Country Report

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Country Report

Egypt

May 2013

Economist Intelligence Unit 20 Cabot Square London E14 4QW United Kingdom

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Symbols for tables "0 or 0.0" means nil or negligible;"n/a" means not available; "-" means not applicable Egypt 1

Egypt

Forecast Highlights

Outlook for 2013-17 3 Political stability 3 Election watch 4 International relations 4 Policy trends 5 Fiscal policy 5 Monetary policy 5 International assumptions 6 Economic growth 6 Inflation 7 Exchange rates 7 External sector 7 Forecast summary

Data and charts 8 Annual data and forecast 9 Quarterly data 10 Monthly data 11 Annual trends charts 12 Monthly trends charts 13 Comparative economic indicators

Summary 13 Basic data 15 Political structure

Recent analysis Politics 17 Forecast updates 20 Analysis Economy 24 Forecast updates Analysis

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 2 Highlights Editor: Robert Powell Forecast Closing Date: May 8, 2013 Outlook for 2013-17 Political uncertainty will remain high in the early part of the forecast period as Islamists and non-Islamists clash over policy. The parliamentary election has been delayed and is now set for October—a date that looks realistic. The Muslim Brotherhood is once again expected to perform well, but it will not match its previous electoral success. More hardline Islamist parties, such as Nour, will benefit from disillusionment with the Brotherhood. There is potential for the political situation to stabilise once the parliamentary election is out of the way. However, ongoing social and political unrest, combined with weak economic prospects, poses downside risks. We have revised up our fiscal deficit forecast, after new data showed a sharp widening in the deficit in the first three quarters of the fiscal year, and a big rise in the allocation for public-sector wages in the 2013/14 draft budget. Real GDP growth weakened to 2.2% in the second quarter of 2012/13 (October December) owing to ongoing political uncertainty. We forecast that growth will average 3.9% in 2013-17, assuming greater stability from 2014. Despite measures by the Central Bank of Egypt to shore up the pound, it has continued to slide. We expect it to continue to weaken in 201314, but to re cover in 201517 as the political situation stabilises and the economy improves. Review In the latest indication of rising sectarian tensions between Egypt's Muslim majority and the Coptic community, eight people, including six Coptic Christians, have been killed in sectarian violence. The influence of the Muslim Brotherhood over the government has been enhanced following a cabinet reshuffle that was announced on May 7th. The Ministry of Finance has reported that the budget deficit soared in the first three quarters of 2012/13, and it now appears certain to surpass the government's already upwardly revised deficit target of 10.7% of GDP. The government's draft budget for 2013/14 (JulyJune) includes an allocation of E£172bn (US$25bn) for public sector wages and salaries—an increase of 20% on the budgeted 2012/13 figure, which is likely to displease the IMF. According to the latest data from the Central Bank, banks' Treasury-bill holdings rose by 39% between end- 2010 and end-2012, but total loans rose by just 13%, indicating some crowding out of private-sector lending. Qatar is seeking a 5% interest rate on the US$3bn in Treasury bonds it has pledged to buy from Egypt—well above the rate on the proposed IMF loan. Libya, meanwhile, has provided a US$1bn, five-year interest-free loan.

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 3 Outlook for 2013-17 Political stability Political uncertainty will remain high, particularly in the early part of the forecast period, as the president, Mohammed Morsi, and the Muslim Brotherhood clash with non-Islamists over the direction of policy. A move in November by Mr Morsi to extend his already substantial powers and in effect place himself above the judiciary deepened the schism between Islamists on the one hand and liberals and leftists on the other, sparking large protests and counter-protests by the president's opponents and supporters. The extent of this polarisation was highlighted by the results of the referendum in December on the constitution, which was passed on a turnout of just 32.9%. Non-Islamists have questioned the legitimacy of the document on this basis and will continue to voice their concern over the concentration of power in the presidency and the Muslim Brotherhood. Amid these tensions, civil unrest may well escalate, including sporadic incidents of sectarian violence (as demon strated by the death of eight people, including six Coptic Christians, in early April). An important stepping stone in the increasingly disorderly political transition is the upcoming parliamentary election, which has been delayed from April to October. The opposition National Salvation Front (NSF), an umbrella group formed after Mr Morsi's move in November to consolidate his powers, had said that it would boycott the election in protest at the electoral law, which it argues favours the Muslim Brotherhood-affiliated Freedom and Justice Party (FJP). With the final form of the legislation now in question and the election delayed, the opposition may yet choose to contest the race, however. Whatever the opposition decides, it is unclear if the election will prompt an easing in domestic tensions. On the one hand, there is potential for the political situation to improve, should the election prompt strengthened accountability and the opposition to channel its grievances through the country's institutions (rather than via street protests). In addition, the population's appetite for street protests will probably ebb steadily as the public becomes disenchanted with the repeated disruptions to daily life. On the other hand, tensions between Islamists and liberals are likely to continue to have a destabilising effect, especially as the Brotherhood finds itself under pressure to adhere more closely to Islamist principles both from among its own members and from Salafi (ultra-conservative Islamist) groups. These tensions will only be further strained by the cabinet reshuffle in May, in which the government rejected the opposition's call for a national unity government; instead, the Brotherhood bolstered its own role in the cabinet, by appointing two further ministers with links to the movement. Unrest will be further encouraged by indications of growing authoritarianism on the part of Mr Morsi and the Brotherhood. The president in particular has become increasingly intolerant of criticism from within the media (although in April he decided to withdraw a host of legal complaints against journalists, ostensibly in deference to "freedom of speech"). In addition, the drafting of a law on judicial reform by the FJP has prompted criticism that the bill is seeking to engineer the appointment of new judges more favourably disposed to the Islamist movement (the justice minister, Ahmed Mekky, resigned in April after objecting to the law). Amid all this political manoeuvring, the military, which has taken a back seat since Mr Morsi took office, may be tempted to intervene in the event of a significant deterioration in the political or security situation. It will remain reluctant to take on overt political powers again, however.

Election watch Mr Morsi has said that the election to the House of Representatives (the lower house of parliament), which had been due to begin in April, will now start in October, with parliament to be sworn in by the end of the year. The Economist Intelligence Unit expects the FJP to perform well in the lower house election, but it will not match its previous electoral success. Salafi parties, particularly Nour, stand to gain from disillusionment with the Brotherhood and the secular opposition's poor organisation. Given that Nour has distanced itself from the Brotherhood, by siding with the NSF in calling for the formation of a government of national unity ahead of the election, the FJP may enter into a coalition with other Salafi parties in order to secure a majority in parliament. However, Nour could revise its position, particularly with the promise of government portfolios, after the election. Until the election, however, the FJP- dominated Shura Council (the upper house of parliament) will remain the sole legislative authority. A new election to the Shura Council is due to be held within a year of the new lower house's convening.

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 4 International relations Mr Morsi will seek to reclaim Egypt's position as a key player in regional diplomacy. He revived Egypt's role as mediator between the main Palestinian groups in Gaza (led by Hamas) and Israel, brokering a ceasefire between the two sides following a confrontation in November 2012. His intervention won him the gratitude of both the US and Israel. Mr Morsi's diplomatic efforts during the November Gaza crisis will have alleviated Israeli concerns about his ideological affinity with Hamas. Given hostile Egyptian public opinion, however, this is unlikely to lead to warmer relations between the two countries. Security breaches by militants in the Sinai are likely to necessitate a revival of co- operation with Israel. Attempts to limit freedom of expression, as well as a controversial new draft law that restricts non-governmental organisations' room for manoeuvre, have drawn criticism from the US, but we expect any fallout to remain contained. Although US economic aid has become less important to Egypt, the military still relies on an annual grant of US$1.3bn —which the US defence secretary, Chuck Hagel, recommitted to during his visit to Egypt in April. However, the government will also seek a more balanced foreign policy than the US-oriented approach of the Mubarak presidency, by, for example, strengthening links with Iran (a move that has garnered some criticism of Mr Morsi) and Russia. Mr Morsi will also pay particular attention to relations with potential financial backers. Saudi Arabia and Qatar have provided the government with substantial financial support. However, with Qatar's enthusiasm for handouts to Egypt seemingly lessening, Egypt's government has turned to Iraq and Libya for help.

Policy trends Severe macroeconomic distortions, coupled with a volatile political environment, pose considerable short- and medium-term challenges, requiring the government to take corrective measures on the macroeconomic front. Perhaps the biggest immediate challenge facing Egypt is the conclusion of a long-delayed US$4.8bn stand-by credit facility with the IMF. The Fund is reported to be dissatisfied with the government’s revised package of economic reforms and is likely to press for additional measures. The government will remain hamstrung by fears of social unrest and, ahead of the parliamentary election, of losing popular support. Furthermore, repeated reshuffles in the Ministry of Finance will continue to hinder policymaking—there have now been five finance ministers since 2011 and, exacerbating the situation, Kadry Dimian, a senior official who had been closely involved in the talks with the IMF, resigned in April. We do not expect a final agreement with the IMF to be concluded before a new parliament is in place. Despite having so far rejected the possibility, the government may be forced to take out a rapid financing instrument from the IMF. Unlike a stand-by arrangement, this would not require prior approval of a medium-term economic programme. The much-delayed IMF stand-by arrangement would unlock a further US$9.7bn in funds from the World Bank, the EU and the US.

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 5 Fiscal policy The outlook for the fiscal account has continued to worsen, in the light of continued government profligacy, weak revenue and a fast-rising public debt stock. According to the latest official data, the fiscal deficit increased by 55% year on year in the first three quarters of the 2012/13 fiscal year (July 1st-March 30th) as outlays on debt interest, salaries and subsidies soared. As a result, we now expect the deficit to come in at 13.1% of GDP, up from 10.9% of GDP in 2011/12 and far above the government's already upwardly revised target of 10.7% 0f GDP. The finance ministry had previously stated its intention to narrow the deficit to less than 5% of GDP by 2016/17 by cutting energy subsidies, which account for about one-fifth of total expenditure, and boosting revenue through tax reforms. However, in the face of renewed political instability, the government has made limited progress. Although it has implemented a number of incremental increases to petrol and natural gas prices, they remain heavily subsidised, and plans to ration subsidised petroleum products have been delayed. This caution will be exacerbated by the government's unwillingness to tackle surging outlays on public-sector salaries, with the draft 2013/14 budget positing another 20% increase in their allocation. However, with appetite for its debt waning, the government will eventually have no choice but to make some progress on its economic reform programme over the remainder of the forecast period, and thus we expect the deficit to decline to 8.7% of GDP in 2016/17 (above our previous forecast, in the light of the draft 2013/14 budget). However, political expediency will ensure that a large proportion of fiscal expenditure will continue to be earmarked for social spending. To finance its fiscal shortfalls Egypt will rely mainly on domestic borrowing, although it will also increase foreign debt issuance. It has already received some US$5bn in assistance from Qatar, in a variety of forms, and in April Qatar said that it would buy US$3bn of government bonds (contradicting a previous statement that no further assistance was planned). However, reports in May indicated that Qatar was asking for around 5% on its loans—far above the rate being offered by the IMF. The government has also sought help from other Arab states, including a US$2bn loan from Libya (with US$1bn already handed over, interest free). The government is also hoping that the passage in April of a law allowing the issue of sukuk (Islamic-compliant) bonds will open a new avenue for deficit financing.

Monetary policy Ongoing political and economic uncertainty will continue to provide a challenging backdrop for the Central Bank of Egypt. Faced with a weakening currency and rising inflation, the Central Bank raised interest rates in March, for the first time since November 2011. Also in March, the Central Bank reintroduced deposit operations and put repurchase agreement auctions, which were first launched in March 2011, on hold. The Central Bank is likely to continue to prioritise targeting inflation despite weak economic growth, and we therefore expect that it will raise rates again this year. As the political and economic situation stabilises, the Central Bank is likely to begin some loosening of monetary policy later in the forecast period. The Central Bank lowered the reserve requirement for commercial banks from 14% to 12% of deposits in March 2012, and again to 10% in late May, in an effort to boost liquidity in the banking sector and bring down yields on government securities.

International assumptions 2012 2013 2014 2015 2016 2017 Economic growth (%) US GDP 2.2 2.1 2.4 2.3 2.3 2.4 EU27 GDP growth -0.3 -0.4 0.8 1.4 1.5 1.5 World GDP 2.1 2.1 2.7 2.9 2.9 2.9 World trade 2.5 4.0 5.2 5.4 5.5 5.6 Inflation indicators (%) US CPI 2.1 2.1 2.4 2.2 2.3 2.3 EU27 CPI 2.6 2.0 2.0 2.2 2.1 2.2 Manufactures (measured in US$) -0.6 -3.0 0.7 1.2 1.4 1.8 Oil (Brent; US$/b) 112.0 106.6 104.8 107.3 110.0 115.0 Non-oil commodities (measured in US$) -10.8 -2.3 0.5 -1.4 4.0 2.2 Financial variables US$ 3-month commercial paper rate (av; %) 0.2 0.2 0.2 0.3 1.2 2.2 Exchange rate E£:US$ (av) 6.06 7.10 7.24 7.09 6.94 6.61 Exchange rate US$:€ (av) 1.29 1.31 1.29 1.27 1.26 1.26

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 6 Economic growth The real economy grew by just 2.2% year on year in the second quarter of 2012/13 (October-December), taking growth for the first half to 2.4%. We expect growth for the full year to slow, to 2%, as political instability continues to weigh on the economy. Growth will remain well below potential in 2013-17, averaging 3.9% a year, as a result of continued domestic political upheaval, macro economic imbalances and financial constraints. Output will also be constrained by weak global demand, particularly in the euro zone, which will affect Egyptian exports and Suez Canal revenue (the latter of which fell sharply in March). Assuming that the political situation begins to stabilise after a new parliament and government are in place, we expect growth to pick up from 2014. Although private consumption had remained resilient since the revolution, growth fell to just 2.4% in the first quarter of 2012/13 from 5% in the corresponding period of 2011/12. In line with lower demand, imports contracted for the first time in five quarters. The weakening of the Egyptian pound will have contributed to the depression of both private consumption and imports. A weaker pound will also make exports more competitive, however, contributing to an expansion of export volumes from 2013/14. This will be further supported by a recovery in tourism and manufacturing. Rising government consumption will provide some support to private demand, although it will slow as the government eventually introduces a measure of austerity. Investment, meanwhile, remains low, but should pick up strongly after a loan agreement is concluded with the IMF. Investment growth will be supported in the medium term as delayed projects get under way, in turn providing a badly needed boost to employment. Economic growth % 2012a 2013b 2014b 2015b 2016b 2017b GDP c 2.2 2.0 3.5 4.3 5.0 4.8 Private consumption 5.9 2.3 3.6 4.2 5.1 5.3 Government consumption 3.1 3.0 2.8 2.7 2.5 2.5 Gross fixed investment 0.7 -4.9 5.1 6.6 5.4 7.2 Exports of goods & services -2.3 1.9 5.6 8.0 10.4 9.6 Imports of goods & services 10.8 -6.6 5.5 7.5 9.5 10.7 Domestic demand 6.0 -0.7 3.6 4.4 4.9 5.4 Agriculture 2.9 3.2 3.2 3.4 3.4 3.4 Industry 1.1 3.9 6.4 5.8 5.5 5.5 Services 2.9d 0.2 1.4 3.5 5.0 4.6 a Actual. b Economist Intelligence Unit forecasts. c Fiscal year data ending June 30th. d Economist Intelligence Unit estimate.

Inflation Inflation reached 8.2% in March, slightly down from the previous month, but still sharply up from 6.3% in January. The Central Bank has attributed the rise to food and non-food price increases resulting from the depreciating exchange rate and bottlenecks in diesel distribution. Foreign-exchange reserves (excluding gold and special drawing rights) fell to just US$8.8bn at end-March, equivalent to only seven weeks of imports. Insufficient funds to finance imports could result in shortages, adding to inflationary pressures. In an effort to conserve its foreign-exchange stock by dampening import demand, in March the government introduced additional duties for a number of items and increased tariffs on about 100 items, most of which could be classified as luxuries. However, this will probably only serve to push inflation higher. As a result, we expect inflation to rise to an average of 9.8% in 2013, increasing further to 10.1% in 2014. It will moderate in 2015-16 as the currency strengthens, before picking up again in 2017 on the back of rising commodity prices and stronger domestic demand.

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 7 Exchange rates The Central Bank has managed a gradual depreciation of the Egyptian pound since the revolution. As a result, foreign reserves fell from US$36bn in December 2010 to US$15bn at end-December 2012, prompting the Central Bank to announce a series of measures to protect its stock. These included introducing foreign-exchange auctions and rationing the availability of foreign exchange to banks and their customers. In February the Central Bank intervened again to slow the pace of depreciation, reducing the frequency of auctions. Despite these measures, the pound has continued its slide, losing around 10% of its value between late December and late March. The gap between the parallel rate and the official rate has also simultaneously begun to widen. With an IMF deal delayed, inward capital flows remaining low and signs of dollarisation of bank deposits, the Central Bank's actions are unlikely to be sufficient to reverse the pound's trajectory. We forecast that the pound will weaken from an average of E£6.06:US$1 in 2012 to E£7.24:US$1 in 2014, but will strengthen in 201517 as the political situation stabilises and macroeconomic fundamentals improve.

External sector The current-account deficit narrowed to US$6.9bn in 2012 from US$7.5bn in 2011. We expect that it will narrow further in 2013 as export revenue picks up, import growth remains subdued and the services balance strengthens. The transfers surplus will fall as remittances from Egyptians living abroad stabilise. The current-account deficit will narrow over the remainder of the forecast period on the back of a steady rise in export earnings and a widening of the services surplus, as greater political stability results in a recovery in the tourism sector. We expect export earnings to grow to US$37.9bn in 2017 and import costs to US$74.2bn. The income balance will benefit from the improving political situation from 2014 as the government's cost of borrowing declines. The current account will record an annual average deficit of 1.4% of GDP in 2013-17.

Forecast summary Forecast summary (% unless otherwise indicated) 2012a 2013b 2014b 2015b 2016b 2017b Real GDP growth 2.2 2.0 3.5 4.3 5.0 4.8 Industrial production growth -1.9c 3.8 6.4 5.8 6.5 6.5 Gross agricultural production growth 2.9 3.2 3.2 3.4 3.4 3.4 Consumer price inflation (av) 7.1 9.8 10.1 8.7 7.9 8.3 Lending rate (av)d 12.0c 12.3 12.2 12.0 11.7 11.3 Government balance (% of GDP) -10.9 -13.1 -11.7 -10.7 -9.5 -8.7 Exports of goods fob (US$ bn) 26.8 27.9 29.4 31.7 34.4 37.9 Imports of goods fob (US$ bn) 59.7 60.6 63.0 66.3 70.1 74.2 Current-account balance (US$ bn) -6.9 -6.2 -4.9 -4.6 -4.0 -2.7 Current-account balance (% of GDP)e -2.8 -2.4 -1.6 -1.3 -1.0 -0.5 External debt (end-period; US$ bn) 38.9c 41.8 46.4 48.8 49.8 49.0 Exchange rate E£:US$ (av) 6.06 7.10 7.24 7.09 6.94 6.61 Exchange rate E£:US$ (endperiod) 6.36 7.19 7.22 7.03 6.85 6.52 Exchange rate E£:¥100 (av) 7.60 7.22 7.10 6.88 6.80 6.54 Exchange rate E£:€ (av) 7.79 9.30 9.34 9.00 8.74 8.37 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates. d Annual average. e Ratio based on calendar year GDP; national accounts use fiscal year.

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 8 Data and charts Annual data and forecast

2008a 2009a 2010a 2011a 2012a 2013b 2014b GDPc Nominal GDP (US$ bn) 164.8 188.0 214.4 231.0 254.4 246.3 277.8 Nominal GDP (E£ bn) 896 1,042 1,207 1,371 1,542 1,749 2,011 Real GDP growth (%) 7.2 4.7 5.1 1.8 2.2 2.0 3.5 Expenditure on GDP (% real change)c Private consumption 5.7 5.7 4.1 5.5 5.9 2.3 3.6 Government consumption 2.1 5.6 4.5 3.8 3.1 3.0 2.8 Gross fixed investment 14.8 -10.2 7.7 -5.6 0.7 -4.9 5.1 Exports of goods & services 28.8 -14.5 -3.0 1.2 -2.3 1.9 5.6 Imports of goods & services 26.3 -17.9 -3.2 8.4 10.8 -6.6 5.5 Origin of GDP (% real change)c Agriculture 3.3 3.2 3.5 2.7 2.9 3.2 3.2 Industry 7.1 5.6 4.6 0.5 1.1 3.9 6.4 Services 8.2 3.8 6.0 2.8 2.9d 0.2 1.4 Population and income Population (m) 78.3 79.7 81.1 82.5 84.1d 85.6 87.2 GDP per head (US$ at PPP) 5,666 5,878 6,154d 6,287d 6,419d 6,546 6,776 Recorded unemployment (av; %) 8.7 9.4 9.0 12.0 13.5d 14.8 14.1 Fiscal indicators (% of GDP)c Central government revenue 24.7 27.1 22.2 19.3 19.7 18.3 16.9 Central government expenditure 31.5 33.7 30.3 29.3 30.5 31.4 28.7 Central government balance -6.8 -6.6 -8.1 -10.0 -10.9 -13.1 -11.7 Central government debt 86.3 83.7 82.2 84.3 88.0 91.6 92.6 Prices and financial indicators Exchange rate E£:US$ (av) 5.43 5.55 5.63 5.94 6.06 7.10 7.24 Exchange rate E£:€ (av) 7.99 7.73 7.47 8.26 7.79 9.30 9.34 Consumer prices (av; %) 18.3 11.8 11.1 10.1 7.1 9.8 10.1 Producer prices (av; %) 21.1 -5.6 12.6 14.8 2.5 3.0 5.6 Stock of money M1 (% change) 14.9 12.9 13.4 14.4 12.7 15.5 10.5 Stock of money M2 (% change) 10.5 9.5 12.4 6.7 12.3 12.9 7.9 Lending interest rate (av; %) 12.3 12.0 11.0 11.0 12.0d 12.3 12.2 Current account (US$ m) Trade balance -26,774 -22,475 -27,673 -28,218 -32,889 -32,693 -33,594 Goods: exports fob 29,849 23,089 25,024 27,913 26,835 27,906 29,395 Goods: imports fob -56,623 -45,564 -52,698 -56,132 -59,724 -60,600 -62,989 Services balance 14,312 13,242 15,482 11,732 12,690 13,749 14,604 Primary income balance 1,373 -1,922 -5,843 -6,315 -6,510 -6,032 -4,413 Secondary income balance 9,758 7,960 12,439 15,221 19,791 18,758 18,456 Current-account balance -1,331 -3,195 -5,596 -7,581 -6,918 -6,218 -4,946 External debt (US$ m) Debt stock 33,509 34,970 36,427 35,001 38,919d 41,849 46,420 Debt service paide 3,235 2,937 2,987 3,502 3,117d 3,423 3,530 Interest 916 884 864 877 503d 612 729 International reserves (US$ m) Total international reserves 33,849 33,933 35,792 17,659 14,931 16,078 18,481 a Actual. b Economist Intelligence Unit forecasts. c Fiscal year data ending June 30th. d Economist Intelligence Unit estimates. e Includes prepayments of medium- and long-term debt in 2006-08. Source: IMF, International Financial Statistics.

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 9 Quarterly data 2011 2012 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Output Real GDP at 2011/12 prices (E£ bn) 349.3 379.3 402.1 393.6 369.5 394.7 412.4 402.2 Real GDP (% change, year on year) -2.3 1.6 1.1 4.3 5.8 4.1 2.6 2.2 Prices Consumer prices (Jan 2007=100) 111.4 114.1 117.3 119.9 121.3 123.4 124.7 126.2 Consumer prices (% change, year on year) 11.0 11.9 9.0 8.5 8.9 8.1 6.3 5.2 Wholesale prices (2000=100) 167.1 177.0 176.0 175.2 179.1 178.2 178.8 176.4 Financial indicators Exchange rate E£:US$ (endperiod)a 5.960 5.958 5.988 6.050 6.038 6.057 6.090 6.357 Deposit rate (av; %) 6.5 6.6 6.7 7.1 7.6 7.6 7.7 7.6 Discount rate (end-period; %) 8.5 8.5 8.5 9.5 9.5 9.5 9.5 9.5 Lending rate (av; %) 10.7 10.9 11.1 11.5 11.9 12.0 12.0 12.1 M1 (endperiod; E£ bn) 240.8 248.7 253.8 255.6 260.7 274.5 282.9 288.1 M1 (% change, year on year) 19.3 16.2 15.1 14.4 8.2 10.4 11.4 12.7 M2 (endperiod; E£ bn) 988.1 1009.4 1024.4 1038.9 1055.0 1094.4 1124.3 1167.2 M2 (% change, year on year) 11.2 10.0 8.0 6.7 6.8 8.4 9.8 12.3 EGX 30 stockmarket index (end-period; Jan 1st 1998=1,000) 5,464 5,373 4,137 3,622 5,019 4,709 5,887 5,462 Sectoral trends Crude oil production (m barrels/day) 0.70 0.69 0.69 0.71 0.74 0.74 0.73 0.73 Foreign trade (US$ bn) Exports fob 6.24 8.08 6.76 6.82 6.48 6.91 6.95 6.50 Imports cif 12.43 14.51 14.59 14.60 14.41 15.08 13.83 16.41 Trade balance -6.19 -6.43 -7.82 -7.77 -7.93 -8.17 -6.88 -9.91 Foreign reserves Reserves excl gold (end-period; US$ m) 27,676 23,512 20,956 14,916 11,819 12,152 11,663 11,628 a Spot middle rate, New York close. Sources: International Energy Agency, Oil Market Report; IMF, International Financial Statistics; Oil Market Intelligence; Bloomberg; New York Times.

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 10 Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Exchange rate E£:US$ (av) 2011 5.800 5.890 5.920 5.950 5.940 5.940 5.950 5.950 5.950 5.960 5.970 6.010 2012 6.030 6.020 6.030 6.040 6.040 6.050 6.060 6.070 6.080 6.090 6.090 6.170 2013 6.540 6.720 n/a 6.880 n/a n/a n/a n/a n/a n/a n/a n/a Exchange rate E£:US$ (endperiod) 2011 5.858 5.891 5.960 5.947 5.942 5.958 5.955 5.967 5.988 6.000 6.009 6.050 2012 6.012 6.033 6.038 6.042 6.044 6.057 6.075 6.105 6.090 6.112 6.110 6.357 2013 6.716 6.742 6.801 6.936 n/a n/a n/a n/a n/a n/a n/a n/a M1 (% change, year on year) 2011 16.4 19.9 19.3 17.7 19.2 16.2 19.2 18.9 15.1 16.7 14.9 14.4 2012 12.8 8.1 8.2 8.6 8.4 10.4 9.5 9.3 11.4 12.2 11.4 12.7 2013 17.6 19.3 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a M2 (% change, year on year) 2011 11.8 12.2 11.2 10.8 11.0 10.0 10.4 9.5 8.0 7.2 7.1 6.7 2012 7.6 6.9 6.8 7.3 7.4 8.4 8.1 8.9 9.8 11.0 11.2 12.3 2013 14.8 15.3 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Deposit rate (av; %) 2011 6.5 6.5 6.5 6.6 6.7 6.6 6.7 6.7 6.8 7.0 7.1 7.2 2012 7.4 7.6 7.7 7.6 7.6 7.7 7.7 7.7 7.7 7.7 7.7 7.6 2013 7.6 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Lending rate (av; %) 2011 10.7 10.6 10.7 10.8 10.8 11.0 11.0 11.1 11.2 11.3 11.4 11.8 2012 11.9 11.9 12.0 12.1 11.9 11.9 12.0 12.0 12.0 12.0 12.1 12.2 2013 12.1 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 3-month money market rate (end-period; %) 2011 9.5 10.9 11.4 11.4 11.6 12.1 11.8 11.9 13.0 12.2 13.5 14.0 2012 13.8 13.8 13.8 13.9 14.4 14.8 14.2 14.2 12.4 12.4 12.5 13.0 2013 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a EGX 30 index (end-period; Jan 1st 1998=1,000) 2011 5,647 n/a 5,464 5,004 5,523 5,373 5,036 4,640 4,137 4,451 4,020 3,622 2012 4,648 5,350 5,019 4,945 4,686 4,709 4,863 5,332 5,887 5,696 4,808 5,462 2013 5,606 5,489 5,183 5,196 n/a n/a n/a n/a n/a n/a n/a n/a Consumer prices (av; % change, year on year) 2011 10.8 10.7 11.5 12.1 11.9 11.8 10.4 8.5 8.2 7.1 9.1 9.5 2012 8.6 9.2 9.1 8.8 8.3 7.2 6.4 6.4 6.2 6.7 4.3 4.7 2013 6.3 8.3 7.6 n/a n/a n/a n/a n/a n/a n/a n/a n/a Wholesale prices (a; % change, year on year) 2011 14.6 16.8 20.4 20.6 20.0 19.3 17.2 14.0 11.7 6.0 9.1 9.1 2012 7.4 8.8 5.3 2.8 2.8 -3.3 -2.1 1.9 4.5 4.0 -1.6 -0.3 2013 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Goods exports fob (US$ m) 2011 2,085 2,316 2,774 2,740 2,880 2,972 2,669 2,230 2,345 2,397 2,441 2,678 2012 2,263 2,645 2,549 2,494 2,490 2,425 2,196 n/a n/a n/a n/a n/a 2013 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Goods imports cif (US$ m) 2011 4,742 3,327 4,654 4,507 5,723 4,854 4,937 5,277 5,428 5,668 4,501 5,286 2012 5,100 5,002 6,070 5,377 5,629 5,277 5,112 n/a n/a n/a n/a n/a 2013 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Trade balance fob-cif (US$ m) 2011 -2,657 -1,011 -1,879 -1,767 -2,843 -1,882 -2,267 -3,047 -3,083 -3,271 -2,060 -2,608 2012 -2,837 -2,357 -3,521 -2,883 -3,139 -2,852 -2,916 n/a n/a n/a n/a n/a 2013 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Foreign-exchange reserves excl gold (US$ m) 2011 32,596 30,918 27,676 25,595 24,764 23,512 22,676 21,975 20,956 18,868 16,870 14,916 2012 13,135 12,460 11,819 11,921 12,689 12,152 11,039 11,747 11,663 12,107 11,655 11,628 2013 10,234 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Sources: IMF, International Financial Statistics; Haver Analytics; Central Bank of Egypt.

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 11 Annual trends charts

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 12 Monthly trends charts

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 13 Comparative economic indicators

Basic data Land area 997,739 sq km, of which only 5% is inhabited and cultivated territory Population 83m (end-2009 estimate)

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 14 Main towns Population (July 2007 official estimates) Greater Cairo (capital; Cairo, Giza, Helwan, 6th of October & Kalyoubia governorates): 18,440,076 Alexandria: 4,123,869 Port Said: 570,603 Suez: 512,135 Climate Hot and dry, with mild winter Weather in Cairo (altitude 116 metres) Hottest month, July, 2136°C (average daily maximum and minimum); coldest month, January, 818°C; driest months, July, August, 0 mm average rainfall; wettest month, December, 5 mm average rainfall Language Arabic Measures Metric system. Local measures are also used, especially for land area: feddan=0.42 ha or 1.04 acres; cereal crops: ardeb=198 litres or 5.6 US bushels; 8 ardebs=1 dariba; cotton: Egyptian bale=720 lb (325.5 kg), qantar (metric)=50 kg (replacing the traditional qantar equivalent to 44.93 kg) Currency Egyptian pound (E£) = 100 piastres Time Two hours ahead of GMT Public holidays The dates of Islamic holidays are based on the lunar calendar and are therefore approximate: National Police Day (January 25th); birthday of the Prophet Mohammed (January 24th 2013); Sinai Liberation Day (April 25th); Labour Day (May 1st); National Day (July 23rd); Eid alFitr (August 8th 2013); Armed Forces Day (October 6th); Eid alAdha— Feast of the Sacrifice (October 15th 2013); Islamic New Year (October 15th 2013)

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Political structure Official name Arab Republic of Egypt Legal system A new constitution was approved in a referendum in December 2012 National legislature Formally bicameral: the Majlis al-Nowab (House of Representatives, or lower house) must have no less than 350 directly elected members. Members of parliament serve a five-year term. The Shura Council (the upper house) must have no less than 250 members. The president may appoint additional members up to 10% of the elected total National elections A parliamentary election was held between November 2011 and February 2012. The lower house was dissolved in June 2012, however. A new election was due to begin in late April 2013, but has been delayed until October. In the meantime, the upper house holds legislative authority. A new election to the Shura Council is due to be held within a year of when a new lower house convenes Head of state President, directly elected. Mohammed Morsi was elected in June 2012 National government Council of Ministers headed by the prime minister. Hisham Qandil, the former irrigation and water resources minister, has been appoi0nted to the role

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 16 Main political parties Freedom and Justice Party; Nour; Free Egyptians Party; Progressive Unionist Party (Tagammu); Social Democratic Party; Wafd; Wasat Prime minister: Hisham Qandil Key ministers Agriculture: Ahmed el-Gizawi Civil aviation: Wael el-Maadawy Communication: Atef Helmy Defence: Abdel Fattah el-Sisi Education: Ibrahim Deif Electricity: Ahmed Imam Finance: Fayad Abdel-Moneim Ibrahim Foreign affairs: Mohammed Kamel Amr Health: Mohammed Hamed Higher education: Mostafa Mesaid Housing: Tareq Wafiq Information: Metwaly Abdel Maqsoud Interior: Mohammed Ibrahim Investment: Yahya Hamed Irrigation & water resources: Mohammed Bahaeddin Justice: Ahmed Suleiman Local development: Mohammed Ali Beshr Manpower & emigration: Khaled al-Azhari Petroleum & mineral wealth: Sherif Hadara Planning & International co-operation: Amr Darrag Social affairs & insurance: Nagwa Khalil Supply & internal trade: Bassem Ouda Tourism: Mohammed Hisham Zaazou Trade & industry: Hatem Saleh Transport: Hatem Abdel-Latif Utilities, drinking water & sanitation: Abdel-Qawi Khalifa Central Bank governor Hisham Ramez

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 17 Recent analysis

Generated on May 16th 2013 The following articles were published on our website in the period between our previous forecast and this one, and serve here as a review of the developments that shaped our outlook. Politics Forecast updates April 9, 2013: Political stability Sectarian violence leaves eight dead Event A total of eight people, including six Coptic Christians, have been killed in sectarian violence. Analysis Violence first broke out in the town of Khosous in the Qalyubiya governorate north of Cairo on April 5th and left five people dead. Two more people, one of whom was a Copt, were killed on April 7th when clashes erupted at St. Mark's Cathedral in Cairo, where thousands of mourners had turned out for funeral prayers for the five killed in Khosous. Tensions between Egypt's Muslim majority and the Coptic community, which makes up about 10% of the population, have risen since the 2011 revolution, spilling over into sporadic violence. The president, Mohammed Morsi, condemned the clashes at the cathedral and ordered an immediate investigation. However, there have been conflicting reports about how fighting at the cathedral began, and the presidency and the Muslim Brotherhood were initially reluctant to assign blame. The Brotherhood's Freedom and Justice Party issued a statement blaming "dubious parties determined to cause discord". However, on April 9th a statement from the office of Essam el-Haddad, an assistant to the president, said that events on April 7th had escalated when angry Coptic mourners vandalised cars outside the cathedral in Cairo. In an unusually strong response, the head of the Coptic Church, Pope Tawadros II, criticised the president's handling of the situation, describing his response as negligent. In a telephone interview on the private ON TV network, Pope Tawadros also dismissed Mr Morsi's decision to resurrect a state body tasked with promoting religious equality and called for "action not words". The most serious sectarian incident since the revolution took place in October 2011 when the military attacked a mostly Coptic march on the state television building known as Maspero. State media called on Egyptians to take to the streets to defend the soldiers from the Coptic protesters. An estimated 27 people were killed. Tens of thousands of Copts have reportedly left Egypt since the 2011 revolution and subsequent rise of Islamists to power. Impact on the forecast The latest sectarian violence is symptomatic of heightened tensions between Islamists and non–Islamists, as well as of the inability of state institutions to maintain order. We expect such incidents to continue intermittently and will highlight this in our forecast.

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April 22, 2013: Political stability Justice minister resigns Event The political conflict surrounding the position of the judiciary in the post-revolution Egyptian state has sharpened with the resignation of Ahmed Mekky as justice minister. Analysis Mr Mekky said in his April 21st resignation letter to the president, Mohammed Morsi, that since his appointment the opposition had been calling for his resignation to conform with his previous positions taken in support of an independent judiciary, and more recently the president's supporters had called on him to be dismissed because of his criticisms of a new law on the judiciary. He said that now that there was a consensus that he should go, he had decided to request that he be relieved of the burden of office. The issue that triggered Mr Mekky's resignation was the drafting of a law on judicial reform by the Muslim Brotherhood-affiliated Freedom and Justice Party (FJP), which dominates the Shura Council (the upper house of parliament) and which is currently the sole legislative body in Egypt. The most controversial element in the law is the dropping of the normal retirement age for judges to 60 from 70. If applied, this would result in the removal of about 3,000 judges. The opposition claims that the underlying aim of the FJP is to get rid of judges that are hostile to the Muslim Brotherhood and to engineer the appointment of replacements more favourably disposed to the Islamist movement. Mr Mekky objected to the law on the grounds that there had been no consultation with the judicial authorities and that it is not clear whether members of the Shura Council are entitled to propose legislation without input from the relevant ministry. Mr Mekky and his brother, Mahmoud, had been prominent campaigners against moves by the former president, Hosni Mubarak, to curb judges' independence. Mr Morsi appointed Mahmoud Mekky to be vice-president in August 2012, but he resigned in December amid controversy over Mr Morsi's decision to override the judiciary in pushing through a new constitution. He has since been appointed Egypt's ambassador to the Vatican. Ahmed Mekky had already registered his disapproval of Mr Morsi's decisions to effect the dismissal of the previous prosecutor general, Abdel- Meguid Mahmoud, and to appoint Talaat Abdullah as his successor. Mr Mekky made clear that he considered that such decisions should be taken by the Supreme Judicial Council. Impact on the forecast We continue to expect Egypt's political scene to remain fractious and unstable in the early part of the forecast period as Islamists and non-Islamists clash over policy.

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May 7, 2013: Political stability Reshuffle strengthens Brotherhood's grip Event The influence of the Muslim Brotherhood over the government has been enhanced following a cabinet reshuffle that was announced on May 7th. Analysis Among the nine new ministers are two with formal roles in the Brotherhood or its affiliated Freedom and Justice Party (FJP) and one with close associations with the Islamist movement. Following the previous reshuffle undertaken in January, the cabinet had seven ministers with Brotherhood affiliations. The apparent bolstering of the Brotherhood role is likely to antagonise the non-Islamist opposition, which had been calling for the formation of a government of national unity and for the removal of the prime minister, Hisham Qandil. Among the changes was the appointment of Amr Darrag, the head of the FJP's foreign relations committee, as planning and international co-operation minister. As such, Mr Darrag will be closely involved in negotiations with the IMF. During a visit to London just prior to his appointment, he said that he was confident that an agreement could be concluded with the IMF in a few weeks. The reshuffle has also seen the replacement of El Morsi el Sayed Hegazy as finance minister after only four months in the post. The new minister is Fayad Abdel Moneim Ibrahim, a professor of commerce at Al Azhar Islamic University. Scholars at Al Azhar played a critical role in reshaping the recently approved law on sukuk (Islamic fixed-income securities). Mr Ibrahim will be the fifth finance minister since February 2011. Besides Mr Darrag, the other new FJP-affiliated minister is Yahya Hamed. The new oil minister, Sherif Hadara, is also considered within the industry to be close to the Muslim Brotherhood. He was appointed head of the Egyptian General Petroleum Corporation in October 2012, having previously worked as the managing director of a company that manufactured pumps for the oil sector. His predecessor, Osama Kamal, has recently been involved in devising a smart-card system to ration sales of subsidised fuel and in concluding a liquefied natural gas swap deal with Qatar, to ensure adequate fuel supplies for power stations during the summer months. The most important political appointments in the reshuffle were those of Ahmed Suleiman, a former appellate court head, as justice minister (replacing Ahmed Mekky, who resigned over the government's plans for reforms to the judiciary), and Hatem Bagato, who headed the presidential election commission in mid 2012, as minister of state for parliamentary affairs. Impact for the forecast Our current forecast for political stability and policy will remain unchanged. Tensions between Islamists and liberals are likely to continue to have a destabilising effect.

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 20 Economy Forecast updates April 10, 2013: Policy trends Qatar to the rescue Event On April 10th Qatar agreed to provide additional financial support to the Egyptian government, as well as to supply natural gas during the summer months, as required, to help meet the seasonal surge in demand for electricity. Analysis The renewed Qatari support came in the midst of negotiations in Cairo between the government and an IMF technical team about a loan to support the balance of payments. Qatar's prime minister, Sheikh Hamad bin Jassem al-Thani, said that his government had agreed to provide US$3bn in support in the form of purchases of Egyptian bonds, but that the details had yet to be worked out. Qatar has already provided US$5bn in financial assistance to Egypt, including grants to the government and deposits with the Central Bank of Egypt. The agreement came after three days of talks in Doha with Egyptian officials, including the Central Bank governor, Hisham Ramez, and the prime minister, Hisham Qandil. Sheikh Hamad said that Qatar had not demanded anything from Egypt in return. However, prior to the agreement, the Egyptian government had announced the cancellation of an earlier decree imposing a 10% levy on capital gains from the sale of National Société Générale Bank to Qatar National Bank for a total US$2bn. The levy would have increased the costs incurred by the Qatari buyer. Another sensitive issue has been the failure of the Egyptian Financial Supervisory Authority to give final approval to the takeover of the investment banking assets of Cairo- based EFG-Hermes by QInvest, a Qatari investment bank. The agreement between EFG-Hermes and QInvest is set to expire in May. The Qatari funds would help to bolster the Central Bank's foreign-exchange reserves, which sank to US$8.8bn (excluding gold and special drawing rights with the IMF) in March, which is sufficient to cover only two months of imports. They would also provide the government with some more breathing space in which to conclude the agreement with the IMF. The government has been seeking commercial bids for the supply of liquefied natural gas (LNG), but it is doubtful whether a deal can be reached in time to secure supplies this summer. The Qatari gas would probably be supplied via a floating LNG unit. Impact on the forecast Renewed Qatari support will ease some pressure on the Egyptian government to conclude a deal with the IMF. We maintain our view that funding for Egypt under the IMF's stand-by arrangement will not be disbursed until after elections. Our forecasts for Qatar remain unchanged.

April 15, 2013: Economic growth BG commits to new gas investment Event A decision by BG Group (UK) to go ahead with a US$1.5bn project to drill new production wells in the West Delta Deep Marine (WDDM) gasfield will help Egypt to arrest the recent decline in natural gas output. Analysis The benefits of this project (and of a larger scheme being carried out in a nearby block by another UK-based company, BP) will not become apparent until late 2014, and the government has recently agreed with Qatar on a mechanism to ease predicted shortages of gas for power generation during seasonal peaks in demand during the summer months of 2013. BG stated that it and its partner, Petronas of Malaysia, have approved plans to drill nine wells as part of Phase 9 (a) of the WDDM development. Work will start immediately, with the aim of bringing new volumes of gas on stream during 2014. BG has not specified how much additional gas will be produced. BG is one of the largest foreign operators in Egypt's gasfields, but its output has declined in recent years because of the seepage of water into its offshore wells and as a result of delays in new investment. BG's net production was 48.1m barrels of oil equivalent (boe) in 2012, down from 49.1m boe in 2011. The company has stated that it expects a further decline in 2013. Lower output has resulted in a fall in liquefied natural gas (LNG) exports from BG's Idku facility. Qatar has agreed to fulfil some of Egypt's LNG export contracts during the summer, in a swap deal likely to entail compensation in crude oil.

Natural gas balance (bn cu metres/year) Consumption Production 2001 24.5 25.2 2002 26.5 27.3 2003 29.7 30.1 2004 31.7 33.0 2005 31.6 42.5 2006 36.5 54.7 2007 38.4 55.7 2008 40.8 59.0 2009 42.5 62.7 2010 45.1 61.3 2011 49.6 61.3 2012a 52.7 60.4 a Economist Intelligence Unit estimate. Sources: BP, Statistical Review of World Energy 2012; The Economist Intelligence Unit. BG has also stated that it is owed US$1.3bn by the Egyptian General Petroleum Corporation (EGPC) for gas that it sells for domestic consumption, of which US$600m is in arrears. According to an agreement reached with the EGPC, the US$1.3bn is scheduled to be recovered in full by end-2015, and all receivables are supposed to be current by 2017. However, BG has indicated to shareholders that there is a risk of slippage. Meanwhile, BP has started to drill the first production wells at its West Nile Delta development, which is planned to add 9.3bn cu metres to Egypt's total gas output (estimated at 60bn cu metres in 2012). Impact for the forecast In line with recent data and prospects for the medium term, we are likely to revise down our baseline forecast for gas output in 2013, followed by an upturn from 2014 onwards.

April 15, 2013: External sector Libya supports Egypt with US$2bn deposit Event After weeks of speculation, the governor of the Central Bank of Libya, Sadeeq al-Kabeer, confirmed on April 14th that Libya was making a deposit of US$2bn with the Central Bank of Egypt (CBE). Analysis Mr Kabeer told the Libyan news agency, WAL, that, contrary to initial reports, the payment was not a loan but a deposit aimed at bolstering Egypt's dwindling stock of foreign reserves. Officials at the CBE have said that the deposit will be added to Egypt's reserves today (April 15th). Mr Kabeer argued that the health of the Egyptian economy was crucial for the stability of the region and the Libyan economy, and hoped that the deposit would stimulate growth in Egypt. Talking to the Reuters news agency, he likened the move to the EU helping Greece during its financial crisis. Mr Kabeer added that by supporting the Egyptian economy, Libya hoped to help stem the flow of Egyptian migrant workers using illegal means to enter Libya in search of employment. In previous weeks there had been confusion over whether the payment would go ahead, and still on April 13th members of the General National Congress (GNC) speaking to the Libyan press were denying that any such deal had been agreed. The move has caused controversy in some quarters because of speculation that the deposit was linked to the handover of former Qadhafi-era officials living in Egypt to the Libyan government. The highest-profile ex-regime figure in Egypt is Ahmed Qadhaf al-Dam, a cousin and aide of the deposed Libyan leader, Muammar Qadhafi. He was arrested in March a few days before the initial reports of the loan surfaced, and is being held in Egypt pending a police investigation. The Libyan authorities have officially requested his extradition. In March two other Qadhafi-era figures, a former ambassador, Ali Marya, and Mohammed Mansour, a financial official, were handed over to Libya. Impact on the forecast This deposit, in addition to extra financial assistance pledged by Qatar on April 10th, will help tide the Egyptian government over for now, but Egypt's stock of foreign reserves will remain worryingly low—reserves sank to US$8.8bn (excluding gold and special drawing rights with the IMF) in March, which is sufficient to cover only two months of imports. We maintain our view that funding for Egypt under the IMF's stand-by arrangement will not be disbursed until after elections in October. The deposit does not affect our forecast for Libya.

April 19, 2013: Fiscal policy outlook Public-sector wages to rise by 20% in 2013/14 Event The government has included in its draft budget for 2013/14 (JulyJune) an allocation of E£172bn (US$25bn) for public-sector wages and salaries, according to an internal document reported by the London-based Financial Times and Al Masry Al Youm, a local newspaper. Analysis The allocation for publicsector wages and salaries is 20% higher in nominal terms than the E£143bn allocated in the revised 2012/13 budget, and 41% higher than actual expenditure on wages and salaries in 2011/12. Such an increase in public spending on wages will be difficult to reconcile with the conditions set by the IMF for a gradual reduction of the fiscal deficit as part of the negotiations about a US$4.8bn stand-by arrangement. An IMF mission left Cairo in mid- April after two weeks of talks. It said that it had made progress, but there was no announcement of any agreement. The IMF managing director, Chrstine Lagarde, said on April 18th that she hoped that an agreement could be reached, but "there is clearly more work to be done". She added: "We had a programme that was just about ready in November 2012 when political decisions were made to not put in place the fiscal decisions that were intended, which obviously made the programme redundant." We do not expect a final agreement with the IMF to be concluded before a new parliament is in place later this year. Meanwhile, The Economist Intelligence Unit has learned that two senior Ministry of Finance officials who have been closely involved in the discussions with the IMF over the past two years are to leave their positions in the next few weeks. They are Hany Kadry Dimian, assistant to the minister, and Ahmed Kouchouk, a senior adviser. They had both been appointed by the pre-revolution finance minister, Youssef Boutros-Ghali. Since the revolution they had worked under four different finance ministers, and their departure will remove a badly needed measure of stability and continuity amid the internal political flux. To finance the growing fiscal shortfalls, the government will rely mainly on domestic borrowing, although it will also seek to obtain foreign debt at concessional terms from allies. It has received substantial assistance from Qatar and other Arab states. Impact on the forecast The increase in public-sector salaries will not only boost total spending but is likely to delay a deal with the IMF. We will increase our forecast for the overall fiscal deficit for 2013/14.

May 1, 2013: Policy trends Qatar reported to be asking for 5% interest on US$3bn loan Event According to a report on Reuters, Qatar is asking for a 5% interest rate on the US$3bn in Treasury bonds it has pledged to buy from Egypt. Analysis The Reuters report, which cited an unnamed Egyptian official, was partly confirmed by a spokesman from the Ministry of Planning and International Co-operation. However, the spokesman was careful to stress that the negotiations are ongoing, and that thus the details of Qatar's loan have yet to be finalised. Nonetheless, the rate of interest, and the bond's reported relatively short maturity of 18 months, are both not especially generous for what is at least in theory a concessional loan. In comparison, in April 2012 Qatar provided Tunisia with a US$500m loan, at an annual interest rate of 2.5% and with a longer maturity of five years. In addition, Libya has also promised US$2bn in interest-free loans, of which US$1bn, with a maturity of five years, has now been received according to the planning and international co- operation minister, Ashraf el-Araby. However, it is worth noting that in Egypt's latest T-bill auction, for a combined total of E£3bn (US$423m), the yield on the 266day Tbills averaged 13.7%. On the whole, the reported Qatari loan terms highlight the growing risk perception connected to the Egyptian economy. Qatar has already provided Egypt with US$4bn in deposits with the Central Bank of Egypt and a further US$1bn in grants since August 2012, and in March it announced that no further funding would be forthcoming. However, perhaps fearful of losing influence after Egypt turned to other regional donors, Qatar announced it would provide US$3bn in lending on April 10th. The Qatari U turn also came after the Egyptian government announced the cancellation of an earlier decree imposing a 10% levy on capital gains from the sale of National Société Générale Bank to the half-state-owned Qatar National Bank. However, the Qatari leadership stressed that it had not demanded anything from Egypt in return for its loan. Although terms of the Qatari loan not as generous as the concessional terms on offer elsewhere, there is little doubt that the Egyptian government will accept them. Talks with the IMF over a US$4.8bn loan, which would be contracted at a rate of just 1.1%, are going slowly, and the news that parliament has halted talks over reforming the income tax law —a key precondition for the IMF loan— is only likely to further sour the mood. Meanwhile, the government is showing little inclination to rein in the widening budget deficit, with the 2013/14 (July-June) draft budget positing a 20% increase in the allocation for public-sector wages. Impact on the forecast We had factored increased foreign lending into our forecasts. However, if true, the relatively high rate of interest on the Qatari loan may cause us to revise higher Egypt's projected external debt-service payments.

Analysis April 16, 2013: Fiscal policy outlook Banks take on burden of financing deficit Egypt's commercial banks are playing an increasingly important role in financing the fiscal deficit, as a result of the failure of successive post-revolution governments to mobilise external funds, either in the form of direct support from the IMF or through attracting inflows of portfolio investment in Treasury bills. One of the effects of the growth in bank holdings of government securities has been a slowdown in the growth of lending to the private sector, which has been a factor inhibiting a wider economic recovery. At the same time, high yields on domestic Treasury bills have helped Egypt's leading banks to maintain their profits, and the government has managed to claw back revenue in the form of corporate taxes and direct taxes on T-bills. According to data aggregated by the Central Bank of Egypt, holdings of T-bills and other government securities by commercial banks rose by 39% between end2010 and end2012, reaching E£613bn (US$92bn). Over the same period, total loans and advances rose by only 13% to E£517bn—and part of this increase was accounted for by the depreciation of the local currency, as about 23% of the aggregate loan book is in foreign currencies. The loan/deposit ratio has fallen to 47.5%. This provides scope for banks to increase lending to the private sector, but only if assets

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 25 can be shifted from investments in T-bills. Such a shift is unlikely unless the government takes effective steps to reduce the fiscal deficit and secure alternative sources of finance.

Aggregate position of Egyptian banks (E£ bn) 2009 2010 2011 2012 Jun Dec Jun Dec Jun Dec Jun Dec T-bills & other securities 338 361 406 441 474 503 555 613 Loans & advances 430 433 466 458 474 490 507 517 Deposits 810 849 892 944 957 981 1,024 1,088 Total assets/liabilities 1,092 1,152 1,221 1,283 1,270 1,308 1,361 1,441 Loan/deposit ratio (%) 53.1 51.0 52.2 48.5 49.5 49.9 49.5 47.5 Source: Central Bank of Egypt. Limited investment options are available At a recent discussion at the Egyptian Banking Institute, affiliated to the Central Bank, some bankers argued that they had little option but to continue to invest in T-bills, as demand for loans from the private sector was so weak, according to a report on the meeting by Reuters. Other bankers expressed concern about the risk of impairing their credit ratings through such a concentration of government-linked assets, and about the upward pressure on interest rates. The government's need for banks to finance the deficit has contributed to their profitability because of the high interest rates on offer. T-bills have provided a relatively secure stream of earnings at a time when other lending opportunities have been limited and as banks have been obliged to make heavy provisions for loans to sectors such as tourism that have been badly affected by the post-revolution turmoil. Among the leading private-sector banks, loans and advances to customers are still significantly larger than holdings of T-bills, but income from the latter has played an important part in sustaining profits. At Commercial International Bank (CIB), for example, T-bill income in 2012 was E£4bn, while income from lending to customers was only E£3.5bn, despite the fact that the bank's loan portfolio was five times larger than its stock of T-bills. Banks hold the bulk of the debt The three public-sector banks account for the bulk of the holdings of government debt. The biggest of the three is National Bank of Egypt (NBE), whose holdings of Tbills totalled E£67.7bn at endJune 2012. This was E£10bn lower than the position 12 months earlier, but the shift reflected the government's reliance on NBE for loans to the state- owned and import-dependent petroleum sector rather than denoting any significant increase in lending to small- and medium-sized enterprises in the private sector. Despite the drop in the size of its holdings, NBE's earnings from T-bills rose by 50% year on year to reach E£18bn, about two and a half times its income from lending to customers.

Scale of T-bill investment at selected banks (E£ m) T-bill Loans & T-bill Loan Net

holdings advances income income profit 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 Commercial International Bank 9,261 8,018 41,065 41,877 2,233 4,021 2,900 3,524 1,615 2,226 National Société Générale 9,899 12,205 35,099 35,885 1,615 1,817 2,711 3,400 1,490 1,538 Bank Crédit Agricole Indosuez 4,382 3,415 11,472 12,925 450 425 1,079 1,347 458.0 640.0 Bank of Alexandria 9,111 9,957 19,381 19,420 890 1,413 1,798 2,129 353 625 National Bank of Egypta 77,293 67,698 84,937 95,262 12,148 18,346 6,104 7,018 2,107 2,815 a Fiscal years (June 30th-July 1st). Source: Bank reports. The government's outstanding stock of Tbills and Tbonds as of endFebruary stood at E£748bn, according to the Ministry of Finance, compared with E£432bn at endJune 2010. This constitutes about 55% of gross consolidated government domestic debt. Current yields on government securities range from about 13.2% for 91-day bills to 16.5% for longterm bonds. Interest costs in the first eight months of the current fiscal year totalled E£83.4bn (of which all but E£2.8bn was domestic), accounting for onequarter of total government expenditure.

Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 26 Fiscal deficit will overshoot its official target The government's revised budget for fiscal year 2012/13 (July 1st-June 30th) envisages a deficit of 10.4% of GDP, compared with 7.6% of GDP in the original budget. However, the actual deficit in the first eight months of the fiscal year was 8.2% of GDP. With no major spending cuts or revenue-raising measures set to go into effect by the end of June, the deficit over the full fiscal year is likely to overshoot the revised target by a large margin. The Economist Intelligence Unit forecasts that the deficit will be 12.1% of GDP. Most of the aid that the government has secured in the past few weeks from Qatar, Turkey and Libya has been in the form of deposits with the Central Bank or (in Turkey's case) tied to imports from the donor country, and so these funds are not likely to affect the government's dependence on issuing securities to domestic banks to finance its growing fiscal deficit. An agreement with the IMF would provide a medium-term framework for reducing the fiscal deficit, which could attract foreign banks to resume their previous role as investors in Egyptian securities and thereby free up local bank funds to lend to the wider economy. However, the latest round of negotiations with a visiting IMF delegation has ended without an agreement, leaving Egyptian banks bearing a large part of the burden of financing government expenditure.

May 2, 2013 Budget deficit soars In an indication of the deteriorating state of Egypt's state finances, the Ministry of Finance has revealed that the budget deficit continued to balloon in the third quarter of 2012/13 (July 1st-June 30th), and now appears set to significantly surpass its full-year target. Although news of a tax deal with Egypt's Orascom Construction Industries (OCI) should at least provide a one-off boost to revenue, the overall worsening fiscal picture, as well as news that two of the more experienced officials at the finance ministry have resigned, raises doubts over the ability and commitment of the finance ministry to repair the state finances. According to the finance ministry's budget outturn figures for the first three quarter of fiscal 2012/13, the nine-month deficit increased to 10.1% of projected annual GDP, compared with the ministry's revised target of 10.7% for the full year. This is a substantial acceleration from the shortfall of 5.1% of (annual) GDP returned in the first half of the fiscal year, and, with a further quarter of the fiscal year to go, we thus are presently expecting the budget deficit to reach 12.1% of GDP for the full year. However, in light of the typical stacking of spending bills at the end of the year, we may now need to revise this even higher. Total revenue in the first nine month of 2012/13 was only 5.3% higher in nominal terms than in the comparable period of 2011/12, whereas total expenditure rose by 23% year on year. On the revenue side, the government has managed to achieve a significant increase in sales tax receipts, which rose by 19% year on year to E£65.9bn (US$9.5bn). However, part of the increase can be accounted for by the depreciation in the local currency, which would have the effect of boosting sales tax receipts from imported goods. Revenue from the Egyptian General Petroleum Corporation (EGPC), in the form of both taxes and dividends, fell compared with 2011/12, reflecting the decline in Egypt's oil and gas export volumes as investment has dried up. Fiscal ill-discipline The main drivers of increased spending are public-sector wages and benefits, subsidies on food and energy, and interest payments on domestic debt. The numerous changes of governments over the past two years have contributed to the bulge in the public-sector payroll, as new ministers have found it hard to impose discipline over their departments. The cost of subsidies has been pushed up by the currency's depreciation, as much of the food and energy that is subject to price controls is imported. In the first nine months of 2012/13 the overall subsidy bill rose by 15.2%, with food subsidies totalling E£18.9bn, and fuel subsidies E£72.2bn. Virtually all of the interest payments in the budget are on domestic debt, which continues to increase rapidly as the main means that the government uses to finance the deficit is through issuing Treasury bills and bonds to Egyptian banks, at rates that currently range between 13% and 17%.

Budget highlights (E£ m; actuals, unless stated otherwise) 2011/12 2012/13 2010/11 2011/12 2012/13a Jul-Mar Jul-Mar Revenue, incl 265,286 303,622 396,227 197,521 208,135 Direct & indirect taxes 192,072 207,410 266,905 132,290 153,014 Expenditure, incl 401,866 470,992 588,843 310,813 382,479 Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 27

Employee compensation 96,271 122,818 143,113 82,866 102,604 Interest 85,077 104,441 138,612 78,012 101,494 Subsidies 111,211 134,963 142,993 85,451 98,399 Deficitb 134,460 166,705 185,476 113,138 175,887 Deficit as % of GDP 9.8 10.8 10.7 7.3 10.1 a Revised budget, approved in December 2012. b Including net acquisition of financial assets. Source: Ministry of Finance. The publication of the figures came a few days after the government presented to parliament (currently constituted in the form of the Majlis alShura, the upper house) a budget for 2013/14 that envisages a deficit of 9.6% of GDP—a figure that now appears unrealistic in light of the latest data (at present we are forecasting a shortfall of 10.9% of GDP). The budget for 2013/14 includes a revenue target of E£497.1bn, with total expenditure set at E£692.4bn, leaving a deficit of E£195.3bn. The government said that it has assumed real GDP growth of 3.8% for 2013/14, compared with an estimated 2.5% in the current fiscal year (again, we are more cautious, and instead project growth of 3.4% in 2013/14). Out with the old The operation of the finance ministry will be affected in the new fiscal year by the departure of two senior officials who had served for most of the period of the final Hosni Mubarak-era government (2004-11) and who stayed on after the revolution. As noted by the Economist Intelligence Unit on April 19th, Hany Kadry Dimian has resigned his post as assistant minister, effective from April 30th, and his close aide, Ahmed Kouchouk, will be departing in May. Mr Dimian and Mr Kouchouk led the ministry's team in negotiations with the IMF and the World Bank. Mr Dimian is to be replaced by Abdallah Shehata, an economic policy adviser to the Freedom and Justice Party (FJP), which is the political arm of the Muslim Brotherhood. Mr Shehata had worked for a brief period in the ministry as an adviser before the revolution. One positive development for the government, however, was the news that tax revenue will be boosted before the end of the fiscal year as a result of a settlement with OCI of a claim from the tax authorities with respect to the sale of its building materials business to France's Lafarge in 2007. OCI said that it will pay E£7.1bn in instalments (which will run up to the end of 2017) to settle the claim and accrued interest and fees, although it emphasised that this did not constitute acknowledgement of the validity of the claim. OCI argued that the business that was sold was listed on the Egyptian stockmarket, and that, in accordance with the regulations in force at the time, the sale was exempt from capital gains tax. However, OCI said that it had opted to settle rather than become embroiled in a lengthy and costly legal suit. The company also wants to avoid further delays to its corporate restructuring, which has entailed shifting its main listing to the Netherlands. Although the revenue will no doubt be welcomed by the government, the episode will hardly assist the government's efforts to encourage unregistered companies to declare themselves to the tax authority, as well as further deterring foreign companies from investing in the country.