Soft Launch
    Executive Summary  


The Egyptian Economy is building significant momentum on top of implementing a new comprehensive set of economic and structural reforms. Latest economic data strongly indicate an upsurge in economic activities, decline in domestic inflation and interest rates, and returned confidence into the local capital market and Egyptian pound denominated assets; including the national currency itself. 

 GDP growth recorded 5.1 percent for the year 2004/05 compared to an average of 3.5 percent during the previous three years, and is highly expected to exceed 6 percent in 2005/06; gaining from equal contributions of sustained foreign investors appetite for domestic financial and non-financial assets, and buoyant domestic demand, particularly on the investments side which grew by 17.9  percent in 2004/2005. More recent data show an annual growth of 5.3 percent during the first quarter of 2005/06, compared to 4.8 percent for the same period during last year.  Meanwhile, annual inflation notably subsided to 4.2 percent during July-September 2005/06, and further to 3.1 percent in October 2005, down from nearly 17 percent during  July-September of last year.  Accordingly, the Central Bank of Egypt (CBE) adjusted to the recent developments with successive reductions in its overnight lending rate to 10.75 percent in December 2005, down from 12.5 percent in June 2005.  Lending rates and volumes are expected to turn more responsive in light of the increased confidence and competition within the banking sector, especially with the lately announced banking sector reform program. On a different front, the interbank market for foreign exchange is becoming active and liquid.


In the mean time, the domestic capital market reported remarkable performance; both in terms of liquidity and value. The dynamic stream of initial public offerings (IPOs), mergers and acquisitions - which took place in the banking and non-banking sectors, and the strong appetite in Egyptian assets, coupled with positive expectations for continued reforms were the main stimuli for such upsurge.   Both CMA and CASE-30 domestic indices increased by 66.4 percent and 116 percent since the beginning of  2005, respectively.



Budget figures indicate a slight improvement during year 2004/05. The overall fiscal deficit declined from 9.5 percent of GDP in 2003/2004 to 9.3 percent of GDP in 2004/2005. Total revenues and grants increased by 8 percent during 2004/2005 to some LE 110  billion (20.5 percent of GDP), compared to LE 102 billion    (21 percent of GDP) on 2003/2004.  Total expenditures increased by 8.5 percent during 2004/2005 to LE 158 billion (29.5 percent of GDP) compared to LE 146 billion in 2003/2004 (30.1 percent of GDP).


More recently, the overall fiscal deficit during the first quarter of 2005/06 recorded LE 8.1 billion (1.3 percent of GDP) compared to LE 10.2 billion (1.9 percent of GDP) during the same quarter in 2004/05. Total revenues and grants increased by 17.3 percent to LE 24.6 billion (3.9 percent of GDP) compared to some LE 21 billion last year (3.9 percent of GDP). Total tax receipts remained almost unchanged from the previous year at LE 13.5 billion; despite implementation of the new tax code, while taxes on goods and services increased by 7.7 percent to LE 6.4 billion. Meanwhile, non tax revenues increased by 51 percent to LE 11.2 billion. At the same time, total expenditures increased by 3.8 percent to LE 32.4 billion (5.2 percent of GDP) compared to LE 31.2 billion (5.8 percent of GDP) during the same period in last year.  Wages and salaries increased by 13.5 percent to LE 12.4 billion during the first quarter compared to LE 10.9 billion during July – Sep 2004. Interest payments increased by 21 percent to LE 5.9 billion. Finally, purchase of non financial assets (investments) were almost unchanged at some LE 2.0 billion.


Ongoing reforms in the fiscal area aim at boosting the domestic economy; both on the supply and demand sides.  Recent restructuring of the overall tax system including widening of the tax base, redistributing economic surpluses, including alleviating the tax burden for vulnerable groups and investors, reducing customs barriers to international trade, simplifying and upgrading taxes and customs administrations and streamlining procedures, all aim towards bringing historical structural weaknesses impeding economic growth to an end.   Faster growth and introduction of enhanced systems for assets, debt, cash and treasury management represent the main counter reforms to ease any associated budgetary costs to those reforms.



On the monetary side, total liquidity (M2) increased by 0.4 percent during September 2005 to some LE 515 billion.  The year on year M2 growth was 14.2 percent. Quasi money increased by some 12 percent to LE 415 billion and money (M1) by 24 percent to almost LE 100 billion. The year on year net foreign assets (NFA) of the banking system increased by 96 percent to LE 104 billion, whereas CBE net international reserves (NIR) increased during the year ending September 2005 by some 44 percent to US$ 21 billion. Net domestic assets increased by 3.3 percent to some LE 411 billion, while claims on the private sector increased by 5.7 percent to some LE 275 billion. Total deposits with the banking sector (excluding CBE) increased by 11.5 percent to LE 537 billion, of which 84 percent belong to the non-government sector. Loans to deposits ratio were 60.5 percent for local currency in September 2005, and 50.6 percent for foreign currencies, compared to 70.2 percent and 43.9 percent a year earlier, respectively. Dollarization in total liquidity declined to 24.2 percent from 28.5 percent in September 2004, while dollarization in deposits declined to 28.3 percent compared to 32.4 percent  in September 2004, reflecting a reverse in previous trends of accumulating foreign currency denominated assets.


The balance of payments achieved an overall surplus of US$ 4.5 billion during 2004/05.  The current account recorded a surplus of US$ 2.9 billion (3.2 % of GDP) compared to US$ 3.4 billion (4.3 % of GDP) in the previous year.  Non-oil commodity exports continue to be the largest source of foreign exchange; indicating for greater diversity in the domestic exports base.  Non-oil exports increased by 30.5 percent to US$ 8.5 billion (some 25 percent of the current account receipts in 2004/2005). Tourism receipts increased by 17.4 percent to US$ 6.4 billion (18.8 percent of current account receipts), while oil exports increased by 34.9 percent due primarily to the surge in international oil price to US$ 5.3 billion (15.4 percent of current account receipts).  Revenues from oil will most likely continue to increase due to an expected boost in liquefied natural gas exports estimated to exceed US$ 2 billion in 2006/2007 compared to only US$ 0.4 billion in 2004/2005. Finally, the capital account witnessed a net inflow position of US$ 3.4 billion, while errors and omissions were US$ 1.8 billion.


Total foreign debt declined by 3.2 percent to US$ 28.8 billion in June 2005 (32.3 percent of GDP), compared to US$ 29.8 billion (37.8% of GDP) a year earlier.  The foreign debt composition remains quite favorable with only US$ 1.8 billion (2.0 percent of GDP) in short term.


Other leading indicators reveal an increase in the number of tourist arrivals during 2004/2005 by 15.2 percent to 8.6 million tourist compared to 7.5 million tourist in previous year. Tourist nights also increased by 17.4 percent to 85.7 million nights compared to 73 million night in previous year.


Finally, the privatization program gained momentum during 2004/2005 with 28 new transactions with total value of LE 5.6 billion, compared to average LE 0.5 billion during the previous four years.