The following report was commissioned by Alexander Nubia International Inc. and produced by Steven's & Company.
For additional information or for a more detailed report contact:
Rodney Stevens, CFA
rstevens@forvant.com
Country Profile
| Size: | 1,001,450 sq km |
| Capital city: | Cairo (Al-Qahirah) |
| Climate: | arid, with temperatures ranging from 18° C to 43° C |
| Currency: | Egyptian pound (E£) |
| Population: | 81 million + |
| Labour force: | 22.1 million |
| Population growth rate: | 1.8% p.a. |
| Life expectancy: | 69 years |
| Age composition: | 31.8% under 14 15-64 year 62% |
| Ethnic composition: | Egyptians, Falahin (farmers), Sa'aedy (from Upper Egypt)and Bedouins (dwelling in the deserts) |
| Literacy rate: | 71% |
| Languages: | Arabic (official), English, French |
| Major religions: | Islam (Sunni Muslim), Christianity (Coptic Christian and other denominations) |
Executive Summary
Emerging economies, led by China, are set to regain growth momentum. Continued GDP growth from emerging economies should continue to attract foreign investment relative to developed countries, albeit at a slower pace over the next few years. Egypt's economy should benefit from its diversified GDP, liquid banking system, a lack of toxic financial products, relatively low-cost production, having an under-leveraged economy and from having 75% of the economic growth driven by domestic demand. Long-term growth is assured by demographics and geographic location. Given Egypt's fertile business soil and the increasing investors' confidence in a reformist government, foreign investment should still find its way over to Egypt.
Demographics and Resources
Population
| 2004 | 2005 | 2006 | 2007 | 2008 | |
|---|---|---|---|---|---|
| Population (M) | 71.6 | 72.9 | 74.2 | 75.5 | 76.9 |
| % Change | 1.8% | 1.8% | 1.8% | 1.8% | 1.8% |
Source: US Consensus Bureau
Egypt's population is now estimated at over 81 million people. In 2005, 0.8 million Egyptians lived abroad as temporary migrants, compared with 2.2 million in 1996, reflecting the decline in job opportunities and the need greater training. Remittances from expatriates represent a major source of foreign-exchange receipts.
The population continues to expanding at a fast pace, with a growth rate of about 1.8%, and it is expected to exceed 100 million by 2020. Young people account for more than a third of the population, with 31.8% of Egyptians being under 14 years of age, whereas only 6% are over 60.
Around 98% of the population is considered to be ethnically Egyptian, while Nubians, Berbers and Bedouins make up about 1% of the country's population, as do expatriate Europeans. The vast majority of Egyptians are Sunni Muslims and around 8-10% of the population are Coptic Christians.
Education
The Egyptian government has been committed since the 1960s to provide free education for all. About 18% of all children are enrolled in pre-primary school. Literacy among adults has increased from 44.4% in 1986 to 71.4% in 2006, and among youth from 63.3% to 85.4%, respectively.
Natural Resources
Less than 5% of Egypt's total 1m-sq km land area is settled and cultivated. Most of the rest of the land is uninhabitable desert, so more than 97% of the population lives in the narrow strip of the Nile Valley that runs the length of the country. The overall population density reached 72.04/sq km in 2007, which was an increase of 22% in 10 years. Egypt has petroleum reserves estimated at 3.7bn barrels. Increasing quantities of natural gas are currently being discovered an exploited, with proven reserves of 72.3trn cu ft. Egypt started exporting liquefied natural gas (LNG) in 2005, and is now the sixth-largest LNG exported in the world.
Infrastructure
Railways: The national rail system is the oldest in the region. The current network carries 435m passengers and 11m tonnes of goods per year; however, with cheap third-class trains serving more than 80% of the passengers. By contrast, Cairo has a growing metro system, currently consisting of two lines, each carrying more than 688 million passengers per year. A third line is under construction, linking the suburb of Imbaba to Cairo Airport.
Roads: Following an extensive modernization and expansion programme that began in the 1980s, Egypt had 81,932 km of paved roads by mid 2006, but many are in poor condition. Approximately 85% of domestic freight and 60% of passenger movements are by road.
Ports: Egypt's navigable waterways total about 3,100 km, divided almost equally between the River Nile and canals, and carry about 4% of domestic freight. Egypt's seaports process 85-90% of Egypt's international trade.
The Suez Canal is an important source of foreign exchange revenues which reached US$4.17bn in 2007. Receipts have been boosted by rising global trade with China, and the surge of world oil prices, which has made it more cost-effective for tankers to take the shorter route to Western markets via the Canal than to sail to Africa. About 7.5% of world sea trade passes through the 190-km canal.
Air Transport: Egypt has 22 airports, the vast majority of which are owned by the government. The state-owned carrier, EgyptAir, is by far the largest Egyptian airline. The airline is undergoing a programme of modernization in order to attract more customers. A handful of local and regional charter companies have recently begun operations, and the Cairo International Airport is being expanded and upgraded with financing by the World Bank.
Energy: Demand for power is rising rapidly as a result of demographic and economic growth. In 2006, installed generation capacity stood at 21,944mw, of which 75% was based on locally produced natural gas and most of the remainder was hydro electric. The Ministry of Electricity and Energy is implementing plans to bring on stream 12,875 mw of new capacity by 2012. Some of the new capacity will be in the form of wind power. The government's current target is for 20% of supply to come from renewable energy resources by 2020, including 12% from wind power and 8% from hydro power.
Construction has also started on a part-solar power plant with 30mw of solar capacity out of a total planned capacity of 150mw. Solar power could become a viable energy source because of year-round sunlight.
Telecommunications & IT: The expansion of telecoms services and related infrastructure is a national development priority, and the telecoms network has undergone extensive modernization with the goal to provide fixed-line access to 40% of the population.
Egypt is witnessing an Internet boom, with strong support from the government, which hopes to turn the country into an information and communications technology hub. In March 2008, there were 9.7m Internet users.
The Economy
Background
Egypt has an economy of awesome complexity and challenges. The basic situation, however, is easy to comprehend: Egypt's challenge is keeping pace with feeding, housing and employing its fast-growing population. Egypt has a host of social programs geared towards employment, providing social welfare through housing, health, education and other services and protecting the consumer from increases in the cost of living through subsidies.
Budget Deficit and Sources of Financing (LE mn)
Source: CBE
Egypt currently has four major sources of the foreign currency it needs to finance its food imports and debt: oil and gas exports, the Suez Canal transit fees, tourism, and remittances from Egyptians working abroad. The prosperity of the country is highly dependent on these export sectors.
Source: CBE
Egypt's fundamental problem is low productivity. Inefficiency is exacerbated by obsolete machinery, low quality output, lack of marketing, and swollen payrolls because of pressure on every enterprise to absorb as much as much man power as possible. Low productivity has produced a growing balance-of-payments deficit as demand for imports exceed exports. This has been exacerbated by global food and energy prices, which has weakened the current account by 85% y-o-y in the first three quarters of the fiscal year 2007-08.
Although the political and psychological climate for foreign investment has been increasingly favourable since the introduction of "Open Door", the main challenge to investors is concern is related to profitability, based on operational hurdles.
Source: CBE Annual Report
Economic Structure
Real gross domestic product by sector
| (% shaare of GDP) | 2003 | 2004 | 2005 | 2006 | 2007 |
|---|---|---|---|---|---|
| Agriculture | 16.3% | 15.2% | 14.9% | 14.1% | 13.8% |
| Industry | 35.7% | 36.8% | 36.3% | 38.4% | 38.1% |
| Services | 48.0% | 48.0% | 48.8% | 47.5% | 48.0% |
Source: Economist Intelligence Unit
Egypt has the largest population in the Arab world, but only the fourth-largest economy. About half of the GDP is accounted for by services including public administration, tourism and the Suez Canal. Although tourism is venerable to political events, it has become resilient in recent years. The Suez Canal has performed well in recent years as high fuel prices have made the longer trip around Africa more expensive for ships travelling between Europe and Asia. Agriculture's economic contribution has been gradually diminishing, but is still an important activity accounting for 13.8% of GDP. Manufacturing industries (including oil refining) account for 19% of GDP while mining account for 8.6%. There is a large informal sector, which the Ministry of Finance estimates represents some 30% of total economic activity.
The public sector now accounts for one-third of GDP. Consumption both private and public is a major expenditure component of GDP, making up 82% of the total, compared with 21.2% for gross fixed investment in 2007.
Nominal gross domestic product by expenditure
| (% shaare of GDP) | 2003 | 2004 | 2005 | 2006 | 2007 |
|---|---|---|---|---|---|
| Private consumption | 73.0% | 71.7% | 71.6% | 70.6% | 70.4% |
| Government consumption | 12.7% | 12.8% | 12.7% | 12.3% | 11.5% |
| Gross fixed investment | 16.3% | 16.4% | 17.9% | 18.7% | 21.2% |
| Stockbuilding | 0.6% | 0.5% | 0.1% | 0.1% | 0.2% |
| Net Exports of goods & services | -2.6% | -1.4% | -2.3% | -2.3% | -3.3% |
Source: Central Statistics Office
Fiscal Policy
Fiscal policy has improved markedly since mid-2004, proceeded with a radical reshuffle of minister's. This resulted in an economic and fiscal reform that has been bolder than anticipated.
Reduction in customs tariffs with immediate effect, bringing the weighted average initial trade tariff down from 14.6% to 9.1%. Import tariffs were reduced again in February 2006, to a weighted-average of 6.9%. Focusing on goods for use in production, the measures were intended to make importing capital goods less expensive and time-consuming. Sharp reductions in personal and corporate income taxes were also implemented in 2005. Corporation taxes (excluding those on oil companies) were lowered to a standard rate of 20% from the basic rate of 40%, and exemptions were abolished. Individual tax rates were also cut, and the qualifying tax brackets were raised considerably (Individual tax rates are subject to a maximum of 20% for the highest income tax bracket). In 2006 property tax was reduced from 47% to 10% and its scope was expanded. These moves were designed to raise disposable income for consumption and investment.
Source: CBE
The measures led to a substantial broadening of the tax base. Total budget revenue increased by 35% in 2005/06, which was 15% higher than budgeted. It rose a further 19% in 2006/07 and is expected to have increased by 18% in 2007/08.
Source: CBE
Source: CBE Annual Report
Monetary Policy
The Central Bank of Egypt (CBE) has full independence in carrying out monetary policy. In the 1990's monetary policy was constrained by the government's determination to maintain the value of the Egyptian pound against the U.S. dollar. However, since 2004, Egypt's external position has been boosted by huge foreign-exchange inflows from the fast-expanding tourism sector, hydrocarbons earnings and Suez Canal receipts. This has led to a steady appreciation of the pound and the total elimination of the black market.
Meanwhile, CBE has significantly improved its policymaking framework. It now operates a corridor system for overnight lending and deposit rates, to manage liquidity in the domestic banking system, and is gradually moving towards targeting inflation. To enhance transparency, the CBE now publishes the dates and decisions of the meetings of the Monetary Committee, which meets every six weeks. As a result, the credibility of the monetary policy framework has significantly increased.
Inflation: Since mid-2007, the domestic economy has faced strong inflationary pressures arising from increasing international prices and buoyant economic growth. Rising global oil prices as well as international commodities prices, namely food lifted up local products' prices, leading CPI reading of 11.7% in FY07/08. As a measure to counteract inflation, the Central Bank of Egypt (CBE) raised interest rates for six consecutive times starting February 2008. The overnight deposits and lending rates rose from 8.75% and 10.75% in December 2007 reaching 11.5% and 13.5%, respectively in September 2008. But inflation maintained its increase with CPI reading reaching the peak of 23.6% in August 2008.
Source: CBE Annual Report
As a result of these monetary policy and capital market weaknesses, Fitch Ratings revised its long-term foreign currency issuer default rating (IDR) for Egypt from BB+ positive to stable and long-term local currency IDR from BBB to BBB- stable in August, 2008.
The decline in global oil prices witnessed since July 2008 was filtered down to food commodities' prices. With easing inflation readings coupled with expected risk of a downturn, the tightening monetary cycle may come to an end, focusing on the need to support the economy in facing the global economic downturn.
Employment
| 2003 | 2004 | 2005 | 2006 | 2007 | |
|---|---|---|---|---|---|
| Labour Force (m) | 20.4 | 20.9 | 21.2 | 21.6 | 22.1 |
| Unemployment Rate | 11.0% | 10.3% | 10.3% | 9.5% | 9.1% |
Source: Central Agency for Public Mobilization and Statistics
The number of females employed rose by 11.7% in 2007, after growth of little more than 2% in the previous two years. Approximately 600,000 people join the labour market every year.
About 51% of the labour force is in the agriculture, manufacturing, mining and construction sector, 17% in the services industry (represented primarily by tourism), including transportation and wholesale and retail segments and 32% in the public sector. All private sector companies must provide free healthcare to local employees through the government's Medical Insurance Plan or private insurance, and contribute to the government's Social Security Fund equivalent to about 25% of the worker's salary.
Economic Performance
Source: Economist Intelligence Unit
Real GDP growth reached a low of 3.0% in 2001/02, following sharp falls in private consumption and investment growth owing to a tightening of monetary policy. In 2004/05 real GDP growth accelerated to 4.5%, as the pound stabilized and business and consumer confidence recovered. On the back of ongoing iberalization and rising liquefied natural gas exports, real GDP growth rose strongly from 2005/06 to 2007/08. Economic expansion is estimated to have been about 7.1% in 2007/08.
Source: CBE
Agriculture
The contribution of agriculture to nominal GDP is 13.8% (including fishing and irrigation), and the sector remains the country's largest employer (30% of the labour force). Approximately 95% of local production is consumed domestically. Egypt is largely self-sufficient in white meat and dairy products and produces 80% of its red meat requirements. However, it remains a large food importer, taking in 5 million metric tonnes of wheat annually from the U.S., Australia and France. Cotton is Egypt's major agricultural export and was for many years extensively subsidized, however, the sector has suffered from inconsistent state policy, and cotton production and exports have declined.
An estimated 3.5 million farmers cultivate holdings of an average size of 2 feddans (0.84 ha). Production is therefore labour intensive, and fertilizer use is among the highest in the world, at an annual 465 kg/feddan. Yields are also high, despite the irregular and insufficient supply of water for irrigation. Only 3% of the total land area is arable, of which about one-third is serviced by main and secondary drains.
Agriculture is highly subsidized, with irrigation water provided free by the government. To increase arable land, there are ongoing projects to reclaim desert land for agriculture; however, the area under cultivation has remained constant as agricultural land is lost to urban and industrial expansion.
Livestock production is dominated by small farmers, who account for about 80% of output, but the number of modern dairy and beef farms has increased over the past few years. In 2006 there were 4.6 million cows, 3.9 million buffalo, 5.3 million sheep, 3.8 million goats and 148,000 camels. Most producers are small and lack information on modern farming methods. The elimination of subsidised feed in 1990 and the gradual easing of import restrictions have discouraged farmers from raising livestock.
The government is looking for more ways to boost the country's agricultural output. The agricultural sector supports an estimated 55% of Egypt's population and reclamation plans are expected to generate another 440,000 jobs directly and indirectly by 2011. Incentives are provided for projects in the government-sponsored Mega-Projects', including the Toshka and East Oweinat desert reclamation projects south-west of Egypt. Egypt's Ministry of Agriculture and Land Reclamation (MALR) projected target since 1997 has been to reclaim and cultivate 3.4 million feddans (approximately 1.4 million ha) of the Sahara by 2017. Because the population is expected to increase by 40 million to 120 million by 2050, finding new ways to increase water efficiency is of paramount importance.
Industry
Manufacturing: Manufacturing (including oil refining) accounted for 19% of GDP in 2006/07. In recent years, industrial production in the once-dominant public sector has declined and private-sector production has increased sharply in response to privatization and liberalization initiatives. According to the Central Bank, in 2006/07 the private sector contributed around 90% of the growth in manufacturing output. The vast majority of private manufacturers are small units with more than 90% of employment in enterprises of 15 people or fewer. The bulk of the manufacturing value added comes from food-processing and textiles, but the proportion accounted for by furniture, ceramics, pharmaceuticals, metallurgy, and engineering has increased gradually.
Textiles: The textile industry is a crucial foreign exchange earner, contributing up to 23% of industrial exports and nearly half of all non-oil exports, of which 50% goes to the U.S., 35% to the EU, and the remainder to nearby countries. Textile output has been stifled by high costs arising from overstaffing, outdated technology, unproductive seeds, excessive pollution and a lack of quality control. The sector, which competes on its low costs, underwent upheaval in 2006 when several strikes broke out in response to a series of privatizations of major textile firms when workers demanded an increase to their wages. By contrast, the ready-made garment industry, 90% of which is owned by the private sector, has boomed, and manufacturing for international franchises is on the rise. In 2004, Egypt signed an agreement with Israel and the U.S. to establish seven Qualifying Industrial Zones in Egypt, from which goods can be exported duty-free to the U.S. provided they contain a minimum proportion of Israeli input (11.7%). Overall, cotton farming and textile manufacturing have declined since 2004 as these sectors face strong competition from cheaper producers in India and China.
Mining: Under the watchful guidance of the Minister of Petroleum, H.E. S. Fahmy, the mining sector accounted for 15.2% of GDP in 2006/07. It is the country's single largest source of foreign exchange earner, accounting for 38.4% of Egypt's export revenues. The sector's activities are mainly exploration and processing of oil and gas, which comprise the largest share of foreign investment in Egypt. Other mining activities include the extraction of coal, iron ore, limestone, phosphate, granite and marble. Egypt also possesses appreciable deposits of manganese, gold, zinc, tin, lead, copper, potash, sulphur and uranium. These other mining activities are still in their infancy and contribute very little to Egypt's GDP.
Egypt's oil refining industry is one of the largest in the Middle East. Total crude production and refined output is around 30 million tonnes per year (800,000 barrels per day). Almost 79% of Egypt's oil comes from the Gulf of Suez and Sinai.
Egypt produces about 16 million tonnes of gas per year to meet domestic consumption of about 14-15 million tonnes. The government is encouraging industries to switch to natural gas as a more cost-effective source of energy. Around 90% of Egypt's thermal power is generated from natural gas. The abundance of natural gas has attracted a number of foreign companies to invest in new natural gas projects.
Fertilizers: Until 1996 all domestic fertilizer production was publically owned. Since 1998, the government has gradually privatized a large part of the fertilizer sector. The sector has consequently grown rapidly since, helped by the abundance of cheap raw materials.
Construction and Real Estate: The nation's construction sector continued to enjoy strong growth in 2008, with domestic demand from real estate developers remaining firm, coupled with demand from new infrastructure projects in the transport ector. The fundamentals of the Egyptian market remain unmistakeable: massive unmet housing demand ranging across all sections of the market, which even at the current unprecedented rate of construction remains difficult to meet. At the time of the most recent government census in 1998 Egypt's housing shortfall stood at 4m units, with annual new demand estimated at around 570,000 units. Since then annual production has averaged 300,000 units, leaving unsatisfied demand of around 270,000 units a year.
The construction sector is becoming a significant driver of foreign direct investment (FDI) for Egypt. In previous years, construction sector FDI has accounted for roughly 6% of the total (US$11.5 billion), while real estate as a separate proportion has grown from US$39 million in 2006/07 to US$77.1 million from quarter one to quarter three of 2007/08.
Builders anticipated the current up-cycle to come to a close around 2011, however, with inflation developing, some have brought forward their prediction to 2010 or earlier.
Services
Egypt's services sector has been expanding over the past decade. Latest figures reveal that wholesale and retail sales grew by 7.1% year on year in 2007/08. The financial sector expanded by 7.6% and the all-important tourism sector (using the restaurant and hotels sub-sector as a proxy) by 24.3%.
Tourism: Tourism accounts for 16.3% of Egypt's GDP, with total revenue of US$18.2bn, and 40% of Egypt's non- commodity exports. As of 2007, there were 1,409 tourism companies, and the total domestic value of restaurants and hotels reached Eur22.8bn. In 2006/07 an estimated 2.8 million jobs depended on the sector, directly and indirectly. A total of 11 million tourists arrived in 2007, up from 9.1 million the year before. The strong performance in tourism can in part be attributed to government efforts. Apart from long-standing tax holidays for investors in designated tourism areas, the government has provided support for the industry, marketing heavily in key European and Golf countries and offering financial incentives to foreign charter operators. The growth is also attributed to Egypt's immense archaeological richness and year- round sunshine.
Recent growth in the sector is almost entirely attributable to the Red Sea resort market, with Eastern European visitors demonstrating an enormous increase in 2007-08. Official figures place total tourist arrivals for 2007 at 11.1 million, which represents year-on-year growth of 20%, up from 5.8% the previous year. Most of this growth has come from the Russian market, which now accounts for the largest share of arrivals, with an estimated 1.5 million tourist, or 13.5% of the total.
Egypt's tourism industry is currently suffering from a weakness in human resources, both in terms of skilled hospitality labour and the attitude of the wider public. This problem was highlighted in the World Economic Forum's Travel and Tourism Competitiveness Report 2008, which said that substandard quality of service was one of the factors discouraging travellers from returning to Egypt.
Tourism in Egypt is entering a critical period, as important new markets in Eastern Europe promise a major expansion in visitor numbers, while a series of new resort developments on the Red Sea and northern coasts will see a massive increase in capacity
Banking: Egypt's banking sector has undergone considerable restructuring and consolidation in recent years. The banking sector was liberalised in 1991, opening the foreign exchange market and easing restrictions on foreign bank branches. In 1993, foreign bank branches were allowed to operate in Egyptian pounds for the first time. In June 1996, new legislation enacted permitted 100% foreign ownership of local banks subject to approval by the Central Bank of Egypt (CBE) for any acquisition exceeding 10% of foreign capital. In 1998 legislation was passed to allow privatisation of the four state-owned banks.
Since 2003 the most significant reform achieved by the state in terms of the everyday operation of the Egyptian economy has been the complete overhaul of the banking system. After a disastrous crash at the end of the 1990s that left Egyptian banks with more than LE40b ($7.38bn) in non-performing loans (NPLs), the government launched a two-tiered programme to make a healthy financial system the bedrock for economic uplift.
Fundamentally, Egypt remains an under-banked and underleveraged society. As the global credit crisis and incipient recession deepened towards the end of 2008, its impact on Egypt was therefore a mixed picture. On the one hand, the crisis has hit foreign investments in Egyptian banking hard, especially for publicly listed institutions. However, high liquidity has actually turned out to be a boon, especially for the newly acquired public banks that are still restructuring, as their risk- weighted assets to capital remains firmly within safe levels compared to the rest of the developed world.
Overall business lending growth has continued to accelerate from 3% and 2% in the years to June 2005and 2006, respectively, to 8% in 2007 and 9.5% by May 2008. For 2008 the breakdown reveals an increase of trade-related lending of 15%, while industrial lending growth has slowed from 9% to 6%. The deposit-to-loans utilisation ratio has continued to fall in 2008, albeit more slowly. Since 2003 the ratio has fallen from 70% to 53%, putting pressure on the bottom line. The liquidity in the market is at a very high level and the CBE is willing to offer any liquidity needed by the banking sector.
Increases in the cost of funding are also responsible for the difficulty in increasing margins. In response to growing inflation, the CBE increased the overnight borrowing rate five times in 2008 to 13.5% by September. Moreover, in order to decrease the budget deficit, the Ministry of Finance decided to end the tax-exempt status of treasury security income starting in July 2008. This was once a very large part of commercial banks' balance sheets, but they have largely moved to higher yielding CBE time deposits. As a result of these hikes, many banks are looking at ways to increase their fee income to bolster poor asset-based margins.
Transportation: The transportation sector ranks among the toughest in the Egyptian cabinet's agenda as all facets of the sector are approaching maximum capacity, with major capacity shortfalls forecast over the coming five to ten years. With domestic enterprises shifting their focus to the export market and increased demand for imported and locally produced goods there is strong demand for physical transport infrastructure and logistics services.
Retail: Egypt's retail and wholesale sector grew from US$35 billion in 2003 to US$43 billion in 2006, with sales projected to reach US$67 billion in 2011. Egypt estimates that approximately 7.5 million people can afford to make at least one purchase every year at high-end shopping malls, with the wealthiest segment of 3.6 million, able to purchase more frequently.
Egypt's wholesale and retail sectors contributed a combined 11.4% of GDP in 2006/07, employing 9% of the country's labour force. The sector consists mainly of small enterprises (99.7% of all establishments). Of these, 51% are food and beverage retailers, followed by textiles, garments and footwear enterprises, which make up 9%. Mass retailers only account for 8.6% of the total market by value.
The External Sector
Current Account
Source: IMF
Egypt runs a structural deficit on its trade balance because the country's population has outstripped its productive capacity, particularly for food. The trade deficit has widened steadily since 2004 as access to hard currency has improved, tariffs have been reduced and domestic demand has strengthened. The resultant expansion in imports has more than offset the marked increase in merchandise exports earnings, facilitated by the fall of the pound. Around 55% of Egypt's export earnings are driven by hydrocarbons and derivatives.
Remittances began to recover in 2005, as international oil prices rose and more money was returned from Egyptian expatriates in the Gulf States. They rose by 25% year on year in 2007, to over US$6.3bn, having climbed by 16% the previous year. In the July-March 2007/08 period, remittances were US$6.1bn, a 40% increase on the same period of the previous year. Nevertheless, transfers are still dwarfed by services, which have grown in importance as Egypt's tourism sector has strengthened and Suez Canal receipts have soared. The income account recorded a small deficit from 2002 to 2004, but posted widening surpluses from 2005 to 2007.
Source: CBE Annual Report
The trade balance has been on the edge with expectations of a growing deficit, given the extensive growth in imports driven by the buoyant domestic demand.
Provoked by the widening trade deficit and the declining growth in net services, the current account is expected to leave its surplus era, which has been prevailing since FY01/02.
The Ministry of Trade and Industry has taken an active role in promoting export-oriented manufacturing, targeting adding value to resources that had formerly been exported in raw form, such as crude oil or cotton. The government has negotiated a free trade agreement with Turkey, the European Free Trade Agreement, a pan-Arab group agreement, and the Qualifying Industrial Zone protocol, which allows free trade with the U.S. for products with a limited Israeli component.
Outlook
Forecasted continued real GPD growth for the Egyptian economy, but at a reduced rate from the 7% growth in the recent past. Emerging economies, led by China, are set to regain growth momentum towards the remainder of the year, helping the world recover from its worst slump since World War II. Continued GDP growth from emerging economies should continue to attract foreign investment relative to developed countries, albeit at a slower pace over the next few years.
Egypt's economy will benefit from its diversified GDP, geographical proximity to other European countries, Africa and the Middle-east, regional significance as a trade route, liquid banking system, a lack of toxic financial products, relatively low- cost production, an under-government, foreign investment should still find its way over to Egypt.
