Egyptian Economic Performance

           The latest report published by the Ministry of Finance concerning the most recent Egyptian economic indicators indicates the following :               

           GDP real growth (at factor cost) is targeted at 6.9 percent in 2006/07 compared to 5.9 percent in FY 2005/06 (excluding the gas sector, and 6.9 percent including the gas sector), and up from average 4.1 percent during the past three years.

           Preliminary figures show that investments have increased by 12 percent in 2005/2006, and estimated to grow by 13.2 percent in 2006/07, whereas total consumption would grow by 4.4 percent and 4.5 percent over the same two years respectively. Natural gas, construction and building, and Suez canal sectors are expected to be the main growth drivers in 2006/07. The year-on-year growth for the third quarter in 2005/06 recorded 5.9 percent, compared to 5.1 percent for the same quarter last year. It is noteworthy that non-oil Manufacturing (18.3% of GDP, 5.7% growth), Construction (4.6% of GDP, 12.5% growth), Natural Gas (4.3% of GDP, 24% growth), and Suez Canal (3.5% of GDP, 12.5% growth) sectors are seen as the prime driving engines for growth in 2005/06.

           The 2006/07 budget sector outcomes are expected to improve over 2005/06 results as indicated by a cash deficit of 8 percent of GDP, some 1.6 percentage points lower than its preliminary level in 2005/06. The General Government budget outcomes are also expected to improve with cash deficit of some 5.4 percent of GDP compared to 6.4 percent in 2005/06, and an overall deficit of slightly less than 7 percent of GDP in 2006/07 compared to 7.2 percent of GDP in last year. The  primary deficit for the budget sector level is anticipated to decline to 1.7 percent of GDP (0.7 percent of GDP for the General Government), compared to average 3 percent (2.4 percent of GDP for the General Government) during the previous three years.

           Preliminary figures for FY 2005/06 indicate a decline in overall budget deficit by 1.6 percent to LE 50.8 billion (8.6 percent of GDP) compared to LE 51.6 billion (9.6 percent of GDP) in 2004/05. Revenues increased by some 31.4 percent to LE 145.7 billion (24.6 percent of GDP). Total tax receipts increased by 28.1 percent to LE 97.1 billion. Despite implementation of new income tax code, income taxes – excluding petroleum subsidies settlement - increased over budgeted value by 10 percent to LE 45 billion. Taxes on goods and services and taxes on international trade increased by 7.5 percent to some LE 34 billion and by 21 percent to LE 9.4 billion respectively, in light of accelerated economic activities and surge in imports. Meanwhile, non-tax revenues increased significantly by some 39 percent to LE 48.6 billion. Total expenditures reported some LE 203 billion during 2005/06 (34.2 percent of GDP) compared to LE 162 billion (30.1 percent of GDP) a year earlier. Wages and salaries increased by 9.1 percent to LE 45.3 billion during FY 2005/06 compared to LE 41.5 billion during 2004/2005. Interest payments increased by 15 percent to LE 37.7 billion. Finally, purchase of non financial assets (investments) amounted to LE 19.8 billion.

           Likewise, preliminary figures for FY 2005/06 indicate existence of fiscal consolidation on the general government front. Hence, overall deficit declined to LE 42.6 billion (7.2 percent of GDP) compared to LE 48.6 billion (9.1 percent of GDP) in 2004/05. This occurred as revenues increased by 28.4 percent to some LE 171 billion (28.8 percent of GDP) compared to LE 133 billion (24.8 percent of GDP) in 2004/ 2005. At the same time, total expenditure increased by 22.3 percent to LE 209.1 billion (35.3 percent of GDP) compared to LE 171 billion (31.8 percent of GDP) in the previous year.

           Public debt, still within manageable levels, and debt indicators are expected to notably improve in light of the intended Ministry of Finance program to reduce the budget deficit by one-half over the medium term. According to recent statistics on domestic debt, central government net debt was reported as of end March 2006 at some LE 374 billion (63 percent of GDP) compared to LE 333.3 billion (62.1 percent of GDP) in March 2005.

           On the other side, foreign debt declined by 4.3 percent to US$ 28.9 billion in March 2006 (28.0 percent of GDP), compared to US$ 30.2 billion .(33.8 percent of GDP) a year earlier. In general, the foreign debt composition remains quite favorable, with only some US$ 1.5 billion (5.1 percent of total foreign debt) of short term maturity. Outstanding gross government debt was reported at US$ 11.7 billion in March 2006 compared to US$ 10.6 billion a year earlier.

On the monetary side, total liquidity (M2) increased during May 2006 by 1.4 percent to LE 553.4 billion. The year on year M2 growth recorded 12.9 percent. Quasi money increased by 11.2 percent to LE 447.2 billion and money (M1) by 20.3 percent to LE 106.3 billion. The year on year net foreign assets (NFA) of the banking system increased by 77 percent to LE 134 billion, whereas CBE net international reserves (NIR) increased during the year ending May 2006 by 22.2 percent to US$ 22.9 billion. Net domestic assets increased by 1.2 percent during the year ending May 2006 to LE 419.5 billion. This occurred as claims on the private sector rose by 6.9 percent to LE 287.5 billion (68.5 percent of net domestic assets), compared to an increase of 3.5 percent to LE 269 billion in May 2005 (64.9 percent of net domestic assets).

           Total deposits with the banking sector (excluding CBE) increased by 9.3 percent to LE 567 billion, of which 85.3 percent belong to the non-government sector. Loans to deposits ratio in May 2006 was 58.8 percent for local currency and 50.9 percent for foreign currencies; compared to 63.9 percent and 48.4 percent a year earlier, respectively.

           Dollarization in total liquidity declined slightly to 24.4 percent from 25 percent in May 2005. However, dollarization in deposits increased slightly to 29.4 percent compared to 29.3 percent in May 2005. These developments reflect a reversal in previous trends of accumulating foreign currency denominated assets.

CBE maintained the corridor rates unchanged during August 2006 at 8 percent for overnight deposit facility and 10 percent for overnight lending facility, compared to 9.5 percent and 12.5 percent at beginning of fiscal year 2005/06, respectively. It is noteworthy that CBE reduced the discount rate by 1 percentage point to 9% earlier this

year. Lending rates started to respond to these developments; albeit slower than hoped. The year on-year credit growth to the private sector picked up by 6.9 percent during the year ending May 2006 compared to annual growth of only 3.5 percent in the previous year. In the meantime, total liquidity grew at a slightly slower pace than last year.

           Domestic inflation recorded 8.4 percent in July 2006 compared to 4.3 percent in July 2005. The average inflation for FY 2005/06 is reported at 4.2 percent compared to 11.4 percent during FY 2004/05.

The balance of payments surplus increased slightly during the first nine months of 2005/06 to US$ 3.3 billion compared to a surplus of US$ 3.2 billion during the corresponding period last year. The capital and financial account reported a significant net inflow of almost US$ 1.9 billion due to an increase in both direct and portfolio investment inflows.

           On the current account side, total commodity exports increased by 38 percent to US$ 13.5 billion, due to the increase in international oil price and surge in natural gas exports. Likewise commodity imports reported an increase of 27 percent to US$ 21.5 billion, reflecting a surge in domestic demand. Services receipts grew by 13.6 percent to US$ 12.9 billion due to an increase in receipts from nearly all main sub-items. It is worth mentioning that services receipts are currently some 188 percent of services payments. Private transfers also increased to US$ 3.7 billion, up from 3.1 billion during the same period last year. Despite a reported increase of some 21 percent in total current account receipts (including official transfers), the current account surplus for July-March 2005/06 recorded US$ 2.1 billion, down from US$ 2.8 billion last year.

           Domestic capital market indices performance picked up substantially during July 2006, after slowing down in June 2006. The value of traded papers increased by 59.8 percent to LE 19.8 billion. Likewise, CASE-30 index increased by 901 points during July 2006 and by 883 points during the year ending July 2006 (17.2 percent increase). Market capitalization also increased over the previous year by 24.2 percent to LE 426 billion (64.1 percent of GDP). At the same time, S&P/IFCG index for emerging markets for Egypt increased during July 2006 by 18.3 percent.

           Other indicators reveal that the number of tourist arrivals during fiscal year 2005/2006 increased mildly by less than one percent to 8.7 million tourists. However, Tourist nights declined slightly by 0.7 percent to 85.1 million nights compared to 85.7 million nights in previous year.