This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 CAIRO 009385 
 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA, AND EB/IDF 
USAID FOR ANE/MEA MCCLOUD 
USTR FOR SAUMS 
TREASURY FOR MILLS/NUGENT/PETERS 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
E.O.  12958: N/A 
TAGS: ECON EFIN ETRD EINV ENRG EWWT EG
SUBJECT: ECONOMIC MONTHLY REPORT:  October-November 2005 
 
 
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Summary 
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¶1.  (U) In this edition: The Central Bank of Egypt (CBE) 
narrows the overnight interest rate band, and issues new 
checking regulations.  Planners from the World Economic 
Forum (WEF) meet with GOE officials to discuss the WEF 
meeting on the Middle East, to be held in Sharm el Sheikh in 
May 2006.  The National Competitiveness Council issues its 
second report on Egypt's competitiveness, while Merrill 
Lynch and Capital Intelligence issue reports on Egypt's 
currency rating and economic outlook.  The GOE decides to 
increase its export of natural gas, while Apache sells part 
of its holding in Egypt and Oriental Weavers signs an 
agreement with the Holding Company for Petrochemicals to 
build a new petrochemical facility.  The GOE also announces 
plans to issue licenses to provide services currently 
provided only by Telecom Egypt.  The GOE also announces new 
air pollution monitoring facilities, and attends a number of 
meetings on Nile Basin issues.  End summary. 
 
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Monetary Policy 
--------------- 
 
¶2.  (U) In its monthly meeting held on October 5, 2005, the 
Monetary Policy Coordinating Committee (MPCC) decided to 
narrow from 2.5% to 2% the width of the overnight interest 
rate corridor (the range of interest rates within which 
banks may set overnight lending rates).  The corridor was 
thus reduced from 9-11.5% to 9-11%.  According to a 
statement by CBE, the MPCC believes that any potential 
inflationary risk stemming from the reduction in the 
corridor is balanced in the near term by other economic data 
available regarding spending-saving ratios. 
 
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Banking Regulations 
------------------- 
 
¶3.  (U) In early October, the CBE circulated instructions to 
all banks to start application of new check regulations, as 
stipulated in Trade Law No. 17 of 1999.  The execution of 
this legal requirement was delayed for six years due to lack 
of preparedness on the part of both banks and the business 
community.  The regulations (Article 473 of the trade law) 
strictly define the type of checks for which legal 
protection applies:  only checks issued on the official 
paper of the bank from which it is drawn.  Many Egyptian 
businesses deal primarily in unofficial, or non-banking 
checks (also known as handwritten, office or personal 
checks).  Some members of the business community reacted 
negatively to the new instruction, but the CBE made it clear 
in the instruction that it would not allow further delay in 
executing the legal requirements of the law. 
 
--------------------- 
World Economic Forum 
--------------------- 
 
¶4.  (U) On October 5 representatives of the WEF and Egypt's 
Ministry of Foreign Trade and Industry met in Sharm El 
Sheikh to sign a Memorandum of Understanding for the WEF on 
the Middle East, to be held May 20-22, 2006, in Sharm el 
Sheikh.  The WEF on the Middle East will devote a 
considerable part of the agenda to business issues in the 
Middle East as well as political, security, energy, and 
reform issues.  According to Egyptian Minister of Foreign 
Trade Rachid, the WEF on the Middle East signals an 
important milestone for Egypt.  Rachid stated "The decision 
to bring the WEF to Sharm El Sheikh sends a clear signal: 
Egypt is open for business.  We are serious about reform. 
We are determined to engage - as an equal and active partner 
- with our global peers.  The international community 
believes in our commitment and is prepared to support Egypt 
as it strives for change." 
 
-------------------------------------- 
Second National Competitiveness Report 
-------------------------------------- 
 
¶5.  (U) The National Competitiveness Council issued the 
second National Competitiveness Report (2004-2005) for Egypt 
in October.  The report concluded that Egypt remains behind 
its peers in competitiveness.  The report did not, however, 
take into consideration the economic reforms of the Nazif 
administration.  The Executive Opinion Survey (EOS) - a tool 
used by the Competitiveness Council to translate perceptions 
about the country's economic environment into measurable and 
comparable indicators - was conducted in March 2004, before 
the Nazif administration took office in July 2004.  In 
analyzing the impediments to business in Egypt, the EOS 
identified eight constraints, ranked in order of 
significance:  1) access to financing; 2) tax regulations 
and rates; 3) inefficient bureaucracy; 4) policy 
instability; 5) foreign currency regulations; 6) inflation; 
7) an inadequately educated workforce; and 8) restrictive 
labor regulations.  Although many of these impediments 
remain unchanged, the Nazif administration has addressed 
some of them, such as tax rates and regulations, which were 
changed by a new law passed in June of 2005. 
 
----------------------------- 
Ratings Institutions On Egypt 
----------------------------- 
 
¶6.  (U) A report by Merrill Lynch in October forecasted an 
appreciation in the real value of the Egyptian Pound (LE) in 
the medium term, while the nominal value was not expected to 
change significantly, in light of the GOE's intention to 
boost non-oil exports.  The report also estimated that 
recent tariff cuts would help keep inflationary pressures 
under control, as would stability of the LE due to CBE's 
success in controlling liquidity, and the still wide supply- 
demand margin.  The report predicted the national economy 
would continue to recover, with a real growth rate rising 
from 5.1% in 2004/2005 to 6% in the present fiscal year, 
which will end June 2006.  Recent economic growth has been 
driven primarily by export growth, but growth in domestic 
consumption and private sector investment will likely 
increase in the present fiscal year. 
 
¶7.  (U) Capital Intelligence (CI), the international 
emerging markets rating agency, announced on October 12, 
that it affirmed Egypt's BB+/B long- and short-term foreign 
currency ratings and its BBB/A3 long- and short-term local 
currency ratings.  The outlook remains stable. According to 
CI, Egypt's ratings are supported by improved international 
liquidity and a manageable external debt burden.  CI also 
noted that while the rate of economic growth has accelerated 
over the past few years, it remains below the level needed 
to absorb the approximately 3% annual growth in the labor 
force.  CI noted that the GOE's renewed commitment to 
structural reform raises the prospect that a more resilient 
and dynamic economy will emerge over the medium term. 
 
---------------------- 
Industrial Development 
---------------------- 
 
¶8.  (U) In mid November Minister Rachid met with the 
Federation of Industries and the presidents of chambers of 
commerce to discuss the GOE's 2005-2025 industrial strategy. 
The goal of the strategy is for Egypt to become the leading 
industrial country in the MENA region, and a center of low- 
technology exports.  To reach this goal, the GOE plans to 
increase industrial production, target export development, 
and attract more FDI.  The 20-year strategy sets growth 
targets for real industrial production (from 5 percent in 
2005 to 9 percent in 2020), industrial investment (from a 
projected LE 16 billion in 2006 to LE 229 billion in 2025), 
exports (from an estimated LE 20 billion in 2006 to LE 291 
billion in 2025), and new jobs (from an expected 134,000 in 
2006 to 911,000 in 2025). 
 
---------------------------- 
Intellectual Property Rights 
---------------------------- 
 
¶9.  (U) In late November an Egyptian delegation participated 
in the Fifteenth International Intellectual Property Rights 
Conference in Geneva.  The delegation pressed the case for 
making Egyptian cotton an internationally recognized 
geographical indicator, as a way to protect the use of the 
Egyptian cotton trademark. 
 
------ 
Energy 
------ 
 
¶10.  (U) In late October, press reports indicated that the 
GOE decided to allocate a quarter of Egypt's proven reserves 
of natural gas for export.  Reports estimates proven gas 
reserves at approximately 67 trillion cubic feet (TCF), with 
an additional 80-100 TCF of probable/undiscovered reserves. 
Exports of natural gas come chiefly from three liquefied 
natural gas projects:  1) Damietta, from which the Spanish 
electric utility, Union Fenosa, began exporting in January 
2005; 2) Idku, which came on line in October and is operated 
by British Gas and the Malaysian state oil company Petronas; 
and 3) the Arab Gas Line to Jordan, which started operation 
in mid-2003.  Oil and gas accounted for approximately 12% of 
Egypt's GDP and total exports of natural gas are expected to 
double to 12 million tons in FY 2005/06. 
 
¶11. (U) On October 9, the Egyptian Holding Company for 
Petrochemicals and Oriental Weavers signed an agreement for 
the construction of a new petrochemical facility.  Total 
investment in the facility will be $350 million, shared by 
the Egyptian Holding Company for Petrochemicals, the 
Oriental Weavers Group, and the latter's subsidiary 
Sharqioun for Petrochemicals.  The new facility will produce 
an annual 350,000 tons of poly-propylene, a major component 
in manufacturing carpets, ready-made clothes and pipelines. 
 
¶12.  (U) In mid October, Apache Corporation reached an 
agreement with Amerada Hess Corporation to sell its 55% 
interest in the deepwater section of Egypt's West 
Mediterranean Concession for $413 million.  Apache has also 
agreed to purchase Amerada Hess's interests in eight fields 
located in the Permian Basin of West Texas and New Mexico, 
six of which are currently operating, for $404 million. 
 
¶13.  (U) In mid November, press reports indicated that a new 
370 km section of the Arab Gas Line to Jordan has been 
completed.  This section of the pipeline will transport 
Egyptian natural gas from Al Aqaba port in southern Jordan 
to the Samra and Rehab power stations in the north.  A joint 
venture company, "Egyptian-Jordanian Fajr Company," 
constructed the pipeline at a cost of $300 million.  The 
pipeline is part of a broader plan to distribute Egyptian 
natural gas throughout the region, including to the Zahrani 
refinery in northern Lebanon and to Banias, Syria.  Gas 
exports to Jordan generated gross revenues of approximately 
$60 million in FY 2003/04 and have already reached $85 
million in the current FY. 
 
¶14.  (U) In early November, press reports indicated that the 
Ministry of Electricity was implementing a project to 
modernize the High Dam Electricity Station.  The project 
will be funded with a loan of $580 million from the German 
Reconstruction Bank. 
 
------------------ 
Telecommunications 
------------------ 
 
¶15.  (U) In mid-October, Minister of Communications and 
Information Technology Tarek Kamel indicated that new 
telecom services licenses would be offered internationally 
before the end of 2005 for international gateway and Voice 
over Internet Protocol (VoIP) services currently monopolized 
by Telecom Egypt (TE).  These measures are part of overall 
plans to deregulate the telecommunications sector by the end 
of 2005 in accordance with Egypt's obligations under the 
Basic Telecom Agreement, a part of the WTO General Agreement 
on Trade in Services. 
 
¶16. (U) On November 1, Alex Shalaby replaced Osman Sultan as 
President and CEO of MobiNil.  Shalaby has extensive 
experience in the telecom field and joined Mobinil in 1998. 
During the third quarter of 2005, Mobinil succeeded in 
adding 1.4 million subscribers, bringing the total number of 
Mobinil subscribers to about 7 million, a 26% increase over 
the first half of 2005. 
 
¶17.  (U) On November 11, the Egyptian National 
Telecommunications Regulatory Authority (NTRA) gave Mobinil 
and Vodafone two months to improve services and raise 
network capacity to accommodate new subscribers.  Official 
reports released in November indicate that total mobile 
subscribers have increased to more than 13.5 million, 
exceeding fixed-line subscribers (10.3 million) for the 
first time.  The increase was driven by a big jump in low- 
income subscribers to mobile services.  A separate report 
published in late November predicted that Egypt's mobile 
market would reach 21.1 million by the end of 2008. 
 
¶18.  (U) In late November, Alaa Fahmi, Executive Director of 
NTRA, stated that a third cell phone operator is expected to 
launch its services in Egypt by the end of 2006.  He added 
that the third operator would receive benefits that will 
enable it to compete with the other existing two GSM 
operators and noted that six international firms have 
expressed interest in investing in Egypt's telecom sector. 
In a recent meeting with Akeel Bashir, Chairman of TE, 
Bashir told embassy staff that while TE does not have a 
wireless license, it owns 25.5% of Vodafone.  He added that 
TE would not compete for the third cell phone license, 
unless it was confident that it could increase profits over 
its shares in Vodafone. 
 
¶19.  (U) In mid November, Minister Kamel headed the Egyptian 
delegation to the World Summit on the Information Society 
(WSIS) held in Tunis in November 16-18, 2005.   The 
delegation included government, private sector and civil 
society representatives.  During the summit, Dr. Kamel held 
bilateral meetings with counterparts from various countries, 
and affirmed that Egypt's telecom services would be 
liberalized by early 2006, including issuance of licenses to 
provide VoIP services.  At the end of the Summit, the 
minister warned against broadband becoming a new digital 
divide between developed and developing countries. 
 
----------- 
Environment 
----------- 
 
¶20.  (U) In late October, Egyptian Minister of State for 
Environment Affairs, Maged George, told the press that LE 
4.5 million would be allocated for refurbishment of four 
pollution-monitoring centers within Greater Cairo.  In 
addition, six new centers would be built.  All 10 locations 
will be linked to a central station, which will monitor 
pollution levels and issue advisories as appropriate. 
 
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Nile River 
---------- 
 
¶21.  (U) Several meetings related to Nile Basin issues took 
place in October.  In early October the Egyptian-Sudanese 
Nile Water Authority met in Khartoum to discuss future 
projects, including resumption of the Jonglei Canal project. 
In mid-October Dr. Abdel Fattah Metawi, First Undersecretary 
of the Ministry of Irrigation and Water Resources, headed 
the Egyptian delegation to the Nile Basin Initiative 
technical meeting in Holland.  The press also reported in 
October that this year's Nile flooding was slightly above 
average, with the water level at Lake Nasser rising to 174.5 
meters above sea level. 
 
------------------- 
Economic Statistics 
------------------- 
 
¶22.  (U) 
 
Exchange Rate: 
                               (09/29/05)     (11/30/05) 
Egyptian Pounds/$             Buying Selling Buying Selling 
Avg. Bank/Bureau Rate         575.10 577.70  575.22 577.55 
 
Capital Market: 
                                (09/29/05)    (11/30/05) 
Capital Markets Authority Index  1988.58       2055.64 
Hermes Financial Index           48113         49354 
EFG Index                        25123         25210 
 
Interest Rates: 
(percent, monthly comparison) 
 
Interbank Overnight              9.42          8.86 (12/4) 
T-bills (182 days)               9.46          9.36 (10/31) 
T-Bond (maturing 01/06)          4.15          4.15 
T-Bond (maturing 04/09)          5.50          5.50 
 
Foreign Reserves: 
(US $ billion, official gov't figures) 
 
                              (09/2005)       (11/2005) 
                               21,113.1        21,212.1