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SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ENRG EWWT EG
SUBJECT: EGYPT:  QUARTERLY ECONOMIC REPORT 
 
 
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SUMMARY 
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¶1.  In this edition:  The Central Bank intervenes to raise interest 
rates, parliament decreases stamp taxes and considers a single 
Treasury account, while the GOE increases cooperation with China. 
Industry organizations sign a cooperative agreement with major banks 
to finance new factories.  Egypt's exports surge, Turkey invests in 
the textile sector and China is denied market status.  A Gulf 
investor bids to purchase 25 percent of EFG-Hermes, Egypt's largest 
investment bank.  The Ministry of Communication and Information 
Technology signs several agreements with the World Bank and Mubarak 
establishes a new university dedicated to info technology.  Kuwaiti 
and Spanish firms invest in Egypt's oil and gas sectors, and the 
Ministry of Electricity plans to build several plants to increase 
electrical output.  Suez Canal revenues soar. End summary. 
 
------------- 
MACROECONOMIC 
------------- 
 
¶2.  INTEREST RATES:  In mid-July, the IMF warned the Central Bank 
(CBE) against further reduction in interest rates until liquidity 
growth had decelerated and inflation stabilized.  Inflation 
increased from 4.4 percent in April to 6.4 percent in June.  The IMF 
recommended strict limits on government financing.  In an apparent 
response, CBE announced a new saving instrument on July 31, with 
interest rates between 7-7.5 percent and maturities of 4, 6 months 
and 12 months.  CBE Deputy Governor Tarek Amer told the press that 
CBE's market intervention was due to distortions in interest rates; 
bank rates on deposits were as low as 4-5 percent while earning 
risk-free gains of 8.9-9.2 percent on government securities.  The 
new instrument was expected to increase short term interest rates on 
deposits.  The CBP plans to end its intervention once stable short 
term interest rates are restored. 
 
¶3.  STAMP TAX LAW:  In late June, parliament amended the Stamp Duty 
Law of 1980 by simplifying procedures and reducing tax rates on some 
products and services.  Rates on radio, TV, cinema and print ads 
were reduced to 15 percent, while a new rate of 15 percent was 
imposed on billboard ads.  Rates on life insurance premiums were 
reduced from 3 to 1 percent, while rates on maritime, land and air 
transportation insurance premiums were reduced from 15 to 10 
percent.  Rates on credit accounts and loans were also reduced from 
LE .01 to LE .001 piaster.  The Tax Authority will automatically 
dismiss tax disputes under LE 5,000 ($877) to reduce collection 
costs. 
 
¶4.  SINGLE TREASURY ACCOUNT:  Parliament is considering 
establishment of a unified Treasury account to consolidate LE 83 
billion ($1.4b) in 48,000 accounts held by governmental authorities 
and agencies into fewer than 20.  The new law would promote more 
efficient fiscal management and increase control of off-budget 
resources.  The IMF has been urging this reform for years. 
 
¶5.  CURRENCY:  Metallic LE .01 and .50 piaster coins have been 
issued, after a decision to eliminate their paper equivalents. 
Paper LE .01 and .50 piaster bills will be gradually removed from 
the market. 
 
¶6.  ECONOMIC DEVELOPMENT PLAN:  The Ministry of Finance will 
establish a Central Unit for Public-Private Partnerships (PPP).  In 
the short term, the unit will focus on promoting public-private 
sector partnerships for school and hospital construction, but may 
eventually include utilities and other service areas.  The legal 
framework is still under preparation. 
 
¶7.  COOPERATION WITH CHINA:  Chinese Prime Minister Wen Jiabao 
visited Egypt in June.  Jiaboa met with President Mubarak to discuss 
economic and trade relations and with PM Nazif, with whom he signed 
10 agreements on oil and natural gas, telecommunications, and 
resumption of Egyptian citrus exports to China.  China will provide 
a $50 million loan and a $10 million grant to build an investment 
headquarters in the industrial area northwest of the Gulf of Suez. 
Telecom Egypt and the Chinese company Huawei Technologies have 
agreed to manufacture CDMA wireless local loop terminals in Egypt. 
 
-------- 
INDUSTRY 
-------- 
 
¶8.  The Federation of Egyptian Industries, the Industrial 
Modernization Center and the Egyptian Banking Federation will 
provide LE 75 billion ($13b) over the next five years to finance new 
factories and expand existing ones, part of Mubarak's campaign 
promise to build 1000 new factories.  PM Nazif has said the GOE will 
provide 10 million square meters of land annually, complete with 
infrastructure, for construction of industrial export projects.  The 
GOE also plans to will upgrade existing industrial zones and 
construct 1700 small factories over the next 18 months, and to 
provide LE 1.5 billion ($263m) to upgrade utilities in new urban 
communities. 
 
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TRADE 
----- 
 
¶9.  DDA TALKS:  Minister of Trade and Industry Rachid has announced 
that, in view of the suspension of the WTO Doha Development Agenda, 
Egypt will focus on its Arab and European trade partners within the 
framework of the Arab Free Trade Area and the Euro-Mediterranean 
Partnership.  He added that Egypt is ready to cooperate to revive 
the round. 
 
¶10.  EXPORTS SURGE:  Egyptian exports reached $8.1 billion over the 
11 months ending in May, seven percent over projections.  Trade 
Minister Rachid credited the newly-restructured Egyptian Exports 
Promotion Center, which builds the capacity of exports councils, 
directs exporters to development funds, provides training and 
technical assistance and monitors service provision.  Rachid noted 
challenges still facing Egypt's exports, including transportation, 
shipping, marketing and an absence of Egyptian trademarks. 
 
¶11.  EGYPT DENIES CHINA MARKET ECONOMY STATUS:  Rachid, supported by 
the Federation of Egyptian Industries (FEI), announced Egypt's 
opposition to China's recognition as a market economy at the WTO. 
The FEI has criticized the impact of China's undervalued currency, 
export subsidies and dumping strategies on Egyptian industry. 
 
¶12.  TURKISH TEXTILE INVESTMENTS IN EGYPT:  Egypt's FTA with Turkey 
is attracting Turkish FDI to the textiles sector.  Eyeing the 
benefits of the QIZs, along with Egypt's preferential agreements 
with EU, COMESA and GAFTA, 17 Turkish companies, with investments of 
$63 million, are operating in Egypt.  Investment is expected to rise 
to $1.5 billion by the time the agreement enters into force in late 
¶2006.   Trade Minister Rachid attributed the increase of Turkish 
investments to Egypt's low costs, QIZ privileges, and investment 
incentives. 
 
¶13.  INTRA-ARAB TRADE:  The Council of Arab Economic Unity approved 
Egypt's proposal to increase intra-Arab in-kind trade.  To promote 
intra-Arab trade, member states agreed to establish a holding 
company for agricultural equipment production, an investment 
services corporation, as well as a new Arab investor identification 
card to ease investor travel and simplified port procedures. 
 
¶14.  FOREIGN TRADE STATISTICS:  Egypt's trade deficit increased 69 
percent in 2005 to $9.1 billion, with exports rising 39 percent to 
$10.6 billion, and imports by 54 percent to $19.8 billion. 
Petroleum exports rose 69 percent to $5.2 billion, compared to a 
17.6 percent rise in non-oil exports to $5.4 billion.  Increasing 
petroleum import costs, up 78 percent to $1.8 billion, were a major 
factor.  Non-oil imports increased by 52.4 percent to $18 billion, 
with raw materials making up the majority of the increase in non-oil 
imports, rising 87.8 percent, followed by intermediate goods rising 
46 percent; investment goods, 36 percent; and consumption goods, 
35.7 percent. 
 
--------------- 
CAPITAL MARKETS 
--------------- 
¶15.  EFG-Hermes has accepted a bid by Dubai-based Abraaj Capital to 
acquire 25 percent, or 97,074,010 common shares, of EFG-Hermes' 
stock at share price of LE 30.  The acquisition will be made through 
a wholly-owned subsidiary, Abraaj Egypt Limited; the transaction is 
worth $505 million.  The transaction must be approved by 
shareholders and regulatory authorities.  If approved, Abraaj 
Capital will be the largest single shareholder in EFG-Hermes, which 
in turn is the largest shareholder in Lebanon's Bank Audi. 
¶16.  Shares in EFG-Hermes, regarded as the region's leading 
investment bank, jumped 23.8 percent on news of the offer.  Listed 
on both the Cairo and London stock exchanges, it is two-thirds 
publicly owned and has more than 40 percent of the market for 
securities brokering in Egypt.  EFG has won about 7 percent of the 
securities brokering market in the United Arab Emirates since 
opening an office there in 2004.  This year the firm received a 
license to operate investment banking and asset management 
activities at the Dubai International Financial Exchange and a 
license to operate in Saudi Arabia. 
 
----------------------------------------- 
COMMUNICATIONS AND INFORMATION TECHNOLOGY 
----------------------------------------- 
 
¶17.  Minister of Communication and Information Technology (MCIT) 
Tarek Kamel and his Syrian counterpart, Amr Nazir Salem, recently 
signed an MOU for bilateral cooperation in communications and 
information technology.  MCIT will help Syria develop communications 
regulations, including for IPR, e-commerce, online payment, 
electronic crime, and e-signatures.  In addition, both parties will 
cooperate in developing human capacities by exchanging training 
experiences and organizing bilateral and regional workshops. 
 
¶18.  During a visit to the U.S. this summer, MCIT Minister Kamel 
witnessed the signature of several agreements between the World Bank 
and GOE agencies.  The National Postal Authority (NPA) signed an 
agreement to restructure, and to develop postal services, with a 
focus on human resources.  The Information Technology Industrial 
Development Authority signed an agreement to increase use of 
e-signatures, protect IPR, and increase information technology 
exports.  Kamel signed an agreement to develop and liberalize 
communications services.  During the visit, Lucent and Telecom Egypt 
agreed to establish 50,000 phone lines using CDMA technology. 
During the visit, Kamel said subscribers to both mobile and fixed 
telephone lines in Egypt will reach 26 million by the end of 2006 - 
which would mean 36.2 percent overall telephone density in Egypt - 
while Internet users were projected to reach 5.5 million.  He 
stressed that even Egypt's smallest population centers are now 
covered by stationary lines via 1,131 telephone exchanges. 
 
¶19.  Also in June, the National Telecommunication Regulatory Agency 
(NTRA), in conjunction with Egyptian internet service providers and 
Telecom Egypt, agreed to reduce the price of Asymmetric Digital 
Subscriber Line (ADSL) by 40 percent.  The decision came as part of 
the NTRA's efforts to increase accessibility to ADSL services and 
broaden the base of internet users in Egyptian governorates, 
especially as the latest statistics reveal that 90 percent of 
internet users are clustered in Cairo and Alexandria.  Currently, 
ADSL users are only about 130,000, but are expected to reach half a 
million by the end of 2007. 
 
¶20.  In July, Mobinil and Vodafone share prices increased 
dramatically in reaction to the Emirati-led consortium Etisilat's 
payment of LE 16.7 billion ($2.91 billion) for Egypt's third mobile 
license.  Mobilnil topped the best performer's list, soaring by 20.0 
percent to finish at LE 156.02.  Vodafone rose by 9.6 percent, to 
close at LE 91.16.  On the other hand, Telecom Egypt witnessed heavy 
selling, trading at EGP 11.67, a 2.8 percent decline.  Also in July, 
IRAQNA's (affiliated with Orascom Telecom) license for mobile 
service was extended until the end of September.  Reports indicated 
IRAQNA mobile subscribers reached 2.2 million as of March 2006. 
Investments in the IRAQNA GSM network are reportedly over $ 250 
million. 
 
¶21.  On July 16, President Mubarak issued a Presidential Decree to 
establish Nile University in 6th of October City on the outskirts of 
Cairo.  The university's mission is to expand Egypt's scientific and 
technological base in the field of information technology and 
communications.  The new university will partner with Egyptian 
industries and business associations as well as international 
universities and research institutes in order to achieve its goals. 
The university is expected to begin offering classes in September 
2007 with graduate programs in business and engineering and offering 
masters degrees in technology managements. 
 
------ 
ENERGY 
------ 
 
¶22.  OIL AND GAS:  Wood Mackenzie Consulting recently presented a 
study at the Egyptian Petroleum Society indicating that sharp 
increases in oil prices, drilling equipment fees and the cost of 
deep marine drilling operations, are the main obstacle to gas 
investments and further development of a domestic gas market. 
However, the study also indicated the success rate in finding gas in 
Egypt is three times higher than for the rest of the world.  Proven 
gas reserves in Egypt are about 67 trillion cubic feet (TCF); 
probable reserves in the deep Mediterranean region are estimated at 
70 TCF.  Egyptian Minister of Petroleum Fahmy challenged the study's 
figures for probable gas reserves, claiming reserves are 
approximately 90 TCF.  Most industry experts believe the GOE's 
figures are overly optimistic. 
 
¶23.  On June 7, the Kuwait Energy Company (KEC) announced the 
purchase of 37.5 percent of the Gharib field in the northwestern 
desert of Egypt.  KEC officials say this is the first in a series of 
potential projects in Egypt.  KEC was established in August 2005 
with the aim of becoming a key independent oil and gas company, and 
hopes for production of 50,000 barrels/day with net reserves of 300 
million barrels by 2010. 
 
¶24.  The Spanish electrical company Union Fenosa has signed a 
framework agreement with the Italian company Eni, the Egyptian 
Natural Gas Holding Company (EGAS), and the Egyptian General 
Petroleum Corporation to double the output of the LNG facility in 
Damietta.  Under the agreement, the consortium will build a second 
LNG train, to be operational by 2011, with a capacity of 7 billion 
cubic meters (BCM) a year.  Total output from Damietta will reach 14 
BCM per year, or slightly less than half of Spain's total demand. 
 
 
¶25.  In late July, press reports indicated that the Eastern 
Mediterranean Gas Company (EMG), an Israeli-Egyptian joint venture 
company, had resumed talks with Israeli customers willing to 
purchase gas at 2006 market prices.  While EMG did not say with whom 
it was negotiating, the report indicated that the potential 
customers were cement, power and chemical enterprises.  EMG 
currently has one contract in Israel, for sale of 1.7 BCM annually 
to Israel Electric Corporation. 
 
¶26.  ELECTRICITY:  This summer, Minister of Electricity Hassan 
Younis announced Arab and international investors will finance most 
projects in the GOE five year plan.  The plan includes construction 
of 14 new plants with total capacity of 7,957 megawatts.  Younis 
denied rumors that the GOE will either privatize or conduct IPOs of 
shares of electrical companies.  He said recent fuel and natural gas 
price increases will not affect electricity but noted that prices in 
Egypt are low compared to region, and that subsidies cost the GOE LE 
3 billion ($526m) per year. 
 
---------- 
SUEZ CANAL 
---------- 
 
¶27.  Canal revenues, Egypt's third largest source of income, were 
$1.2 billion in January-June 2006, compared to $3.4 billion for all 
of 2005.  The Suez Canal Authority expects annual revenues to 
increase 12-13 percent over 2005.  Increases are a result of a 3 
percent hike in transit fees, as well as an increase in traffic 
(1575 ships in the same six month period).  On July 26, Egypt 
celebrated the 50th anniversary of Nasser's nationalization of the 
Suez Canal. 
 
------------------- 
ECONOMIC INDICATORS 
------------------- 
 
¶28. 
 
Exchange Rate: 
                 (06/29/06)     (08/31/06) 
Egyptian Pounds/$      Buying Selling Buying Selling 
Avg. Bank/Bureau Rate         575.24 577.18  573.76 575.84 
 
Capital Market: 
                (06/29/06)     (08/31/06) 
CASE 30 Index                     5,298          5,674 
Hermes Financial Index         47,364         50,025 
EFG Index        24,055         25,509 
 
Interest Rates: 
(percent, monthly comparison) 
 
Interbank Overnight              8.3 (06/28)    8.1 
T-bills (182 days)               8.97(06/27)    8.99(08/01) 
T-Bond (maturing 12/08)         9.1 (06/15)    9.25(07/25) 
T-Bond (maturing 10/11)          9.0 (06/25)    9.1 
 
Foreign Reserves: 
(US $ billion, official gov't figures) 
 
       (06/2006)        (08/2006) 
       22,930.0         23,051.1 
Interbank Overnight              8.185(05/30)   8.3 (06/28) 
T-bills (182 days)               8.727          N/A 
T-Bond (maturing 12/08)         8.94(05/25)    9.1 (06/15) 
T-Bond (maturing 10/11)          8.9 (05/15)    9.0 (06/25) 
 
Foreign Reserves: 
(US $ billion, official gov't figures) 
 
       (05/2006)   (08/2006) 
       22,860.0         22,930.