Country Report

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Country Report

Egypt

April 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 6 International assumptions 6 Economic growth 7 Inflation 7 Exchange rates 7 External sector 8 Forecast summary

Data and charts 9 Annual data and forecast 10 Quarterly data 11 Monthly data 12 Annual trends charts 13 Monthly trends charts 14 Comparative economic indicators

Summary 14 Basic data 16 Political structure

Recent analysis Politics 18 Forecast updates 18 Analysis Economy 24 Forecast updates 31 Analysis

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 2 Highlights Editor: Karin Maree Forecast Closing Date: April 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. New parliamentary elections have been delayed and are now set to begin in October. 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 parliamentary elections are out of the way. However, ongoing social and political unrest, combined with weak economic prospects, poses downside risks. Economic policy will combine a focus on social justice and economic growth. Faced with a large fiscal deficit, the government will be forced to make some progress on increasing taxes and cutting energy subsidies. 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. We expect the current-account deficit to narrow from 2.8% of GDP in 2012 to 2.4% of GDP in 2013, as exports pick up and the services surplus widens. This trend will continue up to 2017 with the deficit averaging 1.2% of GDP. Review Several people were killed in sectarian violence in early April. The Muslim Brotherhood's Freedom and Justice Party condemned the violence, but blamed "dubious parties determined to cause discord". A technical team from the Fund returned for talks in Cairo over a US$4.8bn stand-by credit facility. The government has so far rejected the possibility of emergency funding. The government has introduced changes to customs tariffs aimed at helping to conserve foreign exchange by dampening import demand, and at boosting customs revenue for the budget. The government has increased the price of a 12.5–kg canister of liquefied petroleum gas, known popularly as butagas, by 60% for domestic consumers. It doubled the price for larger canisters. The Central Bank raised interest rates in late March in an effort to tackle rising inflation and support the currency. It followed the move be reintroducing deposit operations seeking to absorb excess liquidity. The current-account deficit narrowed to US$6.9bn in 2012 from US$7.6bn in 2011 on the back of higher remittances and tourism revenue.

Country Report April 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 late 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 on the constitution held in December—an estimated 63.8% of voters cast their ballots in favour, but turnout was just 32.9%, meaning that the document was passed with the backing of only 20.9% of eligible voters. 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. Renewed serious violence since the second anniversary of the January 25th 2011 uprising has further demonstrated the fractured state of Egyptian society and has exposed the failings of key institutions, including the presidency, the judiciary and the forces of law and order. Civil unrest may escalate and sporadic incidents of sectarian violence will continue. Parliamentary elections have been delayed from late April with Mr Morsi stating that they will now go ahead in October. The opposition National Salvation Front (NSF), an umbrella group formed after Mr Morsi's November move to consolidate his powers, had said that it would boycott the elections in protest at the electoral law, which it argues favours the Muslim Brotherhood. With the final form of the legislation now in question and the election delayed, the opposition may yet choose to contest the race. The Economist Intelligence Unit expects the Muslim Brotherhood's Freedom and Justice Party (FJP) to perform well, but it will not match its previous electoral success. Salafi (ultra- conservative Islamist) 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, siding with the NSF in calling for the formation of a government of national unity ahead of the elections, the FJP may enter into 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. The Brotherhood will find itself under greater pressure to adhere more closely to Islamist principles while at the same time facing opposition from secular groups. There is potential for the political situation to improve following elections, but tensions between Islamists and liberals are likely to continue to have a destabilising effect. Although the military has taken a back seat since Mr Morsi took office, it may 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 elections to the House of Representatives (the lower house of parliament), which had been due to begin in late April, will now start in October, with parliament to be sworn in by the end of the year. Given ongoing legal issues, and with the slowdown in activity in the summer months, the timetable appears realistic. The Shura Council, the upper house of parliament and currently the sole legislative authority, in late March preliminarily approved a revised draft electoral law. In parallel, the presidency has appealed a ruling by the Supreme Administrative Court that suspended the elections on the grounds that the original electoral law had not been passed to the Supreme Constitutional Court for a second review. Under the new constitution, a new election to the Shura Council is due to be held within a year of when a new lower house convenes.

Country Report April 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 mid-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 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. Mr Morsi will pay particular attention to relations with potential financial backers. Saudi Arabia and Qatar, have provided the government with substantial financial support. Most recently, Qatar has said it will buy US$3bn of Egyptian bonds. The government has also 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, particularly ahead of the parliamentary elections, of losing further popular support. 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, but overall borrowing under this facility would be limited to 100% of a country's quota, rather than the 300% (or more) available under a stand-by credit facility. 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 April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 5 Fiscal policy The public finances will remain strained and the government will be forced to adopt some consolidation measures. The budget for fiscal year 2012/13 (July 1st-June 30th) had initially envisaged an overall fiscal deficit of 7.6% of GDP. However, as part of negotiations with the IMF for the US$4.8bn stand-by credit facility, the Ministry of Finance revised its deficit target to 10.9% of GDP. The deficit target for 2013/14 has also been revised up to 9% from 8.5%. 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 a range of tax reforms. However, the government has pulled back from these commitments in the face of renewed political instability. The government has made limited progress on reducing fuel subsidies. It liberalised 95-octane petrol prices in November 2012 and increased the price of natural gas and fuel oil supplied to industry in February. In early April it raised the price of liquefied petroleum gas canisters, known popularly as butagas, by 60%, but even at the new price the fuel remains heavily subsidised. Plans to ration subsidised petroleum products have been delayed. The fiscal deficit widened to 8.2% of annualised GDP in the first eight months of 2012/13 (July-February) from 6.1% of annualised GDP for the same period of 2010/11. We expect the deficit to widen to 12.1% of GDP for the full fiscal year. The government will have no choice but to make some progress on its economic reform programme over the remainder of the forecast period, and we expect the deficit to decline to 7.8% of GDP in 2016/17. 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 received substantial assistance from Qatar, which has deposited US$4bn with the Central Bank of Egypt and provided a further US$1bn in grants since August. In April Qatar said it would buy US$3bn of government bonds, contradicting a previous statement that no further assistance was planned in the near future. The government has also sought help from other Arab states. It has requested a US$4bn Central Bank deposit from Iraq, and Libya is to provide a US$2bn loan. The public debt stock will rise to 91.2 % of GDP in 2013/14, before declining gradually to 85.2% of GDP in 2016/17.

Monetary policy Ongoing political and economic uncertainty will continue to provide a challenging backdrop for the Central Bank in its setting of monetary policy in 2013-14. Faced with a weakening currency and rising inflation, the Central Bank raised interest rates in March, for the first time since November 2011. The bank raised the overnight deposit and overnight lending rates by 50 basis points to 9.75% and 10.75%, respectively. The discount rate was increased by 75 basis points to 10.25%. Also in March, the Central Bank reintroduced deposit operations and put repurchase agreement auctions, which were first launched in March 2011, on hold. The move is aimed at absorbing excess liquidity following accelerated money supply expansion. 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 late 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.

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 6 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 -0.1 1.2 1.6 1.5 1.5 World GDP 2.1 2.2 2.9 2.9 2.9 2.9 World trade 2.7 4.0 5.2 5.4 5.5 5.6 Inflation indicators (%) US CPI 2.1 2.2 2.5 2.2 2.3 2.3 EU27 CPI 2.6 2.0 2.0 2.2 2.1 2.2 Manufactures (measured in US$) -0.6 -1.8 1.3 0.8 1.0 1.9 Oil (Brent; US$/b) 112.0 106.6 104.8 107.3 110.0 115.0 Non-oil commodities (measured in US$) -10.8 -1.5 -0.1 -0.8 3.5 2.4 Financial variables US$ 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 1.33 1.31 1.27 1.26 1.26

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, macroeconomic 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. 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. Government consumption will continue to be supported by high current spending, providing some support to private demand. Investment remains low and is unlikely to pick up until after a loan agreement is concluded with the IMF. Investment growth will be supported in the medium term as delayed projects get under way.

Economic growtha % 2012b 2013c 2014c 2015c 2016c 2017c GDP 2.2 2.0 3.5 4.3 5.0 4.8 Private consumption 5.9 2.3 3.4 3.9 4.6 5.0 Government consumption 3.1 2.6 2.8 3.0 2.9 2.7 Gross fixed investment 0.7 -4.9 5.1 6.6 5.4 7.2 Exports of goods & services -2.3 2.1 5.9 8.3 10.9 9.9 Imports of goods & services 10.8 -6.7 5.2 7.1 8.8 10.2 Domestic demand 6.0 -0.8 3.4 4.2 4.5 5.1 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 0.4 1.5 3.5 5.1 4.6 a Fiscal year data ending June 30th. b Actual. c Economist Intelligence Unit forecasts. d Economist Intelligence Unit estimates.

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 7 Inflation Inflation rose to 8.3% in February from 6.3% in January, recording the sharpest month-on-month rise since September 2010. The Central Bank attributed the rise to higher food and non-food price increases resulting from the depreciating exchange rate and bottlenecks in diesel distribution across the country. Foreign-exchange reserves (excluding gold and special drawing rights) fell to just US$8.8bn at end-February, 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. The government has also cut back wheat imports sharply as a result of foreign-exchange constraints and in expectation of an above-average domestic harvest. There is concern however that the government's estimate of the domestic harvest may be exaggerated. In addition, existing wheat stocks are low, having fallen to 2.2m tonnes in- March. This is sufficient to cover only three months of consumption, about half the period usually covered by stocks. The inflationary impact of a wheat shortage would be disguised by subsidies on bread, however. We expect inflation to average 9.8% in 2013, rising 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.

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 early February the Central Bank intervened again to slow the pace of depreciation, reducing the frequency of auctions. It has also cut the cap on interbank currency trades to a margin of 1 piastre above or below the weighted average rate in the most recent auction. Despite these measures, the pound has continued its slide, losing around 10% of its value between late December and late March. The parallel rate has also continued to weaken. 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. Foreign reserves fell to a new low of US$13.4bn at end-March. 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$38.5bn in 2017 and import costs to US$74.1bn. 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 1.2% of GDP in 2013-17.

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 8 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 -12.1 -11.0 -9.8 -8.6 -7.8 Exports of goods fob (US$ bn) 26.8 27.9 29.6 32.0 35.0 38.5 Imports of goods fob (US$ bn) 59.7 60.5 62.8 66.0 70.3 74.1 Current-account balance (US$ bn) -6.9 -6.3 -4.8 -3.9 -3.2 -1.4 Current-account balance (% of GDP)e -2.8 -2.4 -1.6 -1.1 -0.8 -0.3 External debt (end-period; US$ bn) 38.9c 42.5 47.6 50.0 51.7 51.8 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 7.55 7.60 7.37 7.12 6.85 Exchange rate E£:€ (av) 7.79 9.41 9.50 9.00 8.74 8.35 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 April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 9 Data and charts Annual data and forecast

2008a 2009a 2010a 2011a 2012a 2013b 2014b GDPc Nominal GDP (US$ bn) 164.8 188.0 214.4 231.0 254.4 245.0 276.6 Nominal GDP (E£ bn) 896 1,042 1,207 1,371 1,542 1,739 2,003 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 3.4 Government consumption 2.1 5.6 4.5 3.8 3.1 2.6 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 2.1 5.9 Imports of goods & services 26.3 -17.9 -3.2 8.4 10.8 -6.7 5.2 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 0.4 1.5 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 6,418d 6,544 6,778 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 18.7 17.3 Central government expenditure 31.5 33.7 30.3 29.3 30.5 30.8 28.3 Central government balance -6.8 -6.6 -8.1 -10.0 -10.9 -12.1 -11.0 Central government debt 86.3 83.7 82.2 84.3 88.0 91.0 91.2 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 9.41 9.50 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 14.9 10.6 Stock of money M2 (% change) 10.5 9.5 12.4 6.7 12.3 11.8 7.8 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 -32,601 -33,268 Goods: exports fob 29,849 23,089 25,024 27,913 26,835 27,943 29,558 Goods: imports fob -56,623 -45,564 -52,698 -56,132 -59,724 -60,544 -62,826 Services balance 14,312 13,242 15,482 11,732 12,690 13,683 14,567 Income balance 1,373 -1,922 -5,843 -6,315 -6,510 -6,037 -4,439 Current transfers balance 9,758 7,960 12,439 15,221 19,791 18,654 18,381 Current-account balance -1,331 -3,195 -5,596 -7,581 -6,918 -6,301 -4,759 External debt (US$ m) Debt stock 33,509 34,970 36,427 35,001 38,919d 42,501 47,569 Debt service paide 3,235 2,937 2,987 3,502 3,117d 3,423 3,495 Interest 916 884 864 877 503d 613 752 International reserves (US$ m) Total international reserves 33,849 33,933 35,792 17,659 14,931 16,104 18,496 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 April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 10 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) 349.3 379.3 402.1 383.4 369.5 394.7 412.4 391.8 Real GDP (% change, year on year) -2.3 1.6 1.1 1.6 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, NY close. Sources: International Energy Agency, Oil Market Report; IMF, International Financial Statistics; Oil Market Intelligence; Bloomberg; New York Times.

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 11 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 n/a 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 n/a 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 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 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 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 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 5,822 5,696 4,808 5,462 2013 5,607 5,489 5,099 n/a 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 n/a 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 -0.4 2013 -0.4 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 n/a 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 April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 12 Annual trends charts

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 13 Monthly trends charts

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 14 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 April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 15 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 hxours 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)

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 16

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 Parliamentary elections were held between November 2011 and February 2012. The lower house was dissolved in June 2012, however. New elections were due to begin in late April 2013, but will be delayed. 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 April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 17 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: Salah Abdel Momen Civil aviation: Wael el-Maadawy Communication: Atef Helmy Defence: Abdel Fattah el-Sisi Education: Ibrahim Deif Electricity: Ahmed Imam Finance: El-Morsi el-Sayed Hegazy Foreign affairs: Mohammed Kamel Amr Health: Mohammed Hamed Higher education: Mostafa Mesaid Housing: Tareq Wafiq Information: Metwaly Abdel Maqsoud Investment: Osama Saleh Interior: Mohammed Ibrahim Irrigation & water resources: Mohammed Bahaeddin Justice: Ahmed Mekky Local development: Mohammed Ali Beshr Manpower & emigration: Khaled al-Azhari Petroleum & mineral wealth: Osama Kamal Planning & International co-operation: Ashraf el-Araby Supply & internal trade: Bassem Ouda Social affairs & insurance: Nagwa Khalil 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 April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 18 Recent analysis

Generated on April 12th 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 March 27, 2013: Election watch Shura Council approves new draft of electoral law Event The Shura Council, the upper house of parliament and currently the sole legislative authority, has given its preliminary approval to a revised draft of legislation that is to govern the election of a new House of Representatives (lower house) later this year. Analysis The Shura Council passed an earlier version of the legislation—comprising amendments to two existing laws—in February, which prompted the president, Mohammed Morsi, to set dates for the election over eight weeks starting in late April. However, the legislation was challenged by an administrative court on the grounds that it had not been properly reviewed by the Supreme Constitutional Court (SCC), and Mr Morsi suspended the election. The government has lodged an appeal against the court challenge. Meanwhile, on March 26th the Shura Council gave its approval in principle to a new version of the election legislation. It will be open to further debate by the upper house in the first week of April. The Muslim Brotherhood- affiliated Freedom and Justice Party (FJP), which is the largest bloc in the upper house, has said that the revised law will be passed to the SCC for review. One of the critical issues raised by the SCC in its initial review of the earlier legislation was the need to make changes in electoral districts in order to take into account changes in the size of the population. Few details of the proposed changes have been made public. However, Rami Lakah, an appointed member of the upper house (and a prominent Coptic Christian businessman), criticised the changes for dividing districts on sectarian criteria and for using the number of registered voters rather than overall population as the basis for the new electoral boundaries. Mr Morsi was quoted in Doha, Qatar, where he was attending an Arab summit, as telling Egyptian expatriates in the Gulf state that the election was now likely to go ahead in October, and that the new parliament would be sworn in by the end of the year. Given the pending legal issues and the slowdown in activity during Ramadan (which starts in July) and over the summer holidays, this appears to be a realistic timetable. Impact on the forecast The Shura Council's move to push ahead with a new draft law rather than wait for the SCC's ruling on the original legislation will lead to further political uncertainty and legal wrangling. We will amend our forecast to include an election at the end of the year.

Analysis March 27, 2013 Global democracy at a standstill Global democracy has neither advanced nor retreated substantially in the past year, according to The Economist Intelligence Unit's 2012 democracy index, which was published on March 20th. Among the findings of our latest index, now in its fifth edition, are that democratisation prospects in the Arab world remain highly uncertain; that democracy has regressed in much of eastern Europe; and that there is a crisis in popular confidence in politics in

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 19 the West. In short: it is not easy to build a sturdy democracy, and even long-established democracies are vulnerable to corrosion if not nurtured and protected. The index provides a snapshot of the state of democracy worldwide for 165 independent states and two territories. As the index only excludes micro states, this covers the vast majority of the world's population. In 2012 the picture was broadly one of stabilisation after a tumultuous couple of years that in different ways both improved prospects for democracy and renewed threats to it. The political upheavals in the Arab world generated optimism that has only partly—and imperfectly—been fulfilled. At the same time the fallout from the global financial crisis that began in 2008, and from the subsequent debt crisis in the euro zone, continues to have a negative impact on politics in supposedly stable democracies in the rich world. Slightly less than one-half of the world's population lives in a democracy of some sort, although only 11% reside in what we consider "full" democracies. Moreover, some 2.6bn people, more than one-third of the world, still live under authoritarian rule (with a large share being in China). The index uses a scoring system as the basis for its definitions of relative degrees of democracy. Our analysts assign each country scores in five categories: political process and pluralism; civil liberties; the functioning of government; political participation; and political culture. We then combine these scores to generate an overall score, which places each country within one of four types of regime. Those with the highest scores (8 and above on a scale of 0 to 10) constitute "full democracies". Next are "flawed democracies" (6 to 7.99), followed by "hybrid regimes" (4 to 5.99) with elements of both democracy and authoritarianism, and finally "authoritarian regimes" (below 4). Several steps forward… Encouragingly, the global average score improved slightly in 2012, to 5.52 from 5.49 the previous year. Individual scores improved in 54 countries, and in six of these there was a change in regime type. Perhaps most notable were developments in the Arab world. Although hopes for widespread and durable democratisation in the region still look premature, democracy scores in the Middle East and North Africa have improved on average. Tunisia, which saw its score leap in 2011 after the ousting of its autocratic president, Zine el-Abidine Ben Ali, enjoyed a further slight increase in its score last year. Egypt's score rose sharply, allowing it to cross the threshold from authoritarian state to hybrid regime. However, the story of the year was Libya, which made dramatic progress for a second year in a row and in 2012 saw the biggest rise in its score of any country. Like Egypt, Libya moved out of the authoritarian category to become classified as a hybrid regime. One of the reasons for the improvement in the country's score was the successful holding of its first free and fair elections for an interim parliament in July 2012. Notable improvements in democracy scores also occurred in Georgia, Senegal, Myanmar, Yemen and Hong Kong, among others, in 2012. In Georgia, the general election in October marked an important step on the path towards democracy. This was the first time since independence in 1991 that a handover of power had occurred that was accepted by all major players—even if the resulting realignment has stoked political tensions by imposing uneasy cohabitation on the president and parliament. Elsewhere, Senegal's move from hybrid regime to flawed democracy reflects the country's smooth transfer of power in 2012, following a presidential election in which the loser (unusually for Sub-Saharan Africa) accepted the result. The rise in Myanmar's democracy score is testament to significant progress on political liberalisation, which included the election to parliament last year of the pro-democracy leader, Aung San Suu Kyi—a development that would have been unthinkable until recently. That said, Myanmar's improvement has occurred from a low base and the country has much more to do to move out of the authoritarian category. In particular, political pluralism continues to be compromised by the fact that one-quarter of parliamentary seats are reserved for the military. … and backward For all the progress on some fronts, 2012 was by no means an unqualified success for democracy. Scores declined in 40 countries, and in four of these (Burundi, Mali, Haiti and Sri Lanka) there was a regression to a less democratic regime type. Mali recorded the biggest decline in score of any country, following a coup and the takeover by Tuareg and jihadi Islamist rebels of the northern half of the country. This ultimately necessitated French-led military intervention in January 2013. For Sri Lanka, we have downgraded the country's democracy score to reflect the concentration of power around the president, Mahinda Rajapaksa, and continued threats to free speech and political dissent. We now classify Sri Lanka as a hybrid regime. Beyond the changes in individual country scores, a number of themes give cause for concern about the state of democracy. One is that of regression in response to popular protests in the Middle East—most notably in Syria, where the civil war has intensified, causing further massive loss of life, but also for example in Bahrain. In retrospect, it can be said that many of the hopes for democratic transformation as a result of the Arab revolutions were overambitious. It is also worth noting that even in countries where there has been positive progress—such as Libya,

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 20 Egypt and Tunisia—the transition to more democratic rule has been fraught with difficulty. This underlines our broader view that the transition to fully-fledged consolidated democracies depends on more than just holding elections; it also requires the development of a range of supportive institutions and attitudes. Such a transformation takes a very long time. Another area of concern is the fall in democracy scores in eastern Europe. No fewer than ten countries in the region recorded lower scores in the 2012 index compared with 2011. Had it not been for the significant improvement in Georgia's score, the average score for the region would have declined. Democracy remains weakest among members of the Commonwealth of Independent States such as Russia, Kazakhstan and Belarus. However, in recent years we have also seen democracy being eroded in eastcentral Europe—even among EU members such as Hungary. Although democratic forms are superficially in place in much of east-central Europe, the substance of a democracy is often absent. People have little trust in the political system, and a large number of voters feel disenfranchised. Again, this underscores the importance of conceiving of democracy in a more than minimalist sense, and allowing for the fact that democracy depends on a wide range of factors that include the presence of a vibrant political culture, the rule of law and robust public institutions. Nor is the phenomenon of declining confidence in democracy confined to young democracies in emerging markets. One of the most worrying trends in the past few years has been the decline in the status of politics in the established democracies of the West. Political participation has fallen, and voters have become disillusioned with public institutions. In the UK, trust in government, parliament and politics is at an all-time low, and the country's political participation score is among the worst in the developed world. In Europe more broadly, the effects of the Great Recession of 2008-09 and the ongoing debt crisis in the euro zone have been significant. The temporary installation in Greece and Italy of unelected technocratic leaders, by definition, eroded democracy in those countries while also damaging public confidence in the political system. The centralisation of policy—with the response to the euro crisis being directed by the troika of the EU, the European Central Bank and the IMF—also implies a loss of sovereignty for individual countries. Democracy as a value retains strong universal appeal worldwide, nonetheless. Globalisation, the rise of the Internet and the brave examples of the Arab protests of the past two years will continue to inspire people to wish for democracy. But challenges remain. If there is one lesson from the 2012 democracy index, it is that democracy can be fragile and that establishing and sustaining it require persistence and vigilance.

Democracy index, 2012 Overall I. Electoral process and II. Functioning of III. Political IV. Political V. Civil Rank score pluralism government participation culture liberties Full democracies Norway 1 9.93 10.00 9.64 10.00 10.00 10.00 Sweden 2 9.73 9.58 9.64 9.44 10.00 10.00 Iceland 3 9.65 10.00 9.64 8.89 10.00 9.71 Denmark 4 9.52 10.00 9.64 8.89 9.38 9.71 New Zealand 5 9.26 10.00 9.29 8.89 8.13 10.00 Australia 6 9.22 10.00 8.93 7.78 9.38 10.00 Switzerland 7 9.09 9.58 9.29 7.78 9.38 9.41 Canada 8 9.08 9.58 9.29 7.78 8.75 10.00 Finland 9 9.06 10.00 9.64 7.22 8.75 9.71 Netherlands 10 8.99 9.58 8.93 8.89 8.13 9.41 Luxembourg 11 8.88 10.00 9.29 6.67 8.75 9.71 Austria 12 8.62 9.58 8.21 7.78 8.13 9.41 Ireland 13 8.56 9.58 7.86 7.22 8.13 10.00 Germany 14 8.34 9.58 8.21 6.67 8.13 9.12 Malta 15 8.28 9.17 8.21 5.56 8.75 9.71 United Kingdom 16 8.21 9.58 7.50 6.11 8.75 9.12 Czech Republic 17 8.19 9.58 7.14 6.67 8.13 9.41 Uruguay =18 8.17 10.00 8.93 4.44 7.50 10.00 Mauritius =18 8.17 9.17 8.21 5.00 8.75 9.71 South Korea 20 8.13 9.17 8.21 7.22 7.50 8.53

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 21 United States of 21 8.11 9.17 7.50 7.22 8.13 8.53 America Costa Rica 22 8.10 9.58 8.21 6.11 6.88 9.71 Japan 23 8.08 9.17 8.21 6.11 7.50 9.41 Belgium 24 8.05 9.58 8.21 5.56 7.50 9.41 Spain 25 8.02 9.58 7.50 6.11 7.50 9.41 Flawed democracies Cape Verde =26 7.92 9.17 7.86 7.22 6.25 9.12 Portugal =26 7.92 9.58 6.43 6.67 7.50 9.41 France =28 7.88 9.58 7.14 6.67 7.50 8.53 Slovenia =28 7.88 9.58 7.50 7.22 6.25 8.82 Botswana 30 7.85 9.17 7.14 6.67 6.88 9.41 South Africa 31 7.79 8.75 8.21 7.22 6.25 8.53 Italy 32 7.74 9.58 6.43 6.67 7.50 8.53 Greece 33 7.65 9.58 5.71 6.67 6.88 9.41 Estonia 34 7.61 9.58 7.14 5.00 7.50 8.82 Taiwan 35 7.57 9.58 7.14 6.11 5.63 9.41 Chile 36 7.54 9.58 8.57 3.89 6.25 9.41 Israel 37 7.53 8.75 7.50 8.33 7.50 5.59 India 38 7.52 9.58 7.50 6.11 5.00 9.41 Jamaica 39 7.39 9.17 6.79 5.00 6.88 9.12 Slovakia 40 7.35 9.58 7.50 5.56 5.00 9.12 Cyprus 41 7.29 9.17 6.43 6.11 5.63 9.12 Lithuania 42 7.24 9.58 5.71 5.56 6.25 9.12 Timor-Leste 43 7.16 8.67 6.79 5.56 6.88 7.94 Poland =44 7.12 9.58 6.43 6.11 4.38 9.12 Brazil =44 7.12 9.58 7.50 5.00 4.38 9.12 Panama 46 7.08 9.58 6.43 5.56 5.00 8.82 Latvia 47 7.05 9.58 5.36 5.56 5.63 9.12 Trinidad and Tobago 48 6.99 9.58 7.14 5.00 5.00 8.24 Hungary 49 6.96 9.17 6.07 4.44 6.88 8.24 Croatia 50 6.93 9.17 6.07 5.56 5.63 8.24 Mexico 51 6.90 8.33 7.14 6.67 5.00 7.35 Argentina 52 6.84 8.75 5.71 5.56 6.25 7.94 Indonesia 53 6.76 6.92 7.50 6.11 5.63 7.65 Bulgaria 54 6.72 9.17 5.71 6.11 4.38 8.24 Lesotho 55 6.66 8.25 5.71 6.67 5.63 7.06 Suriname 56 6.65 9.17 6.43 4.44 5.00 8.24 Colombia 57 6.63 9.17 7.50 3.89 3.75 8.82 Thailand 58 6.55 7.83 6.07 5.56 6.25 7.06 Romania 59 6.54 9.58 6.07 4.44 4.38 8.24 Dominican Republic 60 6.49 8.75 5.36 4.44 6.25 7.65 El Salvador =61 6.47 9.17 6.07 3.89 5.00 8.24 Peru =61 6.47 9.17 5.00 5.56 4.38 8.24 Hong Kong 63 6.42 4.75 6.07 5.00 6.88 9.41 Malaysia 64 6.41 6.50 7.86 5.56 6.25 5.88 Mongolia 65 6.35 8.33 5.71 4.44 5.00 8.24 Serbia 66 6.33 9.17 4.64 6.11 4.38 7.35 Moldova =67 6.32 8.75 5.00 5.56 4.38 7.94 Papua New Guinea =67 6.32 7.33 6.43 3.33 6.25 8.24

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 22 Philippines 69 6.30 8.33 5.36 5.56 3.13 9.12 Zambia =70 6.26 7.92 5.36 4.44 6.25 7.35 Paraguay =70 6.26 8.33 5.36 5.00 4.38 8.24 Namibia 72 6.24 5.67 5.00 6.67 5.63 8.24 Macedonia 73 6.16 7.75 4.64 6.11 4.38 7.94 Senegal 74 6.09 7.92 5.71 4.44 5.63 6.76 Malawi 75 6.08 7.00 5.71 5.56 6.25 5.88 Montenegro =76 6.05 7.92 5.36 5.56 4.38 7.06 Guyana =76 6.05 7.92 5.36 5.56 4.38 7.06 Ghana 78 6.02 8.33 5.00 5.00 5.00 6.76 Benin 79 6.00 7.33 6.43 4.44 5.63 6.18 Hybrid regimes Ukraine 80 5.91 7.92 4.64 5.56 4.38 7.06 Guatemala =81 5.88 7.92 6.43 3.33 4.38 7.35 Singapore =81 5.88 4.33 7.50 3.33 6.88 7.35 Tanzania =81 5.88 7.42 4.64 6.11 5.63 5.59 Bangladesh 84 5.86 7.42 5.43 5.00 4.38 7.06 Bolivia =85 5.84 7.00 5.00 6.11 3.75 7.35 Honduras =85 5.84 8.75 5.71 3.89 4.38 6.47 Ecuador 87 5.78 7.83 4.64 5.00 4.38 7.06 Turkey 88 5.76 7.92 6.79 5.00 5.00 4.12 Sri Lanka 89 5.75 6.17 5.36 4.44 6.88 5.88 Tunisia =90 5.67 5.75 5.00 6.67 6.25 4.71 Albania =90 5.67 7.00 4.00 5.00 5.00 7.35 Nicaragua 92 5.56 6.58 4.36 3.89 5.63 7.35 Georgia 93 5.53 8.25 3.21 5.00 5.00 6.18 Uganda 94 5.16 5.67 3.57 4.44 6.25 5.88 Libya =95 5.15 4.33 5.71 3.89 6.25 5.59 Venezuela =95 5.15 5.67 4.29 5.56 4.38 5.88 Mali 97 5.12 7.42 3.57 5.00 3.13 6.47 Bosnia and 98 5.11 6.92 2.93 3.33 5.00 7.35 Hercegovina Lebanon 99 5.05 5.67 1.79 7.22 5.00 5.59 Cambodia 100 4.96 5.67 6.07 3.33 5.63 4.12 Liberia 101 4.95 7.83 0.79 5.56 5.00 5.59 Mozambique 102 4.88 4.83 4.29 5.56 5.63 4.12 Palestine 103 4.80 5.17 2.86 7.78 4.38 3.82 Kenya =104 4.71 3.92 4.29 4.44 5.63 5.29 Sierra Leone =104 4.71 7.00 2.21 2.78 6.25 5.29 Kyrgyz Republic 106 4.69 6.58 2.21 5.00 4.38 5.29 Bhutan 107 4.65 6.67 5.36 3.33 4.38 3.53 Pakistan 108 4.57 5.58 5.36 2.22 4.38 5.29 Egypt 109 4.56 3.42 4.64 5.00 5.63 4.12 Mauritania 110 4.17 3.42 4.29 5.00 3.13 5.00 Nepal =111 4.16 2.67 4.29 3.89 4.38 5.59 Niger =111 4.16 7.50 1.14 2.78 4.38 5.00 Iraq 113 4.10 4.33 0.79 7.22 3.75 4.41 Armenia 114 4.09 4.33 3.21 3.89 3.13 5.88 Morocco 115 4.07 3.50 4.64 2.78 5.00 4.41 Authoritarian regimes

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 23 Haiti 116 3.96 5.17 2.21 2.22 3.75 6.47 Madagascar 117 3.93 2.17 2.14 5.00 5.63 4.71 Algeria 118 3.83 3.00 2.21 3.89 5.63 4.41 Kuwait 119 3.78 3.17 3.93 3.89 4.38 3.53 Nigeria 120 3.77 5.67 3.21 3.33 3.13 3.53 Jordan 121 3.76 3.17 3.93 4.44 3.75 3.53 Russia 122 3.74 3.92 2.86 5.00 2.50 4.41 Ethiopia 123 3.72 0.00 3.57 5.00 5.63 4.41 Fiji 124 3.67 0.42 2.86 3.89 5.00 6.18 Burundi 125 3.60 3.00 2.57 3.89 5.00 3.53 Gabon 126 3.56 2.58 2.21 3.89 5.00 4.12 Burkina Faso =127 3.52 4.00 3.21 2.22 3.75 4.41 Cuba =127 3.52 1.75 4.64 3.89 4.38 2.94 Comoros =127 3.52 3.92 2.21 3.89 3.75 3.82 Togo 130 3.45 4.00 0.79 3.33 5.00 4.12 Cameroon 131 3.44 0.75 4.29 3.33 5.00 3.82 Rwanda 132 3.36 0.83 4.64 2.22 5.00 4.12 Angola 133 3.35 0.92 3.21 5.00 4.38 3.24 Gambia 134 3.31 2.17 3.93 2.22 5.00 3.24 Oman 135 3.26 0.00 3.93 3.89 4.38 4.12 Côte d'Ivoire 136 3.25 0.00 1.79 5.00 5.63 3.82 Swaziland 137 3.20 0.92 2.86 2.78 5.63 3.82 Qatar 138 3.18 0.00 3.93 2.22 5.63 4.12 Azerbaijan 139 3.15 2.17 1.79 3.33 3.75 4.71 Yemen 140 3.12 3.00 1.43 5.00 5.00 1.18 Belarus 141 3.04 1.75 2.86 3.89 4.38 2.35 China 142 3.00 0.00 4.64 3.89 5.00 1.47 Kazakhstan 143 2.95 0.50 2.14 3.33 4.38 4.41 Vietnam =144 2.89 0.00 3.93 2.78 6.25 1.47 Congo (Brazzaville) =144 2.89 1.25 2.86 3.33 3.75 3.24 Guinea 146 2.79 3.50 0.43 3.33 3.75 2.94 Djibouti 147 2.74 0.83 1.79 2.22 5.63 3.24 Zimbabwe 148 2.67 0.50 1.29 3.33 5.00 3.24 United Arab Emirates 149 2.58 0.00 3.57 1.11 5.00 3.24 Bahrain 150 2.53 1.25 2.50 2.78 4.38 1.76 Tajikistan 151 2.51 1.83 0.79 2.22 6.25 1.47 Afghanistan 152 2.48 2.50 0.79 2.78 2.50 3.82 Eritrea 153 2.40 0.00 2.86 1.11 6.88 1.18 Sudan 154 2.38 0.00 1.79 3.33 5.00 1.76 Myanmar 155 2.35 1.50 1.79 1.67 5.63 1.18 Laos 156 2.32 0.00 3.21 2.22 5.00 1.18 Central African 157 1.99 1.75 1.07 1.67 2.50 2.94 Republic Iran 158 1.98 0.00 2.86 2.78 2.50 1.76 Democratic Republic 159 1.92 1.75 0.71 2.22 3.13 1.76 of Congo Equatorial Guinea 160 1.83 0.00 0.79 2.22 4.38 1.76 Uzbekistan =161 1.72 0.08 0.79 2.78 4.38 0.59 Turkmenistan =161 1.72 0.00 0.79 2.22 5.00 0.59 Saudi Arabia 163 1.71 0.00 2.86 1.11 3.13 1.47

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 24 Syria 164 1.63 0.00 0.36 2.78 5.00 0.00 Chad 165 1.62 0.00 0.00 1.11 3.75 3.24 Guinea-Bissau 166 1.43 0.42 0.00 2.22 1.88 2.65 North Korea 167 1.08 0.00 2.50 1.67 1.25 0.00 Source: The Economist Intelligence Unit.

Economy Forecast updates March 11, 2013: Policy trends Qatar says no more money as IMF deal looks precarious Event The Qatari finance minister, Youssef Kamal, has told Reuters that his country will not provide Egypt with any more funding in the near future. Analysis Qatar has provided Egypt with US$4bn in deposits with the Central Bank of Egypt and a further US$1bn in grants since August 2012. It had also said that it would buy US$2.5bn of government bonds. Although the assistance from the Gulf state has enabled the government to continue to make scheduled foreign debt repayments, it has not prevented the country's foreign reserves from falling further. At end-February reserves were down to just US$13.5bn (less than three months' import cover) from US$36bn at end-December 2010. Qatari support may also have acted as an additional disincentive for the government to push ahead with politically difficult economic reforms, including fuel subsidy cuts and tax increases, which underpinned an initial agreement for a US$4.8bn stand-by credit facility from the IMF. The Fund is reported to be disappointed with a watered-down economic programme that the government submitted after pulling back from previously agreed reforms, throwing the stand-by credit facility into doubt. A delay to parliamentary elections, which had been due to start in late April, has further complicated the situation. Without the IMF facility, which would unlock a further US$9.5bn in funds from the World Bank, the EU, the US and Gulf Arab states, Egypt faces the prospect of default. Despite this, the planning minister, Ashraf el-Araby, has insisted that the government is not considering emergency IMF funding in the form of a bridging loan. He said that only "broad structural measures" could address the budget deficit and the government was not seeking "quick fixes" from the IMF. With Qatar distancing itself, the government may turn to other potential partners such as China for help. The first state visit of the Egyptian president, Mohammed Morsi, outside of the Middle East and Africa took him to China in August 2012. Furthermore, in early March Al Ahram, a state-owned newspaper, reported that Iraq was planning to deposit at least US$2bn with the Central Bank. Meanwhile, the ongoing depreciation of the pound has pushed the cost of imports upwards, leading to another sharp rise in consumer prices in February. Urban inflation increased by 8.2% year on year, up from 6.3% in January. Food and beverages prices, which account for 39.9% of the consumer price index, were up by 9.3% year on year. Impact on the forecast We will revise our forecast to indicate that, assuming the IMF loan is concluded, it will begin to be disbursed in late 2013 with the remainder of the funds coming in in 2014.

March 15, 2013: External sector Balance of payments deficit narrowed to US$3.8bn in 2012 Event The balance-of-payments deficit narrowed to US$3.8bn in 2012 from US$18.3bn in 2011, bringing the total deficit over the two years to US$22.2bn, new data from the Central Bank of Egypt show. Analysis The improvement in Egypt's external balance resulted from a US$15.2bn year-on-year recovery in the financial account, which was supported in the second half of 2012 by US$4bn in Central Bank deposits from Qatar. In addition, Egypt recorded net foreign direct investment (FDI) inflows of US$2.8bn in 2012, compared with outflows of US$483m in 2011. However, FDI fell to just US$301m in the second half of the year from US$2.5bn in the first half, owing to ongoing political uncertainty. Inward portfolio investment again recorded a net outflow for 2012, but the rate of divestment has slowed gradually as foreigners' sales of Treasury bills have declined. As a result, portfolio investment in Egypt turned positive in the final quarter of 2012 for the first time since the third quarter of 2010. The trade deficit widened to US$32.9bn from US$28.2bn owing to a 3.9% decline in export revenue and a 6.4% rise in import costs. The latter was driven by a 24% increase in petroleum imports owing to domestic fuel shortages and higher international oil prices. Despite this, the current-account deficit narrowed by US$662m year on year as the services surplus grew to US$12.7bn from US$11.7bn in 2011. Tourism revenue rose by 14.2%, while Suez Canal receipts fell by 1.4% year on year. The transfers surplus, which has provided significant support to the current account since the 2011 revolution, widened to US$19.8bn in 2012 from US$15.2bn in 2011. However, quarterly data show that net private transfers (largely remittances from Egyptians abroad) peaked at US$5bn in the second quarter of 2012, falling to US$4.3bn in the final quarter. Official transfers fell to US$739m in 2012 from US$1.1bn in 2011. The cumulative US$22.2bn balance-of-payments deficit for 2011-12 has been mirrored by a decline in foreign reserves from US$36bn at end-December 2010 to US$15bn at end-December 2012. Reserves have continued to fall since, reaching US$13.5bn (less than three months' import cover) at end-February 2013. Impact on the forecast We will maintain our forecast of a further narrowing of the current-account deficit in 2013 as export revenue picks up, import growth remains subdued and the services balance strengthens. The transfers surplus will narrow as remittances from Egyptians living abroad stabilise.

March 19, 2013: Policy trends IMF gears up for another round of discussions Event The IMF has signalled its willingness to start a fresh round of discussions with the Egyptian government about a stand-by credit arrangement (SBA), following a visit to Cairo on March 16th-17th by Masood Ahmed, the director of the Fund's Middle East and Central Asia Department. Analysis Mr Ahmed's visit came after the government rejected suggestions that it take out a rapid financing instrument from the IMF, which, unlike an SBA does not require prior approval of a medium-term economic programme, but which limits the overall borrowing to 100% of a country's quota, rather than the 300% (or more) available under an SBA. Mr Ahmed held meetings with Hisham Qandil, the prime minister; Hisham Ramez, the governor of the Central Bank of Egypt; El-Morsi el-Sayed Hegazy, the finance minister; and Ashraf el-Araby, the planning and international co- operation minister. He issued a carefully worded statement acknowledging the government's determination to continue with its efforts to elaborate an effective strategy for dealing with the economic and financial challenges that it faces "in a socially balanced manner". He said that discussions would continue "diligently" over the coming weeks with the aim of reaching a possible agreement on financial support from the IMF. Mr Ahmed's use of the term "socially balanced" appears to respond to the concerns expressed by the government that the measures agreed as part of an earlier accord with the IMF would impose too heavy a burden on Egyptian society. The government has proposed alternative measures involving less challenging fiscal targets. The IMF received these proposals at the end of February, but did not take any immediate steps to send a technical team to Cairo for detailed discussions. Mr Ahmed avoided specifying the nature of the financial support that the IMF might provide. He also made no reference to the political context, as the status of the current government is uncertain, with a general election planned to take place over the next few months, subject to the resolution of a dispute over the legal status of the electoral law. Impact on the forecast For the time being we will maintain our forecast that Egypt will receive some funding from the IMF later in 2013. However, we may reduce the value of this funding for this year to reflect further delays to the disbursement of the SBA or the conclusion of a rapid financing instrument instead.

March 21, 2013: Inflation Government expects good wheat harvest Event The government has cut back wheat imports sharply as a result of foreign-exchange constraints and in expectation of the domestic harvest being well above average. Analysis The US Department of Agriculture (USDA) has revised its forecast for Egyptian wheat imports in the current fiscal year (July 2012-June 2013) to 8.5m tonnes from a previous 9.5m tonnes. The USDA has left its forecast for Egyptian production unchanged at 8.5m tonnes, but the government is expecting a harvest of 9.5m tonnes, according to officials quoted by the Financial Times.

Egyptian wheat (m tonnes/year; fiscal years July-June) 2008/09 2009/10 2010/11 2011/12 12/13a 12/13b Production 8.0 8.5 7.2 8.4 8.5 8.5 Consumption 17.2 18.1 17.7 18.6 18.9 18.4 Imports 9.9 10.5 10.6 11.7 9.5 8.5 Ending stocks 4.9 5.6 5.5 6.7 5.6 5.1 a February forecast. b March forecast. Source: USDA. Wheat stocks have fallen to 2.2m tonnes, according to a cabinet report issued in mid-March. This is sufficient to cover only three months of consumption, about half the period that is usually covered by stocks. The first supplies of domestic wheat from this season's harvest will become available from March. The government has already agreed to buy 4.2m tonnes from local farmers at a price of US$395/tonne (payable in Egyptian pounds), which compares with international prices that currently range from about US$300 to US$350, depending on the type of wheat. The government's optimistic forecasts for the harvest are borne out by local media reports from farmers about the state of the crop and the weather conditions during the growing period. However, there is concern that the chronic shortages of diesel, used to fuel farm machinery, could have an adverse impact on the harvest. The government is planning to make the whole system of food and fuel provision more efficient and financially sustainable by reforming subsidies. Bakeries are now being charged a higher price for flour, on which they can claim rebates related to the amount of subsidised bread that they sell. This replaces the system of providing flour at heavily subsidised prices, enabling bakers to profit from selling part of their allocation on the black market. Another scheme under consideration is to impose a ration of three subsidised loaves of bread per person per day as a means to reduce waste—subsidised bread is commonly used to feed livestock. However, such a move is likely to spark renewed social unrest. If the harvest is as large as the government expects, wheat supplies could be sufficient to meet demand for the rest of the year. However, if the harvest falls short of expectations, the government will need to boost wheat imports. With foreign exchange already in short supply, this may prove difficult. Impact on the forecast We will maintain our inflation and current-account forecasts, but may adjust these as the outcome of the harvest becomes clearer.

March 22, 2013: Monetary policy outlook Central Bank raises rates Event The Central Bank of Egypt raised the overnight deposit and overnight lending rates by 50 basis points to 9.75% and 10.75%, respectively, on March 21st. The repo (repurchase) rate was also increased by 50 basis points to 10.25% and the discount rate was increased by 75 basis points to 10.25%. Analysis The rate increase is the first since November 2011 and reflects a decision by the Central Bank to prioritise curbing rising inflation and shoring up the weakening Egyptian pound despite poor economic growth. Annual urban inflation rose to 8.7% in February from 6.6% in January. On a month-on-month basis, urban consumer prices rose by 2.8% in February, the sharpest increase since September 2010. The Central Bank said that higher inflation was driven by food and non-food price increases resulting from the depreciating exchange rate and bottlenecks in diesel distribution across the country. The pound has lost around 10% of its value against the dollar since late 2012, closing the day at E£6.80:US$1 on March 21st. The Central Bank has introduced capital controls and dollar auctions in an effort to protect its depleted foreign reserves and slow the rate of the depreciation of the pound. However, we expect that the pound will continue to depreciate owing to weak fundamentals—foreign reserves have fallen to US$13.5bn (less than three months' import cover) and foreign investment remains low. Given growing uncertainty around a US$4.8bn stand-by credit facility from the IMF, a substantial rise in capital flows or reserves in the near future looks unlikely. In addition, the availability of further funds from Gulf countries is uncertain following Qatar's recent announcement that no more financial assistance is planned in the near term. Impact on the forecast The Central Bank may be forced to raise rates again if the IMF credit facility is delayed further. We will amend our monetary policy forecast accordingly, but we will maintain our forecast of further depreciation of the exchange rate.

March 26, 2013: Fiscal policy outlook Tariff changes intended to trim imports and promote industry Event On March 24th the government published in the official gazette a decree (No. 184) signed by the president, Mohammed Morsi, introducing changes to customs tariffs. Analysis The changes included additional duties for a number of items, including equipment for hotel refurbishments, reduced tariffs for industries assembling imported kits and increased tariffs on about 100 items, most of which could be classified as luxuries. The measures appear to be aimed at helping to conserve foreign exchange by dampening import demand, and at boosting customs revenue for the budget. The incentives for local industry came in the form of reductions of up to 90% in tariffs charged on the import of equipment for local assembly. The size of the reduction is related to the local content of the finished products, with a starting threshold of 30%. The introduction of a 20% levy on equipment or furniture imported for refurbishments or upgrades to hotels could be intended as an incentive for hotels to source these materials from local suppliers. Other new levies include a 2% charge on the import of materials for the manufacture of infant formula, and a 2% charge on imports of equipment by the Arab Petroleum Pipeline Company, the operator of the Sumed oil pipeline linking the Gulf of Suez to the Mediterranean. The government has also cut by 25% the tariff on imports of cars with hybrid (electric/petrol) engines or that run on compressed natural gas. The items for which tariffs have been increased include prawns (up to 20% from 5%), cut flowers (to 40% from 30%), nuts (10% from 5%), fruits (such as dates, figs and pineapples; to 20% from 10%), fireworks (40% from 10%) and sunglasses (40% from 30%). Egypt's total imports rose by 6.4% year on year in 2012 to almost US$60bn, although the main reason for the increase was the rise in the cost of petroleum imports to US$13.1bn from US$10.6bn. Foreign-exchange reserves (excluding gold and special drawing rights) fell to US$8.8bn at the end of February, which is sufficient to cover only seven weeks of imports. Impact on the forecast The impact of tariff increases on some imports is unlikely to have a significant impact on the country's fiscal position given that duties account for less than 5% of government revenue. In addition, the impact of the move is limited by its application to mostly luxury items. We will therefore maintain our current forecast for the budget deficit.

April 3, 2013: Monetary policy outlook Central Bank relaunches deposit operations Event The Central Bank of Egypt (CBE) has reintroduced deposit operations in an effort to absorb excess liquidity. Analysis The deposits have a seven-day maturity with a fixed annual interest rate of 10.25%. At its first auction on April 2nd the CBE accepted E£14bn (US$2bn) in deposits. The Central Bank has said that in light of the move to deposit operations, repurchase agreement auctions, which were first introduced in March 2011, will be suspended. The decision to reintroduce deposit operations follows the announcement of a rise in interest rates on March 21st. The CBE raised the overnight deposit and overnight lending rates by 50 basis points to 9.75% and 10.75%, respectively, and the discount rate was increased by 75 basis points to 10.25%. Both moves represent a shift to a contractionary monetary policy as the Central Bank seeks to rein in inflation and support the depreciating currency. The Egyptian pound has depreciated against the dollar by 10% since late December to E£6.80:US$1. In late March Reuters reported that the black market rate fell to E£7.55:US$1 as the supply of dollars has tightened. The weakening currency has resulted in higher import costs, pushing annual inflation up to 8.3% in February. Money supply (M2) growth picked up to 15.3% year on year in February, the fastest rate since August 2008. The CBE's ability to prop up the pound has been limited by its severely diminished stock of foreign reserves. The bank's governor, Hisham Ramez, has said that reserves fell slightly in March from US$13.5bn at end-February, already below three months' import cover. The planning and international co-operation minister, Ashraf el-Araby, has said Egypt plans to boost its foreign reserves to US$16bn at end-June with help from international donors. As funding from Gulf states has dried up, the government has turned to Iraq and Libya for help. Impact on the forecast We expect that ongoing pressure on the currency and prices will force the Central Bank to raise interest rates again this year. We will amend our forecast to include another interest rate rise.

April 3, 2013: Policy trends Cooking gas price hiked as IMF team arrives Event The government has increased the price of a 12.5–kg canister of liquefied petroleum gas (LPG), known popularly as butagas, by 60% in a signal of its resolve to address the issue of energy subsidies, a central element in the reform programme being discussed with the IMF. Analysis The move came as an IMF team arrived in the capital, Cairo, in early April for renewed negotiations about a stand-by credit arrangement. The new price for LPG (butane/propane, used for domestic cooking and heating) is E£8 (US$1.17) per canister, up from E£5. In Egyptian pound terms this marks an increase of 60%, but in the light of the currency's recent depreciation, the rise is only 40% in dollar terms. Egypt consumes about 4.5m tonnes/year of LPG, equivalent to 360m canisters, of which about half is imported. The cost to supply a canister of LPG is about E£90, which makes butagas one of the most heavily subsidised energy products. Butagas accounts for about 15% of the energy subsidies allocation in the government budget. In the revised budget for the current fiscal year (July-June), energy subsidies amount to E£100bn out of total expenditure of E£586bn. Almost half of the energy subsidies are for diesel. The government recently increased diesel prices for supplies to certain industries, notably cement production. The increase in the butagas price will have little impact on the overall subsidy bill unless the government takes effective steps to ensure that only poorer families have access to supplies at this price. Various proposals, including coupons and smart-card-managed rationing, have been under consideration for several years. The IMF proposed in November 2012 to provide a credit of US$4.8bn to support the government's reforms. Following the failure to conclude that agreement, economic conditions and business confidence have worsened. There have been reports that the government will seek a larger amount from the IMF. The rules for stand-by credits limit the total amount to 300% of a country's IMF quota, but this can be exceeded in exceptional circumstances. Egypt's quota is SDR947m (US$1.43bn), meaning that its technical limit for a stand-by credit is US$4.3bn. Impact on the forecast The higher butagas price is unlikely to have a significant impact on the overall fuel subsidy bill. However, we expect the fiscal deficit to narrow in 2013/14 as the government is forced to introduce more reforms. The move may provide some reassurance to the IMF about the government's commitment to reform, but is unlikely to expedite the conclusion of a deal.

Analysis March 14, 2013 Government rejects IMF quick fix The government has rejected suggestions that it could take advantage of an IMF rapid financing instrument (RFI) to bolster its finances in the short term. However, with the timing of parliamentary elections now uncertain and indications that the IMF is dissatisfied with the government's revised economic programme, the RFI would allow more time to resolve the political and economic policy problems that have prevented the conclusion of a broader US$4.8bn stand-by credit arrangement with the Fund. The RFI option came under discussion following indications from the IMF that it was reluctant to provide a stand-by credit on the basis of the revised fiscal projections that the government had sent to it at the end of February. The RFI allows countries to draw on 100% of their IMF quotas (subject to a limit of 50% a year) in order to address urgent financing needs arising from special circumstances. The facility is not tied to any structural reform programme. Egypt's quota is SDR944m (US$1.42bn), which means that it would be able to borrow US$700m during the coming 12 months under the RFI. Emergency finance The IMF announced in November 2012 that it had reached a staff-level agreement to provide a stand-by credit of US$4.8bn, equivalent to 335% of Egypt's quota, as part of a programme of reforms aimed at achieving a primary fiscal

Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 32 surplus by fiscal year 2015/16 (July 1st-June 30th). The government in December asked the IMF board to postpone a meeting scheduled to approve this programme. The decision came amid an upsurge of political tensions as the president, Mohammed Morsi, assumed extraordinary powers in order to ensure the approval of the new constitution. Also in December Mr Morsi cancelled a package of 25 tax-raising measures that were presumed to be part of the IMF- agreed programme. The IMF has not explicitly confirmed that it has offered Egypt the option of using the RFI. However, Wafa Amr, an IMF spokeswoman, was quoted by Reuters in answer to a question about Egypt as saying: "Use of the RFI could be an option if there is a need for interim financing while a strong medium-term policy programme is being put in place." The inference from her statement is that the IMF does not consider that the government's revised proposals amount to a "strong medium-term policy programme". The agreement announced in November set a target for the overall fiscal deficit to be reduced to 8.5% of GDP in 2013/14. The Ministry of Finance has revised that target to 9.5% of GDP. However, at the same time it has trimmed its tax-raising measures to six, and approved increases in tax thresholds that are likely to affect tax revenue. Behind schedule The schedule for introducing measures to cut energy subsidies has been repeatedly put back. Moreover, the interim actual budget outturns for 2012/13 indicate that the deficit in the current year is likely to be considerably higher than the revised projections made in November. In the first seven months of the fiscal year the deficit reached 6.7% of projected full-year GDP. Given that there is typically a bulge in expenditure towards the end of the fiscal year, the 2012/13 deficit is likely to be 11-12% of GDP, and could be even higher. This would make the target of 9.5% of GDP in 2013/14 hard to achieve without major spending cuts and revenue increases, but the government is unlikely to implement major cuts for fear of the political consequences. No quick fixes The first reaction to the reports of an RFI option came from the planning and international co-operation minister, Ashraf el-Araby. He said on March 10th that the cure for the budget deficit was broad structural measures and that the support that the government was seeking from the IMF was not a "quick fix". Mr Araby is one of the most experienced ministers with economic policy responsibility, having served as deputy minister since the mid-2000s, before his promotion in August 2012. His remarks were echoed by the recently appointed finance minister, El-Morsi el- Sayed Hegazy, who said that the government had rejected an IMF offer of US$750m to be disbursed quickly and that it was proceeding with its structural reforms, on the basis of which it was entitled to borrow 300% of its IMF quota. The statements of the two ministers indicate that the government is still aiming to negotiate a new agreement with the IMF on a stand-by credit, despite the discouraging signals from the IMF and the continued political uncertainty. The RFI would only provide limited relief to the government, which is facing increasing difficulty in financing its basic needs, as is reflected in the chronic shortages of fuel and the falling level of wheat stocks, which are currently sufficient to cover only three months' consumption. However, a short-term loan from the IMF would give time for the election of a new lower house of parliament to be completed and for the formation of a new government with a more secure political mandate than that of the current administration. The government may yet accept the RFI, particularly if it becomes clear that the IMF will go no further until after the elections. The election was scheduled to take place between April and June, but has been postponed following objections raised by an administrative court to the procedures for passing the electoral law. Mr Morsi initially accepted the court ruling, but has now decided to lodge an appeal. Even if the legal issues can be cleared up relatively quickly, the election is likely to stretch into the late summer months, and the main opposition bloc has declared its intention to boycott the vote. With a stand-by credit facility unlikely to be concluded until after the elections, the Egyptian economy looks set to remain in limbo in the coming months.