latter to be implemented if sufficient domestic and foreign resources could be mobilized). In May 1976 it was decided to limit invest:ment allocation to LE 1000 million. Actual public sector investment is estimated (by the Ministry of Finance) to have amounted to LE 850 million in Estimates of the composition of domestic expenditures suffer from a number of shortcomings. However, data from the Ministry of Planning indicate that the bulk of the enlarged imports were used to increase investment and build up stocks (particularly in 1975). Public consumption remained generally under control. The increase in private consumption was substantial in 1974, but this reflects in large part the price increases for imported food. 1/ World Bank mission estimates (see table 2.4, Statistical Appendix); the Ministry of Planning preliminary estimates for gross fixed investment in 1975 are LE 1,194 million.

12 - 4 - Table 1.2: COMPOSITION OF DOMESTIC EXPENDITURES (Percent) GDP Growth GDP Growth Rate at Rate at Expenditures as (%) of GDP (Current Market Prices) Constant Current Gross (Changes Public Private Total Year Prices Prices Investment in Stocks) Consump. Consump. Expend./l (1.0) (2.0) (3.9) /1 The excess of total expenditure over 100 percent equals the foreign trade deficit. Source: Statistical Appendix, Table 2.3 Public Finance 1.11 Given the size of the public sector, the bulk of Egypt's domestic financial resources for development are mobilized through the state budget and public sector corporations. Considerable efforts have been made in the past to increase such resources, largely by way of taxation. Average tax revenues amounted to 18 percent of GNP in 1973, 19 percent in 1974, and are estimated to have increased further to 22 percent of GNP in Public enterprises (although hampered by Government-imposed pricing policies) and social insurance and pension funds also mobilize substantial resources--these were estimated to amount to 8 percent and 5 percent of GNP, respectively, in Total public resources (including fees and miscellaneous revenues) were 37 percent of GNP in 1975, a major effort for a country of Egypt's low per capita income The high level of Government current expenditures, however, absorbed most of these resources. The major expenditures were on defense, and more recently on subsidies 1/, which increased from LE 188 million (about 5 percent of GNP) in 1973 to LE 715 million (about 15 percent of GNP) in 1975, as the Government endeavored to protect domestic consumers from the sharp increases in the import prices of foodstuffs and other essential commodities. While exact data on defense spending are not available (since a large portion is channelled through a separate account--the Emergency Fund) it appears that the defense burden on the budget eased in real terms over this period. Expenditures on economic and social services provided by the Government (education, health, maintenance, etc.) as well as other general expenditures have risen at approximately the same rate as GNP. 1/ Including direct subsidies and public economic sector deficits.

13 1.13 With increased current spending, public savings declined between 1973 and from about 4 percent of GNP in 1973 to a negligible amount in With investment growing at a rapid pace, there has accordingly been increasing Government borrowing from the banking sector. This has been further compounded by fast-growing credit demand from public sector corporations and from the private sector. Together, these factors strongly increased inflationary pressures in the economy--causing domestic prices to rise more rapidly. The official consumer price index estimates price increases of almost 10 percent in both 1974 and 1975, but actual inflation rates were probably higher. Table 1.3: PUBLIC SECTOR FINAN4CES (LE million) Prelim. Budget Actuals Budget /1 Actuals Proposals / Total Revenue 1,242 1,426 1,794 2,164 2,216 3,055 Taxes ,040 1,279 1,351 1,979/3 Other ,076 Current Expenditure 1,101 1,361 1,975 2,201 2,046 2,391 Defense /4 679/5 580/5 695/5 Subsidies / General services Economic services Public Savings Public Investment , ,368 Overall Deficit ,094-1, Financed from: External borrowing, net Domestic borrowing, net /1 As revised in April and Slay /2 Includes direct subsidies and public economic sector deficits. /3 Includes expected exchange profits of LE 578 million. /4 Includes LE 184 millien used to finance reconstruction expenditures. /5 Includes reconstructien expenditures in war damaged areas, details of which are not available.

14 The 1976 budget (as revised in April and May 1976) reflected the Government's determination to increase public sector savings and ains both at increases in revenues and cuts in expenditure. The expenditure side emphasized the reduction of subsidies. As of May 1, 1976, subsidies on flour, corn, sesame, meat, coffee, and halawa were abolished at a savings of LE 55 million in 1976 or an annual rate of LE 115 million. Prices of the non-rationed portion of certain government supplies commodities (rice, sugar, fats, paper tissues) were increased; their revenue effect is estimated at about LE 24 million per annum. Declines in international prices are expected to push the subsidy bill even lower. 1/ In order to offset some of the impact of these measures on lower income groups, the Government granted cost of living allowances of LE 34 million. The revised budget for 1976 also incorporated other slight increases in current expenditures due to price increases caused by additional taxation measures (discussed below). In large part however, Government ministries were expected to absorb these price increases with corresponding declines in public consumption On the taxation side, the most immediate and direct measure taken by the Government in 1976 was to change the basis of valuing imports for customs duties. Before May 1, 1976, all items had been valued at the official exchange rate even if imported under the devalued rates of the parallel market and own-exchange rate import schemes. 2/ Since that date, however, customs valuation is at the exchange rate applicable for that import--with the result that for goods imported under parallel market and own-exchange schemes the de facto increase in the rate of customs duties is about 80 percent. The transfer of certain categories of imports to the parallel market (discussed later) will also result in foreign exchange profits for the exchequer, estimated at LE 135 million in The revised budget estimates for 1976 incorporate these changes in estimates of total revenue; they also assume, however, that lower surpluses will be generated by public sector organizations than originally expected On January 17, the Egyptian budget for 1977 was announced. It proposed nearly halving expenditures on subsidies (compared with the then expected 1976 budget outcome this implied a reduction of about LE 278 million). This reduction took into account the effects of the fall in international prices for some commodities, notably wheat, but also included the elimination of subsidies on some important items such as flour, maize, rice, unrationed sugar, tea, and cooking gas. The budget also proposed higher taxes on gasoline, cigarettes, and a number of other items, and higher receipts were projected from customs duties and exchange profits as a result of shifting almost all commodity and invisible imports to the parallel market. The cumulative effect of the taxation measures was to raise projected Government revenues by about 42 percent (LE 861 million) over the then estimated level in The price increases 1/ Major commodities left on ration were wheat, edible oils, sugar and tea. These, together with the deficits of public authorities and certain economic organizations, constitute the total subsidy bill. 2/ A description of the "parallel market" and "own-exchange scheme" is given in paragraphs

15 - 7 - resulting from the budgetary measures were significant, ranging from percent. The prices of several items not directly affected by the budget also went up as producers sought to protect their relative income positions. These measures sparked off serious disturbances and this budget was withdrawn A revised budget for 1977 was approved by the People's Assembly in February. The budget projects revenues of about LE 3050 million and current expenditures of about LE 2400 million. Of the latter amount, direct subsidies account for LE 380 million, compared with LE 500 million in The budget transferred an additional LE 793 million of imports to the parallel market; in order to partially damp down the price effect of this move, a price stabilization fund of LE 224 million was included in the budget. This fund was derived from a part of the exchange profits that would accrue to the exchequer as a result of transferring the additional imports to the parallel market. The fund has been set up for only one year, and its working is such as to cushion a decreasing portion of the price impact during the year Whilst the above measures will provide some help, the generation of adequate domestic resources is likely to be a continuing problem in the foreseeable future. In an econ,omy where, because of the overwhelming size of the public sector, public savings are almost synonymous with total domestic savings, and where taxatiorl is already very high, domestic savings can only be increased substantially through cut-backs in current public expenditures and increases in the surpluses of public sector economic organizations. While some progress has been made in both these areas, the Government still controls very rigidly the pricing policies of the public sector. Thus the increased costs of public sector imports (through their allocation in some cases through the "parallel market") have not yet been fully passed on to consumers--with the result that surpluses of public sector enterprises are likely to be reduced. It is, of course, t:rue that the "open door" policy and the decision to increase the role of the private sector, if successful, will make the public sector less dominani: in years to come. The public sector will, however, continue to play an important role in the Egyptian economy, and measures to increase its ability to mobilize savings must remain an important element of Government policy. Balance of Payments 1/ 1.19 The economic recovery following the October War and the need to maintain minimum living standards for the Egyptian people has brought serious pressure on the country's balance of payments. Balance of payments policy since 1973 has been aimed at (i) meeting the very high level of food requirements of the economy; (ii) importing larger quantities of intermediate and capital goods in order to increase capacity utilization and permit some rehabilitation of equipment; and (iii) building up stocks of both food and intermediate goods which had been depleted to dangerously low levels. Given low export earnings and a negligible level of foreign exchange reserves, this could only be done through massive external financing. The major source of this assistance was the oil-producing Arab countries. Aid was also sought from international institutions and western countries. Finally, the residual gap was filled through large-scale, short-term borrowing (largely incurred 1/ The exchange rate used is LE 1 = $2.56.

16 - 8 - during 1974 and rolled over in 1975) from Arab and western commercial banks. The servicing of this short-term borrowing, however, has created severe liquidity problems for the economy The Trade Accounts: Despite an increase in commodity exports by almost 55 percent between 1973 and 1975 (from $1003 million to $1568 million) almost entirely as a result of improved international prices, export earnings fell well short of the amount needed to meet Egypt's imlport bill, which almost tripled in this period (reaching $4329 million 1/ in 1975). The pressure on Egypt's external accounts was to some extent unavoidable because of the tripling of international cereal prices in 1974 and Egypt's positior as a major food importer. In addition there were substantial price increases in other sectors, including intermediate and capital goods. A major reason for the increase in Egypt's import bill, however, was also the fact that Egypt in 1974 and 1975 endeavored to achieve fuller capacity utilization levels, and to launch a major investment program Due to inadequacies in balance of payments data, the increase in the volume of imports (particularly of agricultural products) can be gauged accurately only through the transactions of the Foreign Exchange Budget. 2/ Imports of selected commodity items are detailed in Table 3.10 of the Statistical Appendix. Amongst the major imports, wheat increased from 2.3 million tons in 1973 to 2,5 million tons in 1974 and 2.8 million tons in 1975; flour increased from 380,00 tons in 1973 to 620,000 tons in 1975; maaize from 165,000 tons in 1973 to 200,000 tons in 1974 and 520,000 tons in 1975, and fertilizer from about 1.7 million tons in 1973 to 2.1 million tons in 1974 and This increased level of imports of agricultural commodities and inputs reflects both adiustment of stock positions as well as a higher level of consumption Egypt's export receipts were influenced by international market conditions, declines in the physical production of certain field crops (particularly cotton) and increased domestic demand for exportable products. As a result, there were declines in the quantities of some important exports, notably cotton. Exports of raw cotton, which amounted to 5.7 nillion kantars in 1973, showed a cumulative decline of 36 percent in the following two years. Exports of "unprocessed" agricultural products (largely onions, garlic, potatoes, groundnuts and citrus) as well as "processed" foods (largely rice) also declined in real terms. The only export sector which showed signs of strength was industrial manufactures (excluding yarns and textiles) which, after experiencing a decline of almost 8 percent in 1974, increased by about 18 percent in / Excluding 'Own Exchange Imports', officially estimated at $167.9 million in / Foreign Exchange Budget "actuals" relate to letters of credit opened rather than payments made and are therefore not directly comparable with the balance of payments.

17 The decline in the exportable surpluses of major sectors reflects the increased domestic demand for most commodities, and a substantial shift in acreage from cotton to other crops. The increase in export receipts over this period, therefore, resulted almost entirely from improved export prices. Egyptian export markets for cotton strengthened in 1974 when the bulk of Egypt's cotton was sold in convertible currency areas. In 1975, however, Egypt was unable to sell a substantial portion of its crop in western markets and sold the bulk of it to bilateral trade partners. While traditional commodity exports are unlikely to grow significantly in the near future, petroleum exports are expected to become an increasingly important source of foreign exchange (See Chapter II) Preliminary data for the first nine months of 1976 suggest that while the external trade deficit reached more managable proportions, this was accomplished only by drastically limiting imports (to about 70 percent of their level in the corresponding period of 1975). This cutting back in imports was affected through restricting imports of intermediate goods--with a consequent running down cf stocks--and by abandoning the second tranche of the 1976 investment program, restricting the import of capital goods. Thus a smaller deficit in 1976 was purchased partly at the cost of Egypt's future growth The Services Accounts: The imbalance in Egypt's trade was compensated to some extent by fast-growing earnings from services and from workers' remittances. Total net earnings from invisibles (excluding 'own exchange funds') rose fromi $7 million in 1973 to $281 million in 1975 and an estimated $470 million in Thus, the overall deficit on the trade and services account, after reaching a record level of $2.5 billion in 1975, declined to an estimated $1.4 billion in 1976.

18 Table 1.5: THE TRADE AND SERVICES ACCOUNTS (In millions of US dollars) est. Trade Balance ,801-2,761-1,860 Exports, f.o.b. 1,003 1,674 1,568 1,605 Imports, c.i.f. /1-1,664-3,475-4,329-3,465 Non-Factor Services, Net Receipts (Suez Canal) (.) ( ) (85) (348) (Travel) (158) (266) (332) (385) Payments Factor Services, Net Receipts / (Workers' Remittances) (86) (189) (367) (445) Payments Balance _,632-2,480-1,390 /1 Excludes 'Own-Exchange' Imports The Financing of the Deficit: The massive deficits on the goods and services account since 1973 have been financed almost entirely by official Arab grants, loans and deposits with the Central lank of Egypt. Western M&LT capital assistance, which had been reduced to a trickle after the cutoff of US PL480 in 1964 and which practically ceased after the 1967 war, was restored after October However, the slow disbursements inherent in the aid process have meant that even through 1975, net M&LT transfers from OECD countries to Egypt were not very large--because of heavy repayments on these accounts from past commitments. The aid commitments from the OECD countries have, however, led to a strong aid pipeline, and it is estimated that there have been substantial inflows in 1976 (about $480 million) which should continue in (See Chapter IV).

19 Table 1.6: FINANCING OF THE EXTERNAL DEFICIT (In millions of US dollars) est. A. Deficit on Goods and Services ,632-2,480-1,390 B. Amortization of M&LT Debt (of which suppliers' credits) (277) (-285) (-280) (-300) C. Reduction of Short-Term Debt D. Reduction of Balance on Bilateral Agreements E. Foreign Exhange Requirements 1,174 2,291 3,553 2,135 F. Supply of Funds 1,290 2,119 3,573 2,135 Private unrequited transfers Official grants 725 1, Gulf Organization for Development in Egypt / Other TI&LT loans Suppliers' Credits M&LT Deposits/Loans.. 5 1, Foreign investment Short-term commercial bank credits, net Other Monetary Movements (net) and errors and omissions G. Change in Reserves n.a. /1 A $250 million cash loan committed by the Gulf Organization for Development in Egypt was disbursed in January As the summary table above indicates, the deficit on goods and services increased from $654 million in 1973 to $1.63 billion in 1974 and reached $2.48 billion i-n 1975, before declining to an estimated $1.39 billion in The reduction in the deficit in 1976 largely reflects the lower volume of external assistance received in that year. This deficit was financed in 1974 through unrequited transfers ($1,306 million, of which $1,264 million was Arab governmental grants), short-term foreign borrowing or use of banking facilities ($585 million, net) and drawdown of reserves. The medium- and long-term capital account (including suppliers' credits) showed a deficit of $159 million, reflecting the burden of servicing the outstanding foreign debt and the slow disbursement on new commitments made largely by multinational institutions and western countries in the post-october 1973 period.

20 During 1975, Egypt received unrequited transfers of $1,079 million (of which $988 million were official Arab grants). Additional Arab assistance took the form of loans to and deposits in the Central Bank of Egypt ($1,580 million). Net M&LT capital inflows in 1975 (including suppliers' credits) amounted to $378 million largely as a result of an Iranian cash loan of $320 million. Other significant monetary movements involved the reduction of indebtedness on the bilateral accounts ($241 million) and reduction of short-term indebtedness ($264 million, net) Foreign aid inflows declined sharply in 1976 (in comparison with the experience of 1975). Unrequited transfers are estimated to have amounted to about $700 million (of which about $635 million were official Arab grants). Arab M&LT loans and deposits amounted to about $470 million; while M&LT loans from OECD countries and Eastern Europe are estimated to have amounted to $665 million. These capital inflows were smaller than had been estimated by the Egyptian authorities. As a result substantial suppliers credits were incurred (an estimated $420 million), and the net use of short-term banking facilities (as a result of non-payment of obligations due) was $235 million Exchange Rates: While the official exchange rate has not been adjusted since February 1973, the Government has created a mechanism whereby a more realistic rate could be applied to some categories of foreign exchange payments and receipts. As a first step in the process it introduced a "parallel market" for foreign exchange transactions in convertible currencies from September The relative exchange rates (set by the Central Bank) have moved as follows: Official Rate Parallel Market Rate 1/ From February 1973 LE 1 = US$ From September 1973 LE 1 = US$ From February 1975 LE 1 = US$ From May 1976 LE 1 = US$ The coverage of the "parallel market" has been gradually enlarged. At its inception, exports excluded from its coverage comprised cotton, rice, onions, potatoes, garlic, cotton yarn, textiles, crude petroleum and petroleum products, and all official receipts, i.e., in short, all traditional export items were excluded. On the imports side, it was confined largely to payments for services and some categories of intermediate goods imports, and was chiefly for the use of the private sector. According to the foreign exchange budget, in 1975 about 45 percent of convertible currency exports of goods and services (which totalled $1083 million) and about 9 percent of convertible currency imports of goods and services which totalled $4564 million 2/ were channeled through the parallel market. However, this market was enlarged substantially in 1976 when an additional $1075 million of public sector commodity imports were transferred to this market ($275 million in February and $800 million in 1/ Buying Rates. 2/ Excluding $180 million of "own exchange" imports--see later.

21 May). As a result, about 37 percent of total convertible currency payments in 1976 (which were estimated at $4392 million excluding about $255 million of own exchange imports) were expected to come at the parallel market rate. The list of commodities to be exported at this parallel market rate remained unchanged until May 1976 ancl only about 27 percent of total convertible currency exports were expected to go through this market. 1/ 1.32 The 1977 Foreign Exchange Budget contemplates that all foreign transactions to convertible currency areas will take place at the parallel market rate except for the following: (i) Exports of cotton, rice and petroleum and invisible receipts from the Suez Canal; (ii) Imports of wheat, flour, edible oils, sugar, tea, insectisides, fertilizer and petroleum and invisible payments to Egyptian embassies abroad, students fees and maintenance abroad and insurance and freight of commodities imported at the official rate of exchange The following table analysing Egyptian foreign exchange markets indicates that the effective exchange rate governing trade transactions with convertible currency areas has been depreciated with significant effect. Table 1.7: EXCHANGE MARKET ANALYSIS (Convertible Currency Transactions - Foreign Exchange Budget) Actuals Budgeted Percent of Total Goods Exported at Parallel Market Rate Percent of Total Goods & Services exported at Parallel Market Rate Percent of Total Goods Imported at Parallel Market Rate Percent of Total Goods and Services Imported at Parallel Rate / The falling proportion in 1976 compared to 1975 is due to greater petroleum exports, which are transacted at the official rate.

22 A third foreign exchange market (in addition to the official and the "parallel" markets) is associated with "own-exchange" imports. The "ownexchange" imports scheme was introduced in 1974 and allows traders or individuals who hold foreign exchange eligible for conversion at the parallel market rate to use such holdings to import goods. This market became extremely popular due to the minimum of formalities required. Under the original scheme, private importers could import a range of about 380 commodities with no licensing requirements for imports below $12,800. In November 1975 the system was changed to make all commodities eligible except for a list of 28 (18 supply commodities and 10 that the Government wanted to protect). Goods imported under this scheme in 1975 are estimated to have been worth about $180 million (converted at the official exchange rate). The exchange rate in this market during 1975 is estimated to have varied between LE I $ (compared to the parallel market rate of LE 1 = $1.55 in this period). During 1976, however, as a result of further widening of the parallel market and the (downward) revision of the "parallel market" rate the "own-exchange" rate has moved closer to the "parallel market" rate Reorganization of the External Trade System: The trend away from bilateralism was prompted not only by the post-october 1973 economic orientation towards an "open-door" policy and the emphasis on trading with the West, but also because the volume of trade itself with bilateral agreement countries was constrained by excessive balances which accumulated against Egypt. At the end of 1973, Egypt was engaged in bilateral trade relations with more than 30 countries. This has now been substantially curtailed. Taking account of negotiations under way, it is probable that Egypt will be left only with the following fourteen bilateral trading partners: The Soviet Union, German Denocratic Republic, Czechoslovakia, Bulgaria, People's Republic of China, North Korea, Sudan, Jordan, Somalia, Mlali, Ghana, Vietnam, Mongolia and Greece A basic change in the organization of the foreign trade sector was the abolishment of the monopoly of the state trading companies, and the permission for private enterprise to trade externally for the first time since The Egyptian General Organization for Foreign Trade, the holding company for the six state foreign trading companies, was abolished from January 1, 1976, along with other public economic organizations as required by Law No. 111 (of September 18, 1975). This decentralization was further reinforced by allowing the private sector to engage in most types of foreign trade. The private sector can now export and import all commodities (with the exception of the supply commodities) to free-currency areas and can also import (in free currency) from bilateral agreement areas items whose quotas have been exhausted or those items which have not been listed for trade under the agreement Relations with the International Monetary Fund: In MIarch 1977, the Government of Egypt signed a Letter of Intent with the International Monetary Fund, which spelt out a series of major actions that would be carried out with respect to the exchange rate, the international trade sector, the budget and fiscal policy, short-term debt, and internal credit levels. The implementation of these measures is expected to strengthen the management of Egypt's economy.

23 External Debt 1.38 Egypt's non-military, medium- and long-term debt outstanding and disbursed at December 31, 1975, was estimated at $5,101 million, which was almost double the amount at end-1974 ($2,760 million). During the first nine months of 1976 the debt rose to $5,670 million. Of this, M&LT loans amounted to $3,043 million (of which $731 million in clearing currencies), M&LT deposits in the Central Bank to $1,942 million, suppliers' credits to $685 million (of which $74 million in clearing currencies). 1/ The major creditors were Saudi Arabia, Kuwait, USSR, USA, Abu Dhabi and Iran. Debt service on medium- and long-term debt was estimated to amount to $680 million in 1975, giving a debt service ratio 2/ of 26 percent. The foregoing figures do not include military debt; it is understood that Egypt is making efforts to obtain rescheduling of service payments on such debt While the bulk of external assistance to Egypt was obtained on highly concessional terms (the grant element of total commitments during 1975 is estimated at 42 percent), the high level of short-term indebtedness continued to be a cause of serious concern. Commercial bankers credit facilities outstanding (including undisbursed) amounted to $2,297 million at the end of 1976 of which $1,447 million were disbursed. The liquidity requirements of this type of indebtedness created severe problems for Egypt and arrears in repayment were reported throughout the second half of / Details of Egypt's external debt are presented in Statistical Appendix Tables / Ratio of M1&LT debt service to exports of goods, non-factor services and workers remittances.

24 CHAPTER II DEVELOPMENT OF MAJOR SECTORS Population, Employment, Urbanization 2.1 Population. The population of Egypt was estimated to be about 38 million at mid In relation to the very limited habitable area, it has one of the highest densities in the world, with over 1,000 persons per square kilometer. Successive censuses since 1927 have shown an increasing growth rate, rising from 1.09 percent per annum between 1917 and 1927 to 1.78 percent from 1937 to 1947 and 2.54 percent from 1960 to 1966, the date of the last census. Current estimates of population growth range between 2.2 percent to 2.5 percent per annum. United Nations projections (medium variant) suggest a population of 65 million by the year Control of this rapid rate of population growth is therefore a matter of considerable urgency. 2.2 The concern of the Government of Egypt over its population growth and its intention to taking action date back at least a decade, when the National Family Planning Board was established. This Board and the Supreme Council for Family Planning established later at the ministerial level to oversee population activities (chaired by the Prime Minister, who has delegated the responsibility to the Mtinister for Social Affairs) are nominally responsible for formulating policies and providing equipment supplies; they have, however, no executive responsibility. This lack of an organiztional focal point for directing the program has hampered the development of a strong and effective family planning program. Responsibility for program implementation is currently divided between the M4inistry of Health (partially responsible for delivery of services) and the Ministry of Social Affairs (also responsible for delivery of services and for the motivational and educational aspects of the program). Further constraints include difficulties in securing Lunds, lack of training, staffing problems, and difficulties in securing equipment and supplies. There are, however, potentially positive aspects to the family planning program effort in Egypt. The country has one of the most comprehensive health infrastructures of any developing country (one rural health unit for every 5,000 population which could be utilized for service delivery). The National Family Planning Board has a policy requiring each Government agency to consider incorporating relevant population activities as part of its own development efforts. There are currently efforts within the Government to involve more ministries in the program and widen the base of support at the ministry and governorate level. A firm commitment will however be needed to set into motion adequate measures to deal with population growth. 2.3 Employment. Egypt's civilian labor force was estimated in 1975 at about 10 million of which about 9.29 million were employed. Open unemployment is maintained at a low level mainly by employment in the public sector-- where disguised unemployment is estimated to be as high as 30 percent with unfortunate effects on administrative efficiency. In addition, for many periods in the year, there is significant underemployment in rural areas. Emigration to oil-rich Arab countries has to some extent eased social strains which could

25 17 - have emerged from the rapid growth of Egypt's labor force. It is estimated that at present only about 185,000 additional jobs are being created each year, of which about 35,001) are in industry and mining and about 31,000 in agriculture. Even if this performance improves substantially, it is clear that Egypt is unlikely to 'e able to provide productive employment for all of the 300,000 young men and women who are currently estimated to be entering the labor force each year. Many will thus end up in low productivity service occupations. This could well prove to be the most serious socioeconomic problem facing the country. 2.4 Urbanization. Egypt has a higher proportion of its population living in towns and cities than most other countries at comparable stages of development--42 percent were living in urban areas in This figure compares with 28 percent in 1937 and 37 percent in The large cities are growing faster than urban areas as a whole. In 1966 Cairo and Alexandria together housed 20 percent cf the total population. As the population of Cairo is estimated to have almost doubled over the past 10 years (from 4.2 million to nearly 8 million) the share of these two major urban centers is likely to be nearer 27 percent today. If present trends continue, Cairo could have a population of 20 million by Several factors are responsible for this rapid rural/urban migration toll. The massive exodus from the villages reflects increasing population pressure on an already intensively cultivated and relatively static cultivable land area, where labor surpluses (at least in off-peak periods) had emerged even 20 years ago. On the other hand, the deliberate allocation of public funds to centra:lized Government services and urban-based production activities, together with other economic forces, have led to a concentration of the more attractive employment opportunities in the cities. These, in turn, have caused an influx of people into the informal sectors which produce the products and services needed to satisfy some of the consumption demand of the higher-income groups. For example, Cairo has about 20 percent of Egypt's population, but has about two-thirds of the television sets, half its telephones, a third of its doctors, two-thirds of its university graduates, uses 27 percent of its power and consumes 40 percent of its meat. 2.6 An important aspect of the urban strategy of the Government involves the reconstruction of the Canal Zone cities. Port Said, Ismailia and Suez, inhabited by almost a million people prior to the 1967 war, were completely evacuated between Port Said and Ismailia have since been largely rehabilitated. The city of Suez will require a much more substantial reconstruction effort. Assistance from Arab countries (and more recently from the United States) has played. a vital role in beginning to restore these cities as viable economic and social entities. A great deal of further rehabilitation is, however, still required. Agriculture 2.7 Agriculture rermains the largest sector of the economy, despite the fact that only about 2.5 percent of Egypt's land area of about one million square kilometers is cultlivable. The sector accounts for about 28 percent of the GDP, employs about 47 percent of the labor force, and provides about 60

26 percent of exports (processed and unprocessed). Output is dominated by field crops, mainly cotton, maize, rice, wheat, and berseem, which together occupy some three-quarters of the total arable land and account for over half the value of agricultural production. Farmers are almost exclusively smallholders, with over 90 percent of operators having an average of one acre or less. Despite successive land reforms in the past 20 years, which have broken up the previous large landholdings, the distribution of land and incomes is still highly skewed, with about 5 percent of farmers owning nearly 43 percent of the land. The maximum permissible holding is 50 feddans per person and 100 feddans per family. 2.8 The country is virtually rainless and its cultivated acreage depends almost entirely on the Nile. While population relentlessly increases, the scope for extending the cultivable area is limited and most gains in production have come from improvements in cropping intensity. Over the last decade or so, agricultural output has grown much more slowly than population. Evidence suggests that total agricultural production has risen 1.6 percent a year, whereas production per head has declined up to about 0.7 percent per year. Food production per head has also declined; this together with the changing consumption patterns away from sorghum and maize to wheat and meat, which accompanied increasing urbanization, led to a rise in food imports at a time when world prices were at record levels. Although domestic wheat production has risen from 1.5 million tons to 2 million tons per year, the wheat-grain equivalent of wheat and flour imports rose from below 2 million tons per year in the sixties to 2.8 million in 1973, 2.93 million in 1974 and to 3.63 million in At the same time, prices rose from LE 30/ton to LE 78 in 1973, LE 112 in 1974 and fell to LE 88 in The capacity to pay for the imports with export income from agriculture has fallen as the domestically consumed share of the total cotton and rice crop has risen. Between 1970 and 1974 the value of rice exports rose 16 percent, reflecting price rises of 95 percent and a fall in quantity of 79 percent. For cotton, the value of exports rose 88 percent, reflecting a price rise of 107 percent, and a fall in quantity of 19.5 percent. For cotton yarn the total value rose 82.8 percent reflecting a price rise of 98.4 percent and a fall in quantity of 15.6 percent. Policy Issues in Egyptian Agriculture 2.9 The major problem facing Egyptian agricultural policy is how to speed up the growth of agricultural output. The most important factors which hinder the growth are discussed below together with the policies which might help remove the constraints. (i) Land and Water Constraints: The most severe natural constraint on Egyptian agriculture is the limited cultivable land available and the problems caused by a rise in the groundwater level. It appears that much of the country's 6.5 million feddans will require drainage in the next two decades. Trials have shown a high yield response to drainage, and to subsoiling and application of gypsum (soil improvement) where soils are especially compact and when drainage is also carried out. Thus, unless a high priority continues to be given for drainage and soil improvement projects in old and new lands the natural productive quality of the most limited resource may well continue to decline.

27 (ii) Budgetary Allocations: While agriculture has consistently accounted for about 30 percent of GNP over the past decade, its share in total government current expendliture has remained at a relatively constant 4.5 percent and its share in total investment has been declining. In 1966/67, Agriculture, Land Reclama,tion, Irrigation and Drainage received 18.3 percent of gross fixed investment:. If the Aswan High Dam investments in that year are included, it received almost 23 percent. This proportion has fallen steadily to 8.1 percent in the 1975 plan. While an "appropriate" share for agriculture in government current expenditures and investments may be difficult to specify precisely, the decline in agricultural growth since the mid-sixties and the decline in the proportion of investments in agriculure seems clearly linked Within agricult:ure, the distribution of investments was heavily weighted in favor of land reclamation, irrigation development in reclaimed lands, and the high dam during the first half of the sixties. As late as 1967/68, horizontal deve:lopment -- land reclamation, irrigation development in reclaimed lands and land development in these areas -- accounted for 72 percent of all investments in the agricultural sector. The traditional agricultural services, including extension, research, the various cooperative organizations and other activities, received inadequate amounts of investment. Without increased budgetary allocations for these items, the major agricultural investments made in the last decade will not be able to yield anything approaching their full potential. Table 2.1: AGRICULTIJRAL INVESTMENTS BY MAJOR CATEGORIES /68-75 (percent) 1967/ / Agricultural Services Land Reclamation and Associated Activities Drainage Public Sector Poultry (iii) Agricultural Credit and Inputs: Except for fertilizer, the consumption of which had already reached 1.8 million tons in 1965/66, there has either been a decline or stagnation in the direct supply of agricultural credit and inputs. The supply of loans through the Agricultural Bank reached $221 million in 1966/67 but had not regained that level through 1972/73 (data for later years are not available). MIoreover, virtually all of this was short-term, and about 71 percent was for fertilizer. The increased allocation of short-term credit (which means essentially claims on inputs through the cooperatives) for wheat after 1971/72 is a major explanation for the dramatic increase in wheat yields in Fertilizer consumption did not regain the 1965/66 level until 1969/70 and has been relatively constant since then at about 2.0 to 2.1 million tons annually. Adequate supplies of fertilizer and credit are clearly an essential part of any effort to step up the growth of agricultural output.

28 (iv) Price System and Structure: A major constraint on the level of output of different crops in the old valley is the administered price system. Its impact on old valley farmers and settlers in reclaimed lands villages is especially pronounced, since they are also subject to the administered cropping pattern. The large state farms in reclaimed lands produce according to agronomically established cropping patterns, and the operating costs and losses are financed through the Central Government budget A major element of Government policy has been that the agricultural sector should finance industrial development, through an indirect tax on agriculture. The prices paid to producers for the major exported crops-- essentially cotton and rice--and the prices of farm inputs have been set in a way which yielded a nominal surplus for the Government. A second major element of policy has been the maintenance of a low consumer price level for basic foods, especially wheat. Fixing the prices of these commodities at the retail level, which in turn sets limits to producer prices, combined with the administered price of cotton and inputs, effectively determines the cost and profitability relationships that dominate agricultural production. The only prices which are uncontrolled at the farm level are those for livestock products, berseem (Egyptian clover), vegetables and fruits. Due to strong consumer demand over the past decade there has been a rapid rise in the prices and profit margins of these commodities In the face of these large discrepancies in income earning possibilities, there have been persistent pressures to increase the area of fruits, vegetables and berseem. Once a permanent orchard is established, a farmer is freed from the requirement to follow the required cropping pattern on that land. Because of the high price of berseem, farmers have stretched out the short-season berseem crop to obtain a second cutting before planting cotton. This delays cotton planting and increases the susceptibility of cotton to insects and pests. Thus, while the farmer is induced by considerations of profitability to move out of the traditional crops, he is constrained in doing so by the imposed cropping pattern and the lack of inputs for such a move. On the other hand, while he is required to grow traditional crops, his inducement to do so is limited. These two competing forces are undoubtedly an important explanation for the slow growth of yields in Egypt in the past decade. There is urgent need for a reexamination of relative and absolute prices received by the farmer so that the pattern of incentives facing the individual corresponds more closely to the country's economic and social needs. (v) Marketing: Marketing and processing are in the hands of the private sector and several ministries, most notably the Ministries of Industry, Supply and Foreign Trade. Marketing and processing by the private sector is limited to the areas of livestock products, fruits and vegetables and a few other crops. Cotton is completely marketed and processed by public sector organizations, while the marketing and processing of rice, wheat, maize, potatoes, garlic and some other crops are heavily influenced by public sector operations. These uncoordinated marketing arrangements remain a serious handicap to expanded agricultural production and close attention should be given to ways of improving them.

29 Industry 2.13 Industry has beccme a large and significant sector of the Egyptian economy. The share in GDP of manufacturing and mining is estimated to have increased from some 8-10 percent in 1946 to 21 percent in Industry currently employs more than ore million persons, i.e. about 12 percent of the civilian labor force, The sector is also responsible for some 35 percent of total exports Industrialization has tended to be inward-looking. Typical import substitution patterns have emerged both under private enterprises (between 1930 and the late 1950s) and under the planned public owned economy of the 1960s and early 1970s. During this period industry has mainly produced basic consumer goods (textiles, food, beverages and cigarettes) and essential intermediates (building materials, ferti!lizers and metals) for the domestic market. Consumer durables were introduced in the late 1950s. The capital goods industry-- machinery and equipment for production--is small. Exports of manufactured goods, despite a steady ex-pansion in both volume and range, until very recently remained of secondary importance As a result of the nationalization measures in the early 1960s, most of the large- and medium-scale industrial enterprises are now in the public sector. This consists of approximately 200 enterprises, accounting for 90 percent of annual investment and some 75 percent of value-added in industry. The public sector in industry employs some 600,000 persons. Until 1975 public enterprises were managed through general organizations which had a status akin to holding companies. The chain of command ran up from the enterprise to the relevant ministry through the general organization. The general organizations were dissolved at the end of 1975 in order to decentralize decision-making and encourage efficiency. They have been replaced by technical secretariats which retain a coordinating function as opposed to the management role of the general organizations. However, managers of firms do still not have the right to lay off their excess labor force nor do they have control over final prices of output (which are fixed by the Government), or over decisions to replace or add to existing capacity (which are taken by the ministries concerned in coordination with the newly created Economic Councils). A further decentralization measure transferred several indust:rial enterprises from the jurisdiction of the Ministry of Industry to that of other ministries. Thus cement and other building materials are now under the Ministry of Housing and Reconstruction, paper under the Ministry of Culture and so on. The advantages of these latter measures are not very evident. Decentralization of decision-making which involves greater autonomy to the enterprise is not inconsistent with some form of coordination under the aegis of a single ministry The nationalization measures of the early 1960s reduced the size and the significance of the private sector, which was left with the small and very small establishments. These establishments were numerous and employed in aggregate some 400,000 persons, but the economic impact measured by their contribution to value-added was very small. The private sector has received considerable encouragement from the Government after 1973 and there is no doubt that it has already gained in both size and strength. Yet the transition from

30 an economy dominated by the public sector to a system in which private industrial enterprise begins to make significant contribution to growth is likely to be long As industry is expected to play a major role in the economic development of Egypt an assessment of past performance is important. The rates of industrial output growth reached a peak of about 9 percent per annum in the period, but declined after 1964/65. The decline reached its lowest point in 1967/68, a year in which industrial output fell. A recovery took place between 1968 and 1972, but the average rate of output growth during these years did not exceed 5 to 6 percent. Recent data indicate that industry slowed down again in 1973, with output growth estimated at between one and two percent. Recovery, however, started towards the second half of 1974 and the situation improved substantially in 1975 (a year during which output growth in industry is estimated to have been in excess of 10 percent) It would seem that a severe shortage of foreign exchange for the input of raw materials, intermediate goods and spare parts was responsible for the slow-down in 1973 and the first half of That shortage was eased in 1974 by new foreign exchange credits becoming available thus enabling the placing of import orders for current inputs and the building up of the necessary stocks. The 1975 boom seems to have been due in part to these favourable factors operating after a short lag. New capacity coming on stream in steel (Helwan) and refining (Suez) also explain parts of the increase in 1975 output. Preliminary data suggest that output growth continued to be high in the first half of 1976, but it may have slowed down in the second half of the year. Stocks are reported to have been run down in 1976 and the foreign exchange bottleneck is making itself felt again. Thus, while the growth performance of industries in 1975 and early 1976 was encouraging it may be difficult to sustain.

31 Table 2.2: INDICES OF PRODUCTION BY INDUSTRY, (Public Sector Only) Sector Food Beverages Tobacco Rubber Coal Petroleum Products Products of Wood, Leather, etc Textiles Wearing Apparel Chemicals Basic Metals, Metal Products Paper, Printing Non-metallic All machinery (incl. transportation equipment) Source: Computed from data provided by the Ministry of Industry. Major Issues 2.19 Output growth is but one aspect of economic performance. Existing industries should be assessed also in terms of their technological efficiency and their contribution to productivity growth while new investment projects must also pass the test of expected economic efficiency. It would seem that in Egypt most factories in all branches of industrial activities--from the old established and traditional textiles to the recent and modern chemicals-- can make substantial gains in technological efficiency. There has generally been widespread idle capacity, often but not always due to foreign exchange shortages; there are substantial wastage of material inputs in some significant industries such as cotton spinning; and observers have noted a lack of quality control in production The problems of economic efficiency are difficult to tackle in an economy where input and output prices are set administratively. Although the system is now being liberalized and decentralized, many of these problems persist, since managers still have little control over these prices. It will be difficult to have any long lasting improvements in industrial performance unless managers of enterprises are given some control over the factors which have an impact on profitability. Indeed, a situation in which some prices reflect market forces while other are administered is not necessarily superior from an economic point of view to a situation in which all prices are administered.

32 Another set of issues is raised by the provisions of Law 43 of 1974, which was intended to act as an important vehicle for attracting foreign investment, by issuing guarantees against nationalization, except under due process of law, and by providing an investment package. For investments in free trade zones, the incentives include complete exemption from all taxes and tariff duties for an indefinite duration; no restrictions on repatriation of earnings and capital, and the provision of infrastructural facilities at essentially subsidized rates. Free trade zone projects must export their outputs and pay a one percent levy (in foreign exchange) on their value in lieu of taxes. In addition, purchases of all local inputs must be paid for in foreign currency at the official rate of exchange. The increase in national income arising from the employment of local labor, the foreign exchange received for the use of local resources, and the one percent levy constitute the primary benefits that will accrue the Egyptian economy from investments in free trade zones. However, the incentive scheme does not include any provision to encourage the development of industries and the use of processes therein, which are oriented towards production of goods with a high domestic value-added content. Thus, it would be necessary for the licensing authorities to consider these factors in project appraisal when determining priorities Private domestic investment is seriously constrained by the availability of foreign exchange for importation of capital goods. The national foreign exchange budget does not make a provision for imports of capital equipment for the private sector. The sole source of institutional foreign exchange finance for private sector industry was the Bank of Alexandria, whose foreign exchange resources consist of an IDA credit of $15 million extended to the Egyptian Government in 1973, and a second one of $25 million in The newly established Industrial Development Bank is taking over this aspect of the Bank of Alexandria's operations. However, it is likely that substantial additional foreign exchange resources will be required to meet the private sector's investment requirements. Thus, it would be desirable to make available to the private sector additional foreign exchange through the parallel market, transferred if necessary from official foreign capital inflows incorporated in the national foreign exchange budget. Such a step would be a concrete indication of the Government's intention to strengthen the role of the private sector in industry The industrial protection system of Egypt, which has hitherto consisted essentially of direct controls over imports, has had limited allocative effects because, since the nationalizations of 1961, about 90 percent of industrial investment has been undertaken by the State, apparently with national requirements superseding economic profitability criteria. The tariff system has been shaped primarily by revenue considerations. However, with the recent liberalization of import policy and the expected upsurge in private investment, the role of tariffs as a major instrument of industrial protection policy has been revived. The current tariff structure consists of very low rates on raw materials and intermediate goods not competing with domestic production, and on capital goods, with higher rates on commodities manufactured domestically, and very high rates on luxury consumer goods. The implications of such a pattern of nominal tariffs for private investment decisions should be reviewed. In particular, it would appear that low duties on capital goods imports inhibit

33 the development of local machine building indistries, while the very high rates on luxury goods would tend to favor investment in industries producing them. This tendency could, however, be checked by the licensing authorities. A study of the pattern of effective rates of protection, which is a vital guide for private investment decisions, would be desirable as part of a review of the tariff structure in Egypt. Petroleum 2.24 Government policy in the petroleum sector aims at self-sufficiency (domestic consumption being about 7 million tons per annum) and the generation of an increasing exportable surplus. Despite the loss of the Sinai oil fields in 1967, total Egyptian petroleum production has indeed been substantially higher than local consumption, except during the period , when production problems reduced total output and the corresponding Egyptian share of oil produced in collaboration with foreign oil companies. These production problems have since been remedied. In addition, the recent petroleum price increases have spurred exploration efforts (particularly by the major Western oil companies) and all indicators point towards substantial increases in output and exports. In addition, the Sinai oil fields which have a production capacity of about 3 million tons per annum, have now been recovered. The production of crude petroleum is shown below. lable 2.3: PRODUCTION OF CRUDE PETROELEUM (in thousands of metric tons) est Red Sea 8,423 6,386 5,866 9,620 13,970 (El-Morgan, July, Ramadan) (7,978) (4,951) (4,289) (7,781) (12,360) (Other Red Sea) (1,445) (1,435) (1,577) (1,839) (1,610) Western Desert 1,297 2,025 1,587 1,599 1,095 Sinai ,987 Total 10,720 8,411 7,453 11,588 18,052 Source: Table 8.3 Statistical Appendix During the Five-Year Plan period ( ) the country intends to intensify its oil production in the existing fields and develop new ones. In its drive to discover neu oil reserves, the Ministry of Petroleum signed 27 exploration and producticn agreements by end the contracts covering an area of nearly 160,000 km2. These agreements with major Western oil companies are almost exclusively of the production-sharing type. In return, the oil companies have guaranteed minimum exploration and development expenditures of nearly $250 million (over the next 10 years), besides paying Egypt the sum of about $75 million as signature bonuses. Prospects for future oil discoveries

34 are promising and total Egyptian oil production is projected at about 700,000 barrels per day (about 35 million tons/per annum) by Even assuming a high level of growth of domestic consumption this would still leave an exportable surplus of about 15 million tons by 1980, worth an estimated $1.4 billion at present prices. The Suez Canal 2.26 The reopening of the Suez Canal has been of substantial economic importance to both Egypt and the world economy. The closure of the canal from 1967 to 1975 had lengthened many trade routes and increased shipping charges. 1/ Egypt lost the foreign exchange earnings from canal dues (which had reached an annual level of almost $200 million by 1967), and was only able to sustain this loss to the economy by offsetting compensatory payments made by Arab countries under the Khartoum Agreement The canal was reopened in the summer of 1975 at its pre-1967 efficiency at an estimated cost of about $290 million (of which $180 million was in foreign exchange). The canal is presently operating at its maximum permissable draft of 11.6 m (38 feet) and is open to ships of about 60,000 dwt loaded and ,000 dwt in ballast. Traffic has been increasing steadily and the number of transits by the end of 1976 was about 80% of 1966 levels. Revenues accruing to Egypt from the canal amounted to $85 million in 1975 and are estimated to have reached $348 million in A project to widen and deepen the canal so that it can accommodate ships with a 16.1 m (53 foot) draft is currently under preparation. The project cost is estimated at about US$1.1 billion (with a foreign exchange component of about 60 percent). The enlarged canal will be able to accommodate most of the large oil tankers (up to 150,000 dwt laden and 350,000 dwt in ballast) and should lead to significant savings in oil shipping costs and generate substantial additional revenues. Tourism 2.29 Egypt is a country with a long tourism tradition and with a great tourism potential. The number of foreign visitors has increased rapidly (by some 14 percent per year on average from 1968 to 1975, and by some 25 percent in the first half of 1976) but the number of guestnights spent in the country still has to match the records achieved just before the 1967 war, largely because the acute shortage of accommodation capacity has reduced the average length of stay. However, accommodation capacity is expected to almost double by 1980, therefore making it possible for Egypt to increase its foreign exchange earnings from tourism to a projected $600 million per annum (1976 prices). 1/ A UNCTAD report of 1973 estimated that from 1967 to 1971 shipping cost increases resulting from the closure were $4,355 million.

35 Infrastructure 2.30 The diversion of resources away from investment over an extended period has led to a considerable deterioration in the country's infrastructure. This is evident in almost all the sectors, but is especially clear in transport and communications, electricity, and urban facilities. The restoration of the infrastructure is, however, being given appropriate importance in Egypt's development strategy; almost 40 percent of total investment in the Plan is directed towards infrastructure projects. The Government also hopes that foreign aid donors will involve themselves substantially in this vital area.

36 CHAPTER III MANAGEMENT OF THE ECONOQMY 3.1 Government policy seeks to maintain the momentum of the economic expansion currently being experienced. Emphasis is therefore being placed on (i) strengthening the economic and social infrastructure; (ii) maintaining existing facilities and providing sufficient inputs for their full utilization; and (iii) mobilizing adequate financial resources (both in domestic currency and foreign exchange) to support additional investment. 3.2 The Government recognizes that these objectives can only be achieved within a comprehensive economic management program involving the coordination of decision-making at the highest levels. An active instrument of policy in this regard is a medium-term Plan which is now being prepared, and which is expected to provide a consistent framework for implementing macroeconomic policies as well as for reviewing investment programs and sectoral strategies. Medium-Term Planning 3.3 Preparation of the proposed Five-Year Plan has been slow, both at the technical and political level. However, the basic development strategies for the proposed Five-Year Plan as approved by the Council of Ministers in February 1976 are: (i) attaining an annual average rate of growth in GDP at factor cost 1/ of 9.6 percent; (ii) reducing the balance of payments deficit to an amount not exceeding capital goods imports; and (iii) adopting policies and measures to stabilize increases in public and private consumption and to increase the domestic savings rate. A draft macroeconomic framework of the Plan was made available to the World Bank mission in March 1977 and is summarized below. Table 3.1: DRAFT FIVE-YEAR PLAN FRA4E - MACROECONOMIC FRAMEWORK Constant 1975 Prices 1976 Est Plan Target LE Million LE Million Growth (% of GDP) (% of GDP) Rate (%) Gross Domestic Product (Market Prices) 5,498 (100.0) 8,382 (100.0) 11.0 Total Consumption 4,854 ( 88.0) ( 81.3) 8.8 Gross Investments 1,086 ( 19.7) 1,930 ( 23.0) 15.4 Imports (including NFS) 1,696 ( 30.8) 3,158 ( 37.7) 16.8 Exports (including NFS) 1,269 ( 23.1) 2,800 ( 33.4) 22.0 Gross Domestic Savings 659 ( 12.0) 1,572 ( 18.7) 23.0 Source: Government of Egypt, Egypt's Development Strategy, Economic Reforms and Growth Objectives, , March / Because of the projected decline in subsidies, the growth rate of GDP at market prices is put at 11 percent annually.

37 The draft Five-Year Plan is ambitious in its growth targets (almost 11 percent per annum), the total gross investment planned to sustain this growth rate (nearly LE 8,000 million, constant 1975 prices), and the assumptions of foreign aid likely to become available (LE 5,000 million or $12.8 billion). The achievement o[ substantially higher investment levels than those being currently experienced will also require sustained efforts on project evaluation and preparation; easing of administrative and physical bottlenecks; enhanced levels of public savings in order to generate an adequate level of domestic resources to complement the external assistance that is being projected; and effective incentives for private investment activity (both domestic and foreign). The most important of these issues are discussed below. Project Selection and Evaluation 3.5 In the past, executing ministries have found that the best way of securing more investment for their sectors has been to initiate new projects. This has resulted in a large number of unfinished projects which are likely to preempt the bulk of investment expenditures proposed for the Plan period. However, the choice between the completion of ongoing projects and initiation of new projects should take account of such factors as (i) fast gestation, i.e., projects that can reach the production stage quickly, irrespective of whether they are old or new; (ii) export-oriented production; and (iii) labor intensity, with emphasis on small farms and small-scale industry. Efficiency Policies 3.6 The need for increasing labor productivity and operational efficiency in enterprises is recognized. by Egyptian policymakers. However, it is difficult to measure efficiency in Egypt because the price signals are not functioning well. The widening of the parallel foreign exchange market is a major move in the right direction--the scarcity value of foreign exchange being now more realistically reflectecl in terms of domestic cost. Domestic Resource Mobilization 3.7 Egypt's large allocation of resources to consumption since 1973 has left very little to be used for growth, and consequently led it to rely heavily on external assistance. Out: of total consumption, public (Government) consumption is large (28 percent of GDP in 1975) in comparison with other countries at a similar level of development. In addition, while collective consumption is a direct result of Government expenditures, private consumption is partly influenced by the Government's policies, e.g., subsidies to main food items, popular cloth, and housing. Government's own consumption expenditures include free education and health, and transportation and utilities at subsidized low prices. Defense aside, the unusually large number of Government employees also accounts for the high collective consumption levels in every Government field, e.g., general administration, education, etc. Since public consumption is preempting resources needed for development, it would be desirable for the Government to review its policies and to concentrate the benefits on those most in need.

38 The Government's policy actions in this field were of relatively little significance until May 1976 when a major effort to mobilize domestic resources through increased taxation and reduction of public expenditures-- particularly subsidies--were announced (see Chapter I). While these actions are important, significant increases in public savings cannot be achieved without further restraining public consumption. The initial budget proposals for 1977 (discussed in Chapter 1) attempted to attain this objective, but had to be withdrawn. The revised budget also endeavors to restrict public consumption, but at a more realistic pace. Nevertheless, major efforts to implement the proposed new tax laws (now ready for presentation to the People's Assembly) and the improvement of tax administration are required if the public finances are to be put on a sounder basis. More price and management flexibility should also help to augment the savings of public enterprises. Foreign Trade 3.9 In order to achieve the economy's growth objective, the Government will have to further accelerate its export drive and restrain less essential imports. Promising export opportunities exist in several areas, e.g. oil, agricultural produce and manufacturing, tourism, Suez Canal, the Sumed pipeline and workers' remittances. The bulk of such additional earnings will accrue in convertible currencies. A successful export drive will, however, require incentives for domestic producers and investors as well as coordination with investment and production programs. Trade and exchange rate policies will also have to be used increasingly by the Government in order to restrain imports. The Government's action in May 1976 and January 1977 (detailed in Chapter 1) have been important, and should lead to a more rational allocation and use of foreign exchange. The Government is continuing its policy of widening the "parallel market" to ultimately encompass all trade transactions with convertible currency areas. In addition, the Government intends to review continuously the country's tariff structure (particularly as the scope of the parallel market is enlarged) to prevent a situation emerging which discriminates in favor of uneconomic import substitution and against exports. Over time these efforts should result in Egypt's own foreign exchange earnings covering an increasing share of its import requirements, especially as the latter should grow more slowly and less erratically than in the past, taking into account current trends in world prices as well as policy measures taken or contemplated by the Government (e.g. more realistic foreign exchange pricing, containment of domestic consumption). External Debt Management 3.10 While the Government has consciously sought to procure external assistance on as concessional terms as possible, it has not pursued an active debt management policy. As a result Egypt's short-term borrowings (of average maturities of 180 days) reached massive proportions during 1974 and 1975, and created severe liquidity problems for the economy. The Government's response to the problem was essentially of an "ad hoc" nature. Limits were placed on new short-term borrowings from the middle of 1975 (first on a one-to-one basis, i.e. new borrowings could not exceed repayments on such debt in any

39 given period; and later on a more restrictive basis). These measures have not yet eased the liquidity situation, which will continue to dominate Egypt's external aid requirements for several years to come. In order, however, to avoid a similar situation emerging in the future and to monitor and plan for the country's future debt service obligations, the Government has indicated that it plans to set up a "'Debt Management Unit" to be located in the Central Bank. A meaningful debt management policy, however, can only be implemented if this Unit is empowered to advise on all foreign debt prior to its incurrence. Given the existing external debt situation, its establishment deserves the highest priority.

40 CHAPTER IV REQUIREIIENTS FOR CAPITAL INFLOW 4.1 Over the longer-run, Egypt's economic potential is considerable. The reasons for this are in brief: (i) the country has a large domestic market, a proficient population, low wages, varied raw materials, and a key geographical location, which makes it a natural base for industries that wish to supply the growing regional market; (ii) Suez Canal revenues are estimated to continue to rise gradually until the Canal's expansion program is completed in about There is likely to be a substantial increase in revenues starting in 1980 resulting from the Canal's increased capacity; (iii) the improved prospects for oil production; (iv) considerably increased earnings from tourism; and (v) an increasing flow of remittances from Egyptians working in the richer Arab countries of the region. 4.2 However, the exigencies of being a war economy for 25 years and of pursuing the political and social goals which the country had set for itself, necessitated a drastic curtailing of development expenditures, especially since This has left a legacy of a dilapidated infrastructure and the existence of a host of policies 1/ which are collectively inimical to development. The result is that Egypt must now make a bold and sustained effort to overcome the structural obstacles that lie in the path of her realizing her development potential. The necessary measures will be easier to undertake, and the time required to attain the development potential will be shorter, if additional amounts of external support are made available. 4.3 Egypt requires external assistance essentially for three reasons: (i) to cover the current account deficit in the balance of payments; (ii) to improve the country's debt profile; 2/ and (iii) to meet a shortfall in domestic resources. These different needs call for different forms of assistance--project, commodity (including food) and cash. Prospects for NIational Income and Investment, According to preliminary data from the Mlinistry of Planning, despite the foreign exchange problem experienced in 1976, the economy managed to sustain a growth rate of about 6.5 percent in real terms. This is attributed, however, largely to increased production in the petroleum sector 3/ and revenues from the first full year of operation at the Suez Canal. In fact, over 40 percent of the increase in value-added in 1976 is estimated to come from these sectors. Growth in the other major sectors is expected to be more modest, but still respectable, with agriculture growing at about 3 percent, industry at 8 percent, and trade and other services at around 7 percent. 1/ Especially for pricing, consumption, public sector employment, and the incurring of short-term debt. 2/ And, in 1977, to repay the arrears on debt. 3/ From a full year's operation of the Sinai oilfields (which were recovered in November 1975) and the stepping up of production in the Red Sea fields.

41 In 1977 it is expected that the economy could grow at a rate of about 6-8 percent in real terms if adequate foreign exchange were made available. The major sectors of the economy--particularly agriculture, industry, public utilities, and supporting infrastructure such as transport and communications--are expected to maintain their long-term trend rates while the substantial rehabilitation being undertaken in these sectors is completed and the major new investments currently being undertaken come on stream. The construction sector is likely to continue its rapid growth, as reconstruction work in the Canal cities is pushed ahead with vigour. 4.6 As was discussed in earlier chapters, Egypt's development strategy has concentrated largely on import-substitution. Moreover, the combination of a shortage of resources and the existing procedures of project selection have led to the existence of a large number of "ongoing" projects in the portfolio for the medium-term Plan. Thus the de facto strategy for the next few years will continue to be dominated by an import substitution outlook. It appears that in the shqrt run the path of import-substitution will be importintensive, i.e. that there will be a sharp rise in imports, because for a time Egypt will have to import both the final commodities (until the facilities to produce these items come into operation) as well as the machinery and equipment required to set up these plants. 4.7 The annual plan for 1977 proposes total investment expenditures of LE 1,594 million, of which LE 255 million are expected to be in the private sector. Mlajor sectoral allocations proposed by the plan are: agriculture LE 136 million; industry arnd mining LE 466 million; and services LE 327 million. The foreign exchange component of the plan works out at about LE 803 million, or 50.6 percent. The increase in the size of the plan, compared to 1976, (and particularly its foreign exchange component) is due to the valuation of all imports of capital goods at the "parallel market" rate. If these imported capital goods are valued at the official rate, the total investment program proposed for 1977 is about LE 1345 million (i.e. about the level originally planned for 1976). Both the domestic budget (as originally proposed) and Egypt's foreign aid request were geared towards mobilizing adequate resources for attaining this level of investment. To the extent the government has had to modify its domestic budget and restore certain expenditures (including subsidies) under public pressures there will be an increased need for commodity assistance in order to generate domestic funds. There will also, however, be a substantial requirement for project assistance. A list of projects suitable for external financing, by sector and stage of progress, has been prepared by the Egyptian authorities for the meeting of the Consultative Group. Foreign Aid Requirements, Egypt's requirements for consumer goods are projected to grow slowly in The bulk of such imports will be the basic food items, the growth of which reflects the increase in both population and urbanization. The Government is still endeavoring to rationalize and adjust subsidies for the basic items, and has undertaken exchange rate and tariff measures for the others in order to ensure that the increases in demand are moderated. The decline in world food