In the 1990s Egypt has emerged as a role-model for the IMF adjustment programmes in the Middle East and African region. The
country, supported by three stand-by arrangements (1991, 1993 and 1996)
has achieved a remarkable economic transition.
During the late 1980s Egypt was gripped by chronic macro-economic
instability. Fiscal and current account deficits averaged 15 per cent
and eight per cent of GDP respectively and inflation exceeded 20 per
cent. The external debt rose to an unmanageable level, with increasing
arrears. Confidence in the Egyptian pound ([pounds sterling] E) was at a
low ebb, with rising dollar holdings.
In 1990-91, with increasing fiscal and external imbalances, Egypt
implemented a bold structural adjustment programme which focused on
creating a decentralised and market-oriented economy and the restoration
of macro-economic stability through pursuit of prudent monetary and
exchange rate policies. The programme was complemented by measures to
liberalise foreign exchange (forex) markets and interest rates, as well
as removing administrative controls on prices.
Since the second-half of the 1990s there has been a reinvigoration
of structural reforms, the results of which have been impressive.
Renewed confidence in Egypt is evidenced by a surge in economic activity
and higher foreign investment.
Annual real GDP growth rose by five per cent between 1995-97,
thanks to expansion of private and government consumption and higher
fixed investment, led by the private-sector. Market liberalisation and
deregulation along with falling interest rates have vastly improved the
In 1996-97 industrial and construction output rose by a robust
eight per cent. Inflation dipped to single-digit (4.7 per cent),
compared to 15.7 per cent in 1995, largely due to a stringent fiscal
policy and a firm exchange rate. The budget deficit in fiscal year
1996-97 was 2.6 per cent of GDP, compared with 20 per cent in 1990-91.
Both investment and savings rates relative to GDP are rising at 2.5 per
cent per annum.
Real GDP over the next two years should continue to grow at a
healthy 4.5-5 per cent, with inflation remaining stable at around five
per cent. The major engines of growth recently, fixed investment and
consumption, will be underpinned by the 1998-99 budget (beginning 1
July), which projects spending at E91.2 billion [pounds sterling], an
increase of E7.7 billion [pounds sterling] on the previous year.
The overall pace of structural reforms has intensified, and the
authorities to-date are making concrete progress on several areas of
The government has sold, fully or partially, 88 companies, compared
with only four between 1991-95.
These divestments have raised E8.2 billion [pounds sterling]. The
state plans to divest its majority stakes in 91 additional companies,
with assets worth E18.3 billion [pounds sterling] during 1998-99.
The government has relaxed its opposition to privatisation of
public utilities such as telecommunications and electricity, as well as
divesting stakes in one of the four major nationalised commercial banks
and one public insurance company. The privatisation of Air and Sea ports
are also envisaged. The government is committed to selling off 90 per
cent of state assets by the year 2000.
Thus a faster pace of privatisation in the medium- to long-term
will lead to increased economic efficiency and lower domestic debt.
Manufacturing will benefit from increased privatisation, which will
result in higher non-oil exports.
The authorities have deregulated certain protected sectors such as
as rents on commercial property and have liberalised procedures for
investment approval. Consequently, investment approvals for both
domestic and foreign investors have increased. The private sector is
being encouraged to participate in basic infrastructural projects on
build-operate-transfer (BOT) structures. Private sector activity
presently accounts for about two-thirds of GDP and spending on fixed
investment. The target is to increase the share to 80 per cent by the
year 2000, through the opening of state monopolies to private-sector
competition. Red tape is being removed and new legislation, which allows
for greater transparency in the public sector’s tenders procedure,
is expected to be enforced this year. In addition, a new commercial code
new corporate laws are being established.
Most quantitative import restrictions are now eliminated, and the
maximum tariff lowered from 70 per cent to 50 per cent, with comparable
cuts in tariffs above 30 per cent. A trade and co-operation accord with
the European Union would commit Egypt to still lower tariffs over a
A combination of high taxation (including the introduction of a
general sales tax) and better collection methods, as well as stringent
control on capital expenditure and the public sector wage bill and
reduced subsidies, have vastly improved Egypt’s fiscal position.
Falling interest rates have lowered government’s interest
payments on public debt. In essence, Egypt has achieved its recommended
IMF’s fiscal target. The deficit for 1998-99 is projected at 8
billion [pounds sterling] ($2.35 billion) equivalent to 2.7 per cent of
Finally, the Central Bank of Egypt has implemented reforms of
regulatory and supervisory regimes in compliance with the Basle
committee’s guidelines. Financial sector reforms have focused on
developing indirect instruments of liquidity control and management and
enhancing the attractiveness of domestic financial assets through
interest and credit liberalisation. The major nationalised banks (Banque
du Caire, Bank of Alexandria, Banque Misr, and the National Bank of
Egypt), which, combined, account for two-thirds of total loans and
deposits respectively, are being recapitalised, and are required to
comply with international standards for disclosure reporting and
accounting. The recent experience in South-east Asia has shown that an
efficient financial systems and intermediation are vital for sustainable
Meanwhile, Egypt’s external payments position is showing
marked improvement during the mid-90s. The current account deficit,
averaging just 0.4 per cent of GDP between 1995-97, remains manageable,
and easily covered by net capital inflows. A perennial large trade
deficit, averaging $7 billion annually between 1992-97 is offset by
surpluses on invisible (services) accounts and private transfers,
constituting workers’ remittances, which amount to under $4 billion
Trade liberalisation and higher fixed investment spending since
1995 have led to an import-boom. A slight deterioration in current
account deficit to $1 billion is expected this year. Imports are
projected at $14.3 billion (against $13.4 billion in 1997), while export
earnings are anticipated at $5.1 billion, almost static from 1997’s
level. Depressed exports reflect the impact of a slump in the oil market
and a slow down in world trade growth. Oil and petroleum products
account for over 50 per cent of total exports.
The government’s measures to improve internal security are
expected to to ease international concern after the Luxor killings last
November. Last year, tourism earned the country some $3 billion.
Egypt possesses an overwhelmingly solid international liquidity
position, a far cry from the early 1990s, when forex reserves fell to
$1.5 billion. In March of this year, official reserves exceeded $20
billion, the equivalent of 17-months import coverage. The country is
also a net creditor to the international banking system, with net
deposits of $20,943 million in OECD-based banks, having doubled since
The external debt of $28,500 million as of end-1997 and
debt-service ratio of around 13 per cent of exports are manageable
within the context of Egypt’s $75 billion plus economy. Egypt has
benefited from highly favourable Paris Club reschedulings and debt
write-offs totalling $10 billion during the 1990s, largely due to
improved relations with the international financial institutions. The
country should not, therefore, experience any external financing gap
over the medium-term, in view of its strategic importance in the Middle
Continuing bilateral funding, especially from the US and Saudi
Arabia are anticipated. Amid considerable volatility in most emerging
markets’ currencies, the Egyptian pound has proved highly stable.
The pound remains underpinned by capital inflows and higher forex
reserves and reduced inflationary expectations.
The exchange rate has been unofficially pegged to the US$ at a rate
of $1:E3.4 [pounds sterling] since 1994. However, in real terms,
Egypt’s currency has appreciated by around 25 per cent since 1991.
This has hindered non-oil exports. The central bank will continue to
pursue a policy of defending $/[pounds sterling]E parity, in order to
maintain foreign investor confidence.
The sound macro-indicators and renewed emphasis on market reforms
have led to Egypt’s improved creditworthiness. The Standard and
Poor credit agency and the International Bank Credit Agency (IBCA) have
assigned an investment-grade rating for Egyptian sovereign debt. This
has enhanced Egypt’s profile in international markets, resulting in
higher foreign investment since 1997.
Foreign portfolio investment in 1996-97 surged to $1,463 million,
from $257 million in 1995-96, while foreign direct investment totalled
$834 million, against $627 million in 1995-96.
The medium-term objectives are to create a conducive business
climate for sustaining the robust eight-nine per cent annual GDP growth
necessary to generate half a million new jobs, and to raise real per
This will require fundamental improvements in the Egyptian economy
and a deepening of structural reforms aimed at integrating Egypt into
the globalised economy.
Notwithstanding its impressive macroeconomic performance since
1995, Egypt still faces formidable challenges of achieving
self-sustaining and export-investment led growth. Both fixed investment
and savings rates at 19.6 per cent and 18 per cent of GDP respectively
are almost half the levels in high-growth emerging markets, while
productivity remains below potential capacity. Exports are limited and
narrow based and tariff rates remain high compared to other free market
economies. Institutional weaknesses, eg, bureaucratic inefficiencies and
over-regulations are a deterrent to foreign investment. High
unemployment, estimated at 15-20 per cent and ongoing threats from
Islamist militants pose political risk.
In essence, what is needed is a highly-diversified expanding
economy, which will enable Egypt to join the ranks of newly
industrialised economies into the 21st century. Most importantly,
increases in both domestic investments and savings rates to 25-28 per
cent and 24-25 per cent of GDP respectively, supported by improved
production methods and higher technology in manufacturing and enhanced
quality of investment, are essential to put Egypt on a higher-growth
path. Domestic savings can be boosted by marketing of long-term equity
funds or issuance of top tier corporate bonds. The bulk of domestic
savings are currently invested in either short-term money market funds
or real estate, thus reducing the funds available for productive
industrial investment. The World Bank estimates that higher savings rate
can increase annual GDP growth by 2.7 per cent. However, medium-term
growth targets are highly contingent on increased inflows of foreign
direct investment (FDI), in view of low domestic savings.
The government needs to attract $4 billion of FDI annually and this
will provide managerial skills and input of advanced technology to make
Egypt competitive in global markets.
This in turn will require a more comprehensive privatisation
programme extending to strategic sectors, like the national airline,
pharmaceutical or electricity distribution, as well as further
deregulation of trade and production.
The government needs to restructure public finance in order to
produce a balanced budget, while increasing spending on selective areas
such as health care and education. Long-term political stability,
essential for sustaining the momentum for market reforms, will require
higher provisions for a social safety net for low-income groups and the
unemployed. The World Bank estimates unemployment affecting 2.8 million
people, 70 per cent of whom are below the age of 20.
Streamlining a huge and unproductive bureaucracy is vital if the
institutions of government are to be improved and the policymaking process made more transparent.
Egypt needs to reduce its reliance on oil by expanding traditional
exports like horticultural products, cotton and manufactured textile and
The key to unleashing Egypt’s potential will be completing the
second stage of micro reforms, aimed at increasing investment and
savings, as well as modernising the financial sector. Egypt should enter
the new millennium with a solid economic base, capable of providing
higher job opportunities and improved living standards across the board.