The rise of economic growth under a liberalized economy that is based on market mechanisms is considered the most distinguished feature of the Egyptian economy in the framework of a developmental strategy whose core is interaction of the power of demand and supply together with paving the way for the private sector to engage strongly in the various economic activities.

 

In this context, report of the International Monetary Fund in 2006 hailed Egypt's achievements in economic reform as regards the increase in growth rate to about 5.8 percent and inflation decrease to about 4 percent. Furthermore, contributions of the leading sectors have helped scoring rates higher than the economic growth as the energy, transportation, tourism sectors and some service activities have achieved high growth rates.

 

Sectors of industry, transport, communications and tourism scored higher rates of growth. Contribution of the spinning and weaving sector to the GDP hits 31 per cent, chemical industries 26 percent, processing industries 18 per cent, transport, communications, Suez Canal 14.1 per cent and tourism 6 per cent.

  In early 1980s and in the framework of the world economic changes over reconsidering the role of the state in the economic activities, Egypt adopted the economic reform policy through rectifying the economic and social track by a coordinated, an integrated and a gradual package of economic, fiscal, monetary and legislative policies with the aim of liberalizing national economy, thus restoring its balance domestically and internationally. Furthermore, the change of the state's role in managing and steering the economic activity from the direct to the indirect management was one of the most distinguished trends that were entrenched during this period. 

 

 This was achieved in the context of an ambitious programme for economic reform that was characterized by being gradual and observing the social dimension in a manner that rendered it, according to many analyses from international institutions, on top of which is the IMF, one of the most successful economic programmes.

 

In the framework of the state's interest in economic development, being the only means towards realizing prosperity and raising incomes, thus consequently raising the Egyptians' standard of living, the first phase of the Economic Reform Programme in Egypt started with the launching of the first five-year plan (1982/87) through starting a process of comprehensive reform that targeted construction of a strong infrastructure that provides a solid basis to open the development process in modern agriculture, industry and various production sectors. This is done to provide a suitable atmosphere for environment and qualify the Egyptian economy to a competitive position among the advanced world economies.

The most distinguished features of the economic reform that started in Egypt during the 1980s are represented as follows:

 

1- Convert from the central economic system that is based upon the domination of the state over the economic life to a system that embraces the philosophy of economic liberalization and believes in the power and mechanisms of the market.

2- Liberate bank interest rates, exchange rates, prices of products and production requirements.

3- Control cash demand and encourage saving together with increasing the state's revenues.

4- Enhance and encourage the private and investment sectors while activating the privatization policy.

5- Activate the money market as one of the vital pivots of reform and economic liberalization policy through issuing a law on capital market in 1992 and its executive regulation in 1993, together with establishing the General Authority for Capital Market as a first step for the market development programme.

a- Liberalize and upgrade the public enterprise sector.

b- Establish the Social Fund for Development in 1991 to create job opportunities and encourage the small industries that contribute to the development process.

 

In the framework of the second phase of the policy of reform and liberalizing the Egyptian economy, Egypt, since 1991, has applied the privatization policy, as the state is no longer the only investor and its role is based on the indicative planning and directly implementing the public investments necessary for socio-economic development that is mainly focused on infrastructure projects.

 

As the privatization policy is deemed an essential component of economic reform, its programme was based on special mechanisms that aim at adjusting the Egyptian economy for the privatization process through restructuring the economic institutions and regaining the balance needed in the main economic changes, together with adopting policies that contributed to opening the door wide before the private sector to enhance its participation in the economic activity.

 

The third phase of the Egyptian economic reform programme is based on a new philosophy of following the rules of world economy as to activate partnership and mutual confidence between the state and the citizens together with giving the private sector the chance to turn from being the small partner who needs support and advice to a full partner in mobilizing investment necessary for employment, generating incomes and drawing and implementing policies.

The most distinguished features of this phase are as follows:

 

Tax Law no. 91 of 2005 reflects a new thought in the tax system's dealing with tax payers. The new Tax Law represents a qualitative leap and a new turning point in the Egyptian national policy. This law contributes to reducing the tax categories to about 50 percent or less for the benefit of the citizens and those working in economic activities. It provides many privileges, the most prominent of which are: tax exemption, tax conciliation, eradicate tax complications together with building bridges of mutual understanding between the state and tax payers in a manner that encourages local and foreign investment in Egypt.

 

Facilitating customs duties procedures is considered one of the most distinguished economic reforms that were entrenched during the recent stage through a number of amendments that aim at scoring the following:

1- Facilitate the customs tax structure.

2- Promote investments in the light of tax cuts on imports, tools and spare parts.

3- Move the market ahead and reduce prices together with a major increase in exports.

4- Raise the economic efficiency by offering the consumer high quality commodities.

5- Eliminate the disputes that might emerge from the various categories of customs tariffs through reducing the average of tariffs to about 9 percent, in addition to reducing the number of tariff categories from 26 categories to five only.   

Banking reform in Egypt started three years ago with issuing a new law for the Central Bank in 2003. Such law grants the bank full independence to practice its mission with freedom and efficiency and make the necessary amendments in the monitory policy, thus increasing the bank's resources of foreign currency. In this framework, the state pays special attention to accelerate the banking restructuring programme, expand processes of merging, and increase foreign contributions in the banking sector. This is because this sector witnessed expanded processes of merging during 2006, thus contributed to liberalizing the rate of exchange and activating the movement of market dealings in addition to motivating investments so that the value of local liquidity rose in June 2006 to reach about LE 560.4 billion at a growth rate of about 13.5 percent.

 

Positive indicators of the performance of the Egyptian economy in 2005/06 reflect an improvement towards acceleration of the growth rate within the tendency towards merger with the global economy as follows:

Gross Domestic Production (GDP) in 2005/06 amounted to LE 915 billion (at current prices) against about LE 828.8 billion in 2004/05 to which the private sector contributes with about 67.3 percent.

(In LE million and current prices)

 

GDP in 2005/06 amounted to about LE 558 billion (at current prices and at production factors cost) at a growth rate of 5.8 percent against about LE 504 billion in 2004/05.

 

Stimulating growth and raising the GDP requires an increase in investment and capital accumulation, besides giving the private and cooperative sector a bigger role in pushing the wheel of economic development forward through increasing its investment in the state socio-economic development plan as investments in 2005/06 plan reached about LE 67 billion from the total investments implemented during this year that amount to about LE 113 billion, of which LE 17.4 billion are government investments.

 

In 2005/06, labour force amounted to about 21,8. Female's contribution to labour force reach about 19 percent within the framework of the State's interest in women affairs and expansion in educating and employing females. Labour force during 2006/07 is expected to reach about 22.4 million, at a growth rate of about 2.8 percent. This leads to a decrease in the volume of unemployment from about 2.1 million in 2005/06 to about 2.08 million in 2006/07, thus bringing down unemployment rate from 9.6 percent to 9.3 percent.

 

Description	2005/06	2006/07	Rate of Change %
Labour Force	21.8	22.4	2.8
Employees	19.7	20.35	3.3
Unemployed	2.1	2.80	-
Unemployment Rate	9.6	9.3	- (0.6)

The policy of financial reform adopted by the State lead to a further merger of the Egyptian economy in the global economy during 2005/06. Thus, foreign trade imports and exports increased to about 60 percent of GDP. Export commodities realized a remarkable increase that reached about LE 16600.0 million and petroleum exports made an unprecedented leap scoring about LE 7.100.0 billion. The value of commodity imports in 2005/06 reached about LE 27.870.0 billion so that the surplus of total balance of transactions witnessed an increase at about $ 3.5 billion against a surplus of $ 2.9 billion last year and at an increase that reaches about 20 percent.

 

Trade balance deficit in 2004/05 amounted to some $ 12 billion. The state economic policy for the next phase is heading towards decreasing the deficit to reach about $ 11.1 billion next year.

 

Consumption expenditure is distributed on two main pivots:

Government consumption: means the government expenditure over salaries, requirements, health and population and utility services.

Household consumption: means the expenditure over the various commodities and services.

Volume of government and household expenditure in 2005/06 reached about LE 488.1 billion (at fixed prices), of which LE 74.1 billion as government consumption and about LE 414,0 billion as household one i.e., 82.3 percent of the GDP, with a real growth rate of 4.4 percent. In this context the per capita share of the GDP during the same year reached about LE 8.2 thousand annually.

(In LE billion)

 

Stock exchange in Egypt witnesses a new breakthrough and a comprehensive development of the rules and criteria of circulation so as to be more efficient and effective via issuing new rules for registration and governance of companies. In this context, the stock exchange witnessed a successive chain of development and modernization on all levels during 2005 so that it would be chosen among the top ten emerging bourses in the world according to the News Week evaluation, as the bourse gained revenues up to 98 percent over the past three years. This by turn, contributed to attract more local and foreign investments, thus the circulation witnessed successive leaps and average of the daily dealings sometimes reached more than LE 2 billion.

 

 Consequently, the rate of foreigners' participation neared about 35 percent of circulation in the stock market against about 20 percent last year. Moreover, the number of the daily transactions in average exceed 30,000 and the market capital of the registered companies leapt to about LE 477 billion against LE 172 billion by the end of 2003 making up about 80 percent of the GDP in Egypt. 

 

Activation of the Egyptian privatization programme contributed to increase the activity of the stock exchange. A number of public companies have been floated to subscription in 2005 at a value of almost LE 8 billion. This led to attracting new Egyptian, foreign and Arab investors to invest in the Egyptian market.

 

Encouraging and developing investment is a mainstay of Egyptian economic policy within a strategy that aims to build a robust economy that can positively and efficiently deal with global economic transformations. It is also deemed a major entrance to realize developmental goals, on top of which, increasing the rates of economic growth and the rise of operating and export indicators. Thus,thestatepays due attention to create a favorable climate for investment in Egypt by providing suitable infrastructure to accommodate major investments under a legislative umbrella to protect and encourage influx of investments in all fields of development. 

 

In the light of facilities and incentives offered to investors, the investment climate in Egypt has gained appreciation of many international economic organizations and institutions. These have underlined efficient performance of the Egyptian economy. Since the second half of the 1990s, Egypt has witnessed a leap in investment leading to an increase in its rate in various production and service sectors. In 1997, President Mubarak declared Egypt an open market for investment with no limits.

 

This was followed by the issuance and amendment of the Investment, Incentives and Guarantees Law so as to encourage investment projects.  Moreover, an integrated system of administrative procedures that contributed to accelerating leaps in rates of investment was carried out. These all have Egypt to be an international investment-attracting hub despite the turbulent global developments and unstable regional conditions.

 

Egypt enjoys several physical and other constituents that make her capable of attracting foreign and domestic investments. These can be summed up as follows:

Egypt is distinguished for is unique geographical location which renders her a centre for boosting trade ties across Europe, Middle East and Africa as Egypt represents a land and air crossover for moving goods and communications, thus enhancing success opportunities for investment projects between Egypt and Arab, African, Asian and European markets.

Thanks to her existing favourable conditions, Egypt enjoys political and economic stability. On the political level, Egypt enjoys excellent relations with all countries. Recently, moves of the Egyptian diplomacy on the foreign level have been employed for serving development goals and opening wide vistas for international and regional cooperation based on mutual interest.

On the economic level, Egyptian economic performance has shown positive indicators thanks to inherent strengths that enhance sustainable development plans in various fields and attract further international investments.

 

Smooth transportation is an effective success factor for investment projects. In this context, Egypt enjoys a foreign and domestic, land and air transportation network linking Egypt with the whole world, in addition to a great number of bridges all over the country to facilitate transportation.

Moreover, the maritime transportation sector has one of the most important trade waterways in the world; the Suez Canal that links together the East and the West, apart from the giant Mubarak/as-Salam  bridge that  links the Asian and African continents, thus contributing to the influx of investments.

Egypt possesses a human wealth estimated at about 73.6 million, including labour force of about 20 million. The State at present exerts substantial efforts in various educational and training fields, thus graduating promising skilled and trained labour force in various vacations at suitable wages.

 

Egypt is keen on coping with the international developments in the field of communications and information technology. For this end, Egypt launched two satellites: Nilesat 101 and Nilesat 102. These satellites contributed to realizing an effective presence for the Egyptian media all over the world, thus promoting Egyptian investment projects abroad. Moreover, the State has recently activated e-government system as an advanced means for raising the efficiency and quality of the administrative machinery in the government and economic bodies to serve investment and investors in Egypt.

The state plays an active role in attracting more foreign capital for direct investment by offering a package of guarantees and incentives that help render investment a success and protect rights of investors. These are all included in the Law on Investment Guarantees and Incentives No. 8 of 1997, which provides a number of guarantees for investors, companies and establishments operating in this field. The Law guarantees the right of companies and establishments to own building plots and real-estates necessary for them to do their businesses. They are also entitled to import, whether on their own or through a third party, production requirements, materials, tools and spare parts needed to build or operate their establishments. They also have the right to export their products on their own or through a mediator without having to obtain a license from any authority.

 

Furthermore, this Law provides many other investment attractive-incentives, notably a 5-year tax exemption on income gained from commercial and industrial activities, and profits of companies and establishments. Such exemption may reach ten years for companies and establishments built in remote industrial zones and new urban communities.

 

In the framework of the state's major interest in attracting foreign investments and providing a favourable climate of Investment, the first Ministry for investment in Egypt was established in 2004. The Ministry's main job is to remove all investment obstacles, close all exerted efforts to provide the various required services.

 

In addition, the Ministry is responsible for increasing Arab and foreign investments through enhancing the investment awareness and promotion to attract more investment for financing various projects.

The Ministry also plays an important role in monitoring and developing the legislative and legal framework that regulates investment climate in Egypt so as overcome obstacles

 

The new measures set by the state to encourage investment and raise the rate of employment have achieved a great leap in establishing companies in 2006. The number of the companies established under Law no. 159 of 1981 and Law no. 8 of 1997 rose to about 5771 at total capital of about LE 41.6 billion against about 2327 companies at total capital of LE 15 billion in 1991/92 at a growth rate 148 percent and 177.3 percent in terms of capital.

 

The investment map of Egypt's governorates has been prepared to show a comprehensive survey of the investment projects in Egypt to push forward the wheel of development. This map clarifies the available natural resources and the infrastructure in the governorates, in addition to the current services, the constituents and capabilities they have for being elements of attraction to the suggested investment projects.

 

The propagation plan of investment in Egypt gives information to investors about all the great strategic projects and the projects of infrastructure in Egypt, in addition to comprehensive studies about the promising investment sectors in the fields of tourism, petrochemicals, cement, spinning and texture, food industries, medicine and the financial and health services.

 

Free zones in Egypt are a distinguished investment pattern. They represent an important mechanism for increasing exports and domestic product and generating new job opportunities. These zones enjoy numerous privileges, the most important of which are direct connection with the outside world and the availability of land plots completely supplied with utilities and infrastructure in addition to special customs, import and monetary treatment, among others that are related to the ingress and egress of goods, thus allowing a great deal of freedom of transaction. These all serve as magnets to investments.

 

Investment in free zones enjoys many privileges and incentives such as lack of restrictions on the nationality of the capital, freedom of selecting the legal form of projects and of pricing products and rate of profits. In addition, capital assets, production requirements, imports and exports are exempted from tax duties, sales and other taxes and duties. Furthermore, projects operating in free zones are granted a number of guarantees, notably inadmissibility of nationalization, confiscation, and sequestration or expropriation of property except by judicial procedures.

There are two types of free zones in Egypt: public free zone and private free zone as follows:

There are seven public free zones in Egypt equipped with utilities and infrastructure for receiving investment projects: Nasr City Public Free Zone, Alexandria Public Free Zone, Port Said Public Free Zone, Suez Public Free Zone, Ismailia Public Free Zone, Damietta Public Free Zone and 6^th of October Public Media Production  Free Zone

Investment activities can be conducted inside Egyptian private free zones under certain conditions, the most important of which are that the investment project should affect or help develop new urban communities and should not pollute the surrounding area.

Any investment project may be converted to a free-zone project, provided that it will have complied with rules specified by the regulations, has actually started its business and has generated exports of more than 50 percent of its production.

 

The approved Free-Zone projects rose to 845 in 2005 in comparison with 734 projects in 2004. The invested capital of Free-Zone projects rose to about $ 7,151 billion in 2005 in comparison with $ 6,355 billion in 2004. The invested Arab and foreign capital of free-zone projects rose to about $ 1818 million in 2005 in comparison with $ 1578 million in 2004. Total commodity exports of free-zones rose to about $ 4850 million in 2005 in comparison with $ 3479 million in 2004. Total of free-zone projects imports from the domestic market rose to about $ 558 million in 2004/05 in comparison with $ 390 million in the previous year. All of these took part to increase the job opportunities which free-zone projects provide with a rate of 29.7 percent and salary rise of 44.7 percent