CENTRAL BANK OF EGYPT · 2015-04-29 · African Central Banks (AACB) adopted the African Monetary Cooperation Program (AMCP) The AMCP is responsible for the harmonization of the monetary

CENTRAL BANK OF EGYPT

ECONOMIC REVIEW

Vol. 51 No. 3

2010/2011

Economic Statistics and Reports Sector

The Economic Review is issued by the Economic Statistics and Reports Sector at the Central Bank of Egypt (CBE) on a quarterly basis. It aims to make available to a broad readership of specialists and non-specialists a wide range of information on the performance of the Egyptian economy during the reporting period. The CBE posts the Review on its website: www.cbe.org.eg.

Contents Page

Main Monetary and Financial Indicators

Leading Article – A Currency Union in Africa: Lessons to be Learned from Other Experiences

1

1- Macroeconomic Performance 1/1- Gross Domestic Product (GDP) ………………………………………….........................1/2- Unemployment....................................................................................................................

39 47

1/3- Inflation……………………………………………………………………….................. 49 1/4- Tourism………………………………………………………………………………….. 55

2- Monetary and Banking Developments 2/1 - Monetary and Banking Policy and Monetary Aggregates……………………………. 62 2/1/1- Monetary Policy……………………………………………………………………… 62 2/1/2- Reserve Money……………………………………………………………................ 64 2/1/3- Banknote Issue………………………………………………………………………. 67 2/1/4- Domestic Liquidity (M2) and Counterpart Assets ………………………................. 69 2/1/5- Payment Systems and Information Technology (IT)……………………………….. 75 2/1/6- RTGS and SWIFT Local Services…………………………………………………… 77 2/2 - Banking and Credit Developments ………………………………………………….. 79 2/2/1- Banking Reform……………………………………………………………………… 79 2/2/2- Supervision Sector…………………………………………………………………… 83 2/2/3- Overview of Banks' Aggregate Financial Position………………………………….... 88 2/2/4- Interbank Transactions in Egypt……………………………………………………… 90 2/2/5- Deposits………………………………………………………………………........... 92 2/2/6- Lending Activity ……………………………………………………………………... 94 3- Stock Market

3/1 - Primary Market ……………………………………………………………............... 100 3/2 - Secondary Market ……………………………………………………………………. 101 3/3 - Mutual Funds ………. ………………………………………………………………. 103 4- Public Finance and Domestic Public Debt

4/1 - Consolidated Fiscal Operations of the General Government ……………………...... 104 4/2 - Domestic Public Debt ……………………………………………………………….. 111 4/2/1- Debt of the Government (Net)………………………………………………………... 111

4/2/2- Debt of Public Economic Authorities (Net)…………………………………………. 114 4/2/3- Debt of the National Investment Bank (Net) …………….......................................... 115 4/2/4- Intra-Debt……………………………………………………………………………. 115 4/2/5- Domestic Public Debt Service ……………………………………………………… 116 5 - External Transactions 5/1 - Foreign Exchange Market…………………………………………………….……... 117 5/2 - Balance of Payments………………………………………………………................ 118 5/2/1- Trade Balance ………………………………………………………………………. 119 5/2//2- Balance of Services and Transfers………………………………………………….. 119 5/2/3- Capital and Financial Account……………………………………………………… 125 5/3- External Trade………………………………………………………………………. 127 5/3/1- Merchandise Export Proceeds by Degree of Processing…………………..………... 128 5/3/2 Merchandise Import Payments by degree of Use…………...………………………. 129 5/3/3- Sectoral Distribution of Commodity Transactions………………………………….. 130 5/3/4- Geographical Distribution of Commodity Transactions…………………………….. 132 5/3/5- Breakdown of Trade by Main Commodity………………………………………….. 133 5/4- International Finance ……………………………………………………….............. 135 5/4/1- Foreign Direct Investment (FDI) in Egypt ………………………………………….. 137 5/4/2- External Official Grants …………………………..………………….……………... 141 5/4/3- External Debt………………………………………………………………………... 143 Annex

- Statistical Section…………………………………………………………………………... 153

Main Monetary and Financial Indicators

July/March GDP (LE bn) 2009/2010 2010/2011

GDP at Market and Current Prices 895.9 1021.5 Annual Growth Rate (%) 15.7 14.0 Real GDP at Factor Cost 622.6 638.1 Annual Growth Rate (%) 5.0 2.5

GDP Growth Rate by Sector (%) (at Factor Cost)

A) Productive Sectors

Of which: Electricity 6.6 5.3 Water 6.6 5.2 Construction & Building 13.7 5.0 Agriculture, Forestry & Fishing 3.5 2.8

B) Services Sectors Of which: Suez Canal -6.8 11.1 Communications 12.6 8.5 Real Estate 4.4 3.5 Finance 5.0 1.6

Price Index (%) 2009/2010 2010/2011 - Change rate in consumer price index (urban) (January 2010 = 100) 8.4 9.8 - Change rate in producer price index (2004/2005 =100)

6.3

17.9

July/March 2009/2010 2010/2011 Monetary Survey (LE bn)

End of Period

Reserve money 196.1 234.9

Growth rate (%) 12.0 15.7 Domestic liquidity (M2) 888.2 988.1 Growth rate (%) 6.9 7.7 Money supply (M1) 201.9 240.8 Growth rate (%) 10.3 12.5 Currency in circulation/Money supply (%) 63.6 67.9 Banking system foreign assets, of which: 312.2 311.9

CBE foreign assets 188.1 175.5 Banking system foreign liabilities, of which: 35.8 45.9

CBE foreign liabilities 8.3 8.1 Total deposits with banks (excluding the CBE) 867.1 940.8

In local currency 664.9 706.8 In foreign currencies 202.2 234.1

Foreign currency deposits/total deposits (%) 23.3 24.9 Total lending and discount balances extended by banks (excluding the CBE), of which: 441.4 470.0

To government and public economic authorities 33.0 38.3 To business sector (public and private) 301.5 315.9

Portfolio of securities and TBs with banks (excluding the CBE), of which: 372.3 451.4

TBs and government bonds 313.4 389.9 Loans/deposits with banks (%) 50.9 50.0 Investment in securities, TBs and equity participations/deposits (%)

42.9

48.0

US Dollar Exchange Rate Announced by the CBE

(PT/Dollar)

- Buy and Sell Exchange Rates (Average of the Period) 549.7 577.9 - End of the Period (Average Market Buy Rate) 549.1 595.4

July/March - Annual Discount and Interest Rates (%) 2009/2010 2010/2011 End of Period CBE Lending and Discount Rate 8.5 8.5 CBE Overnight Deposit and Lending Rates Deposit 8.25 8.25 Lending 9.75 9.75 Interest Rate on Deposits of More than 1 Month to

3 Months 6.0 6.5 Interest Rate on Loans of 1 Year or Less 11.0 10.7

2010/2011 Estimates FY Actual

(July/March)

Consolidated Fiscal Operations of the General Government (Budget Sector)

LE bn - Total Revenues 285.8 144.3 - Total Expenditures 403.2 239.8 - Cash Deficit (or Surplus) 117.4 95.5 - Net Acquisition of Financial Assets

-8.3 -1.5

Overall Deficit (Surplus) . 109.1 94.0 Total Finance 109.1 94.0 - Domestic Finance 118.5 116.8 Banking 53.2 54.4 Non-Banking 65.3 62.4 - Foreign Borrowing -9.7 3.0 - Arrears - - - Others -0.7 1.7 - Revaluation Differences - 3.9 - Net Privatization Proceeds 0.3 - - Difference between TBs Face Value and Present Value - -2.5 - Foreign Debt Reclassification Diff. and Related FX Diff. - - - Discrepancy 0.7 -28.9 - Cash Deficit (Surplus) as a Percentage of GDP (%) 8.5 6.9 - Overall deficit (Surplus) as a Percentage of GDP (%) 7.9 6.8 - Revenues as a Percentage of GDP 20.7 10.5 - Expenditures as a Percentage of GDP 29.3 17.4

End of

June 2010 March 2011Domestic Public Debt LE bn

Gross, due on: 888.7 1001.9 - Government (net) 663.8 778.9 - Public Economic Authorities (net) 67.8 67.6 - NIB (Minus Intra-Debt) 157.1 155.4

Balance of Payments (US$ bn) July/March

2009/2010 2010/2011 Current Account & Transfers (2.6) (2.4) Trade Balance (18.5) (18.4) Merchandise Exports 17.0 18.9

Oil and its Products % 41.6 43.7 Others % 58.4 56.3 Merchandise Imports 35.5 37.3 Intermediate Goods % 33.3 31.1 Consumer Goods % 25.2 24.9

Fuel, Raw Materials and Others % 20.4 23.2 Investment Goods % 21.1 20.8

Services Balance 8.8 6.8 Receipts, of which: 17.7 17.3

Transportation % 29.5 34.9 Travel % 49.2 50.6

Investment Income % 3.7 1.7 Payments, of which: 9.0 10.4

Transportation % 10.2 10.2 Travel % 19.8 15.6 Investment Income % 32.8 44.3

Transfers 7.2 9.2 Official % 87.5 97.6 Private % 12.5 2.4 Capital and Financial Account 5.2 -1.8 Overall Surplus/(Deficit) 3.1 -5.5

The Leading Article

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A Currency Union in Africa:

Lessons to be Learned from Other Experiences1

I. Background

There are different theoretical approaches to the process of monetary integration2. The German ‘economist’ thesis considers currency unification as an ex-ante process that precedes the coordination and unification of fiscal, political and social policies. On the contrary, the French ‘monetary’ school argued that monetary unification is an ex-post process that follows the coordination and unification in the other areas (Goodhart, 2007).

As per the German economist thesis, Rose et al. (1998) argued that countries with different levels of economic growth should first undertake extensive structural and institutional changes by adhering to settled convergence criteria. Bukowski (2006), and Hashmi and Lee (2008) named five steps towards successful economic integration. First, establish a free trade zone through bilateral and multilateral trade arrangements. Second, promote regional financial cooperation through freedom of capital mobility and financial markets unification. Third, achieve relative stability of mutual exchange rates. Fourth, assess the macroeconomic and financial conditions of member economies through effective policy dialogue, and finally; achieve political unification.

The roadmap for creating a CU in Africa is depicted by the Abuja Treaty that was signed in 1991 and launched in 1997. The treaty set the stages for the establishment of the African Economic Community (AEC) that will eventually end up by a monetary union, thus a CU, for Africa by 2028. First, create Regional Economic Communities (RECs) by 1999; second, strengthen intra-REC integration and harmonization by 2007; third, establish a free trade area and customs union within each bloc by 2017; fourth, establish a continent-wide free trade area and customs union by 2019; fifth, establish a continent-wide African Common Market (ACM) by 2023 (Bhatia et. al. 2010). The Treaty’s goal of establishing AEC was fast tracked to 2021.

To facilitate the achievement of the treaty’s goal, the Assembly of Governors of the Association of the African Central Banks (AACB) adopted the African Monetary Cooperation Program (AMCP) The AMCP is responsible for the harmonization of the monetary cooperation programs of the five AACB sub-regions. It also tackles the various RECS as building blocks for ultimately one African monetary union with a common central bank and a single currency by 2021. In this context, the various RECs are seeking to fast track their monetary cooperation programs as follows: EAC (2015), SADC (2016) and COMESA (2018).

In line with the Abuja Treaty and the AACB initiative, the African continent witnessed the formation of a number of Regional Economic Communities (RECs). The currently existing blocs are the

1 Prepared by: Dina Rofael, Mona Kamal, Mariana Rizk, Amira Saleh, Rana Magdy, Wafaa Ismail, Mai Hamdy, and Shaimaa Abdel Azeim. Many thanks are due to Heba Wageih and Yasmine Sabri for their dedicated research assistance. The paper was prepared to be presented in the Annual Meeting of The Association of the African Central Banks (AACBs) held in Malawi on August, 8-12, 2011. 2 Monetary integration is an agreement among some countries to unify their monetary policies, which requires the fixity of their mutual exchange rates. In this sense, monetary integration implies currency unification.

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Economic Community of Central African States (ECCAS)1, the Economic Community of West African States (ECOWAS)2, the South African Development Community (SADC)3, and the East African Community (EAC)4, in addition to the Common Market for Eastern and Southern Africa (COMESA)5 that has some countries in common with the SADC and EAC.

The ECCAS started in 1983 and covered 11 countries in the Central African sub-region. ECCAS aimed to establish a customs union in 2003. It started by a trade liberalization program that was to be implemented in stages. These stages entail the gradual reduction of tariff rates and the elimination of non-tariff barriers to intra-ECCAS trade. However, little progress has been made in implementing any element of the trade liberalization program. The failure to achieve strong actions in the trade liberalization program was attributed to socio-political turbulences that prevailed for many years. Nevertheless, despite all of these problems, the idea of re-energizing ECCAS is not yet dead and members are still discussing various ways of rebuilding ECCAS.

The CFA Franc Zone is a monetary union in Africa that is composed of 14 countries plus the Islamic Republic of Comoros. The CFA members have joined sequentially over a period of 40 years starting from Guinea in 1958 and ending with Guinea-Bissau in 1997. The CFA zone is divided into two monetary sub-unions. The first sub-union is the Western African Economic Monetary Union (WAEMU), which consists of eight countries6, while the Central African Economic and Monetary Community (CEMAC) consists of six countries7.

In West Africa, the non-WAEMU-ECOWAS countries intend to create a common currency area named West African Monetary Zone (WAMZ)8 and eventually merge it with the WAEMU. Accordingly, the whole ECOWAS region will be a single-currency area. On the June 2007 ECOWAS Summit, the leaders requested a feasibility study of a single monetary union by 2009 that comprises WAMZ and WAEMU countries, thus skipping the intermediate stage of two parallel monetary unions. However, in June 2009, the WAMZ countries agreed to further postpone the launch date for the WAMZ common currency until 2015 and the ECOWAS currency to 2020, due to the global financial crisis and the insufficient macroeconomic and institutional convergence. COMESA started as a preferential trading area in 1981 prior to attaining its current form in 1994. It is comprised of 19 countries spread over the two sub-regions of Eastern and Southern Africa and with a small number of countries in the Central and North sub-regions. The trade liberalization objective of these sub-regions envisaged a progression from a preferential trading area through a free trade area and customs union to a common market. In particular, the sub-regions aimed to establish a

1 The ECCAS includes Angola, Burundi, Cameroon, Chad, Central African Republic, Democratic Republic of Congo (C.A.R.), Gabon,

Guinea, Rwanda and Sao Tome and Principe. 2 The ECOWAS includes Benin, Burkina Faso, Cote d'Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria,

Senegal, Sierre Leone and Togo. 3 The SADC includes Angola, Botswana, Democratic Republic of Congo, Lesotho, Malawi, Mauritius, Mozambique, Madagascar,

Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. 4 The EAC includes Burundi, Kenya, Rwanda, Tanzania and Uganda. 5 The COMESA includes Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Malawi,

Mauritius, Madagascar, Seychelles, Sudan, Swaziland, Rwanda, Uganda, Zambia and Zimbabwe. 6 The WAEMU includes Benin, Burkina Faso, Cote d'Ivoire, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Senegal, Sierre Leone, Togo. 7 The CEMAC includes Cameroon, the Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon. 8 The WAMZ includes Gambia, Ghana, Guinea, Nigeria and Sierre Leone.

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customs union by eliminating all barriers against intra-COMESA trade and implementing a common external tariff and rule of origin. They planned to create a free trade area in 2000 and a customs union in 2004. However, progress in the implementation of trade liberalization program in COMESA has been behind schedule.

The EAC is a regional intergovernmental organization of Burundi, Kenya, Rwanda, Tanzania and Uganda. In 2005, a customs union was successfully launched. The agreement became fully fledged in 2010 after eliminating the asymmetric internal tariffs imposed by Tanzania and Uganda on selected Kenyan imports. Additionally, primary and secondary convergence criteria have been set for Stage 1 (2007–10) and Stage 2 (2011–12) of the convergence. The EAC central banks operate de jure flexible exchange rate regimes, target reserve money, and use similar domestic money market instruments for liquidity management.

The SADC governments have agreed on a set of macroeconomic convergence indicators, focusing on low inflation rate. The macroeconomic performance has been relatively improving in most countries (with the exception of Zimbabwe) concerning the government budget balance, public debt, and current account positions. Moreover, the Southern African Customs Union (SACU)1 has been known as the anchor and potential driver of deeper integration in SADC.

It is worth mentioning that some African countries are members of two regional blocs. For example, Tanzania is a member of both the EAC and the SADC, while Kenya, Tanzania, Burundi, and Rwanda are members of both the EAC and COMESA. Moreover, the Democratic Republic of Congo, Madagascar, Malawi, Mauritius, Seychelles, Swaziland, Zambia and Zimbabwe are members of both the COMESA and SADC. As such, a Tripartite Summit of the Heads of State and Government of the COMESA, EAC and the SADC was held in Kampala, Uganda in 2008. The summit recommended that the three RECs should seek the merger into a single REC with the objective of fast tracking the attainment of the AEC. However, no specific timeline has been developed yet.

This paper aims to identify the appropriate setup for the establishment of a successful CU in Africa. Accordingly, the paper adopts three types of analysis. First, it draws some lessons from the existing CUs, such as the Economic and Monetary Union of the European Union (EMU) as an example of the German thesis; and the CFA Franc Zone as a model for the French school. Second, the paper evaluates the African sub-regions to determine the building block(s) for a successful CU in Africa. Third, the paper examines the degree of nominal and real convergence within the selected building block(s).

The rest of the paper is organized as follows: the first section presents a background on the OCA theory and the convergence criteria, including the optimal exchange rate policy and the co-ordination between fiscal and monetary policies in the OCA framework. The second section assesses the two case studies of EMU and CFA Franc Zone. The third section reviews the empirical literature on nominal and real convergence. The fourth section displays empirical analysis of the degree of convergence in the African sub-regions. The final section reports the policy recommendations and conclusions.

1 SACU (includes Botswana, Lesotho, Namibia, South Africa, and Swaziland) is the oldest customs union in the world dating back to

1910. It represents a pool for common external tariff and common excise tariff. The collected customs and excise are paid to South Africa’s national Revenue Fund. The Revenue is shared among members according to a revenue-sharing formula as described in the agreement.

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II. Optimum Currency Area (OCA) and Convergence Criteria

The OCA theory emerged from the early discussions on the choice of the exchange rate regime, as an extension to the benefits of the fixed exchange rate. Mundell (1961) and McKinnon (1963) defined an OCA as the optimal domain of a single currency or several national currencies with mutually fixed rates (multiple currencies). The authors initiated the debate on the convergence criteria that qualify a group of countries for currency area creation. Latter (1996), Rose et al (1998), and Bukawski (2006) highlighted the essential criteria as follows: small size with strong trade links and a comparative advantage in production, flexible prices and wages, factor mobility, homogeneity of business cycles, converging fiscal indicators and inflation rates.

a) Fixed or Floating Exchange Rate

The debate on the optimal exchange rate regime was also used to determine the relationship of the area's currency (single or multiple) with the external world. Mundell (1961) favored the flexible exchange rate to maintain external balance. For example, if the balance of payments is in deficit, the nominal exchange rate should depreciate or domestic prices (and wages) should decrease. If the nominal exchange rate is fixed and prices are relatively rigid, the country's exports become less competitive, which exacerbates the external deficit.

McKinnon (1963) argued that the choice of exchange rate regime should depend on the size of the economy and its degree of openness (shares of tradable and non-tradable sectors in GDP). If the tradable sector represents the greater share in a small economy, the flexible exchange rate regime will be optimal to achieve external balance. In this case, the country should practice a proactive monetary policy to counteract the pass-through effect and attain internal price stability. On the other hand, if the non-tradable sector represents the greater share of the GDP, the fixed exchange rate would be appropriate given the existence of intra-industry factor mobility.

For developing countries, Abed et al. (2003) supported a currency peg to the dollar as a credible anchor for the monetary policy. Nevertheless, if capital is perfectly mobile, the pegging country will not be able to determine its domestic interest rate independently of the US interest rate, and therefore, it cannot use its monetary policy to achieve domestic policy goals (Setser, 2007). Arayssi (2008) and Khan (2009) highlighted the main advantages of the dollar peg as it simplifies trade and financial transactions, limits the pass-through effect to domestic inflation and reduces exchange rate volatility. The reductions in exchange rate and inflation risks lower the country's cost of borrowing in the global capital markets (Plümper and Troeger, 2008). Khan (2009) stated that the fixed regime helps developing economies to cope with their weak monetary transmission mechanisms and shallow credit and capital markets.

In general, the decision to join a currency area involves the abandonment of an independent national monetary policy to follow a unified one. This might involve the creation of a new single currency by a new independent central bank or the fixity of the national mutual exchange rates. In the latter case, a common reserve will be needed for countries to supplement their external positions vis-à-vis other member countries (Cohen, 1992). If the currency area chooses to peg its unified currency (single or multiple) to a key currency (such as US dollar or Euro), it abandons the area's monetary independence for the sake of the key currency's country.

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b) Coordination of Monetary and Fiscal Policies

Mundell (1961) and Mackinnon (1963) argued that there is a trade-off between two objectives: macroeconomic stabilization (lower inflation vs. full employment) and the reduction of transaction costs (interest rate). An optimal monetary policy would eliminate this trade-off. Given that a country forfeits its national monetary policy to join a CU, each member country may use the stabilization tools of fiscal policy (such as income tax) to achieve macroeconomic stabilization. In this case, the magnitude of the national fiscal policy will map the idiosyncratic shock hitting a particular country.

Consequently, there are two main negative spillovers in a CU; first, the macroeconomic stabilization losses that result from an unsustainable fiscal deficit. The second spillover is the resort of members to monetize their fiscal debts, which depreciates the region's currency and exacerbates its debt-service obligations. Therefore, there is a need for setting ceilings on fiscal deficits and/or coordinating the national fiscal policies (Masson, 1993).

Cooper and Kempf (2004) proposed the optimal setup for the coordination between the monetary and fiscal policies in a CU. In a multiple currency environment, each country should design its optimal fiscal policy to achieve macroeconomic stabilization, then use the monetary policy to offset the remaining deviations (from price and output targets). If the country-specific monetary policies are highly correlated, it would be less costly to delegate the monetary policy to one central bank. Then, the coordination of each national fiscal policy with the regional monetary policy would be necessary to mitigate the negative spillovers within the CU.

III. Lessons Learned from Established CUs

This section evaluates the experiences of the EMU and the CFA regarding three main aspects; the applied convergence criteria, the impact of external shocks on the stability of the CU, and the degree of co-ordination between the monetary and fiscal policies. This section draws some important lessons from past experiences, which should be utilized when establishing an African CU.

a) Case Study of EMU

The European Union (EU) consists of 27 member states.1 The Euro-zone came into existence with the official launch of the Euro in January 1999. In 2011, 17 EU members have already joined the Euro-zone and fulfilled the Maastricht convergence criteria for economic and monetary integration, thus forming the European Monetary Union (EMU).2

The Maastricht Convergence Criteria focus on four nominal indicators. The first criterion is the achievement of a low and stable inflation rate. The reference value of inflation was calculated as the arithmetic average of the inflation rate of the three EU countries with best inflation indicators, plus

1 Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland,

Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

2 The 17 member countries of the Euro-zone are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The other ten non-Euro EU countries are Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Sweden, and the United Kingdom.

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1.5 percentage points. The second criterion requires a sustainable fiscal policy that does not result in excessive deficits. Specifically, the annual budget deficit should not exceed 3% of GDP, and the public debt (government debt) should not exceed 60% of GDP.

The third criterion is concerned with the exchange rate stability. The Maastricht treaty requires the candidate country to abide by the fluctuation margins of the Exchange Rate Mechanism of the European Monetary System (+15% band), for at least two years, without devaluing against the currency of any other member state. A precondition for Maastricht nominal convergence is the achievement of exchange rate stability; then, the binding fixity of mutual exchange rates between participating national currencies; followed by the elimination of cross-currency exchange rates.

The fourth criterion emphasizes the long-term interest rate alignment among member states. The treaty specified an average long-term interest rate (over the past one-year period) that should not exceed, by more than two percentage points, the average long-term interest rate of the three members with the lowest inflation rates. Interest rates were measured based on gross yield on long-term (10-year) government bonds or comparable securities.

In assessing the sources of instability in the EMU, it has been observed that violating the fiscal criteria by some member countries are the main sources of vulnerability to the union. These violations stem from the asymmetry of shocks. Beetsma and Bovenberg (2001) and Uhlig (2002) focus on the effectiveness of fiscal policy in responding to asymmetric shocks in assessing the viability of a common European currency. Issing (2002) suggested that the European policymakers should decide the macroeconomic policy instruments mutually on the regional level in order to achieve the economic objectives1. In this context, Majocchi (2003) highlighted the 'Institutional Asymmetry' problem, due to the divergence between achieving price stability as the primary objective of the ECB and the other economic objectives of the fiscal authorities (e.g. achieving full employment and increasing incomes).

The fiscal policy co-ordination within the Euro-Zone was tackled through Broad Economic Policy Guidelines (BEPGs). However, Begg et.al. (2003) argued that those guidelines were not binding. That is why there was a failure in realizing the fiscal discipline since the cash surplus/deficit as a percentage of GDP reached 5% in 2009 (it should not exceed 3%). Moreover, the central government debt as a percentage of GDP reached 70% (it should not exceed 60%). The poor performance in the fiscal side at the Euro-zone level was attributed to the breaches of some member states to the limits determined by the fiscal criteria due to asymmetric shocks.

The unsatisfactory fiscal indicators are well presented by the case of Greece with a central government debt to GDP ratio approaching 120%, compounded by a government budget deficit of almost 15% of GDP. Moreover, Italy and Portugal were characterized by a vulnerable fiscal situation. Additionally, in 2010 the area was affected by the first considerable shock since its establishment, and fears of a sovereign debt crisis had developed in the member states with the bad historical performance in fiscal indicators; especially Greece and Portugal2.

1 Several papers reviewed the co-ordinating arrangements between the two policies in the Euro-zone (e.g. Hallett et. al., 2000, Von

Hagen and Mundschenk, 2001, Beetsma and Bovenberg, 2001, Issing, 2002, Begg, et. al., 2003, and Majocchi, 2003). 2 In this context, Gros and Mayer (2010) introduced a measure for the country's financial vulnerability to highlight the sudden stop in

external financing, thus financial turmoil in the Euro-zone. The results indicate that Greece, Portugal, Ireland, Italy, and Spain are the most vulnerable countries to external shocks in the zone.

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In an attempt to overcome violations to the criteria in the EMU, Von Hagen and Hammond (1995), Beetsma and Bovenberg (2001) suggested the adoption of a system of cross-border fiscal transfers to countries hit by exceptionally bad shocks. Calmfors (2003) suggested the establishment of a 'Fiscal Policy Committee' in order to enhance the role of the Stability and Growth Pact (SGP). Alternatively, a proposed solution was to remove the barriers so that migration of workers and flexible wages would be able to absorb asymmetric shocks rather than the redistribution of funds from one state to another.

This led the authorities to undertake an in-depth review of the existing framework for fiscal policy co-ordination. Therefore, the national governments that violated the deficit criteria were required to pay up to one-half percent of GDP as a fine.1 Furthermore, the European Council decided exceptional breaches; it stated that the country could legitimately exceed the three percent ceiling of the deficit criteria (and presumably the 60 percent debt limit) if the spending that caused that violation was aiming to achieve European policy goals2.

b) Case Study of CFA Franc Zone

The CFA Franc Zone is divided into two monetary sub-unions composed of 14 countries plus the Islamic Republic of Comoros, which is not included in our analysis. The CFA members have joined during a period of 40 years starting from Guinea in 1958 and ending with Guinea-Bissau in 1997. The first sub-union is the Western African Economic Monetary Union (WAEMU) which consists of eight countries, while the other six countries compose the Central African Economic and Monetary Community (CEMAC). Each zone has a separate treaty with France, a separate currency and an independent central bank. The two sub-unions' exchange rates were pegged to the French Franc which has been pegged to the Euro after the establishment of the EMU. Worth to mention, the CFA Zone was hit by severe shocks that led to the devaluation of the CFA Franc in January 1994.

The countries of the WAEMU zone strived to converge after suffering from economic instability. The WAEMU convergence criteria were set in October 1999 within the framework of the Pact of Convergence, Stability, Growth and Solidarity (PCSGS). The criteria can be summarized in nine objectives: inflation rate not exceeding 2%, wages not exceeding 30% of total government revenues, government revenues equal to at least 17% of GDP, government investment not lower than 25% of GDP. Moreover, the government should target a balanced primary budget, zero new arrears in payment, elimination of borrowing from the central bank, cuts in the current account deficit to 3% of GDP and a total of foreign and domestic debt not exceeding 60% of GDP (Georgioni and Holden, 2002).

In the WAEMU, two main problems caused the overall deterioration of the CU; a domestic problem and an external one. The domestic problem is due to the lack of co-ordination between the monetary and fiscal policies. For example, the central bank of Cote d'Ivoire channeled excessive credit to the government for investment spending, which resulted in crowding out the private sector and huge capital outflows, which eventually led to lower economic growth rates. This problem was intensified when the government started borrowing from abroad and accumulated foreign debts. The external source of instability was the pegging of the CFA Franc vis-à-vis the French Franc.

1 However, the European Union’s Council of Ministers voted to suspend its enforcement. 2 The agreement made clear that this could include spending on education, research, defense and financial aid. Feldstein (2005).

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The domestic inflation and the appreciation of the French Franc vis-à-vis the dollar, rendered the exports of Cote d'Ivoire more expensive and less competitive, which worsened the current account position and accumulated increased foreign debts.

Turning to the CEMAC case, four main surveillance criteria were set in 2001 to achieve convergence among the sub-union's countries. First, the basic fiscal balance1-to-nominal GDP ratio should be at least 0%. Second, the average annual inflation should not exceed 3% (measured by the CPI after excluding the food sub index). Third, the stock of domestic and external debt as a percentage of nominal GDP should not exceed 70%; and fourth, new domestic and external payment arrears should be eliminated. These criteria were followed by secondary non-obligatory criteria in 2008, specifically: net international reserves-to-monetary base ratio≥20%, a non-negative primary fiscal balance-to-nominal GDP, non-oil fiscal revenue-to-nominal GDP ratio≥17%, share of the change in public wages of the total change in public revenues≤1 percent and a non-negative current account balance net of grants as ratio of GDP.

When setting those criteria, it was taken into consideration that the CEMAC countries have experienced volatile economic business cycles caused by shocks to terms of trade and real effective exchange rates. All CEMAC countries - except for the Central African Republic - have experienced significant volatility in the terms of trade (standard deviation exceeded 15%), while the standard deviation in the real effective exchange rate was about 10% for all countries. Moreover, the shocks to the two variables led to volatility in the economic growth of the CEMAC countries, which hindered the achievement of CEMAC convergence criteria.

Due to the large share of the public sector in the non-oil economies of CEMAC countries, Iossifov et. al. (2009) proposed that the counter-cyclical fiscal policies (eg. discretionary public spending increases and tax cuts) could mitigate the impact of external shocks on CEMAC countries' business cycles. More specifically, there is a high correlation between the fiscal and external balances in all CEMAC countries, attributed to the correlation between oil revenues and oil exports. However, fiscal policy reaction to external shocks may be desirable in terms of stabilizing economic activity, but counterproductive for external stability. Such a problem could be avoided by accumulating sufficient government foreign reserves at the regional central bank, when external conditions are favorable, to cover any sudden external shock.

IV. Review of the Empirical Literature

One strand in the literature examines the degree of convergence, based on formal or informal tests. The informal tests entail descriptive analysis such as tracing the development of the volatility (measured by the standard deviation) of a particular convergence criterion, and pointing out the countries diverging from the regional average.

The formal tests of economic convergence include two main methods; the first is the test for co-integration (long-run relationship) between a country's series (of a convergence criterion) and a benchmark series. In the case of the EU, the benchmark series is usually of Germany or France due to their success in achieving the Maastricht convergence criteria. The second method involves the use of simultaneous models such as Vector Auto-regression (VAR) and Structural Vector Auto-regression (SVAR) to examine the symmetry of shocks across member countries.

1 The basic fiscal balance stands for the difference between the total revenue net of grants and total expenditure net of foreign-financed capital spending.

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The second strand in the literature attempts to determine the domain of the OCA; based on a mixture of real and nominal convergence criteria, usually using cluster models. The nominal convergence criteria include the inflation rate, public debt and fiscal deficit. While the real convergence criteria include the symmetry of shocks, business cycle synchronization, the quantity of potential intra-trade flows and the convergence of per-capita income. The following section presents an empirical review that focuses on formal tests in examining the degree of convergence using nominal or real criteria.

Degree of Convergence

1. Nominal Criteria

Karfakis and Moschos (1990) used the Engle and Granger (1987) bivariate framework to investigate the nominal interest rate linkages between Germany and each of Belgium, France, Ireland, Italy, and the Netherlands. They found no evidence of co-integration in monthly data from April 1979 to Nov.1988. The identification of a common trend in nominal interest rate series is useful for the coordination of monetary policies (Koukouritakis and Michelis, 2003)1. Hafer and Kutan (1994) adopted the multivariate co-integration framework with short-term interest rates and money supplies for Belgium, France, Germany, Italy and the Netherlands. The authors covered the period March 1979 - Dec.1990 and found evidence of partial policy convergence2 among these countries.

Haug et al. (2000) employed the Johansen’s co-integration approach to determine which of the twelve European countries3 would form a successful monetary union, based on nominal exchange rates, real exchange rates, long-term interest rates, and fiscal deficits. Using monthly and quarterly datasets during the period 1979-1995, the authors found potential problems for Italy, Portugal, and Spain concerning their fiscal and monetary policies. The results suggested also that Denmark and the UK can successfully join the EMU, even though they were reluctant to do so.

Meister (2002) examined the degree of convergence achieved by the Central-Eastern European Countries (CEECs) towards the EMU. The author tested whether a new multivariate co-integration vector is created when each Eastern European country joins the EMU area - known as relative co-integration. He applied this method to inflation rates, exchange rates, and long-term interest rates for two groups of countries. The first group was expected to join in 2004 and includes the Czech Republic, the Baltic States, Poland, Hungary, Slovenia, Slovak Republic, Cyprus and Malta. The second group consists of Bulgaria, Hungary, Poland and Romania was expected to join a few years

1 Koukouritakis and Michelis (2003) used the co-integration technique to investigate the prospects of 10 countries (Cyprus, the Czech

Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia) based on convergence criteria in relation to France and Germany. In addition to the nominal convergence criteria, they analyzed the long-run relationships of real exchange rates and real per capita GDP. The monthly data sample extended from Jan. 1993 to Dec. 2003. The empirical results showed that most of the countries were partially ready to join the Euro-zone but needed further adjustments to their government policies to be fully prepared.

2 "Complete Convergence" of government policies among a set of p countries means that there exist p - 1 co-integrating vectors and a single shared common stochastic trend. Hence, a multitude of policy measures had converged to a single common long-run path, dominated by the policy preferences of a reference country in the union. On the other hand, "Partial Convergence" implies that there exist two or more shared common stochastic trends in some policy measure of a given group of European countries, then it must be the case that some countries in the group set their policies independently at least in the long-run. Therefore, it will be quiet difficult to form and maintain an economic and monetary union under the circumstances.

3 The countries included in the analysis are Belgium, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Greece, Spain, UK and Denmark.

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later. The results suggested that the first group was much closer to the Maastricht convergence criteria than the second group.

Carmignani (2005) applied the co-integration approach to test the degree of monetary convergence among the Common Market for Eastern and Southern Africa (COMESA) countries, using inflation and monetary aggregates. The sample extends from 1980 to 2002, taking into consideration the region's transformation from a Preferential Trade Area (PTA) into the COMESA sub-region in 1994. The co-integration results highlighted the existence of partial convergence among COMESA members due to the independent policies of some countries.

2. Real Criteria:

Symmetry of Shocks

The symmetry of shocks among countries is one of the most important ‘real’ prerequisites for an OCA (Mundell, 1961). This means that a shock in one country is equal to the total effect of spillovers in the rest of the region, resulting in co-movements in the members' business cycles. However, the creation of a monetary union may also lead to greater synchronization of business cycles – referred to as the endogeneity of the OCA properties (Frankel and Rose, 1998). In theory, the effect of a monetary union on the cyclical synchronization can be positive or negative, depending on the nature of trade.1 Trade activity could be characterized as intra-industry or inter-industry. If trade among member countries is mostly intra-industry, then it is more likely that demand and sectoral shocks will affect these countries in a similar way, leading to higher synchronization.2 Conversely, if trade is mostly inter-industry, the member countries will become more specialized and therefore subject to frequent asymmetric shocks.

Bayoumi and Eichengreen (1993) applied the Blanchard and Quah (1989) methodology on an estimated SVAR model to analyze the asymmetry of shocks in 11 European countries during the period 1963-19883. The countries were classified into two groups. The first one consisted of Germany, France, Belgium, the Netherlands and Denmark. The other group included the United Kingdom, Italy, Spain, Portugal, Ireland and Greece. They extracted the underlying demand and supply shocks from the price and output data for all prospective members of the monetary union. Then the correlation of those demand and supply shocks with the average of the union was computed4. They found that the shocks are idiosyncratic across the 11 countries. However, the first group of countries experienced shocks of similar magnitude. 5

Christodoulakis et al. (1995) assessed the response shocks from a VAR system for a group of 13 European countries6 using annual and quarterly datasets during the period 1960-1990. They

1 For more details refer to Kenen (1969), Eichengreen (1992), and Krugman (1993), Ricci (1997), Frankel and Rose (1998). 2 Steps towards economic integration through the removal of trade barriers and the elimination of the exchange-rate risk through a CU

will reinforce this similarity. 3 In order to identify demand and supply shocks it is assumed that demand shocks have only temporary effects, while supply shocks

have permanent effects on prices and output. For more details, refer to Blanchard and Quah (1989). 4 In this context, Fidrmuc and Korhonen (2003) applied the same methodology to assess the correlation of supply and demand shocks

between the countries of the Euro Area and the accession countries in the 1990s. They found that some accession countries had a quite high correlation of the underlying shocks with the Euro Area. However, even for many advanced accession countries, the shocks remain significantly idiosyncratic.

5 Bayoumi and Eichengreen (1993) compared the pattern and the magnitude of the shocks in those countries to those in the US. 6 Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain and the United Kingdom

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concluded that the responses of real GDP, investment, consumption, prices, and to a lesser extent net exports, are similar across countries, despite the different disturbance terms. However, responses of government spending, money supply and terms of trade vary across countries. In their opinion, the observed differences in shocks and business cycle mechanisms will melt down as institutions and policies merge.

Crowley (2003) tested the business cycle synchronicity between the CEECs (29 countries) and Germany. The author estimated the cyclical components of real GDP, inflation, unemployment, short-term and long-term interest rates, using the band-pass filter. Then he computed a set of cross correlations between the cyclical components of the CEECs and Germany. The results show that the average correlations for the cyclical components of real GDP during the period 1993-2001 were 0.611 for the Eurozone member states, compared with 0.196 for those countries outside the area.1

Carmignani (2005) employed the hypothesis of Enders and Hurn (1994) that countries would face symmetric shocks when their bilateral Real Exchange Rates (RERs) share a common trend –known as Generalized Purchasing Power Parity (G-PPP). The author tested the hypothesis for the COMESA sub-region using a quarterly data sample from 1980 to 2002. The results showed more than one stochastic trend in the RER series, which implies the exposure to asymmetric shocks.

V. OCA in Africa: Empirical Analysis

This section will resort to informal and formal tests to determine the degree of convergence in the African sub-regions; in order to identify the building block of a successful currency area. It starts with descriptive analysis of some economic, social, political and institutional features of the major four African sub-regions, upon which the candidate sub-region(s) will be selected. Then, the formal tests are used to measure the degree of nominal and real convergence among the countries of a particular sub-region.

a) Descriptive Analysis (Informal Test of Convergence)

This section will investigate the convergence of the four African sub-regions based on the economic, socio-economic and political (institutional) aspects.

1. Economic Features

The first part traces the developments of two indicators of the monetary policy (inflation rate) and the fiscal policy (cash surplus/deficit to GDP ratio) over four intervals during the period 1990-2008. The statistics (in table 4a) show that the four sub-regions witnessed a downtrend in the average inflation rate till 2004. During the period 2005-08, ECCAS and ECOWAS recorded the minimum inflation rates of 5.6% and 5.9%, compared to 9.3% and 11.1% of SADC and COMESA respectively. Yet, the standard deviation of the ECCAS inflation rate has risen from 2.1% in 1990-94, to 3.5% in 2005-08, unlike the converging pattern (decreasing standard deviation) of all other sub-regions. After excluding outliers from the ECCAS, namely Burundi and Gabon, the sub-region showed a more converging inflation rate with a standard deviation of 1.2% in 2005-08.

1 A high degree of business cycle correlation with that of Germany, implies that the country will benefit from its membership in the

CU or at least will not be adversely affected by its membership.

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As for the cash surplus/deficit to GDP ratio, the SADC was the best during the latest period with a surplus of 1.0%, improving from 1.4% deficit in the first period 1990-94. This can be attributed to the dramatic increase of Lesotho’s cash surplus to 7.7%. Moreover, both Namibia and Seychelles shifted from a cash deficit of 3.8% and 3.2% respectively, in 1990-94, to a cash surplus of 2.4% and 1.7% in 2005-08. Nevertheless, SADC showed a diverging pattern with an increasing standard deviation from 2.7% in 1990-94 to 3.4% in 2005-08.

On the other hand, the COMESA showed slight improvement on average; despite its diverging pattern; due to the tremendous improvement of Seychelles, unlike other members that exhibited cash deficits in 2005-2008. Based on the available data, the ECOWAS sub-region showed the worst fiscal profile with a deteriorating deficit from 2.2% in 2001-2004 to 3% in 2005-2008. On the other hand, ECCAS experienced a decline in the average deficit to GDP ratio in 2001-2004 compared to 1990-94, in addition to the decline in both the standard deviation and the number of countries that lay in the tails.

Table (4A): Descriptive Statistics for Measuring the Degree of Economic Convergence in the Four Main African Sub-Regions

COMESA SADC ECOWAS ECCAS

Inflation Rate (Average)

Mean St. Dev.

Tails (Outlier)

Mean St. Dev.

Tails (Outlier)

Mean St. Dev.

Tails (Outlier)

Mean St. Dev.

Tails (Outlier)

1990-1994 27.9 36.8 64.3 26.9 33.6 63.6 15.0 14.1 72.7 6.5 2.1 0.0

1995-1999 15.3 16.4 78.6 15.6 11.9 45.5 11.3 11.7 81.8 7.1 5.9 33.3

2000-2004 7.4 6.5 35.7 9.6 5.7 27.3 5.5 6.9 90.9 3.2 3.5 50.0

2005-2008 11.1 3.8 14.3 9.3 2.3 0.0 5.9 3.1 18.2 5.6 3.5 33.3

Public Surplus/Deficit (%GDP)

Mean St. Dev.

Tails (Outlier)

Mean St. Dev.

Tails (Outlier)

Mean St. Dev.

Tails (Outlier)

Mean St. Dev.

Tails (Outlier)

1990-1994 -1.9 2.2 71.4 -1.4 2.7 100.0 … … … -3.1 1.8 66.7

1995-1999 -3.4 3.5 44.4 -2.9 5.1 42.9 … … … -2.0 2.6 66.7

2000-2004 -2.4 2.7 66.7 -2.2 2.0 62.5 -2.2 2.0 80.0 -1.4 0.9 0.0

2005-2008 -1.8 2.5 50 1.0 3.4 100.0 -3.0 2.1 100.0 … … …

Source: World Bank, World Development Indicators (WDI), CD-Rom, 2010. Notes: Mean is calculated as simple average, while the tails (outliers) represent the countries lying outside the range of ± 50% of the mean. The included

and excluded countries are further discussed in the appendix.

The second part displays the developments in the intra-trade flows of the African sub-regions over the same sub-periods (see table 4b). The analysis focuses on three indicators for each sub-region: (1) intra-regional trade as a ratio to nominal GDP; (2) intra-regional trade as a percentage of total trade with Africa and; (3) intra-regional trade as a percentage of total trade with the whole world. The intra-regional trade, as a ratio to the GDP, is the highest for the ECOWAS sub-region standing at 6% in 2005-2008 while the lowest ratio is for the ECCAS at 1%. The second best sub-region is the SADC at 5%, followed by the COMESA at 3%. However, both the SADC and COMESA sub-regions have experienced growth in their intra-regional trade/GDP ratios through the four sub-periods, unlike the relatively static position of ECOWAS and ECCAS. The second two indicators of the intra-trade are the highest for the SADC sub-region, followed by ECOWAS, COMESA and ECCAS, respectively.

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The decomposition of the change in total trade for the SADC sub-region revealed that, in 2005-2008, 9% of the total change went to SADC members, 3% to non-SADC African countries and 88% diverted to non-African countries. Moreover, the other sub-regions have experienced similar diversion of trade to non-African countries, with COMESA and ECCAS experiencing the highest diversion rates in 2005-2008 and SADC and ECOWAS experiencing the lowest diversion rates.

Table (4B): Developments of Intra-Trade Indicators by Sub-Region (in Percentage) 1990-1994 1995-1999 2000-2004 2005-2008

(1) (2) (3) (1) (2) (3) (1) (2) (3) (1) (2) (3) COMESA

Excluding Sudan* 1 41 4 2 38 5 2 39 5 3 44 5

Excluding Sudan & Zimbabwe**

1 49 4 2 46 5 2 45 5 3 47 5

ECOWAS

5 79 9 6 73 9 6 69 9 6 70 9

SADC*** Excluding Zimbabwe - - - 2 80 10 4 77 8 5 76 9

ECCAS Excluding Sao Tome & Principe**** 1 20 1 1 22 2 1 18 1 1 11 1

Source: IFS DOTS database, World Development Indicators (WDI), CD-Rom, 2010. Notes: *Sudan was excluded from the COMESA due to suspected errors in the available data, ** Zimbabwe GDP is not available for 2005-2008, ***South African GDP is available starting from 1995-1999, ****Sao Tome and Principe GDP is available starting from 2001.

2. Socio-economic Features

The socio-economic features determine the economic performance of the country, since better health can improve the labor productivity and will ultimately raise economic growth. This sub-section will analyze the changes in life expectancy and mortality rate over two discrete years; 2005 and 2008, as indicators for the population’s health, living conditions and quality of health care as displayed in chart (4a). On average, Africa has experienced a slight improvement in its socio-economic environment during the studied period. Specifically, COMESA and ECOWAS showed the highest average life expectancy while COMESA and SADC showed the lowest mortality rate. Accordingly, ECCAS was the only diverging sub-region in Africa with the maximum mortality rate and the minimum life expectancy, which worsened the African averages for both indicators in 2005 and 2008. Therefore, it can be concluded that both COMESA and SADC outperformed the other two sub-regions, ECOWAS represented the average performance (the closest to the African standard) and ECCAS appeared as an outlier.

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Chart (4A): Socio-economic Indicators and the Degree of Social Convergence to the African Average in the Four Main African Sub-Regions

Source: World Bank, World Development Indicators (WDI), CD-Rom, 2010.

3. Institutional and Political Features

The political stability and the institutional readiness are important pre-requisites for a successful monetary union. The World Bank's Worldwide Governance Indicators capture six key political and institutional features that this sub-section will analyze. Generally, it is obvious that Africa witnessed, on average, a significant improvement in three main indicators; namely political stability, control of corruption and regulatory quality, whereas the other three indicators showed slight improvement during the same period. The SADC showed the best performance for all indicators, while the performance of the ECCAS was the weakest. Meanwhile, the COMESA and ECOWAS converged towards the African average.

In general, the results of the descriptive analysis for the economic, socio-economic and political/institutional features show the heterogeneity of the African sub-regions. To sum up, this section has nominated SADC as the Building block for Africa due to statistical and institutional reasons. Statistically, the SADC has relatively the best performance with respect to the different aspects. As for the institutional reasons, the choice is supported by the success of the largest economic community in Sub-Saharan Africa, in adopting a Regional Indicative Strategic Development Plan (RISDP) in 2003. This plan sets out a timetable for deepening regional integration, calling for the creation of a free trade area (FTA) by 2008, a customs union by 2010, a monetary union by 2016, and a single currency by 2018.

Additionally, both COMESA and ECOWAS can also be good candidates; after the exclusion of the outlying countries. The focus on COMESA and SADC in the rest of the paper stems from the growing interest to merge the SADC-COMESA-EAC sub-regions into single Free Trade Area.

Mortality Rate (Under 5 Years per 1000 person)

0

50

100

150

200

ECOWAS COMESA SADC ECCAS

20052008Af rican Regions Mean_2005 = 130Af rican Regions Mean_2008 = 122

Life Expectancy (in Years)

48

50

52

54

56

58

ECOWAS COMESA SADC ECCAS

20052008

Af rican Regions Mean_2005 = 53Af rican Regions Mean_2008 = 54

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Chart (4b): Degree of Political and Institutional Convergence to

the African Average in the Four Main African Sub-Regions

Source: World Bank Institute, "Worldwide Governance Indicators". Notes: 1) African averages are calculated based on the simple average of the four African sub-regions, the indicators ranges between ±2.5, the higher the score, the better the political and institutional performance of the sub-region and vice versa. 2) Definitions of the six governance indicators are presented in the appendix.

b) Testing Nominal Convergence

This section employs a formal test to examine the degree of nominal convergence among the countries of each nominated sub-region; namely SADC, COMESA and ECOWAS. It presents the methodology, followed by a detailed analysis of empirical results. The empirical results include the findings of the unit root tests and the Johansen co-integration tests. The indicators of nominal convergence include the nominal exchange rate, CPI-based inflation rate, the monetary base/reserve money and a proxy for the economy-wide interest rate (lending rate for SADC and COMESA, and discount rate for ECOWAS). The sample for inflation rate, exchange rate and the monetary base covers the period Dec. 2001 to July 2010. As for the interest rate, the common sample covers Nov.1998 to Dec. 2008.

1. Methodology a) Unit Root

This paper uses the Augmented Dickey-Fuller (ADF) test to determine the order of integration for the nominal and real variables. The lag length of the ADF equation is selected based on the Schwarz information criterion. The test is run twice in the level; once with a constant, and another time with a constant and trend. If the test rejects the null of ‘unit root’ in the level, the test is re-run for the variable in its first difference.

Regulatory Quality

-1.50-1.00-0.500.00

ECOWAS COMESA SADC ECCAS20052009Af rican Regions Mean_2005 = -0.74Af rican Regions Mean_2009 = -0.67

Governmnent Effectiveness

-1.50

-1.00

-0.50

0.00


Political Stability

-1.50

-1.00

-0.50

0.00


Regulatory Quality

-1.50

-1.00-0.500.00


Rule of Law

-1.50

-1.00

-0.50

0.00


Voice and Accountability

-1.50-1.00-0.500.00


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b) Cointegration

Two variables are said to be cointegrated if they are non-stationary but their linear combination is stationary. For more than two variables, there can be more than one cointegrating equation that links the non-stationary variables and produce a stationary equilibrium error. However, for ‘n’ non-stationary endogenous variables, the maximum number of cointegrating equations is less than n by one. This implies that they share one common stochastic trend, and therefore indicates complete convergence. Any number of cointegrating equations that is less than n-1 indicates partial convergence. Therefore, the number of cointegrating equations is a measure of the degree of convergence.

There are two common tests for cointegration: the OLS-based approach of Engle and Granger (1987) and the VAR-based method of Johansen (1991). The Engle-Granger method tests the null hypothesis of ‘no cointegration’ versus the alternative hypothesis of ‘cointegration’, without identifying the number of cointegrating equations. On the other hand, the Johansen method tests the null hypothesis of ‘k cointegrating vectors’ against the hypothesis of ‘more than k cointegrating vectors’. The procedure runs a sequence of tests starting from the null of k=0 to k=n-1. The null that we fail to reject should determine k. Nevertheless, the failure to reject the null that k=n-1 indicates the presence of ‘n’ cointegrating equations. In this case, each variable is cointegrated with itself. The method of Johansen was applied on the basis of the results of trace statistics.

The optimal lag length for the VAR is determined based on the Loglikelihood Ratio (LR). The LR criterion tends to include more lags and therefore is better at capturing the dynamics in the data. However, with short samples of data, the longer lags jeopardize the reliability of the results. Based on Meister (2002), this paper will evaluate the African integration in a specific-to-general framework. First, we test the degree of convergence among the countries of the African sub-regions that are candidates for significant convergence. Then the most co-integrated sub-region is used as a building block, which other African countries can join.

2. Empirical Results

a) Unit Root Tests

The cointegration analysis requires the included variables to be integrated of order (1). Therefore, variables that are integrated of orders (0) or (2) should be excluded. The unit root results for the inflation rate (see appendix table X2) indicate that for SADC, both Madagascar and Mozambique are stationary (integrated of order zero) and therefore should be excluded. For the same reason, Ethiopia, Madagascar and Sudan should be excluded from COMESA; and Benin, Cote d'Ivoire and Togo should be excluded from the ECOWAS sub-region.

With regard to the nominal exchange rate, as illustrated in table X3, South Africa, Swaziland and Lesotho are excluded from the SADC as they follow I(0). In the COMESA, three out of the 14 countries are excluded, since Libya and Swaziland are stationary, while Ethiopia follows I(2). As for the ECOWAS, all series are integrated of order one, eight of which belong to the WAEMU and therefore have an identical exchange rate series. Regarding the monetary base (M0), all countries are integrated of order one, except for Seychelles, in SADC and COMESA, and Mali in ECOWAS (see table X4 in the appendix).

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Finally, the lending rates of all SADC countries are stationary only in the first difference, except for Botswana, Mauritius and Swaziland, which are stationary in the level. In addition, Seychelles is integrated of order two, which leads to its exclusion from both COMESA and SADC. In the COMESA, six countries are excluded from the analysis; Mauritius, Rwanda, Uganda and Swaziland due to their stationarity, and Sudan due to implementation of Islamic banking (refer to table X5 in the appendix). The discount rate for all ECOWAS countries is integrated of order one.

b) Co-integration Analysis

In this section, the main objective is to find the best converging group of countries within each of the SADC and COMESA sub-regions. The paper will examine the marginal effects of augmenting the converging countries in the COMESA to those of the SADC. As for the ECOWAS sub-region, the paper will empirically examine the possibility of admitting the non-Franc countries to the existing monetary union of WAEMU.

For any group of countries that intend to create a CU, there should be a long-run relationship among their exchange rate policies in order to reduce the cost of sacrificing the national exchange rate policy. Therefore, in determining the building block for any CU, the degree of convergence among the nominal exchange rates should be examined. Moreover, the establishment of a CU also requires convergence on the monetary, fiscal and real levels, as recommended by the OCA theory.

Against this background, this section will analyze the degree of nominal convergence within and among the African sub-groups. The analysis will tackle the exchange rate, inflation rate, monetary base and the nominal interest rate. Unfortunately, the fiscal convergence cannot be traced for most countries under investigation due to data limitations. In applying the co-integration, conclusions are based on the Trace statistics results.

1. Exchange Rate

The results in table (4C) show that when including all I(1) exchange rates of SADC countries in the cointegration test, no common trend exists; which implies that some countries diverge from the policies of the rest of the region. The largest optimum domain (maximum level of convergence among the largest number of member countries) is achieved through the exclusion of Zambia from the SADC sub-region, while the smallest optimum domain (maximum level of convergence among the smallest number of member countries) occurs when Seychelles is excluded, in addition to Zambia. The results of the different scenarios reveal an adverse significant impact on the convergence process when excluding Mauritius from the SADC.

Table (4C): Johansen Co-integration Results for Exchange Rate in SADC

Countries No. of

countries (1) Lags Int.◦

No. of CE◊ (2)

No. of common trends (1)-(2)

Degree of convergence†

ALL * 8 7 8 0 None ALL Exc. Zambia 7 9 6 1 Complete ALL Exc. Zambia+Seychelles 6 9 5 1 Complete ALL Exc. Zambia+Seychelles+Mauritius 5 9 5 0 None ALL Exc. Zambia+Seychelles+Tanzania 5 7 1 4 Partial ALL Exc. Zambia+Seychelles+Mauritius+Tanzania 4 4 0 4 None ◦ Refers to the lag interval from VAR based on the Log Likelihood Criteria. ◊ Refers to the number of co-integrating equation. † Complete if there is one common stochastic trend, partial if there is more than one common trend and none if there are no common trends. * ALL: Botswana, Madagascar, Malawi, Mauritius, Mozambique, Seychelles, Tanzania and Zambia.

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As for the COMESA, it was not possible to include all eleven I(1) series in one Johansen test due to data limitations. Therefore, we resorted to a correlation coefficient test for the exchange rates to identify the most correlated series. Accordingly, the most correlated set of five countries was used as a starting subset (Burundi, Madagascar, Malawi, Rwanda and Sudan). Then, each of the remaining six countries was added separately to the base subset, to examine its marginal impact on the number of cointegrating equations. Eventually, three countries were excluded from the COMESA, specifically Seychelles, Uganda and Zambia.

Table (4D): Johansen Co-integration Results for Exchange Rate in COMESA

Countries No. of

countries (1)

Lags Int.

No. of CE (2)


Degree of convergence

ALL * 8 9 8 0 None ALL Exc. Egypt 7 9 6 1 Complete ALL Exc. Egypt+Sudan 6 8 5 1 Complete ALL Exc. Egypt+Sudan+Mauritius 5 9 4 1 Complete ALL Exc. Egypt+Sudan+Burundi 5 8 4 1 Complete * ALL: Burundi, Egypt, Kenya, Madagascar, Malawi, Mauritius, Rwanda and Sudan.

Results in table (4D) illustrate all the possible scenarios for complete convergence within the COMESA, after applying the general-to-specific approach. The largest optimum domain is achieved when Egypt is excluded. Moreover, the exclusion of Sudan, together with Egypt, leads to complete convergence as well. If Burundi or Mauritius is further excluded, complete convergence can be also attained. Evidently, COMESA proves to be converging without Mauritius. Therefore, it is recommended that Mauritius be integrated with the SADC rather than with the COMESA, due to its significant marginal impact on convergence in the SADC.

Turning to the ECOWAS, the results in table (4E) show that the exclusion of Gambia or Nigeria will lead to complete convergence. On the other hand, the exclusion of Ghana leads to no co-integration. This implies that Ghana is the only non-Franc ECOWAS country that is ready to join the WAEMU. Moreover, the three ECOWAS countries that do not belong to the Franc-ECOWAS realized only partial convergence, which promotes their integration with the existing WAEMU bloc rather than developing a separate CU.

Table (4E): Johansen Co-integration Results for Exchange Rate in ECOWAS

Countries No. of

countries (1)

Lags Int.

No. of CE (2)


Degree of convergence

ALL* 4 7 4 0 None ALL Exc. Gambia 3 5 2 1 Complete ALL Exc. Nigeria 3 8 2 1 Complete Gambia, Ghana and Nigeria 3 5 1 2 Partial *ALL: Gambia, Ghana and Nigeria and the eight Franc-ECOWAS countries (WAEMU).

Given that the optimum domains for both COMESA and SADC were independently determined, the main objective now is to determine the largest optimum domain that includes both sub-regions, after ruling out overlapping membership. However, due to the large number of countries that

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are tested, an arbitrary lag length of three is applied1 for the Johansen test. Also, the general-to-specific approach is employed by excluding one country at a time from the total aggregation of SADC and COMESA, in order to identify the marginal effect of each country.

Table (4F): Johansen Co-integration Results for the SADC plus COMESA at a Truncated Lag of Three

Countries No. of Countries No. of CE

SADC 7 0 SADC+COMESA* 11 3 SADC+COMESA Exc. Burundi 10 3 SADC+COMESA Exc. Burundi & Sudan 9 2 SADC+COMESA Exc. Burundi & Rwanda 9 2 *SADC includes Botswana, Madagascar, Malawi, Mauritius, Mozambique, Seychelles and Tanzania, while COMESA includes the non-overlapping countries namely, Burundi, Kenya, Rwanda and Sudan.

The number of cointegrating equations increased among the SADC countries from zero to three, when we aggregated the countries of the SADC and COMESA, at a truncated VAR lag length of three. The exclusion of Burundi from the aggregation did not affect the number of cointegrating equations. However, the exclusion of either Sudan or Rwanda -in addition to Burundi- had a negative impact on the convergence of SADC and COMESA.

2. Inflation Rate

The inflation rate is considered one of the essential monetary convergence criteria. Therefore, the evidence of convergence among inflation rates underscores the existence of a long-run relationship among the different monetary policies. Regarding the SADC, only eight countries are qualified for the co-integration test.

Table (4G): Johansen Co-integration Results for Inflation Rate in SADC

Countries No. of

countries (1)

Lags Int.

No. of CE (2)



ALL* 8 9 8 0 None ALL Exc. Mauritius 7 9 6 1 Complete ALL Exc. Malawi 7 9 6 1 Complete ALL Exc. South Africa 7 10 6 1 Complete ALL Exc. Tanzania 7 9 6 1 Complete ALL Exc. Seychelles 7 10 6 1 Complete *ALL: Botswana, Malawi, Mauritius, Seychelles, South Africa, Swaziland, Tanzania and Zambia. Note: Lesotho is excluded from the tests due to lack of a complete data series.

The above table (4G) shows that when including all eight countries together, no co-integration exists. However, the exclusion of one country at a time resulted in five different possibilities for complete convergence, three of which were achieved one month earlier than the other two scenarios (VAR lag length is 9 versus 10). Moreover, it was also concluded that the coexistence of Botswana, Swaziland and Zambia is necessary for attaining complete convergence among the SADC countries.

1 Given the large number of endogenous variables, an arbitrary lag length of (3) is utilized in order not to lose the degrees of freedom

and therefore preserve the important information embedded in the dataset. This approach follows that of Meister (2002).

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For the COMESA, it is not possible to include more than eight endogenous variables at a time in the Johansen test, due to data limitations. Table (4H) shows some of the most converging combinations. It is obvious that the exclusion of Swaziland does not affect the complete convergence of COMESA, opposite to its impact on SADC convergence. Therefore, it is recommended for Swaziland to integrate with the SADC rather than the COMESA.

Table (4H): Johansen Co-integration Results for Inflation Rate in COMESA

Countries

No. of countries

(1)

Lags Int.

No. of CE (2)



ALL* Exc. Mauritius, Swaziland & Rwanda 8 10 7 1 Complete ALL Exc. Mauritius, Libya & Rwanda 8 10 7 1 Complete ALL Exc. Mauritius, Seychelles & Rwanda 8 10 7 1 Complete ALL Exc. Mauritius, Malawi & Rwanda 8 10 7 1 Complete ALL Exc. Swaziland, Libya & Rwanda 8 9 7 1 Complete ALL Exc. Swaziland, Seychelles & Rwanda 8 10 7 1 Complete ALL Exc. Mauritius, Swaziland & Kenya 8 10 7 1 Complete ALL Exc. Mauritius, Swaziland & Libya 8 10 7 1 Complete ALL Exc. Mauritius, Swaziland & Malawi 8 10 7 1 Complete ALL Exc. Mauritius, Swaziland & Uganda 8 10 7 1 Complete * ALL: Burundi, Egypt, Kenya, Libya, Malawi, Mauritius, Rwanda, Seychelles, Swaziland, Uganda and Zambia.

Turning to the ECOWAS, the results in table (4I) show that there is complete convergence among the eight I(1) countries, which represent the largest optimum domain in ECOWAS. In addition, the exclusion of Burkina Faso also leads to complete convergence but in a longer period (one month later). The smallest optimum domain is obtained through the exclusion of Burkina Faso, Niger and Nigeria. The results indicate that the existence of Gambia is necessary for realizing monetary convergence in the sub-region from the inflation rate perspective. Moreover, the group of Burkina Faso, Niger and Nigeria are not integrating well with the ECOWAS.

Table (4I): Johansen Co-integration Results for Inflation Rate in ECOWAS

Countries No. of

Countries (1) Lags Int.

No. of CE (2)



ALL * 8 8 7 1 Complete ALL Exc. Burkina Faso 7 9 6 1 Complete ALL Exc. Burkina Faso & Nigeria 6 9 4 2 Partial ALL Exc. Burkina Faso, Niger & Nigeria 5 8 4 1 Complete ALL Exc. Burkina Faso, Gambia & Nigeria 5 6 5 0 None ALL Exc. Burkina Faso, Gambia, Niger, Nigeria 4 6 4 0 None *ALL: Burkina Faso, Gambia, Ghana, Guinea-Bissau, Mali, Niger, Nigeria and Senegal.

According to the previous results, each of the five fully co-integrated SADC blocs (table 4G) will be augmented by the COMESA's first fully co-integrated candidate bloc (table 4H), after dropping the overlapping member countries in COMESA. Due to the high number of the endogenous variables, only four out of the five COMESA countries are included at a time. In general, the empirical results show several scenarios for successful integration between the SADC and COMESA countries with regard to the inflation rate. The largest optimum domain is attained in the case of augmenting COMESA to SADC1 bloc, after excluding Burundi or Libya.

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The smallest optimum domain is attained when excluding Egypt and Libya or Egypt, Libya and Burundi.

Table (4J): Johansen Co-integration Results for Inflation Rate in SADC Plus COMESA at Truncated Lag of Three

Countries No. of Countries No. of CE

SADC1* 7 4 SADC1* + COMESA++

Exc. Burundi 11 8 Exc. Libya 11 8 Exc. Egypt and Libya 10 7

Exc. Burundi, Egypt and Libya 9 6 SADC2** 7 2

SADC2**+ COMESA++ Exc. Libya 11 6 Exc. Uganda 11 6 Exc. Egypt, Libya and Uganda 9 4

SADC3*** 7 3 SADC3***+ COMESA++

Exc. Burundi 11 7 Exc. Libya 11 7 Exc. Burundi, Egypt and Libya 9 5

SADC5**** 7 3 SADC4****+ COMESA++

Exc. Libya 11 7 Exc. Egypt and Libya 10 6 Exc. Egypt, Libya and Uganda 9 5 ++ COMESA: includes Burundi, Egypt, Kenya, Libya and Uganda. * SADC1: includes Botswana, Malawi, Seychelles, South Africa, Swaziland, Tanzania and Zambia. ** SADC2: includes Botswana, Mauritius, Seychelles, South Africa, Swaziland, Tanzania and Zambia. *** SADC3: includes Botswana, Malawi, Mauritius, Seychelles, Swaziland, Tanzania and Zambia. **** SADC4: includes Botswana, Malawi, Mauritius, South Africa, Swaziland, Tanzania and Zambia.

3. Monetary Base / Reserve Money (M0)

The convergence among the monetary aggregates can be another indicator of the monetary policies’ convergence. Accordingly, this sub-section will investigate the narrowest definition of money (M0) for the three African sub-regions. Six out of the ten SADC countries appear to be most correlated. The test for cointegration among the six SADC countries; which are Madagascar, Malawi, Mozambique, South Africa, Zambia and Tanzania, results in five co-integrating equations as displayed in table (4K).

By dropping one country at a time from the six highly correlated countries, and testing for co-integration, the only scenario that results in complete convergence is that which excludes Tanzania. Then, it was possible to replace Tanzania by one of the previously excluded four countries, namely, Botswana, Lesotho, Mauritius and Swaziland. The results show that including Botswana instead of Tanzania leads to narrower optimum domain that includes Botswana, Madagascar, Malawi, Mozambique, South Africa and Zambia.

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Table (4K): Johansen Co-integration Results for M0 in SADC

Countries No. of Countries (1)

Lags Int.

No. of CE (2)



ALL* 6 8 5 1 Complete ALL Exc. Tanzania 5 9 4 1 Complete ALL Exc. Mozambique 5 8 3 2 Partial ALL Exc. Malawi 5 9 3 2 Partial ALL + Botswana Exc. Tanzania 6 10 5 1 Complete * ALL: Madagascar, Malawi, Mozambique, South Africa, Tanzania and Zambia.

As for COMESA, based on the highest correlation coefficients, seven countries are selected for the co-integration analysis. Accordingly, the cointegration test for Burundi, Kenya, Libya, Madagascar, Sudan, Uganda and Zambia yields four co-integrating equations. It has been noticed that dropping Sudan does not reduce the number of cointegrating equations. Moreover, if Mauritius replaced Sudan, this will improve the result to five co-integrating equations. As for ECOWAS, the optimum domain is among the eight countries and these are Burkina Faso, Niger, Senegal, Togo, Ghana, Gambia, Nigeria and Cote d'Ivoire.

Table (4L): Johansen Co-integration Results for M0 in COMESA

Countries No. of Countries (1)

Lags Int.

No. of CE (2)



ALL* 7 8 4 3 Partial ALL Exc. Sudan 6 10 4 2 Partial ALL + Mauritius Exc. Sudan 7 8 5 2 Partial * ALL: Burundi, Kenya, Libya, Madagascar, Uganda, Zambia and Sudan.

When combining a fully co-integrated subset of SADC countries with a partially co-integrated subset of COMESA, the best result is six co-integrating equations among 11 countries. These countries are Burundi, Kenya, Libya, Uganda, Mauritius, Madagascar, Malawi, Mozambique, South Africa, Zambia and Tanzania.

Table (4M): Johansen Co-integration Results for M0 in SADC Plus COMESA at a Truncated Lag of Three

Countries No. of Countries No. of

CE

SADC1 6 3 SADC2 6 3 SADC1 + COMESA 11 6 SADC2 + COMESA 11 4 SADC1 includes Madagascar, Malawi, Mozambique, South Africa, Zambia and Tanzania. SADC2 includes Madagascar, Malawi, Mozambique, South Africa, Zambia and Botswana. COMESA includes the non-overlapping countries; namely, Burundi, Kenya, Libya, Uganda, and Mauritius.

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4. Interest Rate

The nominal interest rates of the three sub-regions are also used to test monetary policy convergence, as emphasized by Karfakis and Moschos (1990), Hafer and Kutan (1994), Haug et al. (2000) and Meister (2002). Additionally, Koukouritakis and Michelis (2003) argued that the identification of a common trend in the nominal interest rate series is useful for the co-ordination among the countries' monetary policies. Accordingly, the relevant policy rates should be considered, for example; the overnight rate or the discount rate, to reflect the country-specific monetary policy. However, the lending rate is the only nominal interest rate variable for which a common sample is available.

The results for SADC show four co-integrating equations among seven I(1) lending rates, which implies partial convergence. The largest optimum domain is attained in SADC through the exclusion of Zambia. However, the narrowest domain is attained through the exclusion of both Malawi and Tanzania. The latter two scenarios have yielded complete convergence.

Table (4N): Johansen Co-integration Results for Lending Rate in SADC

Countries No. of

Countries (1)

Lags Int.

No. of CE (2)



ALL * 7 6 4 3 Partial ALL Exc. Zambia 6 8 5 1 Complete ALL Exc. Malawi 6 10 4 2 Partial ALL Exc. Malawi &Tanzania 5 10 4 1 Complete * ALL: Lesotho, Madagascar, Malawi, Mozambique, South Africa, Tanzania and Zambia.

In COMESA, the co-integration results in table (4O) illustrate that the largest optimum domain yields partial convergence among COMESA countries excluding Burundi. However, in deriving the smallest optimum domain in COMESA, two cases show complete convergence: either by excluding Egypt, Madagascar and Ethiopia or by excluding Libya, Madagascar and Kenya.

Table (4O): Johansen Co-integration Results for Lending Rate in COMESA

Countries No. of

Countries (1)

Lags Int.

No. of CE (2)



ALL* 8 8 5 3 Partial ALL Exc. Burundi 7 8 5 2 Partial ALL Exc. Libya 7 1 3 4 Partial ALL Exc. Egypt, Madagascar & Ethiopia 5 1 4 1 Complete ALL Exc. Libya, Madagascar & Kenya 5 1 4 1 Complete

* ALL: Burundi, Egypt, Ethiopia, Kenya, Libya, Madagascar, Malawi and Zambia.

When combining the SADC and COMESA, the largest optimum domain is obtained when Kenya and Libya are excluded, since seven cointegrating equations exist among ten countries.

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Table (4P): Johansen Co-integration Results for Lending Rate in SADC Plus COMESA at Truncated Lag of Three

Countries No. of Countries No. of

CE

SADC 6 2 SADC+ COMESA Exc. Egypt & Ethiopia 10 5 SADC+ COMESA Exc. Egypt, Ethiopia & Libya 9 5 SADC+ COMESA Exc. Kenya & Libya 10 7 SADC+ Burundi + Ethiopia 8 4 SADC: includes Lesotho, Madagascar, Malawi, Mozambique, South Africa and Tanzania. COMESA includes Burundi, Egypt, Ethiopia, Kenya, Libya and Zambia.

The investigation of the degree of convergence for the interest rate in ECOWAS is applied to the discount rate rather than the lending rate, due to data restrictions. The empirical results indicate partial convergence for ECOWAS countries, after including Gambia and Ghana to the WAEMU countries and excluding Nigeria due to its stationarity.

c) Testing Real Convergence

The OCA theory requires the fulfillment of both nominal and real convergence as prerequisites for the establishment of a successful CU. As such, proving nominal convergence among a group of countries is a necessary but not a sufficient condition. Accordingly, the next section will utilize an informal test for business cycle synchronization within and across the groups of countries that proved to be converging nominally.

Empirically, the correlation coefficients of the cyclical components of real GDP are computed bilaterally among the candidate countries, using a sample of annual data covering the period 1960-2008 (obtained from the WDI database). The cyclical component is extracted as the difference between the real GDP trend (based on Hodrick-Prescott filter) and actual real GDP. Due to the lack of a common sample for real GDP, the pair-wise correlation coefficients are calculated to maximize degrees of freedom. The statistical significance of the correlation coefficients is determined based on the critical values table for Pearson's Correlation Coefficient, r (see the appendix tables X6 through X9).

The results in table (4Q) show that the subset of SADC countries that converged in their monetary bases, are correlated in their business cycles with most of the group’s countries, as well as with the converging COMESA countries. For example, each of Madagascar and South Africa has significant real GDP correlation coefficients with four of the six SADC countries in the monetary base group. Moreover, Madagascar, Malawi, Tanzania and Zambia have significant GDP correlations with three of the four converging COMESA countries.

With regard to the inflation rates converging group, it is obvious that the SADC countries, like Malawi, Mauritius and Tanzania have fewer GDP correlations with the countries of the same group, than with the selected COMESA countries. This could be an indicator of a mismatch between the supply-driven inflation volatility and business cycle fluctuations. Moreover, it is noticed that Kenya has significant correlations with SADC and COMESA as it always exhibits the largest and strongest bilateral relationships concerning the four nominal indicators.

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To sum up, the empirical evidence shows that the building block for Africa can be attained conditional on the integration among nine countries belonging to SADC and COMESA sub-regions. The structure of the building block is as follows: seven countries belong to SADC; Madagascar, South Africa, Tanzania, Malawi, Zambia, Mauritius and Seychelles, in addition to two countries from the COMESA, namely Kenya and Uganda. These countries are selected based on the evidence that they relatively fulfill two important preconditions of the OCA theory, namely the nominal and real convergence prerequisites. Importantly, in doing so, there is an opportunity to overcome the problems that arise from the overlapping membership of some countries.

Table (4Q): Significant Bilateral Correlations for Real GDP in SADC and COMESA No. of Significant

Relationships (SADC)

No. of Significant Relationships

(SADC+COMESA)


(SADC)


(SADC+COMESA)

Exchange Rate Group

Monetary Base Group Botswana 1 2 Madagascar 4 7 Malawi 4 6 Malawi 3 6 Mozambique 3 4 Mozambique 2 3 Tanzania 1 3 South Africa 4 6 Mauritius 3 5 Tanzania 3 6 Seychelles 4 7 Zambia 3 6 Madagascar 4 7 Burundi 4 Kenya 6 Kenya 7 Rwanda 4 Uganda 6 Sudan 6 Mauritius 5

Inflation Rate Group Lending Rate Group Botswana 1 2 Malawi 3 4 Malawi 2 5 Mozambique 2 3 Mauritius 1 3 Madagascar 3 6 Swaziland 2 4 Lesotho 2 3 Tanzania 2 5 Tanzania 3 6 Zambia 3 5 South Africa 3 5 South Africa 3 5 Zambia 5 Burundi 4 Burundi 4 Kenya 7 Kenya 6 Uganda 5

VI. Conclusions and Policy Recommendations

The OCA is defined in the literature as the optimal domain of a single currency or several national currencies with mutually fixed rates. Establishing an OCA needs some essential criteria that qualify a group of countries for a currency area creation. These criteria measure the degree of convergence among countries on both nominal and real levels. The nominal criteria include the exchange rate, inflation rate, monetary aggregates, interest rate as well as fiscal deficit (debt) to GDP ratios. The real criteria include the symmetry of shocks (resulting in co-movements in the members' business cycles), intra-trade flows and per-capita income convergence. The decision to join a currency area involves the abandonment of an independent national monetary policy to follow a unified monetary policy. In this case, we have two alternatives; the first is when the country-specific monetary policies are highly correlated, therefore it will be less costly to delegate monetary policy to one central bank. In that case, the coordination of each national fiscal policy with the regional monetary policy is necessary to mitigate the negative spillovers within the CU in a fiscal framework. However, when the country-specific monetary policies are not highly correlated, each

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country should design its optimal fiscal policy that achieves macroeconomic stabilization and then use the monetary policy to offset the remaining deviations (from price and output targets).

In an OCA framework, the choice of the exchange rate regime towards the rest of the world is an essential issue, where it could be either a fixed or a flexible one. Most literature argue that the developing countries should adopt a fixed regime by pegging their currencies to dollar or any other currency as a credible anchor for monetary policy, to help them cope with their weak monetary transmission mechanisms and shallow credit and capital markets. Nevertheless, the experiment of CFA franc zone proved the failure of such assumption, especially after facing fatal external shocks concerning the deteriorated terms of trade and real exchange rate shocks.

Meanwhile, adopting a flexible exchange rate regime would not safeguard the CU from potential shocks. Caveats still exist for any potential currency area, especially when the participating countries focus only on monetary convergence, while ignoring both the harmonization on the fiscal level and the synchronicity on the real level. The EMU is a good example, in which all the participating countries conform to the monetary convergence criteria, while some countries have experienced recently fiscal deviations. This situation is well presented by the case of Greece, Italy and Portugal that were characterized by a vulnerable fiscal situation. Additionally, the area had been affected in 2010 by the first considerable shock since its establishment, and fears of a sovereign debt crisis had developed in the member states with the bad historical performance in fiscal indicators.

Empirically, the paper applied some informal tests to determine the building block(s) in Africa; the analysis shows that SADC, COMESA and ECOWAS are good candidates for a CU in Africa. As for the formal test, the Johansen cointegration approach is used to test for nominal convergence in the three sub regions. This is followed by a simple correlation coefficient test for the degree of real convergence among the sets of countries that are converging nominally.

The results of the nominal convergence show that different sets of countries are successful candidates to constitute a CU as a building block in Africa. As for the real, it was observed that the business cycle synchronicity bilateral relationships among the SADC countries are not sufficiently strong, except for Madagascar, Tanzania, South Africa and Zambia. However, the results of the real convergence should be tackled cautiously due to the lack of common sample of real GDP and the limited analysis of the contemporaneous correlations, which does not capture the dynamic relationship between the countries' business cycles.

Sufficient fiscal data for most of the African countries is generally unavailable. Therefore, it was impossible to trace the fiscal aspects empirically. However, creating a CU without examining the fiscal status for the African countries would be useless.

For a unified monetary union and eventually a successful CU in Africa, seven SADC countries (Madagascar, South Africa, Tanzania, Malawi, Zambia, Mauritius and Seychelles) relatively fulfill the nominal and real convergence prerequisites. In addition, there exists a strong opportunity that two countries from COMESA (Kenya and Uganda) can successfully integrate with SADC. For ECOWAS, two important empirical observations have to be highlighted. First, there is an opportunity for the non-WAEMU countries to join the WAEMU members, in the framework of a common currency. Nevertheless, this is only applicable under a certain condition; only two out of the non-member countries can join at a time; these are either Ghana and Nigeria or Ghana and Gambia.

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Second, both WAEMU and non-WAEMU countries exhibit full nominal convergence, which is proved for both inflation rate and monetary base indicators. Therefore, revisiting the proposal that WAMZ and WAEMU can create one monetary union seems to be feasible with further co-operation and policies harmonization actions in the future.

Countries sharing strong intra-trade regional relations are not necessarily qualified to form a CU. Taking SACU as an example; it was found that these countries are not strongly synchronized at both the nominal and real levels, despite the fact that they have strong intra-trade relationships.

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Latter, Tony (1996). "The choice of Exchange Rate Regime", The Center for Central Banking Studies, Handbooks in Central Banking No. 2, Bank of England.

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Masson, Paul R. & Mark P. ,Taylor (1993), "Fiscal Policy within Common Currency Area", Journal of Common Markets Studies, Vol. 31, No. 1, March 1993

Mckinnon, RI. (1963). “Optimum Currency Areas”, The American Economic Review, Vol. 53, No. 4. pp. 717.

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VIII. Appendix:

1. Economic Features:

Some countries are excluded from each African region, either due to lack of data or the high performance volatility, which probably would affect the consistency of the results. The following table shows which countries are included or excluded from the descriptive analysis:

Table (X1): Included versus Excluded Countries in the Empirical Analysis

Excluded Countries Economic

Indicator Included Countries

Due to Lack of Data Due to High

Volatility

Inflation Rate Burundi, Egypt, Ethiopia, Kenya, Libya, Malawi, Mauritius, Madagascar, Seychelles, Sudan, Swaziland, Rwanda, Uganda and Zambia,

Comoros, Djibouti and Eritrea

Democratic Republic of Congo and Zimbabwe

COMESA

(19) Surplus/Deficit

GDP Ratio

Burundi, Democratic Republic of Congo, Egypt, Kenya, Mauritius, Seychelles, Uganda, Zambia and Zimbabwe

Comoros, Djibouti, Eritrea, Ethiopia, Libya, Madagascar, Malawi, Sudan, Swaziland, Rwanda

N/A

Inflation Rate Botswana, Lesotho, Malawi, Mauritius, Mozambique, Madagascar, Seychelles, South Africa, Swaziland, Tanzania and Zambia

Namibia Angola, Democratic Republic of Congo and Zimbabwe

SADC (15)

Surplus/Deficit

GDP Ratio

Democratic Republic of Congo, Lesotho, Mauritius, Namibia, Madagascar, Seychelles, South Africa, Zambia and Zimbabwe

Angola, Botswana, Malawi, Mozambique, Swaziland and Tanzania

N/A

Inflation Rate Benin, Burkina Faso, Cote d'Ivoire, Gambia, Ghana, Guinea-Bissau, Mali, Senegal, Togo, Niger and Nigeria

Guinea, Liberia, Sierre Leone N/A

ECOWAS


GDP Ratio

Benin, Burkina Faso, Cote d'Ivoire, Ghana and Togo

Gambia, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Senegal and Sierre Leone

N/A

Inflation Rate Burundi, Republic of Congo, Cameroon, Chad, Central African Republic, Gabon and Rwanda

Equatorial Guinea, Sao Tome and Principe

Angola, Democratic Republic of Congo

ECCAS


GDP Ratio

Burundi, Democratic Republic of Congo and Cameroon

Angola, Chad, Republic of Congo, Central African Republic, Gabon, Equatorial Guinea, Rwanda and Sao Tome and Principe

N/A

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2. Political/Institutional Features Definitions:

The institutional and political environment of each region is investigated through the World Bank's Worldwide Governance Indicators. They capture six key dimensions of governance; the World Bank's defines these six indicators as:

a. Voice and Accountability: captures perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.

b. Political Stability and Absence of Violence: measures the perceptions of the likelihood

that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism.

c. Government Effectiveness: captures perceptions of the quality of public services, the

quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies.

d. Regulatory Quality: captures perceptions of the ability of the government to formulate and

implement sound policies and regulations that permit and promote private sector development.

e. Rule of Law: captures perceptions of the extent to which agents have confidence in, and

abide by, the rules of society, and in particular, the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.

f. Control of Corruption: captures perceptions of the extent to which public power is

exercised for private gains, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.

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3. ADF Unit Root Test Results:

Table (X2): Unit Root Test for Inflation by Sub-Region ADF Statistics*

Lags Criterion (Log Likelihood) Level

(with Intercept) Level

(with Intercept&Trend) First Difference (with Intercept)

SADC** Botswana 5 -1.98 -1.88 -8.46 Madagascar 10 -3.04 -3.06 -6.52 Malawi 7 -2.52 -2.58 -4.06 Mauritius 2 -1.89 -1.86 -6.98 Mozambique 2 -3.07 -2.74 -6.67 Seychelles 6 -1.87 -1.82 -4.36 South Africa 9 -1.75 -1.67 -5.76 Swaziland 4 -1.73 -1.72 -4.04 Zambia 9 -1.44 -2.52 -6.96 Tanzania 5 -2.03 -2.43 -8.57

COMESA◊ Burundi 6 -2.00 -2.04 -9.16 Egypt 2 -2.27 -2.76 -5.57 Ethiopia 4 -2.93 -2.76 -5.10 Kenya 8 -2.72 -2.53 -7.56 Libya 6 -2.23 -2.42 -12.84 Rwanda 3 -2.85 -2.53 -4.59 Sudan 4 -3.77 -4.46 -4.96 Uganda 6 -2.57 -1.98 -10.40

ECOWAS Benin 10 -2.95 -2.93 -10.80 Burkina Faso 8 -2.22 -2.13 -12.18 Cote d'Ivoire 3 -3.38 -3.38 -4.72 Gambia 6 -1.59 -2.15 -6.52 Ghana 2 -2.36 -2.44 -7.87 Guinea-Bissau 3 -2.23 -2.17 -10.01 Mali 2 -2.25 -2.30 -7.41 Senegal 5 -1.97 -2.01 -9.54 Togo 8 -2.90 -3.02 -12.25 Niger 10 -1.65 -1.70 -8.87 Nigeria 6 -2.51 -2.50 -8.77

* The 5% critical value is -2.89 for both level and first difference with intercept, while the 5% critical value at level with intercept and trend is -3.45.

** Note: Lesotho is excluded from the common sample since the starting date for the series is 2003:01. ◊ Members that are not included in SADC.

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Table (X3): Unit Root Test for Exchange Rate by Sub-Region ADF Statistics*

Lags Criterion (Log Likelihood) Level

(with Intercept) Level

(with Intercept&Trend) First Difference (with Intercept)

SADC

Botswana 7 -1.35 -2.88 -9.60 Madagascar 3 -1.37 -1.58 -9.04 Malawi 2 -2.46 -2.12 -6.98 Mauritius 10 -2.23 -2.54 -10.27 Mozambique 6 1.51 0.16 -7.69 Seychelles 1 -0.88 -2.14 -8.59 South Africa 7 -3.25 -2.96 -9.35 Swaziland 7 -3.25 -2.96 -9.35 Zambia 4 -1.97 -1.96 -9.78 Tanzania 1 -1.27 -2.73 -11.62 Lesotho 7 -3.25 -2.96 -9.35

COMESA◊ Burundi 1 -2.10 -2.46 -11.11 Egypt 1 -2.35 -2.11 -9.47 Ethiopia 7 0.40 -0.16 -1.15 Kenya 4 -1.74 -1.51 -8.75 Libya 1 -23.78 -24.34 -44.38 Rwanda 4 -2.83 -2.52 -4.64 Sudan 10 -1.25 -0.42 -6.34 Uganda 2 -1.85 -2.02 -7.43

ECOWAS** Benin Burkina Faso Cote d'Ivoire Guinea-Bissau Mali Senegal Togo Niger

1 -2.91 -2.14 -9.11

Gambia 2 -2.60 -2.53 -6.95 Ghana 2 -0.37 -1.68 -3.34 Nigeria 4 -1.30 -1.60 -6.74 * The 5% critical value is -2.89 for both level and first difference with intercept, while the 5% critical value at level with intercept

and trend is -3.45. ◊ Members that are not included in SADC. ** The ADF indicates that the Franc-ECOWAS is stationary at level when we include intercept in the estimation. However, we treat

this series as a non-stationary process in the analysis due to the results obtained from incorporating intercept and trend.

-35-

Table (X4): Unit Root Test for Monetary Base/Reserve Money (M0) by Sub-Region ADF Statistics* Lags Criterion

(Log Likelihood) Level (with Intercept)

Level (with Intercept&Trend)

First Difference (with Intercept)

SADC Botswana 3 -0.38 -1.97 -5.57 Madagascar 9 0.53 -2.60 -12.56 Malawi 9 0.28 -2.13 -6.75 Mauritius 9 0.60 -1.53 -11.63 Mozambique 5 1.96 -0.92 -10.40 Seychelles 4 -1.66 -3.47 -12.69 South Africa 4 0.39 -2.91 -10.71 Swaziland 9 3.23 1.51 -3.76 Zambia 1 1.09 -2.31 -9.32 Tanzania 6 3.78 0.63 -3.57 Lesotho 4 -0.37 -3.49 -11.34

COMESA** ◊ Burundi 10 1.19 -1.67 -8.49 Egypt 1 -0.87 -1.10 -8.40 Kenya 5 0.93 -2.32 -10.72 Libya 8 0.91 -1.76 -9.75 Sudan 5 2.46 -0.57 -9.72 Uganda 2 1.73 -1.23 -14.88

ECOWAS Benin 3 -1.16 -3.40 -11.58 Burkina Faso 1 -1.19 -2.57 -10.43 Cote d'Ivoire 2 -1.24 -1.89 -8.17 Gambia 9 -0.94 -2.27 -13.01 Ghana 10 5.27 2.57 -4.34 Guinea-Bissau 1 -2.07 -2.09 -9.28 Mali 1 -2.81 -3.77 -10.28 Senegal 1 -0.76 -3.07 -11.03 Togo 2 0.71 -1.28 -12.83 Niger 2 -0.13 -3.24 -14.53 Nigeria 3 -0.32 -2.74 -11.49 * The 5% critical value is -2.89 for both level and first difference with intercept, while the 5% critical value at level with intercept

and trend is -3.45. ** Note: Both Ethiopia and Rwanda are excluded from the analysis due to lack of data. ◊ Members that are not included in SADC.

-36-

Table (X5): Unit Root Test for Lending Rate by Sub-Region ADF Statistics* Lags Criterion

(Log Likelihood) Level (with Intercept)

Level (with Intercept&Trend)

First Difference (with Intercept)

SADC Botswana 1 -2.98 -2.89 -9.99 Lesotho 3 -2.63 -1.03 -10.54 Madagascar 1 -0.55 -1.68 -10.76 Malawi 1 -0.37 -3.35 -11.00 Mauritius 1 -4.26 -4.19 -13.17 Mozambique 1 -1.62 -1.67 -12.21 Seychelles 5 0.90 1.35 2.05 South Africa 4 -2.66 -2.64 -3.37 Swaziland 11 -3.93 -3.61 -3.34 Zambia 1 -0.26 -2.40 -10.50 Tanzania 1 -1.77 -1.31 -11.30

COMESA**◊ Burundi 3 -2.28 -2.04 -12.11 Egypt 2 -2.55 -3.19 -14.16 Ethiopia 1 -1.24 -0.86 -9.63 Kenya 11 -2.16 -1.87 -7.78 Libya 1 -1.18 -2.48 -10.92 Rwanda 3 -10.49 .. .. Swaziland 11 -3.93 -3.61 -3.34 Uganda 3 -4.19 .. ..

ECOWAS▪ Benin Burkina Faso Cote d'Ivoire Guinea-Bissau Mali Senegal Togo Niger

9 -1.08 -0.65 -10.94

Gambia 8 -1.83 -1.80 -2.96 Ghana 3 -1.65 -1.32 -7.90 Nigeria 11 -0.76 -3.53 -9.72 * The 5% critical value is -2.89 for both level and first difference with intercept, while the 5% critical value at level with intercept and

trend is -3.45. ** Note: Sudan is excluded from the analysis due to lack of data as the Central Bank of Sudan adopts the Islamic banking principles. ▪ As for ECOWAS, discount rate is utilized instead of the lending rate, because no common sample for the lending rate existed for this

sub-region. ◊ Members that are not included in SADC.

-37-

Table (X6): Pairwise Correlation Coefficients for Real GDP Cyclical Components in SADC and COMESA for the Exchange Rate Group

Botswana Malawi Mozambique Tanzania Mauritius Seychelles Madagascar Kenya Rwanda Sudan CV (10%) Botswana 1.00 0.21 0.22 0.02 -0.17 0.06 0.25 0.11 0.49 -0.18 0.24 Malawi 0.21 1.00 0.43 0.34 0.50 0.46 0.29 0.47 0.24 0.18 0.24 Mozambique 0.22 0.43 1.00 0.17 0.34 0.44 0.14 0.23 0.17 0.39 0.31 Tanzania 0.02 0.34 0.17 1.00 0.36 0.13 0.69 0.72 0.34 0.63 0.37 Mauritius -0.17 0.50 0.34 0.36 1.00 0.55 0.16 0.49 0.20 0.41 0.29 Seychelles 0.06 0.46 0.44 0.13 0.55 1.00 0.33 0.39 0.24 0.30 0.24 Madagascar 0.25 0.29 0.14 0.69 0.16 0.33 1.00 0.69 0.24 0.48 0.24 Kenya 0.11 0.47 0.23 0.72 0.49 0.39 0.69 1.00 0.15 0.28 0.24 Rwanda 0.49 0.24 0.17 0.34 0.20 0.24 0.24 0.15 1.00 0.18 0.24 Sudan -0.18 0.18 0.39 0.63 0.41 0.30 0.48 0.28 0.18 1.00 0.24 No. of Obs. 49 49 29 21 33 49 49 49 49 49 Degrees of Freedom 47 47 27 19 31 47 47 47 47 47 CV (10%) 0.24 0.24 0.31 0.37 0.29 0.24 0.24 0.24 0.24 0.24

Source: World Bank, WDI, online database. Correlation coefficients were calculated for the cyclical components of the GDP (2000=100). The critical values of Pearson's Correlation Coefficient (r) were obtained from the table of the two-tailed test.

Table (X7): Pairwise Correlation Coefficients for Real GDP Cyclical Components in SADC and COMESA for the Inflation Rate Group

Botswana Malawi Mauritius Swaziland Tanzania Zambia South Africa Burundi Kenya Uganda CV (10%) Botswana 1.00 0.21 -0.17 0.58 0.02 0.18 0.00 0.39 0.11 -0.41 0.24 Malawi 0.21 1.00 0.50 0.26 0.34 0.14 0.26 0.15 0.47 0.35 0.24 Mauritius -0.17 0.50 1.00 -0.10 0.36 0.19 0.24 -0.11 0.49 0.70 0.29 Swaziland 0.58 0.26 -0.10 1.00 0.31 0.42 0.23 0.43 0.33 -0.12 0.27 Tanzania 0.02 0.34 0.36 0.31 1.00 0.73 0.60 0.62 0.72 0.61 0.37 Zambia 0.18 0.14 0.19 0.42 0.73 1.00 0.44 0.41 0.39 0.30 0.24 South Africa 0.00 0.26 0.24 0.23 0.60 0.44 1.00 -0.03 0.54 0.58 0.24 Burundi 0.39 0.15 -0.11 0.43 0.62 0.41 -0.03 1.00 0.23 -0.10 0.24 Kenya 0.11 0.47 0.49 0.33 0.72 0.39 0.54 0.23 1.00 0.52 0.24 Uganda -0.41 0.35 0.70 -0.12 0.61 0.30 0.58 -0.10 0.52 1.00 0.32 No. of Obs. 49 49 33 39 21 49 49 49 49 27 Degrees of Freedom 47 47 31 37 19 47 47 47 47 25 CV (10%) 0.24 0.24 0.29 0.27 0.37 0.24 0.24 0.24 0.24 0.32


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Table (X8): Pairwise Correlation Coefficients for Real GDP Cyclical Components in SADC and COMESA for the Monetary Base Group

Madagascar Malawi Mozambique South Africa Tanzania Zambia Burundi Kenya Uganda Mauritius CV (10%) Madagascar 1.00 0.29 0.14 0.61 0.69 0.60 0.38 0.69 0.32 0.16 0.24 Malawi 0.29 1.00 0.43 0.26 0.34 0.14 0.15 0.47 0.35 0.50 0.24 Mozambique 0.14 0.43 1.00 -0.21 0.17 0.24 0.31 0.23 0.05 0.34 0.31 South Africa 0.61 0.26 -0.21 1.00 0.60 0.44 -0.03 0.54 0.58 0.24 0.24 Tanzania 0.69 0.34 0.17 0.60 1.00 0.73 0.62 0.72 0.61 0.36 0.37 Zambia 0.60 0.14 0.24 0.44 0.73 1.00 0.41 0.39 0.30 0.19 0.24 Burundi 0.38 0.15 0.31 -0.03 0.62 0.41 1.00 0.23 -0.10 -0.11 0.24 Kenya 0.69 0.47 0.23 0.54 0.72 0.39 0.23 1.00 0.52 0.49 0.24 Uganda 0.32 0.35 0.05 0.58 0.61 0.30 -0.10 0.52 1.00 0.70 0.32 Mauritius 0.16 0.50 0.34 0.24 0.36 0.19 -0.11 0.49 0.70 1.00 0.29 No. of Obs. 49 49 29 49 21 49 49 49 27 33 Degrees of Freedom 47 47 27 47 19 47 47 47 25 31 CV (10%) 0.24 0.24 0.31 0.24 0.37 0.24 0.24 0.24 0.32 0.29


Table (X9): Pairwise Correlation Coefficients for Real GDP Cyclical Components

in SADC and COMESA for the Lending Rate Group Malawi Mozambique Madagascar Lesotho Tanzania South Africa Zambia Burundi Kenya CV (10%)

Malawi 1.00 0.43 0.29 0.14 0.34 0.26 0.14 0.15 0.47 0.24 Mozambique 0.43 1.00 0.14 0.32 0.17 -0.21 0.24 0.31 0.23 0.31 Madagascar 0.29 0.14 1.00 0.23 0.69 0.61 0.60 0.38 0.69 0.24 Lesotho 0.14 0.32 0.23 1.00 0.44 0.09 0.02 -0.01 0.35 0.24 Tanzania 0.34 0.17 0.69 0.44 1.00 0.60 0.73 0.62 0.72 0.37 South Africa 0.26 -0.21 0.61 0.09 0.60 1.00 0.44 -0.03 0.54 0.24 Zambia 0.14 0.24 0.60 0.02 0.73 0.44 1.00 0.41 0.39 0.24 Burundi 0.15 0.31 0.38 -0.01 0.62 -0.03 0.41 1.00 0.23 0.24 Kenya 0.47 0.23 0.69 0.35 0.72 0.54 0.39 0.23 1.00 0.24 No. of Obs. 49 29 49 49 21 49 49 49 49 Degrees of Freedom 47 27 47 47 19 47 47 47 47 CV (10%) 0.24 0.31 0.24 0.24 0.37 0.24 0.24 0.24 0.24


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1: Macroeconomic Performance

1/1- Gross Domestic Product (GDP) According to the follow-up data of the Ministry of Planning on the economic

performance in July/March 2010/2011, the annual real GDP growth at factor cost slackened to 2.5 percent against 5.0 percent a year earlier. The slowdown came about because of the negative 3.8 percent growth registered in the third quarter (January/March 2010/2011), down from a positive 5.6 percent during the previous corresponding period. In comparison, the estimated growth of the emerging markets combined recorded 5.7 percent during the period under review.

Chart Source: Ministry of Planning. Emerging Economies: J.P. Morgan, "Global Data Watch",

March, 2011. On the supply side, the slowdown in economic growth was mainly the result

of the lower contribution of domestic demand-driven sectors (2.1 percentage points) in July/March 2010/2011, against 4.4 percentage points during the previous corresponding period, as the sluggish performance in the third quarter of January/March echoed in the reporting period. Nevertheless, some sectors continued to record positive contributions, albeit to a lesser degree than the previous FY. In the forefront came the sector of agriculture, irrigation and fishing (0.4 point against 0.5 point), followed by construction and building (0.3 point

5.3

5.74.1 4.3

5.7

5.7

1.6

5.0

-0.71.1

5.8

-1.3

7.1 6.6

-3.8

5.74.6 4.65.5

4.2 5.6 5.4

-8.0-6.0-4.0-2.00.02.04.06.08.0

10.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2008/2009 2009/2010 2010/2011

Emerging Economies Egypt

% Real GDP Growth of Egypt vs. Emerging Economies

-40-

against 0.6 point), communications (0.3 point against 0.4 point), and the general government (0.3 point against 0.4 point). However, the share of the manufacturing sector retreated from 0.8 point to nil, and the wholesale and retail trade from 0.6 point to 0.1 point. Moreover, no change was observed in the contribution of the electricity sector which maintained almost the same level (0.1 point).

GDP Growth by Domestic and External

Demand-Driven Sectors in July/March 2010/2011

(Percentage Point) Domestic Demand- Driven Sectors

Sector

Growth Rate (%) Share in Real GDP Growth (2.5 percent)

Agriculture, irrigation and fishing 2.8 0.4 Manufacturing 0.1 0.0 Electricity 5.3 0.1 Construction and building 5.0 0.3 Transportation and storage 1.5 0.1 Communications 8.5 0.3 Wholesale and retail trade 1.4 0.1 Financial intermediaries 1.6 0.1 General government 3.8 0.3 Other sectors 4.7 0.4 Total 2.6 2.1

External Demand-Driven Sectors Sector Growth Rate (%) Share in Real GDP Growth Extractions 1.0 0.2 Suez Canal 11.1 0.3 Tourism -1.7 -0.1 Total 1.9 0.4 Source: Based on the Ministry of Planning data for July/March 2010/2011.

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The external demand-driven sectors added 0.4 point (against 0.6 point),

mainly generated by Suez Canal (0.3 point), and extractions (0.2 point). On the other hand, the tourism sector has been the hardest hit by the events of the Revolution, which drove down its contribution from a positive (0.5 point) to a negative (-0.1 point), in view of the sharp decline in arrival tourism and the fall in the occupancy rate.

Analysis of the trend component estimate of GDP growth rate and the GDP

gap indicates that the economy has suffered from recession. In figures, the contraction of the GDP gap was estimated at 8.1 percent in the third quarter of 2010/2011 against an expansion of 0.7 percent a year earlier. This proves that the economy has been exposed to a severe supply shock, manifested in the underperformance of the productive sectors, a matter that weakened the performance of several other sectors that have inter-linkages with them. The political instability associated with the 25th January Revolution has much to do with such state of affairs, casting its shadows by far on the sectors of tourism, construction and building, manufacturing, and wholesale and retail trade. Consequently, the GDP gap of these sectors recorded, respectively, negative rates of 35.7 percent, 18.9 percent, 14.3 percent, and 13 percent in the third quarter of FY 2010/2011.

Source: Based on the data of the Ministry of Planning.

Development of the Real GDP Growth Rate Divided into GDP Trend and GDP Gap (Annual basis)

-3.6

4.4

-10-8-6-4-202468

10

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

(%)

GDP Gap - Business Cy cleGDP Growth Rate - Seasonally AdjustedPotential GDP-Trend

- 42-

Obviously, the marked slowdown of economic activity in the third quarter of the current FY followed the recuperation of the economy, in the first and second quarters of FY 2010/2011, from the pass-through effects of the global financial crisis, and its full recovery from the ensuing recession. To enable the detailed analysis of the supply side, a comparison was made between the performance of the different economic sectors at the time of the global financial crisis (external crisis), and their performance throughout the ongoing political turmoil (domestic crisis). It is found out that domestic demand-driven sectors, in case of domestic crises, are immediately affected as soon as the crisis flares. However, the impact of crises, on these sectors comes with a lag varying according to the nature of the relevant sector.

Actual Growth Rate (Deseasonalized)

and GDP Gap of Main Economic Sectors

Actual Growth Rate Output Gap (Economic Business Cycle)

Sector Q3

2010/2011 (Domestic Turmoil)

Q1 2008/09 (Global

Financial Crisis)

Q3 2010/2011

Q 1 2008/09

Tourism -29.4 9 -35.7 69.4 Construction and building -9.3 8.4 -18.9 3.2 Manufacturing -10.5 4.3 -14.3 2 Transportation and storage -8.9 7.3 -14 1 Wholesale and retail trade -8.7 7.5 -13 -14.2 Suez Canal 11.1 20.5 8.4 7.6 Source: Based on the data of the Ministry of Planning.

It is also concluded that the sector of wholesale and retail trade is the most

sensitive to the different types of shocks (exogenous or endogenous), due to the strengths of its inter-sectoral backward and forward linkages. Thus, the rates of this sector showed contraction in the third quarter of 2010/2011. Moreover, results indicated that it was the sole sector that experienced economic contraction when

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the global financial crisis had erupted in the first quarter of FY 2008/2009. Contrary to the wholesale and retail trade, the Suez Canal had the most resilient business cycle at the time of the endogenous crisis, as its performance highly held back the slowdown in economic growth in the period under review.

As contributors to growth, the public and private sectors shared to a lesser

degree than the year before (2.5 percentage points together), recording respectively 1.4 point and 1.1 point in the period under review (against 1.1 point and 3.9 points). That bore witness to the influence of the recent events which downsized the role of the private sector in enhancing the development process in the reporting period.

In the public sector, the key drivers of growth were the general government

(salaries) and the Suez Canal. At the level of the private sector, the main contributor was agriculture, irrigation and fishing.

Contribution of The Public Sector to GDP Growth(at Factor Cost)

0.06

0.02

0.09

0.03

0.03

0.09

0.34

0.04

0.17

0.34

-0.30 -0.20 -0.10 0.00 0.10 0.20 0.30 0.40 0.50

Extractions

Manufacturing

Electricity

Construction & building

Transportation & storage

Communications

Suez Canal

Finance

Social solidarity

General Government

July/March 2009/2010 (1.14%) July / March 2010/2011 (1.25%)

-44-

On the demand side, the decline in real GDP growth at market prices (2.3

percent against 5.0 percent) was largely traced to the fall in the share of final consumption to 3.4 points against 3.8 points. Another affecting factor was the decline in the share of total investments (including change in stock), that shifted from a positive 0.2 point to a negative 1.2 point. Furthermore, the data illustrated that the share of net external demand (exports of goods and services minus imports of goods and services) posted 0.1 point against 1.0 point.

Contribution of The Private Sector to GDP Growth(at Factor Cost)

0.38

0.07

0.01

0.22

0.03

0.24

0.03

0.09

0.12

0.14

-0.07

-0.20 0.00 0.20 0.40 0.60 0.80

Agriculture, Forests & Fishing

Extractions

Manufacturing

Construction & building

Transportation & storage

Communications

Wholesale & Retail Trade

Finance

Tourism

Real Estate

Education, health & other services

July/Mar 2009/2010 (3.90%) July / Mar 2010/2011 (1.24%)

-45-

Share of Demand Components in Real GDP Growth

in July/March

Growth Rate in July/March

(%)

Share in GDP Growth in July/March

(Percentage Point)

2009/2010 2010/2011 2009/2010 2010/2011 Real GDP Growth 5.0 2.3 5.0 2.3 1- Domestic Demand 3.8 2.2 4.0 2.2 A- Final Consumption: 4.5 4.1 3.8 3.4

Private 4.5 4.1 3.4 3.0 Public 4.1 3.6 0.4 0.4

B- Capital Formation (including change in the stock) 1.0 -6.0 0.2 -1.2

2- Net External Demand (A–B) 21.2 1.3 1.0 0.1 A- Exports of goods & services -4.8 7.3 -1.5 2.0 B- Imports of goods & services -7.1 6.3 2.5 -1.9

--

Shares of Consumption, Investment and Net Exports in Real GDP Growth Rate (July/March)

3.43.8

1.0

0.10.2

-1.2-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2010/20112009/2010

Net ExportsInvestmentConsumption

(Per

cent

age

poin

t)

-46-

Implemented investments (at 2006/2007 prices) posted LE 115.7∗ billion or a negative growth rate of 5.5 percent in July/March against 0.1 percent a year earlier. The fall was essentially ascribed to the rise in the negative contribution of the private sector from 0.8 point to 1.6 point due to the economic contraction that led to a general slowdown in all economic activities. Also, the share of the public sector in investment growth reversed from a positive (0.7 point) in July/March to negative (3.9 points) in the reporting period.

--

Excluding change in the stock.∗

-0.09

-0.03

-0.03

0.10

-0.20

-1.84

-0.10

-0.80

-0.47

0.30

-0.20

0.10

0.20

0.00

0.02

0.00

0.00

-0.03

-1.29

0.57

-0.06

-3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.00

Agriculture, Irrigation & Reclamation

Crude Oil

Natural Gas

Oil Refining

Other Manufacturing

Electricity

Water

Construction & Building

Transportation & Storage

Communications

Information

Suez Canal


Financial Intermediaries

Insurance & Social Solidarity

Tourism

Real Estate

Educational Services

Health Services

Drainage

Others

Fiscal Year 2010/2011 (-3.9 percentage points)Fiscal Year 2009/2010 (0.7 percentage point)

Sectoral Contribution of the Public Sector in the Real Growth of Investment (July/March)

-47-

1/2- Unemployment

The follow-up data of the Ministry of Planning indicated that unemploy-ment, according to the Labor Force Survey issued by the CAPMAS, accelerated to 11.9 percent at end of July/March of 2010/2011 against 9.1 percent at the end of the previous corresponding period. The acceleration reflected chiefly the increase in male unemployment to 9.0 percent (against 5.2 percent), whereas female unemployment declined to 21.8 percent against 22.0 percent.

-0.16

-1.59

-6.55

0.20

1.32

0.77

-1.25

-0.69

0.98

0.00

1.98

0.00

0.00

0.72

3.50

0.30

0.27

0.00

-1.37

-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0

Agriculture, Irrigation & Reclamation

Crude Oil

Natural Gas

Oil Refining

Other Manufacturing

Construction & Building

Transportation & Storage

Communications

Information

Suez Canal


Financial Intermediaries

Insurance & Social Solidarity

Tourism

Real Estate

Educational Services

Health Services

Drainage

Others

Fiscal Year 2010/2011 (-1.6 percentage point)Fiscal Year 2009/2010 (-0.8 percentage points)

Sectoral Contribution of the Private Sector in the Real Growth of Investment (July/March)

-48-

Change in Unemployment

(%) FY 2008/2009 2009/2010 2010/2011

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q 3

Unemployment 8.55 8.84 9.37 9.42 9.36 9.40 9.12 8.96 8.94 8.90 11.90

Source: the follow-up report issued by the Ministry of Planning according to the Labor Force Survey, CAPMAS.

-49-

0.0

5.0

10.0

15.0

20.0

25.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009/2010 2010/2011

Unemployment rate Males Females

Unemployment Rates

-49-

1/3- Inflation A- Consumer Price Index (CPI)

The annual CPI inflation rate (urban) increased to 9.8% during the period July/March 2010/2011 against 8.4% during the corresponding period of the previous FY. The increase was largely in food and non-alcoholic beverages whose share in headline inflation rose to 6.7 percentage points from 5.6 percentage points in the corresponding period. Add to this the rise in alcoholic beverages, tobacco and narcotics (1.0 percentage point against nil), as a result of the decision to raise taxes on tobacco in July 2010.

Source: CAPMAS.

Moreover the share of education rose (1.1 point against 0.4 point), as well as

restaurants and hotels (0.5 point against 0.2 point). However, the share of housing, electricity and fuel retreated (nil against 0.6), and so did miscellaneous goods and services (0.1 point against 0.6 point), thus curbing the rise in inflation in the period under review. The hike in the share of food and non-alcoholic beverages is associated with the rise of its inflation rate to 16.3% (against 14.4%), due to the noticeable hike of international food prices during the reporting period.

Annual CPI and Price Index of Food and Non-Alcoholic Beverages (Urban)

4

8

12

16

20

24

28

Jun-20

09 Jul

Aug

Sep

Oct Nov DecJa

n-2010

Feb Mar Apr

MayJu

n-2010 Jul

Aug

Sep

Oct Nov DecJa

n-2011

Feb Mar

%

All Items Food and Non -Alcoholic Beverages

-50-

Source: IMF The pickup in the share of food and non-alcoholic beverages in headline

inflation is attributed to the acceleration of the shares of the subgroups of bread and cereals (1.2 percentage point against nil), vegetables (2.7 percentage points against 1.8 point), oils and fats (0.5 point against 0.3 point) and fish (0.1 percentage point against negative 0.2 point). Meanwhile, the share of meat and poultry group decelerated (from 1.7 to 1.3 percentage point), and that of fruits and sugar by about 0.1 percentage point for each of them

The Change in International Food Prices

-6.0-4.0-2.00.02.04.06.08.0

10.012.014.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009/2010 2010/2011

%

Contribution of Main Items of Food to Headline Inflation (Annually)During July/March

0.00.30.60.91.21.51.82.12.42.73.0

Meat & Poutry Oils & Fats Fruits Bread & cereals Vegetables Sugar

Percentage point

2009/2010

2010/2011

-51-

The following table illustrates the shares of CPI groups (urban) in headline

inflation during the periods of review and comparison:

Inflation Rate in

July/March (%)

Share in Headline Inflation in July/March

(Percentage Point) Main CPI Groups

2009/2010 2010/2011 2009/2010* 2010/2011 General Index 8.4 9.8 8.4 9.8 Food and non-alcoholic beverages 14.4 16.3 5.6 6.7 Alcoholic beverages, tobacco and narcotics 0.0 46.9 0.0 1.0 Clothing and footwear 0.6 0.1 0.1 0.0 Housing, water, electricity, gas & fuel 2.9 0.2 0.6 0.0 Furnishings, household equipment and routine maintenance 3.3 1.1 0.1 0.1 Health care 0.3 1.8 0.0 0.1 Transportation 0.4 0.9 0.0 0.1 Communications -0.1 0.1 0.0 0.0 Culture and recreation 0.5 4.4 0.0 0.1 Education 9.4 24.3 0.4 1.1 Restaurants and hotels 4.3 12.2 0.2 0.5 Miscellaneous goods & services 15.6 1.4 0.6 0.1 ∗CAPMAS has issued a new series of CPIs as of August 2010; data of the period of comparison

is not available because of the change in weights in this series.

The CPI inflation rate (urban), on monthly basis, rose to 1.1% on average during the period under review (against 0.9%) in the period of comparison. The monthly inflation rate recorded the highest levels throughout July and August 2010 (2.5% and 2.9%), on the back of the decision on raising taxes on tobacco within a range of 40.0% and 50.0% as of the first of July 2010, along with the price hikes of the food and non-alcoholic beverages in these two months. Afterwards, inflation started to roll back since September 2010, recording the lowest levels (a negative rate) in November and December.

-52-

B- Producer Price Index (PPI)

Annual PPI inflation also noticeably accelerated to 17.9% in July/March 2010/2011 against 6.3% in the previous corresponding period.

The rise in the inflation rate is mainly attributed to the increase in the share of the fishing and agriculture group to 6.0 percentage points (against 1.5 point). That was the result of the pickup in the shares of its subgroups: cereals and leguminous crops (1.1 point against nil), rice (0.3 point against negative 0.2 point), vegetables (3.0 points against 1.4 point), cotton (0.5 point against negative 0.1 point) and fruits (0.5 point against -0.2 point). The pickup in the share of the

Monthly Inflation Rate According to CPI (Urban)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jun-20

09 Jul

AugSep

Oct Nov Dec

Jan-

2010

Feb Mar AprMay

Jun-20

10 Jul

AugSep

Oct Nov Dec

Jan-20

11Feb Mar

%

Annual Inflation Rate According to PPI ( 2004/2005 = 100 )

-15.0-10.0-5.00.05.0

10.015.020.025.0

Jun-2

009 Ju

lAug Sep Oct

NovDec

Jan-2

010

FebMar

AprMay

Jun-2

010 Ju

lAug Sep Oct

NovDec

Jan-2

011

FebMar

%

-53- aforementioned subgroups is associated with the acceleration of their inflation rates, especially cotton (87.4% against negative 11.2%), vegetables (43.6% against 26.5%) and rice (32.2% against negative 18.7%). Meanwhile, the share of poultry and eggs decelerated to nil against 0.6 point in the corresponding period.

The intensification of inflation is also ascribed, to some extent, to the rise in

the share of the mining and quarrying group to 8.1 points against 2.9 points. The increase was mostly in crude oil and natural gas, since the inflation rate of this group conspicuously jumped to 40.7% from 14.7% in the period of comparison. The contribution of manufacturing also inched up to 3.0 percentage points (against 1.6 point). This is partly attributed to the share of the iron and steel industry (0.7 point against 0.3 point) and fats and oils industry (0.2 point against nil). The contribution of food services group also rose to 0.7 percentage point against a negative 0.2 point in the period of comparison.

The following table shows inflation rates and the share of PPI groups in

headline inflation during the periods of review and comparison:

Annual Inflation Rate of Fishing & Agriculture and Mining & Quarrying Groups

-50-40-30-20-10

010203040506070

Jun-20

09 Jul

Aug Sep OctNov Dec

Jan-20

10Feb Mar Apr

May

Jun-20

10 Jul

Aug Sep OctNov Dec

Jan-20

11Feb Mar

%

Fishing & Agriculture Mining & Quarrying

-54-

Share of PPI Groups in Headline Inflation (2004/2005=100)

Inflation Rate (%)

July/March

Share in Headline Inflation (Percentage Point)

July/March Main PPI Groups

2009/10 2010/11 2009/10 2010/11 General Index 6.3 17.9 6.3 17.9 1-Agriculture, Forestry and Fishing,

of which: 4.7 18.3 1.5 6.0 Cereals and leguminous crops 0.0 29.4 0.0 1.1 Rice -18.7 32.2 -0.2 0.3 Vegetables 26.5 43.6 1.4 3.0 Fruits -2.4 8.2 -0.2 0.5 Cotton -11.2 87.4 -0.1 0.5 Poultry and eggs 17.2 0.7 0.6 0.0 Fish -4.8 1.7 -0.1 0.0

2-Mining & Quarrying, of which: 14.6 40.5 2.9 8.1 Crude oil & natural gas 14.7 40.7 2.9 8.1 Stone, sand and clay 11.4 1.1 0.0 0.0

3-Manufacturing, of which: 4.3 8.4 1.6 3.0 Processed food products, of which: 9.8 11.8 0.8 1.0

Oils and fats 1.2 15.3 0.0 0.2 Dairy products 0.3 7.6 0.0 0.1

Fertilizers 7.8 4.5 0.1 0.0 Wood & products 0.2 13.7 0.0 0.0 Cement 1.5 1.2 0.0 0.0 Iron and steel 7.6 16.6 0.3 0.7

4-Electricity and Gas, of which: 22.0 0.0 0.4 0.0 Electric power generation, transmission and distribution 29.4 0.0 0.4 0.0

5-Water Supply Activities 5.6 0.0 0.1 0.0 6-Transportation and

Storage, of which: 0.5 2.0 0.0 0.1 Land transport 3.5 0.0 0.0 0.0

7-Accomodation and Food Services, of which: -4.7 20.6 -0.2 0.7 Meal serving services in limited service facilities 2.4 17.0 0.0 0.1

8-Information and Communications 0.0 0.0 0.0 0.0

-55-

1/4- Tourism

According to the Ministry of Tourism statistics, the number of Egypt’s

visitors declined by 5.8 percent in July/March 2010/2011, relative to the previous corresponding period, reaching some 9.7 million (against 10.3 million). Despite the decline in the number of visitors, tourist nights for departures slightly increased by 0.1 percent, reaching 102.8 million (against 102.6 million) owing to the pickup in the average tourist stay to 10.6 nights (against 9.98 nights).

The decline was ascribed to the noticeable decrease in the number of visitors in the third quarter (January/March 2011) by 45.3 percent, to reach some 1.9 million (against 3.5 million in the corresponding quarter a year earlier). Likewise, tourist nights for departures dropped by 34.0 percent, to some 21.1 million (against 32.0 million). The indicators showed that tourism was influenced by the political conditions in Egypt, especially in February and March 2011, the departure of some countries’ citizens at the end of January 2011, and the cancellation of tourist reservations in February 2011.

Number of Tourists & Tourist Nights (million) (July/March)

102.6

102.8

10.3

9.7

0 20 40 60 80 100

2009/2010

2010/2011

Tourist Nights of Departures Number of Tourists

-56-

It is worth mentioning that the outstanding performance of tourism in the

first half of FY 2010/2011 has offset the decline in tourist flows in the third quarter of the same year, particularly in February and March 2011. Accordingly, the number of visitors registered a modest decline of 5.8 percent in July/March 2010/2011 and tourist nights recorded a slight rise of 0.1 percent as compared with the corresponding period a year earlier.

Despite the steep decline in tourism activity in the third quarter

(January/March 2011), tourism revenues slightly rose to US$ 8735.0 million in the period under review (July/March 2010/2011), against US$ 8722.9 million in the corresponding period and the average spending of a tourist per night remained unchanged at US$ 85. Thus, tourism revenues contributed 3.7 percent of GDP at market and current prices (against 4.0 percent), and represented 19.3 percent of total current receipts, including transfers (against 20.8 percent).

Number of Tourists & Tourist Nights (Jan./March)

32.0

21.13.5

1.9

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2009/2010 2010/2011

million tourists

0.0

1.0

2.0

3.0

4.0

5.0

million nights

Tourist Nights of Departures Number of Tourists

0.02.04.06.08.0

10.012.014.016.018.020.022.0

%

2009/2010 2010/2011

Tourism Indicators during July/March

Tourism Revenues /Current Receipts Tourism Revenues / GDP

-57-

As noted above, the outstanding performance of tourism in the first half of 2010/2011 has offset the sharp decrease in the third quarter (January/March 2011), in which tourism revenues substantially declined to reach merely US$ 1.8 billion (against US$ 2.7 billion in the corresponding period).

Investments oriented to tourism sector amounted to LE 4.8 billion in

July/March 2010/2011, representing 2.9 percent of total implemented investments (against LE 3.3 billion or 2.0 percent in the period of comparison). The private sector undertook the majority of these investments (93.6 percent).

Statistical Indicators

July/March 2009/2010 2010/2011 Change + (-)

% Number of visitors (000s) 10287 9690 -5.8 Number of nights for departures (000s) 102622 102764 0.1 Estimated average spending per tourist a night (US$ ) 85.0 85.0 0.0 Tourism revenues (US$ bn) 8.72 8.73 0.1 Average tourist stay (night) 9.98 10.6 6.2 GDP at current prices (LE bn) 1206.6 1378.0 14.2 GDP at current prices(US$ bn) 219.5 238.5 8.6 Average exchange rate during the period 5.497 5.779 5.1

Source: The CBE and the Ministries of Tourism & Planning.

Development of Tourism Revenues

0.01.02.03.04.05.06.07.08.09.0

10.0

2009/2010 2.72 6.00 8.72

2010/2011 1.79 6.94 8.73

July/Sept. July/Dec. July/March

US$bn

-58-

Number of Tourists Visitors from all tourist-exporting markets recorded 9.7 million in the period

under review, down by 597 thousand visitors or 5.8 percent, as compared with the corresponding period. The decline was concentrated in the third quarter (January/March 2011) because of the events of the Revolution. This was more visible in the last week of January where the number of visitors who departed Egypt was about 210 thousand. In addition, the tourist reservations for February 2011 were cancelled by tourism companies. Consequently, the number of visitors dropped by 80.0 percent and 60.0 percent in February and March 2011, in order, relative to the two months a year earlier.

Number of Tourist Arrivals (Thousand)

July/March 2009/2010 2010/2011

Number Relative Weight


Change + (-) %

Total 10287 100.0 9690 100.0 -5.8 Europe 7825 76.1 7234 74.6 -7.6 Middle East 1229 11.9 1240 12.8 0.9 Africa 333 3.2 356 3.7 6.9 The Americas 388 3.8 364 3.8 -6.2 Asia and the Pacific 481 4.7 474 4.9 -1.5 Others 31 0.3 22 0.2 -29.0

Source: Ministry of Tourism.

Number of Tourists during Q3 (Jan./March)

100.0300.0500.0700.0900.0

1100.01300.01500.0

2010 1054.5 1069.9 1339.0

2011 1148.0 211.0 535.1

Jan. Feb. March

Thousand

-59-

The European group stayed in the lead, with a relative weight of 74.6

percent of total tourist flows (against 76.1 percent). That came despite the decline in the number of visitors therefrom by some 591.0 thousand, recording the largest decline relative to the other groups (accounting for some 99.0 percent of the total decrease in the number of arrivals). The noticeable decrease in the arrivals of this group was ascribed to its reliance on charter flights that were adversely affected by the events of the Revolution in the third quarter (January/March) and the subsequent cancellation of most reservations of this group. The decrease was offset by the rise in the relative weights of the African and Middle East groups by 6.9 percent and 9.0 percent, in order.

The Asian and Pacific group accounted for 4.9 percent of the total visitors heading to Egypt, recording the lowest rate of decline (1.5 percent) relative to the other groups. Though the relative weight of the Americas group remained unchanged at 3.8 percent in the period under review and the period of comparison, it scored the second largest decline (6.2 percent), as compared with other groups. It is noteworthy that the first ten tourist-exporting markets to Egypt remained unchanged with respect to the tourist-exporting countries in the period under review and the period of comparison, although the ranking of some countries changed (see the following table):

Number of Tourist Arrivals through July/March 2009/2010

Asian & Pacific

countries4.7%

The Americas

3.8%African

countries3.2%

Middle East

countries11.9%

Others0.3%

European countries

76.1%

Number of Tourist Arrivals through July/March 2010/2011

Asian & Pacific

countries4.9%

The Americas

3.8%African countries

3.7%

Middle East

countries12.8%

Others0.2%

European countries

74.6%

-60-

The first Ten Tourist-Exporting Markets to Egypt

July/March 2009/2010 July/March 2010/2011

Rank County Visitors % Rank County Visitors % 1 Russia 1926.0 29.0 1 Russia 1678.8 27.2 2 Britain 1072.6 16.1 2 Britain 1037.9 16.8 3 Germany 947.3 14.3 3 Germany 885.6 14.3 4 Italy 789.2 11.9 4 Italy 710.3 11.5 5 France 415.7 6.3 5 Poland 388.1 6.3 6 Poland 364.7 5.5 6 France 369.2 6.0 7 Libya 318.8 4.8 7 Libya 337.5 5.5 8 Ukraine 286.7 4.3 8 Ukraine 284.9 4.6 9 Saudi

Arabia 276.2 4.2 9 Saudi

Arabia 254.2 4.1

10 America 248.0 3.7 10 America 229.2 3.7 Total 6645.3 64.6 Total 6175.6 63.7

Tourist Nights

Tourist nights for departures slightly increased by 142 thousand nights or 0.1 percent, despite the 5.8 percent decline in the number of visitors in the reporting period, relative to the corresponding period. That was a result of the increase in the average tourist stay by some 10.6 nights (against 9.98 nights). In addition, the good performance of tourism in the first half of 2010/2011 has offset the marked decline in the number of tourist nights by 34.0 percent in the third quarter (January/March 2011), to reach 21.1 million nights (against 32.0 million), as tourist nights fell by 53.3 percent and 64.8 percent in February and March 2011, in order.

-61-

Number of Tourist Nights by Departures (Thousand)

July/March 2009/2010 2010/2011



Change + (-) %

Total 102622 100.0 102764 100.0 0.1 Europe 72594 70.7 70152 68.3 -3.4 Middle East 17065 16.6 18925 18.4 10.9 Africa 3743 3.6 4242 4.1 13.3 The Americas 4777 4.7 4789 4.7 0.3 Asia and the Pacific 4178 4.1 4443 4.3 6.3 Others 265 0.3 213 0.2 -19.6

Source: Ibid. The general structure of the geographical groups constituting the tourism

markets remained unchanged, as the European group came in the lead, with a share of 68.3 percent of the total in July/March 2010/2011, albeit scoring a 3.4 percent decline in the number of tourist nights for departures, relative to the previous corresponding period.

The African group achieved the highest rate of growth, relative to the other

groups (13.3 percent). The Middle East group came next with a share of 10.9 percent, then the Asian and Pacific group with 6.3 percent. This compensated the decline in the number of tourist nights of the European group.

Tourist Nights of Departures By Groups (July/March)

0.010.020.030.040.050.060.070.080.0

Europeancountries

Middle Eastcountries

African countries The Americas Asian & Pacif icCountries

Others

2009/2010

2010/2011

%

-62-

2: Monetary and Banking Developments 2/1- Monetary Policy and Monetary Aggregates

2/1/1- Monetary Policy

Embracing price stability as the ultimate objective of the monetary policy,

the CBE seeks to bring inflation to an appropriate and stable level, conducive to fostering confidence and sustaining adequate levels of investment to achieve the targeted economic growth.

The CBE adopted the overnight interbank interest rate as the operational

target of the monetary policy, applying a framework based on the corridor system, within which the ceiling is the overnight interest rate on lending from the bank and the floor is the overnight deposit interest rate at the bank.

The decisions taken by the MPC in the six periodic meetings held in

July/March 2010/2011 were responsive to the changes in inflation and the committee's assessment of inflationary pressures. In these meetings, the committee decided to keep the CBE key interest rate (the overnight deposit and lending rate) and the discount rate unchanged at 8.25 percent, 9.75 percent and 8.5 percent, in order. Subsequently, in its meeting dated 28 April 2011(at the time of preparing this Review), the MPC decided to maintain the same levels of the overnight deposit and lending rates, as well as the discount rate.

Reacting to the transformational changes in the political arena in Egypt in

the last quarter of the FY (July/March 2010/2011), which influenced the pace of economic activity and the performance of financial markets and in turn available liquidity in the market, the MPC (in its meeting dated 10 March, 2011) decided to launch weekly repo operations on a regular basis under the operational framework of the CBE monetary policy as of 22 March 2011, with a maturity of one week and an interest rate to be set by the MPC in each meeting. The committee determined the interest rate on these operations at 9.25 percent per annum, and this rate was kept applicable throughout the period of preparing this Review, to provide adequate liquidity for banks that face potential pressures on their liquidity position.

-63-

The following are the CBE’s key interest rates according to the MPC’s decisions in the reporting period:

Overnight Deposit

Interest Rate Overnight Lending

Interest Rate Lending &

Discount Rate 17 June 2010 8.25% 9.75% 8.50% 29 July 2010 Unchanged Unchanged Unchanged 16 September 2010 " " " 4 November 2010 " " " 16 December 2010 " " " 27 January 2011 " " " 10 March 2011 " " "

Given the excess liquidity at the banking system in July 2010- January 2011,

the weighted average of the overnight interbank rate was more closely oriented to the CBE overnight deposit rate. In the aftermath of the events experienced by Egypt and the consequent fall in the excess liquidity balance at the banking system (from LE 114.9 billion at end of Dec. 2010 to LE 26.5 billion at end of March 2011), the weighted average of overnight interbank interest rate rose in February and March 2011, hovering around the middle of the corridor. (see the following chart)

O/N Interbank Rate and Policy Rates

7.08.09.0

10.011.012.013.014.0

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

( % )

Overnight interbank Deposit facility rate Lending facility rate

-64 - The MPC's decisions enhanced the stability of market interest rates on

deposits, as the weighted average interest rates on deposits with maturities of three and six months or less and of one year posted some 6.5 percent, 6.9 percent, and 7.3 percent, respectively, in March 2011 (against 6.3 percent, 6.9 percent and 7.3 percent in June 2010). On the other hand, the weighted average interest rate on loans of one year or less fell to 10.7∗ percent in March 2011, from 11.1 percent in June 2010.

The reporting period witnessed a decline of LE 75.0 billion in the

outstanding balance of liquidity, which the CBE absorbed from the market. It registered LE 26.5 billion at end of March 2011, compared with LE 101.5 billion at end of June 2010. That was largely attributed to the higher sales of foreign exchange by the CBE to banks. 2/1/2- Reserve Money (M0)

Reserve money is called monetary base (M0) or high-powered money, and is

considered the base for money in its broader definition. Reserve money consists of money in circulation outside the CBE and banks' local currency deposits. The counterpart assets of reserve money are made up of the CBE's net foreign and local assets, including net claims on both the government and banks, and other net balancing items.

Reserve money mounted by LE 31.8 billion or 15.7 percent in July/March

2010/2011, recording LE 234.9 billion at end of March 2011, compared with LE 21.0 billion or 12.0 percent in the same period of the previous FY. The increase in reserve money echoed for the most part (98.6 percent) in the currency in circulation outside the CBE, which rose by LE 31.4 billion or 21.8 percent to LE 175.6 billion, representing 74.8 percent of reserve money at end of March 2011. Banks' local currency deposits at the CBE registered a modest rise of LE 0.4 billion, amounting to LE 59.3 billion or 25.2 percent of reserve money at end of March 2011.

The interest rate on corporate loans after the application of DMMS system.∗

-65 - Following up the developments of reserve money during the period under

review, it is noted that more than half of the increase (51.9 percent) in January/March 2011 was pronounced in reserve money, with a rise of LE 16.5 billion or 7.6 percent. Moreover, the increase in the currency in circulation outside the CBE outpaced the pickup in the reserve money. In figures, the currency in circulation outside the CBE picked up by LE 22.4 billion or 14.6 percent, representing some 71.5 percent of the total increase during the reporting period. By contrast, banks' local currency deposits at the CBE decreased by LE 5.9 billion or 9.1 percent, due to the decline in local currency deposits held therewith. The sharp increase in the currency in circulation outside the CBE in January/March 2011 was ascribed to the large amounts of banknote issued by the CBE in response to the withdrawals from the deposit accounts of its clients, on the back of the circumstances and aftereffects of January 25 Revolution.

Reserve Money and Counterpart Assets (LE mn)

Change during July/ March + (-) 2009/2010 2010/2011

Balances at End of

March 2011

Value Growth Rate

%

Value Growth Rate %

Reserve Money 234900 21002 12.0 31829 15.7 Currency in circulation outside the CBE 175647 10170 8.1 31394 21.8 Banks' local currency deposits 59253 10832 22.2 435 0.7 Counterpart Assets 234900 21002 12.0 31829 15.7 Net Foreign Assets 167446 8077 4.7 (22788) (12.0) Foreign Assets 175498 15077 8.7 (23107) (11.6) Foreign Liabilities 8052 7000 529.0 (319) (3.8) Net Domestic Assets 67454 12925 383.3 54617 425.5 Claims on the Government (Net) 108832 16527 24.1 28221 35.0 Claims on Banks (Net) -1287 23507 7038.8 (30297) (104.4) Net Balancing Items -40091 (27109) 41.3 56693 (58.6)

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-2.96

6.195.38

5.8115.46

0.21

-4-202468

1012141618

2008/2009 2009/2010 2010/2011

Banks' Local Currency Deposits Money in Circulation outside the CBE Growth Rate of Reserv e Money

(%)

Growth Rate of Domestic Liquidity by Component during July/March

The breakdown of the currency in circulation by denomination denotes a

change in favor of the medium denominations (5, 10 and 20 notes). The relative importance of these notes inched up to 9.3 percent of the total currency in circulation at end of March 2011, from 6.8 percent at end June 2010. Likewise, the relative importance of the largest denomination (LE 200 note) rose to 35.0 percent (against 31.5 percent), particularly after modifying its specifications and size in August 2010, and so did the LE 50 note which gained increased importance (13.3 percent from 13.0 percent). By contrast, the relative importance of the LE 100 note declined to 41.4 percent (from 47.6 percent). However, so far the large notes still accounted for the bulk of the currency in circulation (89.7 percent), despite the drop in their relative importance. This gave evidence of the continued preference for large denominations, owing to the increasing value of transactions associated with higher prices. Hence, the average value per note climbed to LE 34.2 at end of March 2011 against LE 33.4 at end of June 2010.

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Relative Importance of the Currency in Circulation (at End of)

2/1/3 - Banknote Issue

The pickup in the currency in circulation outside the CBE resulted from the

increase in the balance of note issue by LE 31.5 billion or 21.6 percent in July/March 2010/2011 (compared with LE 11.1 billion or 8.7 percent a year earlier), amounting to LE 177.4 billion at end of March 2011. As for the issue cover components, the value of gold constituted LE 12.4 billion worth, Egyptian government bonds LE 131.6 billion and foreign currencies LE 33.4 billion. Accordingly, the structure of the cover at end of March 2011 was as follows: Egyptian government bonds (74.2 percent), foreign currencies (18.8 percent), and gold (7.0 percent).

March 2011

1.0%

9.3%

13.3%

41.4%

35.0%

Denomination- 1 LELE 5 - LE 20LE 50LE 100LE 200

June 2010

31.5%

47.6%

13.0%

6.8%

1.1%

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The Banknote Issue and Components of the Cover

0

15

30

45

60

75

90

105

120

135

150

165

180

June 2009 March 2010 June 2010 March 2011

LE bn

Gold Foreign Banknote Egyptian Government Bonds Banknote issue

The increase in the counterpart assets of reserve money was attributable to the growth in net domestic assets, and the decrease in net foreign assets. The increase in the net domestic assets at the CBE (LE 54.6 billion) was the outcome of the rise in both its net claims on the government and in net balancing items, and the decline in the CBE's net claims on the banks. The CBE's net claims on the government went up by LE 28.2 billion (due to the pickup in its claims on the government by LE 39.3 billion and in its deposits therewith by LE 11.1 billion). Other net balancing items had an expansionary effect on reserve money, as its negative balance went down by LE 56.7 billion, owing to the LE 75.0 billion decline in the deposits accepted by the CBE under the open market operations (for the management of monetary policy through repurchase operations), and the LE 18.3 billion drop in net unclassified assets and liabilities. Meanwhile, the CBE's net claims on banks decreased by LE 30.3 billion as a result of the decline in the CBE's claims on the banks by LE 28.5 billion, and the rise in banks' foreign currency deposits therewith by LE 1.8 billion worth. The decline in the CBE's net foreign assets by LE 22.8 billion worth was primarily the result of the decrease in foreign assets therewith by LE 22.8 billion worth, and in foreign liabilities by some LE 0.3 billion worth.

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Reserve Money Counterpart Assets End of Mar. 2011

Net Foreign Assets71.3%

Net Domestic Assets28.7%

Following up developments in the counterpart assets of reserve money during January/March 2011, it is noted that net domestic assets stepped up by LE 47.3 billion, and foreign assets scaled down by LE 30.8 billion worth, due to some foreign investment outflows and the use of part of these assets in importing some basic goods.

The pickup in net domestic assets was ascribed both to the rise in net claims

on the government by LE 8.6 billion or 8.6 percent, besides the expansionary effect of net balancing items by LE 79.8 billion (because of the LE 88.3 billion decrease in the deposits accepted at the CBE under the open market operations and the LE 8.5 billion drop in unclassified net assets and liabilities). Add to this, the decline of LE 41.1 billion in net claims on banks (due to the retreat in the CBE's foreign currency deposits at banks to counteract the foreign capital flight that occurred in the wake of January 25 Revolution).

2/1/4- Domestic Liquidity (M2) and Counterpart Assets

Domestic liquidity (M2) consists of money in circulation outside the

banking system plus banks' deposits (in foreign and local currencies). Domestic liquidity amounted to LE 988.1 billion at end of March 2011, up by LE 70.6 billion or 7.7 percent in July/March 2010/2011 (of which a rise of LE 14.1 billion was realized in January/March 2011, representing about 20 percent of the total increase in the reporting period), against a rise of LE 57.0 billion or 6.9 percent a year earlier.

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Growth Rate of Domestic Liquidity by Component in July/March

0.32.3 2.9

5.1

4.64.85.5

7.66.9

0.0

2.0

4.0

6.0

8.0

2008/2009 2009/2010 2010/2011

(%)

Money Supply Quasi Money Domestic Liquidity

The rise in domestic liquidity led to the growth of money supply and quasi money. Money supply scaled up by LE 26.8 billion or 12.5 percent in the period under review (against LE 18.9 billion or 10.3 percent), recording LE 240.8 billion or 24.4 percent of total domestic liquidity at end of March 2011. The pickup in money supply was the outcome of the rise in the currency in circulation outside the banking system by LE 28.3 billion or 20.9 percent and the fall in local currency demand deposits at banks by some LE 1.5 billion or 1.9 percent.

It is also noted that money supply went up by LE 17.4 billion or 64.8 percent

of the total increase in money supply in January/March 2011, owing to the LE 19.9 billion increase in the currency in circulation outside the CBE following the injection of large amounts of funds into banks by the CBE, to make up for the withdrawals from deposits and bank accounts during, and in the aftermath of, the January 25 Revolution. On the other hand, local currency demand deposits at banks retreated by LE 2.5 billion.

Quasi-money augmented by LE 43.8 percent or 6.2 percent in the reporting period (against LE 38.1 billion a year earlier), reaching LE 747.3 billion, thus exceeding three quarters (75.6 percent) of domestic liquidity at end of March 2011. The increase was traceable to the growth of LE time and saving deposits and foreign currency deposits. In figures, LE time and saving deposits edged up by LE 22.1 billion or 4.1 percent, owing to the growth in the deposits of the

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household sector which outpaced the total increase of LE time and saving deposits. Thus, the household sector’s deposits scaled up by LE 30.2 billion or 6.7 percent, scoring LE 478.5 billion or 84.3 percent of total LE time and saving deposits and 64.0 percent of quasi money at end of March 2011.

Given the developments in January/March 2011, it is observed that LE time

and saving deposits fell by LE 25.1 billion because of the drop in the private business sector's deposits in particular, and in those of the household and public business sectors. Having concerns about the consequences of the Revolution, the household and private business sectors were inclined to maintain their funds in cash or deposit part of them in foreign currency.

Deposits in foreign currency climbed by LE 21.7 billon worth or 13.8

percent, reaching LE 179.9 billion worth or 21.8 percent of total deposits with banks (dollarization ratio) at end of March 2011 (against 20.2 percent at end of June 2010). It is noteworthy that these increases were centered in the period January/March 2011, being indicative of the propensity to save in foreign currency, because of uncertainty about the volatility of the LE exchange rate in the light of the transformational changes experienced by Egypt after January 25 Revolution.

Dollarization Ratio (Deposits in US$/Total Deposits) & Interest Rates on Deposits in LE & US$

0.001.002.003.004.005.006.007.008.00

Jun.0

6

Sept.0

6

Dec.06

Mar.07

Jun.0

7

Sept.0

7

Dec.07

Mar.08

Jun.0

8

Sept.0

8

Dec.08

Mar.09

Jun.0

9

Sept.0

9

Dec.09

Mar.10

Jun.1

0

Sept.1

0

Dec.10

Mar.11

(%)

16.0018.0020.0022.0024.0026.0028.0030.00(%)

Interest rate on less than 3-month deposits in LEInterest rate on 3-month deposits in US$Dollarization rate

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As to the growth of domestic liquidity by component; net domestic assets

made a positive contribution of 9.5 percentage points which was limited by the negative contribution of net foreign assets (1.8 point). The surge in net domestic assets (LE 87.0 billion) was brought about by the increase in domestic credit by LE 95.2 billion or 12.3 percent (compared with LE 55.6 billion or 8.0 percent in the corresponding period), amounting to LE 870.5 billion at end of March 2011. In addition, the negative balance of net balancing items mounted by LE 8.2 billion or 5.9 percent, standing at LE 148.4 billion at end of March 2011.

Domestic Liquidity Growth by Counterpart Assets

during July/March

-7.5

-2.6 -2.5-0.9

2.7

-1.8

10.4

6.7

15.6

6.9

5.57.7

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

2008/2009 2009/2010 2010/2011

Net Foreign Assets Domestic creditNet balancing items Domestic Liquidity Growth Rate

percentage

The bulk of the increase in domestic credit (97.6 percent) went to the

government sector, as net claims on the government scaled up by LE 92.9 billion or 28.5 percent (against a rise of LE 47.8 billion or 17.5 percent during the same period a year earlier), bringing its balance to LE 419.0 billion, or nearly half of the credit granted by banks (48.1 percent) at end of March 2011. The rise resulted from the increase in banks' holdings of government securities and treasury bills by LE 80.1 billion, together with the rise in loans to the government by LE 29.2 billion, and in its deposits at banks by LE 16.4 billion.

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Growth In Domestic Credit by Sectors during July/March

-0.501.503.505.507.509.50

11.5013.5015.5017.5019.5021.50

2008/2009 2009/2010 2010/2011

Government Sector (net)Public Business SectorPrivate Business SectorHousehold SectorDomestic Credit Growth

(%)

Credit to the public business sector inched up by LE 3.7 billion or 12.3

percent (against an increase of LE 3.6 billion or 10.7 percent), posting LE 33.7 billion or 3.9 percent of the total. Likewise, credit to the household sector stepped up by LE 3.4 billion or 3.7 percent during the relevant quarter (compared with LE 4.8 billion or 5.7 percent), reaching LE 96.2 billion or 11.1 percent of total credit at end of March 2011. By contrast, credit to the private business sector receded by about LE 4.8 billion or 1.5 percent (against a drop of LE 0.6 billion or 0.2 percent), reaching LE 321.6 billion or 36.9 percent of total domestic credit at end of March 2011.

It is noted that more than two thirds of the increase in total domestic credit

(68.7 percent) were pronounced during the reporting period, through which domestic credit climbed by LE 65.4 billion. Of this figure, the government and public business sector received 83.1 percent and 14.3 percent, respectively, while the household sector accounted for merely 0.8 percent.

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Relative Structure of Net Foreign Assets At End of March 2011

Net Foreign assets w ith

Banks37%

Net Foreign assets w ith

the CBE63%

Net foreign assets at the banking system reached LE 266.0 billion worth at

end of March 2011, posting a noticeable drop of LE 16.4 billion worth or 5.8 percent during the reporting period, against a rise of LE 22.2 billion or 8.8 percent during the same period a year earlier. The decline was attributable both to the fall in net foreign assets at the CBE by LE 22.8 billion worth or 12.0 percent, and to the rise in net foreign assets at banks by LE 6.4 billion or 7.0 percent.

Change in Foreign Assets and Liabilities at the Banking System

(LE mn) July/March + (-)

2009/2010 2010/2011 Value Growth

(%) Value Growth

(%) Net Foreign Assets at the Banking System 22245 8.8 (16372) (5.8) Net Foreign Assets at the CBE 8077 4.7 (22788) (12.0)

- Foreign assets 15077 8.7 (23107) (11.6) - Foreign liabilities 7000 529.0 (319) (3.8)

Net Foreign Assets at Banks 14168 17.2 6416 7.0 - Foreign assets 14172 12.9 12800 10.4 - Foreign liabilities 4 0.0 6384 20.3

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It is noteworthy that the period January/March 2011 witnessed large capital outflows from Egypt (primarily foreign holdings of government treasury bills and equity investment in the stock exchange). Consequently, cash foreign reserves were drained to some extent, to enable the outflow of these investments and the importation of basic commodities. The retreat in net foreign assets amounted to LE 39.2 billion worth, owing to the fall in net foreign assets at the CBE by LE 30.7 billion worth, and at banks by LE 8.5 billion worth.

2/1/5- Payment Systems and Information Technology (IT)

The CBE’s efforts to develop the payment systems and information technology have been in progress, to bolster the soundness and stability of the financial system, reduce credit risks, expedite payment settlements, and ensure their reliability and confidentiality. In this respect, the following actions were taken in the period of July/March 2010/2011:

• The CBE is in the process of developing the database of the banking sector

units, by setting up a data warehouse conforming to the international standards. The warehouse is designed to help the CBE sectors to have access to accurate and transparent reports, to be able to monitor the performance of the banking sector units and make informed decisions.

• The establishment of a permanent backup site for the CBE is on track, to be

functional in emergencies as an alternative to the main center at El-Gomhoria building. This is intended to ensure the continuity of services, with accuracy and timeliness, taking into account that the backup site should meet international rules and standards. The site is to be located in the CBE building in Tanta, and a study was approved for this purpose. However, due to the replacement of the project’s consultant, the implementation has been delayed until a new consultant is to be chosen, to set the technical specifications of the appliances and equipment of the backup site, in preparation for inviting the specialized companies for bidding.

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• Out of its keenness to secure the banking data, to face the mounting risks associated with internet use and the provision of banking services via the internet, the CBE embarked on a project that obliges banks to identify and assess the weaknesses of the data network that serves the banking operations system and the CBE's website. Banks should also overhaul the design of the data security systems, and run penetration tests in cooperation with specialized companies. Under this project, banks must put forward plans proposing solutions to the detected weaknesses, in agreement with the specialized companies. More over, three reports are to be submitted by the respective banks to the CBE on the diagnosis and assessment of weaknesses, the remedial plan and penetration tests. So far, all banks delivered the required reports to the CBE, which by turn has been analyzing the data of the reports and is about to release its final report on the requisite recommendations in this concern.

• The electronic “Auction Portal System” was introduced to automate the

procedures of submitting offers for the auctions of treasury bills and bonds, and the CBE’s certificates of deposits (CDs). By virtue of this system, the primary and secondary dealers can bid online, according to specific regulations, via the secure and private data network whereby banks and the CBE are interlinked.

• According to the plan of developing the electronic systems of the Printing

Press, assistance has been provided to the CBE Printing Press to adjust the operational programs and systems, in compatibility with the other modernized systems in place at the CBE, to elevate their efficiency and ensure the continuity of business. To date, three systems only have been under development. Aware that upgrading the IT infrastructure at the Printing Press is a prerequisite for developing the above-mentioned systems, the CBE has proceeded to modernize the infrastructure of the information and communi-cation network in the buildings of Al-Haram Printing Press.

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• Under the plan of developing the CBE branches and modernizing their electronic systems, the unification of the Bank’s accounting system is under consideration, to be generalized in all branches (Alexandria, Mohandessin and Port Said). For this purpose, preliminary steps have been taken, starting with Alexandria branch and ending with Port Said branch as scheduled.

2/1/6- RTGS and SWIFT Local Services

In the period July/March 2010/2011, LE local banking transfers under the RTGS system, applied as of mid-March 2009, showed an increase in the number and value of executed messages, registering 931.3 thousand messages, at a total value of LE 13132.3 billion (against 865.2 thousand messages, at a total value of LE 10088.1 billion). It is worth mentioning that RTGS transactions included banks’ deposit acceptance operations at the CBE (corridor transactions and deposits for monetary policy purposes).

RTGS and SWIFT Local Services in Local Currency

Number of

Messages alue of TransfersV Change July/March

(Unit) (LE mn) Number Value

2008/2009 575310 1975558 73395 (360345)

2009/2010 865173 10088079 289863 8112521

2010/2011 931291 13132273 66118 3044194

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According to the statistics of the CBE Automated Clearing House; that operate according to the RTGS; the number of exchanged cheques stayed almost stable at 9.6 million during the periods under review and of comparison, though their value rose to LE 463.3 billion (against LE 427.6 billion). As a result, the average value per cheque mounted to LE 48.1 thousand during the period, from LE 44.5 thousand.

CBE Automated Clearing House Activity

Number of Cheques Value of Cheques %Change July/March (Thousand) (LE mn) Number Value

2008/2009 8786 399905 1.8 16.8 2009/2010 9611 427649 9.4 6.9 2010/2011 9641 463261 0.3 8.3

Transactions executed in foreign currencies under the Fin-Copy system, via SWIFT, showed a rise in their number and value. The number of executed transactions reached 11.6 thousand messages, at a value of US$ 71.2 billion in July/March 2010/2011 (against 8.9 thousand messages, at a total value of US$ 51.0 billion a year earlier).

SWIFT Local Services in US Dollar

Number of Messages Value of Transfers Change July/March (Unit) (US$ mn) Number Value 2008/2009 9999 70777 (277) (10022) 2009/2010 8875 51039 (1124) (19738) 2010/2011 11596 71168 2721 20129

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2/2- Banking and Credit Developments

2/2/1- Banking Reform

In continuation of the banking reform program, launched in September 2004, the Central Bank is currently executing the second phase of the program (2009 - 2011). This phase aims at raising the efficiency and soundness of the Egyptian banking sector, and enhancing its competitiveness and ability for risk management so that it can perform its role in financial intermediation in a way beneficial to the national economy, and achieve the targeted development. The reform program is based on the following pillars:

Preparing and implementing a comprehensive program for the financial and managerial restructuring of specialized state-owned banks (the Principal Bank for Development and Agricultural Credit, Egyptian Arab Land Bank, and Industrial Development and Workers Bank of Egypt). This step is expected to positively affect the performance of the said banks.

Following up - on a periodic basis - the results of the first phase of the restructuring program of the National Bank of Egypt (NBE), Banque Misr (BM) and Banque du Caire (BdC), which revealed that the first phase of the reform program (2004-2008) had already yielded fruit and positively affected their performance levels. This is in addition to the fulfillment, in the second phase, of all requirements for upgrading the efficiency of these banks in financial intermediation, risk management, human resources, and IT to ensure the continued improvement of their financial performance and competitiveness.

Applying Basel II standards in Egyptian banks to enhance their risk management practices. In this context, a protocol had been signed with the European Central Bank and seven European central banks to provide a three-year technical assistance program launched in January 2009, to implement Basel II requirements in the Egyptian banking sector. It is worthy to note that the strategy of the CBE in implementing Basel II framework,

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which was announced for Egyptian banks and the relevant parties in an extensive meeting held in Oct. 2009, is based on the two main principles of simplicity and consultation with banks, to ensure banks’ compliance with these standards. According to the above-said strategy, Basel II standards should be phased in over the following stages:

• The first stage (January 2009 - June 2009) focused on the capacity-building of the CBE’s core team and elaboration on the Egyptian strategy for Basel II implementation.

• The second stage (July 2009 - June 2011) - the pivotal phase of the reform

program - covers extensive coordination with the banking sector, through discussion papers related to the most important topics and selection of the most appropriate methods for application in Egypt, taking into consideration similar experiences in other countries that have implemented Basel II. Moreover, the quantitative impact of the possible consequences of Basel II standards will be measured before the mandatory application.

• The third stage (July 2011 - December 2011) will focus on the fine-tuning

of future supervisory regulations related to Basel II, taking into account the legal aspects and development of corrective action plans commensurate with the different types of banks, according to the simulation results for each bank on a case-by-case basis. Also, a parallel run of existing regulations and Basel II will be applied upon issuance, and a new data warehousing framework will be implemented to support the future updated supervisory regime.

• The fourth stage (implementation is under way) - A parallel run of Basel II

and existing regulations concerning capital adequacy will be applied upon issuance. Moreover, the data warehousing framework will be completed.

Adopting an initiative promoting the development and growth of banking activities/services catering and access to finance for various sectors, especially small- and medium-sized enterprises (SMEs). In this respect, to encourage banking credit to small- and medium-sized enterprises (SMEs),

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the CBE exempted banks' deposits -equivalent to the size of loans extended thereby to finance SMEs- from the reserve requirement ratio (14 percent). It is noteworthy that poor access to adequate, timely and reliable statistical data and information is one of the main obstacles to the improvement and finance of small and medium-sized enterprises (SMEs). Hence, the Central Bank of Egypt and the Egyptian Banking Institute (EBI), in collaboration with the Central Agency for Public Mobilization and Statistics (CAPMAS), embarked on a field survey of small and medium-sized enterprises (SMEs) covering all the governorates of Egypt, on the basis of the full count approach. After completing the first stage, conducted in Al Sharqiya Governorate, the survey was carried out in the rest of the governorates in the light of its results. Furthermore, other eighteen governorates were surveyed up to March. 2010. According to the findings, a database will be set up and is to be periodically updated.

Reviewing and strictly applying the international governance rules to the Egyptian banking sector and the CBE. In this respect, regulations on bank governance were prepared with the aim of helping banks to set/develop their governance systems. As such, each bank shall apply these regulations in accordance with the volume and complexity of its activities, and strategy, as well as capacity for risk management. The said regulations are currently under discussion by the CBE’s senior management, noting that they were submitted to officials in the Egyptian Financial Supervisory Authority (EFSA) within the framework of coordination among the regulatory authorities of the financial sector. Moreover, a blueprint of the regulations was sent to banks to express their comments thereon before submitting them to the CBE's Board of Directors for final approval.

Preparations and execution of the second phase of the banking reform

program have proceeded, after the first phase was successfully implemented. The first phase was centered on four pillars: (1) consolidation and privatization of the banking sector, (2) financial and managerial restructuring of state-owned banks, (3) addressing of the nonperforming loans issue, and (4) upgrading of the Supervision Sector at the CBE.

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As for the first pillar, some voluntary and regulatory-forced mergers took

place, leading to a decrease in the number of banks operating in Egypt from 57 at end of December 2004 to 39 banks at end of December 2008. Under this plan, 80 percent of the share capital of the Bank of Alexandria was sold to Italy’s Sanpaolo Bank, besides the divestiture of the shareholdings of state-owned banks in a number of joint venture banks.

With respect to the second pillar, state-owned banks were restructured

under a comprehensive and time-lined plan, designed by the Banking Reform Unit at the CBE. The plan was intended to reform the practices of all departments and technological systems, besides establishing new departments, particularly for risk management, information technology (IT), and human resources. To this end, a project on the application of the international best practices - implemented with the assistance of foreign consultants - was completed on time. In addition, a full audit of state-owned banks was conducted according to the international accounting standards, covering the years from 2004 to 2008. Finally, the recruitment of highly qualified banking cadres and leaderships at state-owned banks (with finance from the Banking Reform Fund) enabled those banks to push ahead with reform and development.

Concerning the third pillar, to address the problem of non-performing

loans, the CBE's NPL Management Unit worked out a variety of approaches and programs that helped settle more than 90 percent of NPLs (excluding debts of the state-owned enterprises). With regard to the non-performing loans of state owned enterprises to public banks, about 62 percent was repaid in cash to the public commercial banks. As for the remaining debts (38 percent), an agreement was signed on 14/9/2009 whereby the in-kind repayment of the remaining debt was made by the end of June 2010.

A program for the reform of the Supervision Sector was devised to achieve

the following targets: enhance the efficiency of this sector by benefiting from the international best practices, and apply the concept of risk-based supervision to ensure the sector’s robustness and soundness. Furthermore, efforts were exerted to recruit highly qualified staff versed in advanced technology, enhance the efficiency of human cadres to be capable of managing this key sector, and upgrade the

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management information system (MIS) to ensure timely access to accurate data. In this context, a technical assistance program, in collaboration with the European Central Bank (ECB) and four European central banks, was completed in the last quarter of 2007.

It is worthy to note that the successful and timely implementation of the first phase of the CBE's banking reform program was instrumental in helping the Egyptian banking sector to weather the adverse effects of the global financial crisis, and to fare well under the current circumstances.

2/2/2- Supervision Sector

As the authority in charge of bank supervision in Egypt, the CBE aims to

ensure the soundness of banks’ financial positions and evaluate their performance from the perspective of risk-based supervision. In addition, it ascertains banks’ compliance with the established regulatory requirements, including the minimum reserve requirement and liquidity ratios, the maximum limits of a bank’s exposure to a single customer, his related parties, and exposures abroad, as well as the asset-liability matching in terms of maturity and currency. This is in addition to a number of qualitative standards that ensure the soundness of banks’ performance and the safety of depositors’ funds, including governance rules; information systems efficiency rules; and eligibility and competency criteria for the officials and managers of the key sectors at banks.

The implications of the financial crisis bore out that the instructions and

reform policies adopted by the CBE to restructure banks, raise their capitals and strengthen their risk management systems were instrumental in containing the effects of this crisis.

Hereunder are the decisions taken by the CBE during the period under

review: 1- Accepting, as collateral, those letters of guarantee (including standby L/C

and L/G that meet the same conditions) issued by the bank group/a branch of a foreign bank, for benefit of the CBE, or by others outside the group, at the time of provisioning for a certain customer and when

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calculating the maximum limits of a bank's exposure to a single customer and his related parties, on specific conditions.

2- Launching regular repurchasing agreements (repos) as of March 22, 2011 with a maturity of 7 days, at a fixed a rate to be determined by the Monetary Policy Committee in its respective meetings.

3- Providing banks with discussion papers on interest rate risks of the positions held for non-trading purposes, and liquidity risks within the framework of implementing Basel II standards.

In view of the current events, the CBE decided the following: 1- Lifting the daily LE cash withdrawal limit (LE 50 thousand) at banks

per a single customer as of April 13, 2011. 2- Keeping in effect the maximum limit on the transfer of funds outside

the country per a single customer at banks in Egypt (US$ 100000 or their equivalent – imposed as of 13 Feb. 2011) applicable to Egyptian natural persons. As for foreign natural persons, it was decided as of 12 May 2011 that their requests for external transfers may be granted after verifying that the funds to be transferred are generated from the customer's own resources, whether from income sources (e.g. salaries, investment income or a foreign currency transfer made earlier by the customer from abroad to the A.R.E).

3- Underpinning and supporting the banking sector to help it contain the recent crisis and the resultant losses that are likely to weaken banks' performance and impair the soundness of bank credit (as related to retail and corporate loans) as follows:

A- Retail Loans

Banks may submit to the CBE supervision sector requests for postponing the

overdue payments of their retail borrowers that have a good credit history, in compliance with certain determinants. As for retail customers with timely

-85-

payments on 31 Dec. 2010, banks were allowed to defer their overdue payments of January, February, and March 2011, for a maximum of 3 months from the date of maturity.

B- Corporate Loans:

• Banks shall set an organized mechanism to contain the crisis and its spillovers, including at least the following:

- Setting an urgent plan to review the outstanding credit facilities of all

customers and the guarantees offered thereby.

- Analyzing macroeconomic risks and studying the impact of the crisis on the different economic sectors and evaluating their performance.

- As for the tourism sector in particular, a grace period of a maximum of 6

months (from Jan. to June 2011) was given with respect to the installment payments of the customers thereof, to subdue the negative impact on this sector.

- Every bank shall run stress testing on the sectors of activity and the credit

portfolio.

• Banks shall submit to the CBE a summary of the credit risk analysis for corporate loan portfolio, the sectors of activity, and the results of stress testing.

4- Postponing the deduction of additional impairment losses on the excess of

banks' investments in non-financial companies over 40% of the issued capital of a company (the CBE had limited such investments to 40%) for one year.

As for enhancing the framework of the rules of governance at the Egyptian

banking sector, the CBE's Board of Directors approved - on its session dated 6 April 2004 - the competency criteria for chairmen, board members and executive managers of banks to make sure that they are qualified candidates for their

-86-

positions. Moreover, the Board agreed, on its session dated 24 November 2009, to modify these criteria by adding a new criterion stipulating that it shall be prohibited for any one to simultaneously occupy the two positions of a senior manager in one bank and a member of the board of directors of another bank.

In this context, the CBE agreed in the period under review to record in the

register of banks, the following: one chairman, one delegated member, three (executive) board members, four (non-executive) board members, one regional manager for a branch of a foreign bank operating in Egypt, three managers responsible for credit management, two managers for investment management, one manager for risk management, one manager for the management of swaps, and one manager for foreign banks’ representation bureaus in Egypt.

On the other hand, the modifications to certain articles of the statute of two

banks were recorded in the register of banks. This move came in compliance with the provisions of article no. 32/3 of Law No. 88 of 2003 of the Central Bank, the Banking Sector and Money, stipulating that the Governor of the Central Bank, upon the consent of the Board of Directors, shall approve the statute of a bank, as well as any modifications thereto. The Egyptian Financial Supervisory Authority (EFSA) issued Decision No. (3) for 2010 concerning the regulation of the activities of depository banks, and the issuance of Egyptian depository receipts. These regulations shall be applicable to banks that request license from the CBE to practice such activities. In line with the policy of the CBE that promotes the growth and geographical expansion of banks by opening new branches nationwide, the applicable criteria for approving the establishment of new branches/agencies for banks were revised, with a view to organizing and simplifying the relevant procedures. Moreover, a number of guidelines were set for the applicant banks, that give due regard to the soundness of banks’ financial positions, internal control systems, the efficiency of their information systems and capital adequacy to ensure that they can better face the risks arising from the expansion in their activities. In this context, approval of 21 branches of 14 banks, and a primary approval to open a new branch of a single bank were recorded in the register of banks.

-87- The CBE has set and modified the rules of business time for all banks in

Egypt, with respect to the number of hours for rendering banking services to customers, to ensure that competition among banks are based on fair and equal terms. The CBE also laid down the security regulations of foreign exchange offices at banks to avoid any potential threat to their safety and security. In the period under review, one foreign exchange office of a single bank has been recorded.

The CBE is currently in the process of updating the rules of examining the documents required from the houses of expertise (that are eligible for participating in the evaluation of collaterals/guarantees provided to banks) to be listed in the register of houses of expertise at the CBE (63 houses of expertise were listed). This step is bound to raise the efficiency and effectiveness of the credit decisions made by banks to prevent the recurrence of the problem of nonperforming loans.

The CBE allowed banks to participate in the establishment of mutual funds,

regardless of the type, to cater for risk-averse investors who have cash money but lack the necessary experience, know-how, or time to invest in tools that yield good returns. In the reporting period, a single bank was granted licence to take procedures for the establishment of a new mutual fund.

Moreover, in order to encourage individuals to save, banks operating in Egypt have been allowed to issue saving systems of three years or more, with some privileges, to enable them to raise their market interest rates above short-term interest rates. Also, banks were permitted to issue new saving vessels and to make adjustments to the existing ones, with the aim of increasing the volume of medium- and long-term savings, to help banks raise finance for productive and industrial projects.

In the light of the recent events faced by the country, the work of the general

department of credit risk pooling was confined to the usual tasks. To elaborate, the department receives banks' statements on the volume of credit facilities granted thereby to their customers on the CBE's website, prepares the aggregate positions of those customers, as well as the memorandums to be presented to the senior management, and responds to the complaints filed by bank customers pertaining to credit risk information.

-88- As for on-site supervision, the main concern in the first quarter of 2011 was

to check on the transfers made by Egyptian banks, being guided in this respect by the relevant instructions of the CBE - in cooperation with the departments concerned - in the aftermath of the latest events that rocked the country. Moreover, the CBE continued to update the bank inspection reports within the framework of the usual plan, taking into account the above- mentioned circumstances.

Undoubtedly, the inspection reports have helped lately to upgrade the risk management framework in several banks with the effect that they have shown high efficiency in the face of the ongoing turmoil.

Concurrently, the Supervision Sector at the CBE continued to cooperate

with the other supervisory and judicial authorities in resolving a number of money and banking issues. Moreover, the sector examines the complaints filed by bank customers and provides the required banking expertise. 2/2/3- Overview of Banks' Aggregate Financial Position

The financial position of registered banks operating in Egypt (39 banks at

end of March 2011) amounted to LE 1.3 trillion at end of March 2011, up by LE 52.9 billion or 4.3 percent in July/March 2010/2011 (against a rise of LE 106.2 billion or 9.7 percent a year earlier). The increase in the period under review came in spite of the LE 9.3 billion decline in January/March 2011. That was mainly attributed to the decrease of LE 39.2 billion in the obligations of local banks to the CBE, following the withdrawal of some of its deposits with these banks to meet foreigners' liquidation of part of their investments, in the wake of the events of January 25 Revolution.

On the liabilities side, most of the rise (91.4 percent) stemmed from the

pickup of LE 48.4 billion or 5.4 percent in deposits at banks, albeit declining by LE 3.1 billion in January/March 2011. Increases were also seen in banks’ equities by LE 8.5 billion and in long-term loans and bonds by LE 4 billion. However, decreases were seen in both obligations to local banks by LE 27.6 billion (because of the LE 28.7 billion decline in obligations to the CBE), and in banks' provisions by LE 15.1 billion.

-89-

Around 86.0 percent of the increase on the assets side was traceable to the

surge in banks' investments in securities and bills by LE 45.5 billion or 11.2 percent to LE 451.4 billion at end of March 2011. Add to this the pickup in balances with banks abroad by LE 34.9 billion worth or 60.9 percent, and the rise in lending and discount balances by LE 4.0 billion. However, balances with local banks decelerated by LE 63.5 billion (due to the LE 65.0 billion decline in balances at the CBE and the LE 1.5 billion rise in those at other banks). The decline was concentrated in January/March 2011, in which balances with local banks decreased by LE 80.9 billion (because of the drop in the balances with the CBE by LE 85.4 billion, and the rise in those at other banks by LE 4.5 billion).

Growth Rate of the Banking System Liabilities During July/March

28.4

(3.1)

7.1

29.7

12.7

(21.4)

18.4

(83.9)

5.6

2.0

4.9

1.0269.4

(24.9)

8.9

0.9

39.8

5.4

CapitalReserves

ProvisionsBonds & Long-term Loans

Obligations to Banks AbroadObligations to the CBE

Obligations to Banks in Egypt Total Deposits Other Liabilities

%

2009/2010 2010/2011

Growth Rate of the Banking System Assets During July/March

(1.8)

11.9

13.5

19.8

2.7

30.5

11.2

60.9

7.8

0.9

36.031.4

(25.8)(35.9)

Cash

Securities & Investments

Balances with Banks Abroad

Balances at the CBE

Balances at Banks in Egypt

Loan & Discount Balances

Other Assets%

2009/2010 2010/2011

-90-

The increase in banks' investments in securities and bills during the period was attributed to the pickup in their investments in treasury bills by LE 44.5 billion and in government bonds by LE 26.6 billion. However, the increase in banks' investments was mitigated by a drop of LE 25.5 billion worth in their investments in foreign securities. The rise achieved in the last three months of the period under review (January/March) reached LE 10.2 billion, primarily due to the surge in banks' investments in treasury bills by LE 54.7 billon. That rise was held back by the retreat in banks' investments in foreign securities by LE 36.1 billion worth, and in government and non-government bonds by LE 6.5 billion and LE 1.5 billion, in order.

2/2/4- Interbank Transactions in Egypt

Transactions with Banks Abroad

In July/March 2010/2011, net position of local banks with correspondents

abroad unfolded a rise in their transactions by an amount equivalent to LE 34.8 billion or 93.8 percent, reaching LE 71.8 billion worth at end of March 2011 (against LE 37.0 billion worth at end of June 2010). The increase was ascribed to the step-up in their balances with banks abroad by the equivalent of LE 34.9 billion, and to the decline in their obligations to those banks by LE 0.1 billion worth.

Relative Structure of Banks' Portfolio Investment(End of)

4.511.3

33.8

43.0

3.78.2

36.3

7.33.4

48.5

0

10

20

30

40

50

60

Treasury Bills Gov. Bonds Non-gov.Bonds

Corp. Equities ForeignSecurities

٪

June 2010March 2011

-91-

Transactions with Banks Abroad

(LE mn) Change During the Period July/March

At End of June 2009

March 2010

June 2010

March 2011

2009/2010 2010/2011

Value % Value % Net Position 58925 69157 37066 71838 10232 17.4 34772 93.8 Balances at banks Abroad 77120

87540

57371 92319 10420 13.5 34948 60.9

Obligations to banks abroad

18195 18383 20305 20481 188 1.0 176 0.9

Interbank Transactions in Egypt The volume of transactions in the interbank money market (in terms of

deposits) scaled up by LE 1.5 billon or 7.8 percent in the reporting period (against a drop of LE 6 billion or 25.8 percent in the period of comparison), bringing total deposits to LE 21.1 billion at end of March 2011. The rise came on the back of the surge in local currency deposits by LE 0.7 billion, and in foreign currency deposits by LE 0.8 billion.

Deposits in The Interbank Money Market(End of)

02000400060008000

100001200014000

June 2010 March 2011

LE mn

Local Currency Foreign Currencies

-92-

2/2/5- Deposits Deposits at banks (including government deposits) amounted to LE 940.8

billion or 73.9 percent of banks' aggregate financial position at end of March 2011, with a rise of LE 48.3 billion or 5.4 percent in the reporting period. That was ascribed to the pickup in local currency deposits by LE 20.7 billion or 3.0 billion (against LE 66.3 billion or 11.1 percent in the period of comparison), to stand at LE 706.8 billion or 75.1 percent of the total deposits at banks at end of March 2011. In addition, foreign currency deposits rose by the equivalent of LE 27.6 billion or 13.4 percent (against a decline equivalent to LE 9 billion or 4.2 percent), reaching LE 234.1 billion worth.

The household sector was the key contributor to the increase in local

currency deposits (72 percent). Its deposits in local currency soared by LE 31.0 billion or 6.5 percent, to LE 508.8 billion, representing 72 percent of total LE deposits at end of March 2011. Conversely, deposits of the private business sector scaled down by LE 8.3 billon or 7.3 percent, to LE 106 billion; and so did those of the public business sector by some LE 2.3 billion or 6.9 percent.

The increase in foreign currency deposits was mainly due to the growth in

the deposits of the private business sector by the equivalent of LE 11.6 billion, of the household sector by LE 9.0 billion worth, and of the government sector by LE 5.0 billion worth.

Rate of Change in Deposits by Sector during July/March

(25)(20)(15)(10)(5)05

10152025303540

2009/2010 2010/2011 2009/2010 2010/2011


%

Government Sector Public Business Sector Private Business SectorHousehold Sector External Sector

-93-

The breakdown of deposit balances in January/March 2010/2011 showed a decline in their balances by LE 3.1 billion or 0.3 percent. Local currency deposits accounted for the lion's share of this decline (LE 28.5 billion or 3.9 percent) mainly due to the deceleration of the deposits of the private business sector by LE 21.0 billion, and of the household sector by LE 5 billion. However, foreign currency deposits scaled up during the period by LE 25.4 billion or 12.2 percent, primarily because of the step-up in the deposits of the private business sector by LE 11.6 billion, and of the household sector by LE 9.7 billion. Though this mirrored a preference for saving in foreign currency by some depositors on the back of the uncertainty and repercussions of the events of January 25 Revolution, the relative importance of local currency deposits remained high, representing three quarters of total deposits at end of March 2011.

Deposits with Banks by Sector

(LE bn) July/March

2010/11 Jan./March

2010/11 At End of June 2010

Dec. 2010

March 2010 Value % Value %

Total 892.5 944.0 940.8 48.3 5.4 (3.2) (0.3) In local currency 686.1 735.3 706.8 20.7 3.0 (28.5) (3.9) Government sector 58.5 59.5 58.5 - - (0.9) (1.5) Public business sector

32.7 32.1 30.5 (2.2) (6.7) (1.6) (5.1)

Private business sector

114.4 127.0 106.0 (8.4) (7.3) (21.0) (16.5)

Household sector 477.8 513.7 508.8 31.0 6.5 (5.0) (1.0) External sector 2.7 3.0 3.0 0.3 11.1 - - In foreign currency 206.4 208.7 234.0 27.6 13.4 25.3 12.2 Government sector 45.6 47.2 50.6 5.0 11.0 3.4 7.2 Public business sector

6.5 7.1 7.5 1.0 15.4 0.4 5.8

Private business sector

54.9 54.9 66.5 11.6 21.1 11.6 21.2

Household sector 96.9 96.2 105.9 9.0 9.3 9.7 10.1 External sector 2.5 3.3 3.5 1.0 40.0 0.2 6.9

-94- 2/2/6- Lending Activity

Banks' lending and discount balances amounted to LE 470 billion,

(representing 36.9 percent of total assets and roughly half of banks' deposit balances at end of March 2011) up by LE 4.0 billion or 0.9 percent in the period under review, compared with a rise of LE 11.4 billion or 2.7 percent in the corresponding period. The increase was ascribed to the pickup in the balances granted in local currency by LE 4.2 billion or 1.3 percent, and to the decrease in those granted in foreign currencies by LE 0.2 billion or 0.2 percent.

Change in Lending and Discount Balances by Sector

During July/March 2010/2011 (LE mn)

Change Local Currency Foreign Currencies

Total 4214 (243) Government sector 3364 (4437) Public business sector 3847 (84) Private business sector (5818) 1008 Household sector 3015 392 External sector (194) 2878

Lending and discount balances in local currency rose by LE 4.2 billion or

1.3 percent, (against LE 5.7 billion or 1.9 percent in the corresponding period) to stand at LE 317.9 billion at end of March 2011. This was mainly traceable to the increase in loans to the public business sector by LE 3.8 billion or 18.3 percent (compared with an equivalent increase and 15.9 percent in the corresponding period a year earlier). Increases were also noticed in loans to the government sector by LE 3.4 billion or 21.9 percent (against LE 1.1 billion or 8.2 percent) and to the household sector by LE 3.0 billion or 3.3 percent, compared with a rise of LE 8.1 billion or 10.3 percent. Conversely, loans to the private business sector retreated by LE 5.8 billion or 3.1 percent (against a decline of LE 5.9 billion or 3.4 percent in the period of comparison), reaching LE 179.9 billion or 56.6 percent of the total LE lending and discount balances at end of March 2011.

-95- Lending and discount balances in foreign currency went down by LE 0.2

billion worth or 0.2 percent (compared with an increase of LE 5.7 billion worth or 4.2 percent) posting LE 152.1 billion worth at end of March 2011. The decrease was more visible in loans to the government sector which fell by LE 4.4 billion worth. That decline was mitigated by the rise in loans to the external sector by LE 2.8 billion worth, to the private business sector by LE 1.0 billion worth, and to the household sector by the equivalent of LE 0.4 billion.

The distribution of loans by economic activity indicated that the

manufacturing sector was the major recipient of loans, with a share of 36.4 percent of the total loans extended by banks in both local and foreign currencies at end of March 2011. The unclassified sectors (including the household sector) came next with a share of 24.7 percent, services with 26.6 percent, trade with 10.6 percent, and agriculture with only 1.7 percent.

Credit Facilities by Economic Activity At End of March 2011

0

20

40

60

80

100

120

140

160

180

Agriculture Manufacturing Trade Services Unclassified

LE bn

Foreign CurrenciesLocal Currency

-96-

At end of March 2011, loans and advances offered by banks (excluding

discounts) -by maturity- registered LE 467.5 billion, up by LE 3.6 billion or 0.8 percent during the period under review. The increase was a result of the pickup in long term-loans (more than one year) by LE 16.5 billion or 7.1 percent, reflecting the expansion in local and foreign currency loans by LE 9.6 billion and LE 6.9 billion worth, in order. By contrast, short-term loans (less than one year) declined by LE 12.9 billion or 5.6 percent, driven by lower local and foreign currency loans by LE 5.7 billion and LE 7.2 billion worth, in order.

Loans & Advances by Banks Excluding Discounts(End of)

020406080

100120140160180

June 2010 March 2011 June 2010 March 2011

One Year or Less Over One Year LE bn


-97-

3: Stock Market∗

In the last quarter of July/March 2010/2011, the Egyptian Exchange was closed during the period 28 January - 22 March 2011 (38 consecutive trading sessions) in the wake of the January 25th Revolution. Trading over the counter was also suspended till 28 March 2011. That was attributed to the sharp decline in the benchmark index (EGX 30) by 16 percent on 26 and 27 January registering 5646.5 points against 6723.2 points before the outbreak of events. On the first day of re-trading (23 March 2011), the index plunged to 5142.7 points falling 23.5 percent as compared with its pre-revolution level and recording as such the third sharpest daily fall since its launch. The fall resulted from the intensive sales of foreign and Egyptian investors since they did not have a clear vision of the future in addition to continuous strikes and disturbances. Accordingly, the EGX undertook a number of exceptional procedures and measures to bolster investors' confidence (Egyptians or foreigners) in the market. Among these were the following:

- Canceling the pre-trade exploratory session; - Suspending the intra-day trading mechanism, and including the amount

deposited for the intra-day trading mechanism in the calculation of the net working capital of the brokerage firms;

- Halting trading on the stock for half an hour if the change in its price

exceeds 5 percent, but if the change exceeds 10 percent, its price shall be fixed and trading will continue till the end of the session;

- Introducing a new price limit to EGX 100 index, whereby trading shall be

suspended for half an hour if a change of 5% occurs in the index value and for a period to be determined by the EGX chairman if the change exceeds 10 percent;

- Amending the price limits of NILEX listed shares so as not to exceed 5% of

the opening price on a daily basis; Source: the EFSA, and the monthly reports of the EGX.∗

-98-

- Reducing the minimum ratio of net liquid capital of securities brokerage

firms with respect to capital adequacy to 5% of its obligations instead of 10%. The capital adequacy form should also be submitted on a daily basis;

- Cutting down the procedures of approving companies’ requests for the purchase of treasury stocks. The requests shall be decided within the same day of submission by the executive management of the company;

- According to the provisions of Article No. 19 of the EGX's listing rules, the staff of the listed companies may purchase the shares of the companies they work for;

- Listed companies are required to update the disclosure of their operational, financial and administrative status on the first days of re-trading;

- Implementing the decisions of the Attorney General regarding freezing the accounts on a firm basis;

- Communicating with the international and regional exchange unions, and international financial institutions to explain the nature of the timely procedures taken in this concern; and

- Coordinating with the initiative launched by the Egyptian citizens to support the national economy and to prevent stock market crash by providing the necessary data for encouraging investment therein via its website.

In the post-revolution period, supervision over financial markets was

upgraded to protect the interests of dealers and brokerage firms. Within this context, Ministerial Decree No. 345 was issued on 10 March of 2011 to amend some provisions of the Executive Regulations of the Capital Market Law No. 95 of 1992 regarding modifying the percentage of buying securities on margin. Modifications were made on the liabilities percentage, of which the debtor customer shall be notified, in order to be reduced whether by cash payment or by guarantees to 70% at maximum instead of 60% during the financial re-evaluation of stocks purchased on margin at the end of each business day according to their market value. The customer's liabilities percentage, according to which procedures shall be taken to sell his shares and liquidate his warranties, was also modified to constitute 80% instead of 70% of the market value of securities.

-99-

Ministerial Decree No. 355 was issued on 13 March 2011 to amend some

provisions related to establishing a Fund for insuring securities dealers against non-commercial risks. Under the proposed amendment, the Fund may form a portfolio representing some 10% of its resources to face the intensive decline in the prices of securities that are listed on the stock market. The Fund may also intervene in exceptional emergency conditions by offering its members a loan with return that will be used in enhancing their activities in the market. The loans shall approximately be 20 percent of the Fund’s financial resources according to the rules set by the Fund's Board of Directors and approved by EFSA. Moreover, the Fund may compensate its members by purchasing the same securities with the due compensation value of the Fund. The Fund’s Board of Directors may also cut the periodic membership fees in light of market conditions.

As for the performance of the Egyptian exchange, the EGX benchmark

index (EGX 30) fell 9.4 percent in July/March 2010/2011 to record 5463.7 points at end of March 2011 against 6033.1 points at end of June 2010. The CMA's index moved down 36.5 percent posting 843.4 points at end of March 2011 against 1329.0 points at end of June 2010. However, EGX 70 and EGX 100 inched up 9.0 percent and 1.7 percent to register 575.0 points and 924.3 points, respectively, at end of March 2011.

CMA & EGX 30 Indices

3001300230033004300530063007300

Jun.

09Ju

l.09

Aug. 0

9

Sept. 0

9

Oct. 09

Nov. 0

9

Dec. 0

9

Jan.

10

Feb.10

Mar.10

Apr.10

May.10

Jun.1

0Ju

l.10

Aug.10

Sept. 1

0

Oct. 10

Nov. 1

0

Dec. 1

0

Jan.

11

Feb.11

Mar.11

Point

CMA EGX 30

The Egyptian Exchange was closed in the wake of the

rev olution of 25th of January

-100- Sectoral Indicators

Most of the sectoral indicators declined in July/March 2010/2011. The

indicator of basic resources was the most declining as it fell by 38.1 percent, followed by tourism and leisure (30.8 percent), and real estates (30.7 percent). However, healthcare and pharmaceuticals rose by 11.8 percent, chemicals by 10.7 percent, and construction and building materials by 5.8 percent.

3/1- Primary Market

As for the primary market, the number of new issues approved by EFSA

during the period reached 1862, at a total value of LE 29.2 billion (against 2458, at a total value of LE 33.2 billion a year earlier). Issues for new incorporations reached 1196 in number (64.2 percent of total issues), at a value of LE 7.0 billion. Issues for capital increases reached 666 (76.1 percent of total issues), valuing LE 22.2 billion.

Change in the Sector Indices During July/March 2010/2011

5.8

11.810.7

0.6

0.2

-0.3

-6.5

-11.7

-17.6

-30.7-30.8

-38.1

-50.0-40.0-30.0-20.0-10.00.010.020.0

Basic Resources

Travel & Recreation

Real Estates

Financial Services (excl. Banks)

Industrial Goods & Services

Communications

Banks

Personal & Household prod.

Food & Beverages

Construction & Building Materials

Chemicals

Healthcare and Pharmaceuticals

(%)

-101 -

The listing activity on the EGX shows that the number of listed companies declined to 212 at end of March 2011, from 215 at end of June 2010. The market capitalization of those companies decreased by 0.6 percent to LE 407.7 billion, against LE 410.1 billion. The decline was attributed to the fall in the prices of most shares on the EGX in the wake of the instability that accompanied the January 25th Revolution.

The value of issued and listed bonds increased during the period by LE 58.6

billion or 34.1 percent, posting LE 230.3 billion at end of March 2011, against LE 171.7 billion at end of June 2010. That was ascribed to the rise of LE 47.0 billion in the value of Egyptian treasury bonds (primary dealers) during the period, to register LE 206.8 billion or 89.8 percent of the total value of listed bonds at end of March 2011. Another contributing factor was the pickup of LE 1.3 billion in corporate bonds. At end of March 2011, the listed bonds of the New Urban Communities Authority that were issued to provide finance for infrastructure projects valued LE 10 billion. 3/2- Secondary Market

Concerning the secondary market, the relevant three indicators (number of

transactions, and number and value of traded securities) revealed a decline during the period under review, relative to the corresponding period due to the events that took place in Egypt. As such, the number of transactions declined by 4232 thousand, or 44.0 percent. Also, the number of traded securities (shares and bonds) scaled down by 6099 million or 26.8 percent, posting 16657 million papers. Their value decreased as well by LE 188.6 billion or 55.5 percent, to LE 151.1 billion.

Share transactions accounted for the bulk of trading on the EGX during the

period (75.2 percent of total transactions, against 90.3 percent in the corresponding period). In the meantime, trading in bonds represented 24.8 percent (against 9.7 percent).

-102-

Trading in Securities During July/March 2009/2010 2010/2011 No. of Transactions (000) 9613 5055 A- Shares, bonds and mutual funds’ certificates (listed) 9011 4988 B- Shares, bonds and mutual funds’ certificates (unlisted) 602 61 C- Small- and Medium- Enterprises Market (NILEX)* - 6 No. of Traded Securities (mn) 22756 16657 A- Shares, bonds and mutual funds’ certificates (listed) 17585 14959 B- Shares, bonds and mutual funds’ certificates (unlisted) 5171 1683 C- Small- and Medium- Enterprises Market (NILEX)* - 15 Value of Transactions (LE mn) 339686 151088 A- Shares, bonds and mutual funds’ certificates (listed) 239125 139491 B- Shares, bonds and mutual funds’ certificates (unlisted) 100561 11422 C- Small- and Medium- Enterprises Market (NILEX)* - 175 Source: EFSA - monthly reports of the EGX. * Trading on NILEX started on June 3, 2010.

As regards small and medium enterprises market (NILEX), the number of listed companies reached 18 at end of March 2011. The market capitalization of listed shares on NILEX amounted to some LE 1.0 billion at end of March 2011 (against LE 0.4 billion at end of June 2010). Traded securities reached 15 million papers in number through 5700 transactions, with a total value of LE 175 million during July/March 2010/2011.

Foreigners' transactions on EGX declined during the period under review by 28.8 percent (as compared with the previous corresponding period), scoring LE 64.7 billion against LE 91.0 billion. Non-Arab foreigners' trading on the EGX unfolded net purchases of some LE 3.1 billion in the reporting period (against LE 6.7 billion). On the other hand, Arab transactions (excluding bargains) resulted in net sales of LE 589 million (against LE 2.2 billion).

-103 –

Egyptian investors had the lion's share of total transactions (67 percent) on the EGX. Foreign investors (non-Arabs) accounted for 26 percent of the total, while Arabs accounted for 7 percent.

3/3- Mutual Funds

The number of mutual funds amounted to 72 at end of March 2011 (69 open-end and 3 close-end funds), against 66 funds at end of June 2010 (63 open-end and 3 close-end funds).

Foreign Investors' Transactions During July/March

16

111621263136414651

2009/2010 2010/2011

LE bn

Purchases

Sales

Net

Egyptian, Foreign, and Arab Investors' Transactions on the Stock Market During July / March 2010/2011

Foreigners (excluding Arabs)

26%

Arabs 7%

Egyptians67%

-104-

4: Public Finance and Domestic Public Debt 4/1- Consolidated Fiscal Operations of the General Government

The first nine months of FY 2010/2011 unfolded a slowdown in some domestic economic activities, on the back of the repercussions of the 25th Jan. Revolution. In this setting, total expenditure went up by 0.4 percent against a decrease of 5.0 percent in total revenues, with the result that the overall deficit widened to LE 94.0 billion during the period, with an increase of 8.2 percent above the previous corresponding period, representing 86.2 percent of the total estimated deficit for the whole fiscal year.

To address the consequences of the current events, the government adopted a handful of measures, inter alia were the establishment of a fund to compensate individuals and small and micro enterprises for the damages incurred because of these events; appointment of part of the temporary-contract employees; exemption from fines on delayed insurance subscription payments; allowing of the sales tax to be paid in installments in Jan. and Feb. 2011 to provide the required liquidity for projects; and permission of the immediate release of commodity imports before payment of customs duties for Jan. and Feb. 2011, given that they are to be paid at a subsequent time, to satisfy the basic food commodities. In addition, the number of families beneficiary of the security pension were increased; and exceptional pensions and compensations were disbursed for the martyrs’ families.

Hereunder is a follow-up of the execution of the fiscal operations in the first 9 months of FY 2010/2011, as compared with those of the previous corresponding period, according to the data of the Ministry of Finance:

Budget Sector

According to the data of the Ministry of Finance on the budget execution in July/March 2010/2011, collected revenues totaled some LE 144.3 billion (10.5 percent of GDP), with a drop of LE 7.5 billion or 5.0 percent below the period of comparison. Expenditures totaled about LE 239.8 billion (17.4 percent of GDP),

-105- up by LE 870 million or 0.4 percent. Consequently, the overall budget deficit widened to some LE 94.0 billion or 6.8 percent of GDP during the period, against LE 86.9 billion (7.3 percent of GDP) in the period of comparison.

Public revenues rolled back by some LE 7.5 billion or 5.0 percent in the

period under review, posting LE 144.3 billion (10.5 percent of GDP). This decrease in public revenues came as a main result of the retreat of LE 15.0 billion in taxes on income and business profits and property income of the EGPC, because no settlements were made between the Ministry of finance and the EGPC. The drop of 2 percent in customs receipts was partially the result of the decision concerning immediate release of commodity imports, together with the decrease of external grants.

6.97.35.25.03.1

4.05.0 5.4

6.87.3

0.0

5.0

10.0

15.0

20.0

25.0

2006/2007 2007/2008 2008/2009 2009/2010 2010/2011

0.0

2.0

4.0

6.0

8.0

Revenues Expenditures Cash Deficit Overall Deficit

% %Ratios of Expenditures, Revenues & Deficit / GDP

(July / March)

61.0 64.657.5

69.775.8

29.6 25.622.7 20.2 14.8

1020304050607080

2006/2007 2007/2008 2008/2009 2009/2010 2010/2011

Tax Revenues Property Income

%Ratios of Tax Revenues & Property Income / Total Revenues

(July / March)

-106-

The above decline in revenues was mitigated by the increase of 20.1 percent in collected taxes and property income from the Suez Canal; 15.5 percent in taxes on property; 15.4 percent in the taxes payable by individuals and companies’ profits and 10.2 percent in taxes on goods and services.

Concerning expenditures, the follow-up of the budget execution in July/March 2010/2011 showed an increase of LE 870 million or 0.4 percent in total expenditures over the corresponding period, registering LE 239.8 billion (17.4 percent of GDP). Wages and compensations of employees rose by about LE 6.3 billion or 10.9 percent period, to LE 64.3 billion, draining about 44.5 percent of total revenues and 30.0 percent of total current government spending.

Change in Public Revenues Structure during July/March

27.1

4.0

30.6

6.71.4 1.5

20.1

8.64.8

35.4

6.9

1.4 0.6

14.8

8.9

27.2

0.05.0

10.015.020.025.030.035.040.0

Taxes onIncome &

Profits

Taxes onProperty

Taxes onGoods &Services

Taxes onInternational

Trade

Other Taxes Grants PropertyIncome

OtherRevenues

July/March 2009/2010 July/March 2010/2011

%

Interests 25.4%

Other Expenditures

9.5%

Subsidies, Grants and

Social Benefits 22.7%

Wages 26.8%

Investments9.9%

Purchases of Goods and

Services 5.7%

2010/2011Purchases

of Goods

and Serv ices

6.4%

Inv estments 11.8% Wages

24.3%

Subsidies, Grants and

Social Benef its

26.1%

Other Expenditures

8.9%

Interests 22.5%

2009/2010

-107- Noticeably, domestic and external interest payments overburdened the budget, as they went up by LE 7.0 billion to LE 60.8 billion, absorbing 42.1 percent of total revenues. On the other hand, investment spending declined by LE 4.4 billion or 15.6 percent, to LE 23.7 billion. Subsidies, grants and social benefits also retreated by LE 7.8 billion or 12.6 percent, taking into account that such retreat is mainly attributed to the aforementioned absence of financial settlements with the EGPC during this period. As a result, the total subsidies posted some LE 45.3 billion, of which about LE 20.4 billion were earmarked for food subsidies (against LE 13.5 billion), and LE 17.0 billion for oil subsidies.

Against this background, the overall budget deficit inched up by LE 7.1 billion in July/March 2010/2011, posting about LE 94.0 billion or 6.8 percent of GDP (against LE 86.9 billion or 7.3 percent of GDP). Local financing sources (mainly subscriptions for treasury bills and bonds) were chiefly used to cover the budget deficit during the said period. Also, some various local repayments were made.

Budget Sector, NIB and SIFs Adding the fiscal operations of the NIB and SIFs to those of the budget sector, total revenues would augment by 16.5 percent to record LE 168.1 billion (12.2 percent of GDP).

25.429.1

18.922.5

16.619.6

23.1

29.526.824.3

20.623.1

10.0

15.0

20.0

25.0

30.0

35.0

2007/2008 2008/2009 2009/2010 2010/2011

Interests Subsidies Wages (including Compensations of Employees)

%

Ratio of Subsidies, Paid Interest and Compensations of Employees / Total Expenditures (July / March)

-108-

Consolidated Fiscal Operations of the General Government (Budget Sector, NIB and SIFs)

(Total Revenues) (LE bn)

July/March 2010/2011 Budget

Sector Relative

Structure Execution

Ratio/Total Estimates

for the Year

Budget Sector, NIB & SIFs

Relative Structure

Execution Ratio/Total Estimates

for the Year Total Revenues 144.3 100.0 50.5 168.1 100.0 52.1 Tax Revenues 109.4 75.8 54.6 109.4 65.1 54.6 • Taxes on income

and profits 39.3 27.3 44.3 39.3 23.4 44.3 The EGPC 9.8 6.8 27.4 9.8 5.8 27.4 The SCA 7.5 5.2 70.3 7.5 4.5 70.3 The CBE 0.0 0.0 0.0 0.0 0.0 Other entities 9.0 6.3 39.4 9.0 5.4 39.4 Payable by individuals 13.0 9.0 67.2 13.0 7.7 67.2

• Taxes on property 7.0 4.8 56.7 7.0 4.2 56.7 • Taxes on goods

and services

51.1

35.4

63.2

51.1

30.4

63.2 • Taxes on

international trade (customs) 10.0 6.9 64.4 10.0 5.9 64.4

• Other taxes 2.0 1.4 65.4 2.0 1.2 65.4 Grants 0.8 0.5 15.7 0.8 0.5 15.7 Other Revenues 34.1 23.7 42.6 57.9 34.4 49.5 Property income 21.3 14.8 39.8 24.4 14.5 40.4 Selling proceeds of goods and services 8.1 5.7 54.7 8.1 4.8 54.7 Financial investments 2.9 2.0 38.4 2.9 1.7 38.4 Others 1.8 1.2 42.8 22.5 13.4 65.8 Source: Ministry of Finance. Percentages are calculated in terms of LE million. Expenditures also rose by 11.6 percent over the period of comparison, posting LE 267.5 billion or 19.4 percent of GDP.

-109-

Consolidated Fiscal Operations of the General Government (Budget Sector, NIB and SIFs)

(Total Expenditures) (LE bn)

July/March 2010/2011 Budget

Sector Relative

Structure Execution

Ratio / Total

Estimates for the Year


Relative Structure

Execution Ratio / Total


Total Expenditures 239.8 100.0 59.5 267.5 100.0 61.0 Wages & Compensations of Employees 64.3 26.8 67.4 65.2 24.4 67.5 Purchases of Goods & Services 13.7 5.7 47.6 13.9 5.2 47.8 Interest 60.8 25.4 66.7 46.1 17.2 56.3 Subsidies, Grants & Social Benefits 54.5 22.7 46.7 95.6 35.7 59.9

Subsidies 45.3 18.9 44.7 45.3 16.9 44.7 Grants 4.0 1.7 78.1 4.0 1.5 78.1 Social benefits 4.9 2.0 77.8 46.0 17.2 93.3 Others 0.3 0.1 8.3 0.3 0.1 8.3

Other Expenditures 22.7 9.5 73.0 22.8 8.6 73.2 Purchases of Non-Financial Assets (Investments) 23.7 9.9 59.2 23.9 8.9 59.3 Source: Ministry of Finance. Percentages are calculated in terms of LE million. The cash deficit of the consolidated fiscal operations of the general government in the relevant period reached LE 99.4 billion. By adding the net acquisition of financial assets (negative LE 2.2 billion) to the cash deficit, the overall deficit would post LE 97.2 billion (7.1 percent of GDP). The deficit was financed by local banking and non-banking sources.

-110-

Consolidated Fiscal Operations of the General Government

(Budget Sector, NIB and SIFs) (Cash and Overall Deficit/Surplus & Financing Sources)

(LE bn) July/March 2010/2011 Budget

Sector Relative

Structure Execution

Ratio / Total



Relative Structure

ExecutionRatio / Total


Total Revenues 144.3 50.5 168.1 52.1 Total Expenditures 239.8 59.5 267.5 61.0

Cash deficit 95.5 81.4 99.4 85.8 Net acquisition of financial assets -1.5 17.6 -2.2 38.6

Overall Deficit 94.0 86.2 97.2 88.3 Finance Sources 94.0 100.0 86.2 97.2 100.0 88.3 Domestic Finance 116.8 124.2 98.6 116.5 119.8 97.4

Banking finance 54.4 57.8 102.3 57.8 59.4 121.6 Non-banking finance 62.4 66.4 95.6 58.7 60.4 81.5

External Borrowing 3.0 3.2 -31.1 3.0 3.1 -31.1 Others 1.7 1.8 -247.2 5.2 5.4 -777.2 Revaluation Differences 3.9 4.2 3.9 4.0 Net Privatization Proceeds 0.0 0.0 8.8 0.0 0.0 8.8 Difference between the TBs Face Value & Present Value -2.5 -2.7 -2.5 -2.6 Discrepancy -28.9 -30.7 0.0 -28.9 -29.7 0.0 Source: Ministry of Finance. Percentages are calculated in terms of LE million.

-111-

4/2- Domestic Public Debt

4/2- Domestic Public Debt

In July/March 2010/2011, domestic public debt went up by LE 113.3

billion, to LE 1001.9 billion at end of March 2011, or 72.7 percent of GDP, against 73.6 percent at end of June 2010. It consists of the sum total of net government debt, public economic authorities' debt and that of the National Investment Bank (minus intra-debts of public economic authorities and the government to the NIB).

4/2/1- Debt of the Government (Net) The government's domestic debt (net) reached some LE 778.9 billion or 56.5

percent of GDP at end of March 2011, up by LE 115.1 billion or 17.3 percent in July/March 2010/2011. The rise was an outcome of the LE 99.9 billion pickup in the balances of government bonds and bills and the LE 13.2 billion decline in the credit position of net government balances at the banking system (owing to the rise in government loans by LE 22.3 billion and the increase in its deposits by LE 9.1 billion). Add to this the government borrowing of LE 2.0 billion from other local entities.

778.9

67.6

224.6

-69.2

1001.9

-200 0 200 400 600 800 1000 1200

Net Domestic Debt of Government

Borrowing of Economic Authorities

NIB Debt (Net)

Intra-debt

Gross Domestic Debt

Gross Domestic Debt at End of March 2011 (LE bn)

-112-

Net Domestic Debt of the Government

(LE bn ) June 2010 March 2011 Balances at End of

Value % Value %

Change (+)- July/March 2010/2011

Government's Net Domestic Debt 663.8 100.0 778.9 100.0 115.1 - Balances of Bonds & Bills* 779.2 117.4 879.1 112.9 99.9

• Notes and bonds, of which: 513.1 77.3 558.8 17 45.7 Tradable on exchanges 169.7 25.6 218.2 28.0 48.5

• Treasury bills 266.1 40.1 320.3 41.1 54.2 - Borrowing from other Entities - - 2.0 0.2 2.0 - Facilities from the SIFs 2.4 0.3 2.4 0.3 - - Net Balances at the Banking System -117.8 -17.7 -104.6 -13.4 13.2

• Credit facilities 26.8 4.0 49.1 6.3 22.3 • Deposits 144.6 21.8 153.7 19.7 9.1

Net domestic government debt/GDP (%) 55.0 56.5 Source: Ministry of Finance, CBE, and NIB. Ratios are calculated in terms of LE million. *Including treasury bonds; housing bonds; bonds denominated in foreign currencies with public commercial banks; the 5 percent ratio retained from profits of corporations subject to Law No. 97 of 1983 for the purchase of government bonds; the holdings of resident financial institutions (banking system and insurance sector) of bonds floated abroad; and the SIFs bonds against transferring NIB debt to the Public Treasury.

The increase of LE 99.9 billion in the balance of government bonds and bills was an outcome of: A- The pickup in the balance of government bonds by LE 45.7 billion to LE 558.8

billion at end of March 2011, as a result of the following developments:

1- The LE 47.0 billion rise in the Egyptian Treasury bonds in July/March 2010/2011, represented in:

- The LE 1.0 billion rise in the 50th tranche of 7-year Egyptian treasury

bonds, issued in Feb. 2010, at an annual interest rate of 12.6 percent (on the same conditions of issuance), thus raising the total value of these bonds to LE 13.5 billion.

-113-

- The LE 0.5 billion rise in the 55th tranche of 10-year Egyptian treasury

bonds, issued in August 2010, at an annual interest rate of 13.0 percent (on the same conditions of issuance), driving up their value to LE 5.5 billion.

- The LE 1.5 billion rise in the 56th tranche of 3-year Egyptian treasury bonds,

issued in Oct. 2010, at an annual interest rate of 11.60 percent (on the same conditions of issuance), thus raising the total value of these bonds to LE 11.5 billion.

- The LE 1.5 billion rise in the 57th tranche of 5-year Egyptian treasury bonds,

issued in Oct. 2010, at an annual interest rate of 12.35 percent (on the same conditions of issuance), thus driving up the total value of these bonds to LE 7.5 billion.

- The issuance of the 58th tranche of 4-year bonds, on 18 Jan. 2011, at a value

of LE 3.0 billion and an annual interest rate of 12.63 percent.

- The issuance of treasury bonds at a value of LE 49.5 billion during July/Dec. 2010/2011.

- The redemption of Egyptian Treasury bonds at a value of LE 10.0 billion in

July/March 2010/2011 (of which, LE 2.0 billion represented the 15th tranche falling due in July 2010, the 17th tranche due in August, and the 20th tranche due in October), in addition to the LE 4.0 billion representing the value of the 25th tranche falling due in Feb. 2011.

2- The issuance of 10-year Public Treasury bonds (non-interest bearing) at a

value of LE 9.1 billion on the 1st of July 2010.

3- The increase in the net balance of bonds tradable abroad in the US dollar, along with the bonds issued in the Egyptian pound by LE 1.5 billion worth.

-114-

4- The redemption of the bonds issued in foreign currencies at public

commercial banks at a value of US$ 2090.2 million or LE 11.9 billion worth at end of June 2010.

B- The pickup of LE 54.2 billion in the outstanding balance of public Treasury

bills, to stand at LE 320.3 billion at end of March 2011, compared with LE 266.1 billion at end of June 2010.

4/2/2- Debt of Public Economic Authorities (Net)

Debt of the public economic authorities (on a net basis) went down by LE 0.1 billion to LE 67.6 billion at end of March 2011. The decrease was traceable to the retreat in their net borrowing from the banking system by LE 1.3 billion (due to the rise in their deposits by about LE 8.2 billion and the increase of claims thereon by about LE 6.9 billion), in addition to the rise in their borrowing from the National Investment Bank (NIB) by LE 1.2 billion.

Net Domestic Debt of Government

-200.0

0.0

200.0

400.0

600.0

800.0

1000.0

March2010 June2010 March20110.0

10.020.0

30.040.050.060.070.0

Treasury BillsBonds Net Government Balances with the Banking SystemRatio of Government Debt / GDP

%LE bn

-115-

4/2/3- Debt of the National Investment Bank (Net)

Net debt of the NIB (excluding the intra-debt) reached some LE 224.6 billion at end of March 2011, mounting by LE 2.3 billion, compared with the end of June 2010. The rise was a dual effect of the expansion in NIB’s total invested resources by LE 1.4 billion above the level of the end of June 2010, reaching LE 229.1 billion at end of March 2011, and the decline of LE 0.9 billion in its deposits at the banking system, to register LE 4.6 billion at end of March 2011.

4/2/4- Intra-Debt The intra-debt of public economic authorities and the government to the NIB

reached about LE 69.2 billion at end of March 2011, compared with LE 65.1 billion at end of June 2010. Loans granted by the NIB to these authorities posted about LE 52.7 billion, with an increase of LE 1.2 billion in the relevant period, while its investments in government securities (bills and bonds) reached some LE 16.5 billion, up by LE 2.8 billion in July/March 2010/2011.

Resources of the NIB at End of March 2011 (LE bn)

Dollar Development

Bonds &Others 1.5 Social

Insurance Funds

59.0

Proceeds of Investment

Certificates & Accumulated Interest 102.8

Post Office Saving

Account 65.8

Loans to Holding

Companies & Affiliate

Units, Concession-al Lending

& Others 155.4

Treasury bills &

bonds 16.5

Economic Authorities

52.6

Deposits with The Banking

System 4.6

Uses of the NIB at End of March 2011(LE bn)

-116-

4/2/5- Domestic Public Debt Service

Debt service reached LE 80.7 billion in July/March 2010/2011, up by LE 16.9 billion, as compared with the previous fiscal year. The bulk of the increase was due to the rise in principal repayments by LE 10.1 billion to LE 22.6 billion. Moreover, interest payments rose by LE 6.8 billion to LE 58.1 billion. The ratios of debt service to GDP and to total revenues rose to 5.9 percent and 55.9 percent, respectively, in the reporting period (from 5.3 percent and 42.0 percent in the previous fiscal year).

-117-

5: External Transactions 5/1- Foreign Exchange Market

The Central Bank of Egypt (CBE) kept up its successful management of the foreign exchange market through the dollar interbank system, which proved effective in cushioning the LE exchange rate against sharp fluctuations. The weighted average of the US dollar in the interbank market posted LE 5.8496, LE 5.9680 and LE 5.9441, respectively, at end of January, March and May 2011, compared to LE 5.6952 on 30 June 2010. Thus, the Egyptian pound depreciated by 4.6% versus the US dollar in the reporting period, and by 1.6% in the period of February/May 2011, i.e. the rates of depreciation were lower than expected by international organizations.

Net NIR with the CBE shrank by about US$ 5.1 billion or 14.5% in the first nine months of 2010/2011, amounting to US$ 30.1 billion at end of March 2011 (against US$ 35.2 billion at the end of June 2010). The decline in the last quarter was mainly attributed to the massive withdrawals made to face the departure of many foreign investors, after liquidating a considerable part of their financial investments. Despite the drain on NIR, they managed to cover 7.3 months of merchandise imports at end of March 2011. Notably, NIR continued to step down at the time of preparing the Economic Review, albeit at lower rates than before, standing at US$ 26.6 billion at end of June 2011, thereby covering 6.4 months of merchandise imports.

Net International Reserves & Months of Merchandise Imports

05

10152025303540

Jun-07 Mar-08 Jun-08 Mar-09 Jun-09 Mar-10 Jun-10 Mar-11

(US$ bn)

56789101112

NIR NIR/Months of Merchandise Imports

Months

-118 -

5/2- Balance of Payments∗

In July/March 2010/2011, Egypt’s transactions with the external world

recorded an overall BOP deficit of US$ 5.5 billion (against a surplus of US$ 3.1 billion in the same period a year earlier). Data analysis demonstrated that in the period January/March 2011, the BOP ran an overall deficit of US$ 6.1 billion (against an overall surplus of US$ 571.7 million in July/Dec. 2010) in the wake of the dramatic events in Egypt and the Arab region, which weighed heavily on tourism revenues and foreign investments. According to the figures of external transactions in April and May 2011, the overall deficit is expected to hit over US$ 9.0 billion in FY 2010/2011 (ending 30 June 2011).

The BOP deficit (US$ 5.5 billion) reflected the decline in the current account deficit by 7.9 percent to US$ 2.4 billion in July/March 2010/2011 (against US$ 2.6 billion in the corresponding period). In addition, the capital and financial account unfolded a net outflow of US$ 1.8 billion, (against a net inflow of US$ 5.2 billion).

∗ Compiled in accordance with the Fifth Edition of the IMF’s Balance of Payments Manual, September 1993.

Overall Balance

0.010.6

-6.1

2.1

0.60.5 0.2

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009/2010 2010/2011

US$ bn

-119-

5/2/1- Trade Balance

Despite the impact of the revolution of 25th January on economic conditions (banks were closed for 2 weeks; several factories were shut down; curfew was imposed; and Egypt’s credit rating was downgraded from stable to unstable), the trade deficit slightly retreated by 0.7 percent posting US$ 18.4 billion in July/March 2010/2011 (7.7 percent of GDP). The decline was an outcome of the following:- − Export proceeds scaled up by 11.5 percent to US$ 18.9 billion supported by the

increase in oil exports (17.2 percent) and non-oil exports (7.4 percent). − Import payments went up by 5.1 percent to US$ 37.3 billion, fueled by higher

oil and non-oil imports (26.8 percent and 2.9 percent, in order).

5/2/2- Balance of Services and Transfers

A. Balance of Services:

The services surplus fell by 21.8 percent, to US$ 6.8 billion (against US$ 8.8 billion), reflecting the drop in service receipts by 2.7 percent and the rise in service payments by 15.9 percent, as shown below:

Service Receipts Items as a Percentage of Total Service Receipts July/March

0.8 0.5

12.3

3.7

29.5

49.2

16.8

1.7

50.6

34.9

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Transportation Travel Investment Income GovernmentReceipts

Other Receipts

%

2009/2010

2010/2011

-120- − Service receipts decreased by 2.7 percent to US$ 17.3 billion during the period

under review (against US$ 17.7 billion), because of the following developments:-

• Investment income receipts rolled back by 55.2 percent, to US$ 296.4 million

(against US$ 661.5 million), because of the drop in the collected interest payments and dividends of bonds and securities.

• Government receipts dropped by 34.6 percent, to US$ 89.6 million (from US$

136.9 million), due to the lower expenses of the Arab League, international institutions, and foreign embassies in Egypt.

• Other service receipts shrank by 29.1 percent to US$ 2.1 billion as a result of

the weak invisible receipts of the oil sector, receipts for construction and contracting services, transfers to foreign companies, and subscriptions for magazines and journals.

• Conversely, transportation receipts increased by 15.1 percent, to US$ 6.0 billion

(against US$ 5.2 billion). This was driven by the 11.0 percent rise in Suez Canal earnings to US$ 3.7 billion (which mitigated the drop in the state’s earnings of foreign currencies in the post-revolution period) and the higher receipts of Egyptian navigation and aviation companies.

It is worth mentioning that despite the current events in Egypt and the Arab countries, the Suez Canal revenues remained nearly unchanged in the third quarter of FY 2010/2011, registering US$ 1.23 billion against US$ 1.25 billion in the first and second quarters.

• Travel receipts (tourism revenues)∗ remained almost stable at US$ 8.7 billion

relative to the corresponding period. Data analysis showed that tourism revenues recorded US$ 6.9 billion in July/December 2010 (against US$ 6.0

∗ Calculated on the basis of the number of tourist nights multiplied by the average tourist spending per night.

-121-

billion in the same period a year earlier) with a rise of 15.6 percent. However, they fell by 34.0 percent in January/March 2011 to US$ 1.8 billion (against US$ 2.7 billion in the corresponding period) in the wake of the recent events.

− Service payments increased by 15.9 percent to US$ 10.4 billion during the period under review (against US$ 9.0 billion), as an outcome of the following developments:-

• Investment income payments surged by 56.4 percent, to US$ 4.6 billion

(against US$ 2.9 billion), as a result of the increase in the direct investment income and financial investments income (portfolio).

The data for July/Dec. 2010 revealed that investment income payments posted US$ 3.0 billion, with a rise of 63.8 percent (of which 54.4 percent were due to the rise in the payments of direct investment income, 9.7 percent to the increase in portfolio investment income, and 0.3 percent to the retreat in other investment income). As for January/March 2011, investment income payments registered US$ 1.6 billion, up by 43.9 percent (of which the increase in direct investment income accounted for 37.1 percent, the rise in portfolio investment income for 7.3 percent, and the decline in other investment income for 0.5 percent).

Developments of Travel & Suez Canal Receipts as a Percentage of GDP

0.8

0.5

1.41.51.3

1.2 1.31.5

0.50.5 0.5 0.5 0.5 0.5

00.20.40.60.8

11.21.41.6

Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009/2010 2010/2011

%

Travel Suez Canal

-122 -

• Transportation payments moved up by 15.5 percent to US$ 1.1 billion (against US$ 920.0 million), owing to larger transfers by foreign navigation and aviation companies, and Egyptian navigation companies and transfers for hiring aircrafts abroad.

• Government expenditures rolled back by 14.7 percent, to US$ 961.0 million

(against US$ 1.1 billion) as a consequence of the decline in other government expenditures, and the sales of Egypt’s Free Shops Company to foreign embassies and international institutions.

• Travel payments decreased by 8.9 percent to US$ 1.6 billion (against US$ 1.8

billion), because of the drop in the expenses of tourism and medical treatment abroad, as well as lower payments of tourism companies and hotels to abroad, and expenses of training and educational missions abroad.

• Other service payments also retreated by 2.3 percent to US$ 2.16 billion

(against US$ 2.21 billion), due to the decline in the payments for communication services, royalties and license fees, insurance services and transfers by Egyptian and foreign companies abroad.

B. Net unrequited transfers accelerated by 27.9 percent, to US$ 9.2 billion in the

reporting period (against US$ 7.2 billion), due to the pickup in net private transfers by 42.5 percent to register US$ 8.9 billion, against US$ 6.3 billion (mainly remittances of Egyptians working abroad). Concurrently, net official

Services Payments as a Percentage of Total Services PaymentsJuly/March

12.59.2

20.7

32.8

10.3

19.824.6

44.3

15.610.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Transportation Travel Investment Income GovernmentPayments

Other Payments

%

2009/2010

2010/2011

-123-

transfers retreated by 75.2 percent to US$ 221.3 million, thanks to the lower grants and cash donations to the Egyptian government.

Official transfers are expected to increase over the coming periods. This is attributed to the cooperation agreements concluded between the Egyptian government, and the Arab and foreign governments and organizations after the January 25th revolution, to help Egypt overcome the crisis.

Net Current Transfers (Unrequited)

(US$ mn) March/July Change 2009/2010 2010/2011 Value %

Net Current Transfers (Unrequited) 7168.7 9166.0 1997.3 27.9 )c-b+a) (Net( Official Transfers -1 893.1 221.3 671.8- 75.2-

a- Inward cash grants 469.2 8.2 -461.0 -98.3 b- Other inward grants 473.2 238.0 -235.2 -49.7 c- Official outward transfers 49.3 24.9 -24.4 -49.5

)c-b+a) (Net( Private Transfers -2 6275.6 8944.7 2669.1 42.5 a- Workers' remittances 6457.3 9097.2 2639.9 40.9 b- Other transfers 44.7 61.7 17.0 38.0 c- Private transfers abroad 226.4 214.2 -12.2 -5.4

Remittances of Egyptians Working Abroad as a Percentage of GDP

1.2

0.8

1.31.31.5

1.3

0.9

0.60.70.80.9

11.11.21.31.41.51.6

Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009/2010 2010/2011

%

-124-

Against this backdrop, the current account deficit contracted by 7.9 percent to US$ 2.4 billion (against US$ 2.6 billion) during July/March 2010/2011, owing to the increase in current receipts by US$ 3.5 billion or 8.3 percent, to US$ 45.3 billion (against US$ 41.9 billion). Thus, the rise in current receipts exceeded that of current payments, as the latter went up by US$ 3.3 billion or 7.3 percent, to post US$ 47.7 billion (against US$ 44.5 billion).

The following chart clarifies current receipts and payments in both the

reporting and corresponding periods:

Current Receipts & PaymentsJuly/March

-9.0

-35.5

7.2

17.717.0

-10.4

9.217.318.9

-37.3-40.0-35.0-30.0-25.0-20.0-15.0-10.0-5.00.05.0

10.015.020.0

MerchandiseExports

Services Receipts Net unrequitedTransfers

MerchandiseImports

ServicesPayments

(US$ bn) 2009/2010

2010/2011

-125-

5/2/3- Capital and Financial Account

The capital and financial account recorded a net outflow of US$ 1.8 billion in July/March 2010/2011, (against a net inflow of US$ 5.2 billion a year earlier), as a reflection of the following: 1- Portfolio investment in Egypt∗ switched from a net inflow of US$ 7.1 billion to

a net outflow of US$ 968.9 million, of which US$ 1818.9 million were foreigners' net transactions on Egyptian TBs (outflow), US$ 506.2 million were their net transactions on shares (inflow), and US$ 343.8 million were their net transactions on other Egyptian bonds and notes (inflow). Analysis of such flows showed that they reversed to a net outflow of US$ 5.5 billion in Jan./March 2011 (from a net inflow of US$ 4.6 billion in July/Dec. 2010) as foreigners sold their holdings of securities (especially Egyptian TBs that recorded an outflow of US$ 4.9 billion) in the wake of the current events in Egypt.

2- Net foreign direct investment∗∗ (FDI) in Egypt contracted by 51.8 percent to

only US$ 2.1 billion (against US$ 4.3 billion), as an outcome of the following developments:

• Net direct investments in the oil sector retreated to US$ 34.9 million (from US$

2.8 billion).

• Net greenfield investments increased to US$ 1.9 billion (from US$ 1.2 billion).

• Privatization proceeds (selling of companies and local productive assets to non-residents) recorded US$ 19.2 million (against US$ 157.1 million in the period of comparison).

∗ Representing foreigners' net dealings in securities and Egyptian bonds and notes. ∗∗ FDI represents foreign investors that own 10 percent or more of the capital of any resident economic entity, or

have an effective voice in its management. In Egypt, a foreign investor's equity participation shall be at least 10 percent of the capital of any enterprise.

-126-

The chart below shows the sectoral distribution of FDI in Egypt as a percentage of total inflows in the period under review:

Chart

3- Other assets and liabilities (the change in banks’ foreign assets and liabilities, the CBE’s non-reserve foreign assets and foreign liabilities and the counterpart of some items included in the current account) posted a net outflow of US$ 2.4 billion (against US$ 7.2 billion).

4- Medium- and long-term loans and facilities showed a net repayment of US$ 1.4 billion (against US$ 1.1 billion) reflecting the increase in total repayments from US$ 1.6 billion to US$ 1.8 billion, and the decline in total disbursements from US$ 539.1 million to US$ 401.4 million.

Net Foreign Investment in Egypt as a Percentage of GDP

0.7 0.30.2

2.5

0.4

2.4

-0.6

-2.4

-0.1

1.1

0.80.40.80.5

-3.0-2.0-1.00.01.02.03.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009/2010 2010/2011

%

Net FDI in Egypt Net Portfolio Investment in Egypt

Sectoral Distribution of FDI in Egyptin July/March 2010/2011

Petroleum69.6%

Services2.4%

Tourism2.1%

Financing1.5%

Other12.8%

Real Estate1.6%

Manufacturing10.0%

-127 -

5/3- External Trade

In July/March 2010/2011, Egypt’s external trade slightly improved as the volume of trade rose by 7.2 percent to post US$ 56.2 billion, compared with US$ 52.5 billion in the previous corresponding period. Merchandise export proceeds went up by 11.5 percent to US$ 18.9 billion (against US$ 17.0 billion). That was traceable to the rise of 17.2 percent in oil exports (representing 43.7 percent of total exports) and of 7.4 percent in non-oil exports (56.3 percent of the total). Likewise, import payments went up by 5.1 percent to some US$ 37.3 billion (against US$ 35.5 billion), due to the increase in oil imports by 26.8 percent (11.1 percent of total imports) and in non-oil imports by 2.9 percent (88.9 percent of the total).

Distribution of Petroleum & Non-petroleum Exports & Imports July/March

-40.0-35.0-30.0-25.0-20.0-15.0-10.0-5.00.05.0

10.015.0

2009/2010 2010/2011

(US$ bn)

Petroleum exports Non-petroleum exportsPetroleum imports Non-petroleum imports

-128- Due to the revolution of the 25th of January and its repercussions, and the resultant widespread uncertainty; the volume of trade fell by 11.3 percent to US$ 17.6 billion in Jan./March 2011 (against US$ 19.8 billon in Oct./Dec. 2010). The retreat was attributed to the depreciation of 4.9 percent in exports to US$ 6.2 billion and of 14.5 percent in imports to US$ 11.3 billion. Accordingly, the trade deficit contracted by 23.9 percent in Jan./March 2011 compared with the corres-ponding period, due to the decline in both imports and exports by US$ 1.9 billion and US$ 0.3 billion, respectively.

5/3/1- Merchandise Export Proceeds by Degree of Processing

In July/March 2010/2011, export earnings increased by 11.5 percent to US$ 18.9 billion as a result of the rises in the exports of semi-finished goods (21.1 percent), fuel, mineral oils and products (17.5 percent), finished goods (8.2 percent) and raw materials (1.8 percent). The increase was mainly in crude oil, oil products, fertilizers and cotton textiles, probably because of the hike in global prices.

The following chart shows the respective shares of merchandise groups in total export proceeds.

Proceeds of Merchandise Exports by Degree of ProcessingJuly/March 2010/2011

Finished Goods 41.4%

Semi-f inished Goods 7.7%

Raw Materials 5.1%

Fuel, Mineral Oils & Products

45.6%

Undistributed Exports0.2%

-129-

In January/March 2011, export earnings fell by 4.9 percent to US$ 6.2

billion (against US$ 6.6 billion in Oct./Dec. 2010). This came as a result of the decline in the exports of coal; medicinal plants; dairy products, eggs and honey; unalloyed aluminum; pharmaceuticals; fertilizers; iron and steel articles; and soap, detergents and artificial waxes.

5/3/2- Merchandise Import Payments by Degree of Use

Import payments scaled up by 5.1 percent to US$ 37.3 billion in July/March 2010/2011 (against US$ 35.5 billion in the corresponding period). As such, imports of fuel, mineral oils and products rose by 40.0 percent; raw materials by 30.0 percent; investment goods by 3.9 percent; and consumer goods by 3.6 percent. However, intermediate goods decreased by 1.7 percent. The following chart shows the respective shares of merchandise groups in total import payments.

Payments for Merchandise ImportsJuly/March 2010/2011

Intermediate Goods31.1%

Raw Materials 13.5%

Fuel, Mineral Oils & Products

9.1%

Investment Goods 20.8%

Consumer Goods 24.9%

Undistributed Imports0.6%

-130-

As for the period January/March 2011, import payments decreased by 14.5 percent to US$ 11.3 billion (from US$ 13.3 billion in Oct./Dec. 2010). This was explained by the retreat in imports of animal and vegetable fats, greases and oils and products; aluminum and its articles; iron ore; maize and crude oil.

5/3/3- Sectoral Distribution of Commodity Transactions

The private sector accounted for 65.5 percent of the total volume of trade in July/March 2010/2011(against 66.1 percent in the previous corresponding period). The public sector shared with 24.8 percent (against 24.9 percent), and the investment sector with 9.7 percent (up from 9.0 percent).

The following is an overview of the exports and imports of the private,

public, and investment sectors: A. Private Sector:

The volume of trade of the private sector rose by 6.2 percent; reaching some US$ 36.8 billion (exports represented 24.3 percent and imports 75.7 percent).

Volume of Trade by Economic Sector July/March 2010/2011

Investment Sector9.7%

Public Sector24.8%

Private Sector65.5%

-131-

To elaborate, exports of the private sector picked up by 7.5 percent; recording US$ 9.0 billion (47.4 percent of total export earnings) against US$ 8.3 billion (finished goods represented 75.1 percent of the total exports of this sector). Similarly, imports of the sector scaled up by 5.8 percent, amounting to some US$ 27.9 billion (74.7 percent of total import payments), compared with US$ 26.4 billion (intermediate goods constituted 35.6 percent and consumer goods 29.2 percent of the sector's total imports). In January/March 2011, the export earnings of this sector rolled back by 12.3 percent to US$ 2.9 billion, against US$ 3.3 billion in Oct./Dec. 2010. Its import payments also declined by 14.4 percent to US$ 8.5 billion (against US$ 10.0 billion).

B. Public Sector:

The volume of trade of the public sector edged up by 6.9 percent to about US$ 14.0 billion (exports made up 55.1 percent and imports 44.9 percent). That was traced to the higher export proceeds (up by 8.9 percent) recording US$ 8.0 billion (40.7 percent of total exports) against US$ 7.1 billion, given that fuel, mineral oils and products represented 94.5 percent of the sector's total exports. Likewise, imports of the public sector stepped up by 4.6 percent to US$ 6.3 billion (representing 16.8 percent of total import payments), against US$ 6.0 billion (fuel, mineral oils and products constituted 36.4 percent and raw materials 27.0 percent of the sector's total imports). In January/March 2011, the export earnings of the public sector edged up by 1.3 percent to US$ 2.6 billion, against US$ 2.5 billion in Oct./Dec. 2010. Conversely, the import payments fell by 17.4 percent to US$ 1.8 billion (against US$ 2.2 billion).

-132- C. Investment Sector:

The trade volume of the investment sector soared by 15.0 percent, amounting to about US$ 5.4 billion (exports made up 41.6 percent and imports 58.4 percent). The volume of trade was pushed up by the 44.0 percent rise in export earnings to register US$ 2.3 billion; against US$ 1.6 billion (fuel, mineral oils and products represented 47.3 percent, and finished goods 39.4 percent of the total exports of this sector). Furthermore, the imports slightly rose by 0.6 percent posting US$ 3.2 billion, of which intermediate goods constituted 32.4 percent and investment goods 27.9 percent of the sector’s total imports. In January/March 2011, the sector’s export earnings climbed by 7.0 percent to US$ 0.8 billion (against US$ 0.7 billion in Oct./Dec. 2010). By contrast, the import payments of this sector retreated by 10.1 percent to US$ 1.0 billion (against US$ 1.1 billion).

5/3/4- Geographical Distribution of Commodity Transactions

The volume of trade between Egypt and the external world rose to US$ 56.2 billion, registering a rise of 7.2 percent in July/March 2010/2011, thanks to the expansion in trade between Egypt and all economic groupings, except for Federal Russia; USA; other countries and regions; and other European countries. A number of countries accounted for 32.0 percent of the total volume of trade, particularly Italy, Switzerland, Germany, the United Kingdom and China. However, the trade deficit between Egypt and the external world shrank by 0.7 percent to US$ 18.4 billion in the period under review (from US$ 18.5 billion a year earlier) because of the rise in the exports and imports to some US$ 18.9 billion and US$ 37.3 billion, respectively.

-133-

5/3/5- Breakdown of Trade by Main Commodity

The volume of trade of all merchandise groups rose, except for machines and electric appliances and base metals and their products. The following chart illustrates the volume of trade of all merchandise groups and the share of each group in July/March 2010/2011.

Volume of Trade between Egypt and its Trade PartnersJuly/March 2010/2011

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Europe

an U

nion

Other E

urope

an C

ountr

ies

Russia

n Fed

erati

on &

C.I.S

United

Stat

es of

Ameri

ca

Arab C

ountr

ies

Asian C

ountr

ies(N

on-A

rab)

African

Cou

ntries

(Non

-Arab

)

Austra

lia &

othe

r Coun

tries

(US$ bn)

Exports Imports Trade volume Trade balance

-134-

Volume of Trade US$ 56.2 bn

Oil & its products 22.0%

Foodstuff 8.4 %

Cereals 5.4 %

Cotton & its products 5.8% %

Chemicals 9.6%

Machinery & electric equipment 7.8%

Base metals & products 9.1%

Vehicles and means of transportation 8.9%

Imports US$ 4.1bn

Exports US$ 8.3 bn

Imports US$ 3.9 bn

Exports US$ 0.8 bn

Imports US$ 2.9 bn

Exports US$ 0.2 bn

Imports US$ 1.7 bn

Exports US$ 1.6 bn

Imports US$ 3.3 bn

Exports US$ 2.1 bn

Imports US$ 3.8 bn

Exports US$ 0.6 bn

Imports US$ 3.7 bn

Exports US$ 1.4 bn

Imports US$ 4.4 bn

Exports US$ 0.6 bn

Other goods 22.9%Imports US$ 9.5 bn

Exports US$ 3.3 bn

-135-

5/4- International Finance

According to the international finance data in July/March 2010/2011, finance retreated by US$ 14.9 billion, registering a net outflow of US$ 3.5 billion (against a net inflow of US$ 11.4 billion in the previous corresponding period). That was mainly attributed to the increase of US$ 1.7 billion in the outflows of interest payments and profit transfers to US$ 4.6 billion (against US$ 2.9 billion). In addition, total net inflows of resources from abroad declined by US$ 13.2 billion to only US$ 1.1 billion in the period under review (against US$ 14.3 billion in the period of comparison). The decline was ascribable to the following main factors:

(A) Total Net Resource Flows from Abroad:

- Total net foreign investment in Egypt (direct and portfolio) [Inflows Chart (A)]

decreased by about US$ 10.3 billion, to only US$ 1.1 billion (net inflows), as portfolio investments∗ in Egypt declined by US$ 8.1 billion, (in the wake of the political events in Egypt after the January 25 revolution and the liquidation of portfolio investments by foreigners in the Egyptian market) reversing to a net outflow of US$ 968.9 million (from a net inflow of US$ 7.1 billion). Net FDI in Egypt also decreased by some US$ 2.2 billion to only US$ 2.1 billion (against US$ 4.3 billion).

- Total net foreign investments abroad (direct and portfolio) [Outflows chart (B)]

decreased by about US$ 499.3 million to reach US$ 841.9 million (net outflows), as a result of both the decline in portfolio investments abroad by US$ 579.7 million to reach only US$ 112.9 million and the rise in FDI abroad by US$ 80.4 million to US$ 729.0 million.

∗ Including foreigners’ investments in Egyptian Treasury bills of US$ 4.7 billion (inflows) and sovereign bonds

issued abroad of US$ 3.1 billion (holdings of non-residents).

-136–

The following chart shows the developments in net foreign investments (direct and portfolio) in Egypt in the period July/March of FY 2010/2011, and the previous three years.

- Net external borrowing (medium-, long- and short- term loans and facilities)

decreased to realize net disbursements of US$ 629.0 million in the reporting period (against US$ 3.3 billion in the period of comparison, thanks to the new SDR allocations of US$ 1.2 billion from the IMF).

- Net official grants shrank by US$ 671.8 million or 75.2 percent to only US$ 221.3 million due to the events in Egypt during the period under review.

(B) Total flows abroad: total interest payments and profit transfers abroad

accelerated by US$ 1.7 billion to US$ 4.6 billion, due to the rise in profit transfers abroad by foreign companies operating in Egypt.

Net Resources in EgyptJuly/March

2089.64332.0

5238.9

11251.7

(968.9)

7111.2

(8889.8)

(1350.7)

(11000)(9000)(7000)(5000)(3000)(1000)10003000500070009000

110001300015000

2007/2008 2008/2009 2009/2010 2010/2011

US$ mn

Net Direct Investment in Egypt Net Portfolio Investment in Egypt

Chart(A)

Net Resources AbroadJuly/March

(729.0)(648.6)

(411.2)

(1079.9)

(112.9)(692.6)

(929.7)

(285.2)

(1100)(900)(700)(500)(300)(100)100300500700900

110013001500

2007/2008 2008/2009 2009/2010 2010/2011

US$ mn

Direct Investment AbroadNet Portfolio Investment Abroad

Chart(B)

Net Flows of Official Grants and External Borrowing during July/March

588.2

893.1

221.3362.9

687.5

3351.8

629.0420.6

(500)(100)

300700

11001500

190023002700

31003500

2007/2008 2008/2009 2009/2010 2010/2011

US$ mn

Official grants Net external borrow ing

-137-

International Finance from Abroad (Net)

(US$ mn) July/March

2009/10 2010/11* Change + (-)

Net International Finance from Abroad (A-B) 11397.8 (3483.3) (14881.1) A-Total Net Resources from Abroad 14346.9 1129.1 (13217.8) 1 -Official grants (net) 893.1 221.3 (671.8) 2- External borrowing (net) 3351.8 629.0 (2722.8) 3- Direct investment in Egypt (net) 4332.0 2089.6 (2242.4) 4- Portfolio investment in Egypt (net) 7111.2 (968.9) (8080.1) 5- Direct investment abroad (648.6) (729.0) (80.4) 6- Portfolio investment abroad (net) (692.6) (112.9) 579.7 B- Interest Payments and Profit Transfers

(Outflows) (2949.1) (4612.4) (1663.3) 1- Interest on external loans and facilities (461.4) (446.1) 15.3

2- Interest on non-residents’ deposits at Egyptian banks (12.1) (16.8) (4.7)

3- Profit transfers of direct investment (2294.7) (3709.3) (1414.6) 4- Profit transfers of portfolio investment (180.9) (440.2) (259.3) *Provisional. 5/4/1- Foreign Direct Investment (FDI) in Egypt∗

In July/March 2010/2011, net FDI in Egypt contracted by about 51.8 percent to only US$ 2.1 billion, (against US$ 4.3 billion in the previous corresponding period). This resulted mainly from the rise in capital repatriation by 61.6 percent to US$ 5.2 billion, and the decline in total investment inflows by 3.5 percent to only US$ 7.3 billion due to the implications of the current events. The decline in investment inflows reflected mainly lower flows from the European Union (down by US$ 391.5 million to reach only US$ 4.5 billion), and from the rest of the world (down by US$ 359.7 million to post only US$ 491.5 million). By contrast, flows from the USA increased by US$ 400.2 million to ∗ FDI is a category of international investment that implies the existence of a long-term relationship

between a resident in a given economy and an enterprise resident in another economy), in which a direct investor owns 10 percent or more of the ordinary shares or voting power in an incorporated enterprise, or its equivalent in an unincorporated enterprise.

(Source :IMF's BOP Manual, Fifth Edition)

-138- US$ 1.4 billion (of which oil investments accounted for 87.5 percent), and from the Arab countries by US$ 85.8 million to US$ 890.9 million (of which greenfield investments constituted 77.8 percent). The sectoral distribution of total FDI in Egypt in July/March 2010/2011 shows that inflows to the petroleum sector accounted for 69.6 percent of the total (see the following table). The bulk of these flows (68.2) percent came from the European Union particularly the UK (49.1 percent) and Belgium (9.6 percent). The USA provided 24.5 percent: the Arab countries 2.9 percent (UAE 0.8 percent and Qatar 0.5 percent); and the other countries 4.4 percent (mainly Switzerland 2.3 percent, and Hong Kong 0.7 percent).

Sectoral Distribution of Total FDI in Egypt (US$ mn)

July/March 2009/2010 2010/2011 Sector

Value % Value % Total Inflows 7542.3 100.0 7277.6 100.0 Manufacturing 163.8 2.2 726.9 10.0 Agriculture 7.8 0.1 25.6 0.3 Construction 116.4 1.5 93.5 1.3 Finance 314.8 4.2 110.4 1.5 Services 303.8 4.0 174.9 2.4 Tourism 232.0 3.1 154.5 2.1 Communications & IT 59.6 0.8 4.3 0.1 Real Estate 212.8 2.8 115.6 1.6 Petroleum 5755.7 76.3 5065.9 69.6 Undistributed 375.6 5.0 806.0 11.1

-139-

The breakdown of total FDI in Egypt by investment purpose showed that petroleum investments ranked first as stated above, posting US$ 5.1 billion or 69.6 percent of the total. Greenfield investments came next with about US$ 2.1 billion (28.5 percent), then real estate investments with some US$ 115.6 million (1.6 percent).

11251.75238.9 4332.0

2089.6

(5500.0)(3500.0)(1500.0)

500.02500.04500.06500.08500.0

10500.012500.014500.0

2007/2008 2008/2009 2009/2010 2010/2011

Outf lows Proceeds f rom selling local enitities to non-residents Petroleum sector inv estments Transf ers f or buy ing real estates Greenf ield Inv estmentNet Foreign Direct Inv estment in Egy pt

Net Foreign Direct Investment in Egypt July / MarchUS$ mn

-140-

Geographical Distribution of FDI in Egypt (US$ mn)

July/March 2009/2010 2010/2011* Change + (-) Flows of FDI in Egypt (Net) 4332.0 2089.6 (2242.4) Total Inflows 7542.3 7277.6 (264.7) USA 1016.9 1417.1 400.2 EU Countries 4869.1 4478.1 (391.5) Germany 83.4 188.2 104.8 France 169.6 160.4 (9.2) UK 3554.3 3165.8 (388.5) Italy 36.1 185.4 149.3 Greece 60.2 35.2 (25.0) Spain 75.4 31.6 (43.8) The Netherlands 97.6 122.6 25.0 Belgium 678.0 551.8 (126.2) Luxemburg 3.6 0.1 (3.5) Denmark 6.8 14.8 8.0 Sweden 46.0 1.1 (44.9) Austria 1.9 2.3 0.4 Cyprus 53.6 8.1 (45.5) Others 2.6 10.7 8.1 Arab Countries 805.1 890.9 85.8 Saudi Arabia 222.4 152.6 (69.8) UAE 227.9 370.9 143.0 Tunisia 0.3 2.2 1.9 Kuwait 74.1 42.0 (32.1) Lebanon 3.1 12.2 9.1 Libya 68.5 12.4 (56.1) Jordan 81.2 2.0 (79.2) Bahrain 36.1 53.4 17.3 Qatar 46.0 181.7 135.7 Oman 7.1 10.3 3.2 Yemen 6.1 14.6 8.5 The Sudan 0.9 0.3 (0.6) Others 31.4 36.3 4.9 Other Countries 851.2 491.5 (359.7) Switzerland 70.0 138.5 68.5 Japan 10.5 18.0 7.5 Canada 6.1 13.0 6.9 China 24.4 42.8 18.4 Australia 0.8 4.2 3.4 India 7.7 19.1 11.4 Turkey 22.5 26.2 3.7 Norway 2.1 1.4 (0.7) Other countries 707.1 228.3 (478.8) Capital Repatriation** -3210.3 -5188.0 (1977.7) * Provisional. ** Capital repatriation (outflows) means that a direct investor recovers his share in the capital of an

investment enterprise - in case of partial or full disposal - and transfers part or all of it abroad.

-141 -

5/4/2- External Official Grants Net transfers of official grants (cash and in-kind), as shown in the chart below, declined to about US$ 221.3 million in July/March 2010/2011, (from US$ 893.1 million in the previous corresponding period). The decline was an outcome of the sharp decrease in inward grants due to the circumstances that Egypt is going through. In detail, inflows of cash grants fell by some US$ 464.6 million (98.3 percent) to only US$ 8.2 million and so did those of in-kind grants by US$ 231.6 million (or 49.3 percent) to US$ 238.0 million. Meanwhile official grants transferred abroad, declined by about US$ 24.4 million to US$ 24.9 million (against US$ 49.3 million).

According to the Ministry of International Cooperation data, new grant commitments in July/March 2010/2011 decreased by US$ 310.5 million or 57.4 percent to US$ 230.3 million mainly because of the decline in new commitments with the European Commission and the USA.

122.6

371.6472.8289.6

267.5

469.6

238.0

8.2

(49.3) (49.3)(50.9) (24.9)-100.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1000.0

2007/2008 2008/2009 2009/2010 2010/2011

Cash inw ard grants In-Kind inw ard grants Outw ard grants

Transfers of Official Grants during July/MarchUS$ mn

-142-

Official Grants: New Commitments and Net Actual Flows (US$ mn)

July/March 2009/2010 2010/2011* 2009/2010 2010/2011*

Actual Flows New Commitments Net Inflows 893.1 221.3 Inflows, of which: 942.4 246.2 540.8 230.3 USA 559.6 208.2 275.4 166.3 Japan 8.8 13.3 10.8 Germany 30.6 15.6 17.8 The Netherlands 0.2 Italy 1.1 Denmark 0.1 Norway 6.2 Switzerland 0.6 0.1 China 6.7 11.7 Canada 1.2 0.4 Saudi Arabia 200.1 Kuwait 0.4 Austria 1.1 0.4 Belgium 49.0 World Bank 0.9 12.2 European Commission 236.1 25.8 OPEC 0.7 Kuwaiti Fund for Arab Economic Development

2.9 0.3 Other countries 90.0 1.1 3.0 1.0

Outflows (49.3) (24.9)

* Provisional.

The sectoral distribution of grant commitments showed that grants for the services sector were largely directed to the general government, education and health; financial intermediaries; and insurance and social solidarity sectors.

-143-

Breakdown of Official Grant Commitments by Beneficiary

(US$ mn) July/March

2009/2010 % 2010/2011 % Change Total 540.8 100.0 230.3 100.0 (310.5) Productive Sectors 12.3 2.3 59.1 25.6 46.8 Agriculture and irrigation 1.0 0.2 33.0 14.3 32.0 Energy & electricity 11.3 2.1 26.1 11.3 14.8 Services Sectors 528.5 97.7 171.2 74.4 (357.3) Financial intermediaries & supporting services 15.3 2.8 24.6 10.7 9.3 Insurance and social solidarity 0.0 0.0 1.0 0.5 1.0 General government 16.0 3.0 67.3 29.2 51.3 Education and health 63.3 11.7 78.3 34.0 15.0 Others 433.9 80.2 0.0 0.0 (433.9)

5/4/3- External Debt Total external debt (public and private, all maturities) increased by 3.4 percent or US$ 1.1 billion to post US$ 34.8 billion at the end of March 2011 (against US$ 33.7 billion at the end of June 2010). That was ascribed to the increase in most currencies of borrowing versus the US dollar by about US$ 2.0 billion worth, and the realization of net repayments of US$ 0.9 billion of loans and facilities. The public sector was the major obligor, with a share of US$ 32.8 billion or 94.2 percent of the total debt at end of March 2011. The private sector accounted for the remaining US$ 2.0 billion, or 5.8 percent.

-144-

External Debt Components∗ The breakdown of external debt by maturity indicates that medium- and long-term loans and facilities (guaranteed and non-guaranteed) accounted for 91.2 percent of the total external debt (US$ 31.8 billion) during the period under review, of which US$ 31.4 billion were long-term loans, and US$ 416.0 million were medium-term loans mainly LE bonds issued abroad. The short-term debt of US$ 3.1 billion accounted for the remainder (8.8 percent). About US$ 17.3 billion ∗∗ of long-term loans were owed to Paris Club members (49.5 percent of the total). Debt to countries other than Paris Club members reached about US$ 991.4 million (2.8 percent).

Debt to international and regional organizations reached US$ 10.7 billion or

30.6 percent of the total at end of March 2011, up by US$ 675.4 million over the end of June 2010. The stock of Egyptian bonds and notes (holdings of non-residents) amounted to some US$ 2.9 billion or 8.2 percent of the total debt. That figure comprised US$ 188.8 million of dollar-denominated sovereign bonds issued ∗ The structure of Egypt’s external debt by currency of borrowing is one of the key indicators

used by the CBE to determine the structure of international reserves by currency. ∗∗ Representing bilateral loans (rescheduled and non-rescheduled) and suppliers’ and buyers'

credits.

External Debt StructureEnd of March 2011

Priv ate sector (Non- guaranteed)

0.1%

Egy ptian bonds and notes

8.2%

International & regional

organizations30.6%

Suppliers' & buy ers' credits

1.3%

Other bilateral debt

14.8%

Rescheduled bilateral debt

36.2%

Short- term debt8.8%

-145- by the government in July 2001 and falling due in July 2011; US$ 1.3 billion of guaranteed government securities, issued by the government in September 2005 and reaching maturity in September 2015 and US$ 343.6 million of LE bonds issued in July 2007 and falling due in July 2012. This is in addition to the bills issued abroad in April 2010 in an amount of US$ 1083.2 million (holdings of non-residents) and falling due over two tranches in 2020 and 2040. Non-guaranteed debt of the private sector constituted US$ 18.8 million. The balance of short-term debt hiked by about US$ 106.7 million to US$ 3.1 billion (61.4 percent of which was owed by the private sector). That was an outcome of the rise in short-term trade facilities by some US$ 278.2 million to US$ 1.9 billion, and the decrease in short-term deposits of non-residents by US$ 171.5 million to only US$ 1.2 billion. External Debt by Debtor∗ The breakdown of external debt by debtor at end of March 2011 showed that the stock of debt owed by the central government increased by US$ 505.2 million to US$ 26.8 billion. Increases were also seen in the debts of other sectors by US$ 507.7 million to US$ 4.7 billion and of the monetary authority** by US$ 243.0 million to US$ 1.5 billion. By contrast, the debt of banks decreased by the equivalent of US$ 108.9 million to only US$ 1.8 billion.

∗ As of September 2008, the CBE -in coordination with the Ministry of Finance- has reclassified part of the debt

activities of some entities under the "central and local government sector" instead of "other sectors". ** Including SDR allocations of US$ 1.2 billion from the IMF to Egypt in July/Dec. 2009/2010.

External Debt by DebtorShare in Total Increase/Decrease

July /March

3351.1

(837.0)

505.2

(106.5)

243.01069.5

(403.9)

43.7

(108.9)

507.7469.8

(5853.7)

-6500.0

-4500.0

-2500.0

-500.0

1500.0

3500.0

5500.0

2008/2009 2009/2010 2010/2011

(US$ mn)

Central & Local Gov ernmentMonetary Authority BanksOther Sectors

-146- Despite the above-mentioned developments, the structure of external debt by

debtor has not changed, as the central government remained the major obligor, (76.8 percent of the total debt) at end of March 2011, followed by the other sectors (13.6 percent), then banks (5.3 percent), and the monetary authority (4.3 percent).

External Debt by Debtor (US$ bn)

March 2011 June 2010

External Debt by Main Creditor Countries

The breakdown of external debt by creditor shows that 42.8 percent, (almost half of the total), was owed to the four main Paris Club members: namely Japan (11.9 percent), Germany (11.1 percent), France (10.6 percent) and the USA (9.2 percent). Meanwhile, debt to the Arab countries combined posted 4.9 percent, particularly Kuwait (2.4 percent), Saudi Arabia (1.2 percent) and the UAE (0.4 percent).

Central & Local

Government 26.2

Other Sectors

4.2

Banks 2.0

Monetary Authority

1.3Central &

Local Government

26.8

Other Sectors

4.7

Banks 1.8

Monetary Authority

1.5

External Debt by Creditor March 2011

France10.6%

USA9.2%

Japan11.9%

Germany11.1%

United Kingdom3.3%

Arab countries4.9%

Other countries10.2%

International& regional

organizations30.6%

Egy ptian bonds and notes

8.2%

-147- External Debt by Currency of Borrowing The distribution of external debt by main component currencies shows that the US dollar was the main currency of borrowing, with a relative importance of 39.8 percent because of the outstanding obligations in US dollar to creditors other than the USA. The euro came next (28.4 percent), followed by the Japanese yen (12.6 percent), SDRs (7.4 percent) and the Kuwaiti Dinar (6.0 percent).

Debt Service

Turning to external debt service (medium- and long-term), total debt service payments increased by US$ 137.8 million registering US$ 2.4 billion in July/March 2010/2011. That was an outcome of the rise in principal repayments by about US$ 157.1 million to US$ 1.8 billion, and the fall in interest payments by about US$ 19.3 million to some US$ 554.9 million.

External Debt by Major CurrenciesEnd of March 2011

SDRs7.4%

Other currencies

2.1%US dollar 39.8%

Japanese yen12.6%

Egyptian pound2.1%

Swiss franc1.6%

Kuwaiti dinar6.0%

Euro28.4%

-148-

Main Indicators of External Debt Owing to the circumstances in Egypt following the January 25 revolution, the main indicators of external debt showed a slight increase in the third quarter of July/March 2010/2011. Consequently, the ratio of debt service/exports of goods and services reached 6.6 percent against 6.5 percent in the previous corresponding period. The ratio of total external debt/GDP indicator also rose to 15.1 percent (from 14.7 percent in the corresponding period a year earlier),

External Debt and Debt ServiceEnd of March

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2005 2006 2007 2008 2009 2010 2011

0.0

0.5

1.0

1.5

2.0

2.5

3.0

External Debt Debt Service (right axis)

US$ bn US$ bn

Main External Debt IndicatorsJuly/March

143.196.3

32.5 15.1

420.4 412.8

0.050.0

100.0150.0200.0250.0300.0350.0400.0450.0500.0550.0600.0

2004/05 2006/07 2008/09 2010/11

%

0.050.0100.0150.0200.0250.0300.0350.0400.0450.0500.0

(US$)

External Debt / Exports of Goods and Services External Debt /GDP External Debt per capita (US$) (right axis)

-149- The ratios of short-term debt to total debt and to NIR also moved up from 8.0 percent to 8.8 percent and from 7.5 percent to 10.2 percent, respectively. By contrast, the ratio of debt service/current receipts (including transfers) slightly declined from 5.4 percent to 5.3 percent. Moreover, the external debt per capita decreased to US$ 412.8, down from US$ 428.5.

The Global Development Finance Report for 2011 (World Bank) revealed

that Egypt was the largest debtor country in the Middle East and North Africa in 2008 and 2009 (see the following chart).

External Debt Indicators July / March

5.45.3

9.210.2

9.18.8

7.86.6

0.02.04.06.08.0

10.012.0

2004/05 2006/07 2008/09 2010/11

%

Debt Serv ice / Current Receipts (Including Transf ers)Short-term Debt / Net International Reserv esShort-term Debt / Total External DebtDebt Serv ice / Exports of Goods and Serv ices

Total External Debt Stock for Middle East and North African Countries

05,000

10,00015,00020,00025,00030,00035,000

Algeria Djibouti Egypt Iran Jordan Lebanon Morocco Tunisia Yemen

2008 2009

US$mn

-150- According to the same Report, Egypt ranked twenty first in position among the middle-income debtor countries with a debt balance of US$ 33.3 billion in 2009, and China came on top with US$ 428.4 billion (see the following chart). Source: World Bank's Global Development Finance Report for 2011, 2009 data. The next chart shows the indicators of debt service in Egypt compared with other country groups (according to the World Bank’s Global Development Finance Report). The debt service indicators (principal repayments and interest payments) showed that the ratio of debt service to the export proceeds of goods and services in 2008 and 2009 were lower than other country groups. This indicated the ability of the Egyptian economy to repay its external debt.

0.050.0

100.0150.0200.0250.0300.0350.0400.0450.0

China

Russia

Brazil

Turkey

India

Mexico

Indone

sia

Argent i

na

Roman

ia

Kazakh

stan

Ukraine

Chile

Malays

ia

Philippine

s

Thaila

nd

Venezu

ela

Pakistan

Colombia

South Afric

a

Bulgaria

Egypt

Total External Debt Stock for Middle- Income CountriesUS$ bn

Debt Service/Exports

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2000 2007 2008 2009

(%) East Asia and Pacif ic

Europe and Central Asia

Latin America & Caribbean

Middle East & North Africa

South Asia

Sub-Saharan Africa

Egypt

-151-

New Commitments on Loans and Facilities In July/March 2010/2011, new commitments on loans and facilities reached US$ 1.6 billion mostly loans from international and regional organizations (US$ 1.5 billion or 93.5 percent of the total). Commitments on bilateral loans recorded US$ 106.2 million or 6.5 percent of total commitments. Thus, total commitments posted a decline of US$ 907.2 million below the level of the corresponding period of the previous FY. That was mainly attributed to the fall in the new bilateral commitments concluded with Japan, and in those concluded with the World Bank, the African Development Bank and the Kuwaiti Fund compared with the corresponding period.

Annex

- 153 -

Statistical Section

(1) Indicators of Development and Economic Growth

(1/1) GDP at Factor Cost by Economic Sector (at 2006/2007 Prices) (1/2) GDP by Expenditure (at 2006/2007 Prices) (1/3) Consumer Price Index (Urban) (January 2010=100) (1/4) Producer Price Index (2004/2005=100) (2) Monetary Aggregates (2/1/1) CBE Financial Position: Reserve Money and Counterpart Assets (2/1/2) Banking Survey: Domestic Liquidity and Counterpart Assets (2/1/3) Banking Survey: Deposits in Local Currency (2/1/4) Banking Survey: Deposits in Foreign Currencies (2/1/5) Banking Survey: Foreign Assets and Liabilities (2/1/6) Banking Survey: Domestic Credit and Other Items (Net) (2/1/7) Total Saving Vessels (2/1/8) Bank Lending and Discount Balances to Business Sector

Financial Sector (2/2/1) Structure of the Egyptian Banking System (2/2/2) Local Mutual Funds Authorized and Operating as at 31/3/2011

- 154 - Activity of the Banking System

Central Bank of Egypt

(2/3/1) Note Issued, Including Cash in CBE Vaults, by Denomination (2/3/2) Currency in Circulation Outside CBE by Denomination (2/3/3) Transactions Via RTGS and SWIFT

Banks

(2/4/1) Aggregate Financial Position (2/4/2) Deposits by Maturity (2/4/3) Deposits by Sector (2/4/4) Deposits by Economic Activity (2/4/5) Portfolio Investments by Sector (2/4/6) Lending and Discount Balances by Sector (2/4/7) Credit by Sector (2/4/8) Lending and Discount Balances by Economic Activity

Interest Rates

(2/5/1) Discount and Interest Rates on Deposits and Loans in Egyptian Pound (2/5/2) Domestic Interest Rates on 3-Month Deposits in Major Currencies (2/5/3) Interest Rates on Treasury Bills (Weekly Weighted Averages)

- 155 –

(3) Non-Banking Financial Sector (3/1) Companies Listed on the Stock Exchange (3/2) Trading in Shares on the Stock Exchange (3/3) Trading in Bonds on the Stock Exchange (3/4) Foreigners’ Transactions on the Stock Exchange (3/5) Global Depository Receipts (GDRs) (3/6) Outstanding Balance of Treasury Bills (Quarterly) (3/7) Outstanding Balance of Treasury Bills (Weekly) (3/8) Outstanding Balance of Treasury Bonds (End of March 2011) (4) Public Finance & Domestic Public Debt (4/1) Consolidated Fiscal Operations of the General Government (Revenues) (4/2) Consolidated Fiscal Operations of the General Government (Expenditures) (4/3) Summary of the Consolidated Fiscal Operations of the General

Government (4/4) Gross Domestic Debt (4/5) National Investment Bank (Resources & Uses) (5) External Transactions (5/1) Balance of Payments (US$) (5/2) Exports by Degree of Processing (5/3) Imports by Degree of Use (5/4) Regional Distribution of Exports and Imports (5/5) Average Foreign Exchange Rates (5/6) External Debt by Type (5/7) Distribution of External Debt by Main Currencies

(LE mn)

Public Private Total Public Private Total Public Private TotalTotal GDP 229727.4 392891.0 622618.4 237509.0 400623.2 638132.2 3.4 2.0 2.5Agriculture, Irrigation & Fishing 13.2 85572.0 85585.2 13.8 87962.0 87975.8 4.5 2.8 2.8 Extractions 69482.0 15642.0 85124.0 69872.0 16084.0 85956.0 0.6 2.8 1.0

Oil 29950.0 5222.0 35172.0 31009.0 5410.0 36419.0 3.5 3.6 3.5Natural gas 39237.0 8181.0 47418.0 38566.0 8402.0 46968.0 -1.7 2.7 -0.9Others 295.0 2239.0 2534.0 297.0 2272.0 2569.0 0.7 1.5 1.4

Manufacturing Industries 15795.0 82002.0 97797.0 15891.0 82042.0 97933.0 0.6 0.0 0.1Oil refining 2627.0 2070.0 4697.0 2656.0 2218.0 4874.0 1.1 7.1 3.8Others 13168.0 79932.0 93100.0 13235.0 79824.0 93059.0 0.5 -0.1 0.0

Electricity 7579.0 1164.0 8743.0 8157.0 1046.2 9203.2 7.6 -10.1 5.3Water 2184.0 0.0 2184.0 2298.0 0.0 2298.0 5.2 0.0 5.2Sewerage 519.2 0.0 519.2 545.0 0.0 545.0 5.0 0.0 5.0Construction & Building 3407.0 28585.0 31992.0 3602.0 29976.0 33578.0 5.7 4.9 5.0Transportation & Storage 5744.0 20183.0 25927.0 5927.0 20377.0 26304.0 3.2 1.0 1.5Communications 7729.0 16541.0 24270.0 8287.0 18035.0 26322.0 7.2 9.0 8.5Information 472.4 877.4 1349.8 484.0 902.0 1386.0 2.5 2.8 2.7Suez Canal 18940.5 0.0 18940.5 21036.0 0.0 21036.0 11.1 0.0 11.1Wholesale & Retail Trade 2382.0 64699.0 67081.0 2452.0 65549.0 68001.0 2.9 1.3 1.4Finance 16102.0 8946.0 25048.0 16341.0 9114.0 25455.0 1.5 1.9 1.6Insurance 1571.0 466.0 2037.0 1619.0 480.0 2099.0 3.1 3.0 3.0Social Solidarity 21660.0 0.0 21660.0 22688.0 0.0 22688.0 4.7 0.0 4.7Tourism 239.0 27018.8 27257.8 250.0 26556.0 26806.0 4.6 -1.7 -1.7Real Estate 432.0 16194.0 16626.0 446.0 16757.0 17203.0 3.2 3.5 3.5

Real Estate Ownership 279.0 8524.0 8803.0 289.0 8874.0 9163.0 3.6 4.1 4.1Business Services 153.0 7670.0 7823.0 157.0 7883.0 8040.0 2.6 2.8 2.8

General Government 54908.0 0.0 54908.0 57009.0 0.0 57009.0 3.8 0.0 3.8Education, Health & Personal Services 568.1 25000.8 25568.9 591.2 25743.0 26334.2 4.1 3.0 3.0

Education 0.0 7096.0 7096.0 0.0 7292.0 7292.0 0.0 2.8 2.8Health 544.0 7776.0 8320.0 566.0 7986.0 8552.0 4.0 2.7 2.8Others* 24.1 10128.8 10152.9 25.2 10465.0 10490.2 4.6 3.3 3.3

Source : Ministry of Planning* The two items of "Sanitation" and "Information" were excluded from "Other Services" item, in accordance with the International Classification ISIC, Rev. 4

-156 -

(1/1) GDP at Factor Cost by Economic SectorAt 2006/2007 Prices

July / Mar.

SectorsGrowth Rate (%)

2009/2010 2010/2011 2010/2011

2009/2010 2010/2011 2009/2010 2010/2011 2009/2010 2010/2011

1- GDP at Market Price(2+5-6) 651.1 666.1 100.0 100.0 5.0 2.3

2- Total Domestic Expenditure (3+4) 674.9 689.6 103.6 103.6 3.8 2.2

3- Final Consumption 549.0 571.3 84.3 85.8 4.5 4.1

Final private consumption 479.8 499.6 73.6 75.0 4.5 4.1

Final government consumption 69.2 71.7 10.6 10.8 4.1 3.6

4- Gross Capital Formation 125.9 118.3 19.3 17.8 1.0 -6.0

Investments 122.4 115.7 18.8 17.4 -0.1 -5.5

Change in stock 3.5 2.6 0.5 0.4 .. ..

5- Exports of Goods & Services 177.7 190.6 27.3 28.6 -4.8 7.3

6- Imports of Goods & Services 201.5 214.1 30.9 32.2 -7.1 6.3

7- Gross Domestic Saving (1-3) 102.1 94.8 15.7 14.2 8.0 -7.2

..Not available

Source : Ministry of Planning

Value at LE bn Structure (%)

- 157 -

July/March

( At 2006/ 2007 Prices )

(1/2) GDP by Expenditure

Growth Rate (%)

Groups2009/2010 2010/2011

General Index 100.00 93.0 100.8 102.4 112.4 8.4 9.8

Food & Non-alcoholic Beverages 39.92 89.3 102.2 105.9 123.2 14.4 16.3

Tobacco 2.19 100.0 100.0 100.0 146.9 0.0 46.9

Clothing & Footwear 5.41 99.4 100.0 100.0 100.1 0.6 0.1

Housing , Water, Electricity, Gas & Fuel 18.37 96.5 99.3 99.3 99.5 2.9 0.2

Furnishings, Household Equipment & Routine Maintenance of the House 3.77 99.3 102.6 102.6 103.7 3.3 1.1

Health Care 6.33 99.7 100.0 100.0 101.8 0.3 1.8

Transportation 5.68 99.6 100.0 100.6 101.5 0.4 0.9

Communications 3.12 100.0 99.9 99.9 100.0 -0.1 0.1

Recreation & Culture 2.43 99.5 100.0 102.4 106.9 0.5 4.4

Education 4.63 91.4 100.0 100.0 124.3 9.4 24.3

Restaurants & Hotels 4.43 95.9 100.0 100.2 112.4 4.3 12.2

Miscellaneous 3.72 86.5 100.0 100.7 102.1 15.6 1.4

Source: Central Agency for Public Mobilization and Statistics (CAPMAS) (Monthly CPI Bulletin).

* The 9th series of CPI was introduced in August 2010. The weights involved in the formation of the Index were taken from the results of the 2008/2009 survey of income, expenditure and consumption using January 2010 as a base period.

- 158 -

(1/3) Consumer Price Index (Urban) (Jan. 2010 = 100) *

RelativeWeights

Inflation Rate (%)

July/MarchJun-09 Mar-10 Jun-10 Mar-11

Groups

2009/2010 2010/2011

All Items 100.0 148.2 157.5 160.9 189.7 6.3 17.9

Agriculture, Forestry and Fishing 25.1 188.9 197.8 210.9 249.4 4.7 18.3

Mining and Quarrying 21.8 134.6 154.2 147.8 207.6 14.6 40.5

Manufacturing Industries 38.9 140.0 146.0 149.6 162.1 4.3 8.4

Electricity, Gas, Steam and Air Conditioning Supply 2.3 115.0 140.3 140.3 140.3 22.0 0.0

Water Supply, Sewerage, Waste Management and Remediation Activities 2.0 138.7 146.5 146.5 146.5 5.6 0.0

Transportation and Storage 2.8 124.2 124.8 124.8 127.3 0.5 2.0

Accommodation and Food Service Activities 5.0 114.6 109.2 110.6 133.4 -4.7 20.6

Information and Communication Activities 2.1 112.5 112.5 112.5 112.5 0.0 0.0

- 159 -

(1/4) Producer Price Index (2004/2005 = 100)

Source: Central Agency for Public Mobilization and Statistics (CAPMAS) ( Monthly PPI Bulletin issued every two months).

Inflation Rate (%) RelativeWeights Jun-09 Mar-10 Jun-10 Mar-11 July/March

2011Mar. June Mar. June Mar. June Mar.

Reserve Money 159767 169911 174016 175104 196106 203071 234900Currency in circulation outside CBE * 104350 111412 120552 126268 136438 144253 175647Banks' deposits in local currency 55417 58499 53464 48836 59668 58818 59253

Counterpart Assets 159767 169911 174016 175104 196106 203071 234900Net Foreign Assets 114566 180333 177300 171732 179809 190234 167446Foreign Assets 181601 182021 178733 173055 188132 198605 175498

Gold 6744 8695 8695 9385 9386 12393 12393Foreign securities 164110 151175 157191 150556 163029 162247 142807Foreign currencies 10747 22151 12847 13114 15717 23965 20298

Foreign Liabilities + 67035 1688** 1433 1323 8323 8371 8052Net Domestic Assets 45201 -10422 -3284 3372 16297 12837 67454Net Claims on Government 119555 81872 88056 68613 85140 80611 108832

Claims; of which: 192509 159697 162880 146899 160335 150288 189583 Government securities 165438 123123** 122473 121708 124559 121533 130596

Deposits 72954 77825 74824 78286 75195 69677 80751Net Claims on Banks 75017 77581 -2022 334 23841 29010 -1287

Claims 94122 97828 19012 21786 43764 49863 21375Deposits in foreign currencies 19105 20247 21034 21452 19923 20853 22662

Other Items (Net) -149371 -169875 -89318 -65575 -92684 -96784 -40091Assets 44939 25233** 30388 28978 16296 15431 6471Liabilities + 194310 195108 119706 94553 108980 112215 46562

Source : Central Bank of Egypt.* Including subsidiary coins & notes issued by the Ministry of Finance.

- 160 -

+ According to the updated statistical treatment adopted by the IMF, SDR allocations are to be classified as foreign liabilities rather than capital accounts, as of August 2009.

(LE mn)

(2/1/1) CBE Financial Position: Reserve Money and Counterpart Assets

2009 End of

2010

** At the end of June 2008, the CBE and the government agreed on using part of the rescheduled debts -under Paris Club agreement- which are not yet due, to settle part of the government debt to the CBE.

2008


1- Domestic Liquidity 756553 766664 808603 831211 888176 917459 988076

A- Money Supply 158134 170579 173228 182991 201868 214040 240814Currency in circulation outside the banking system 98596 104656 112986 118146 128433 135209 163489

Demand deposits in local currency 59538 65923 60242 64845 73435 78831 77325

B- Quasi-Money 598419 596085 635375 648220 686308 703419 747262Time & saving deposits in local currency 426952 436268 465758 481054 528844 545303 567394

Demand and time & saving deposits in foreign currencies 171467 159817 169617 167166 157464 158116 179868

2- Counterpart AssetsNet foreign assets 253506 303680 * 246338 254134 276379+ 282408 266036

Domestic credit 595334 570953 * 690179 695326 750883 775268 870469

Other items (net) -92287 -107969 * -127914 -118249 -139086+ -140217 -148429

Source : Central Bank of Egypt.

- 161 -

+ According to the new classification of SDR allocations referred to in table (2/1/1).

End of 2009 2010

(LE mn)

(2/1/2) Banking Survey: Domestic Liquidity and Counterpart Assets

* Due to the agreement between the CBE and the government, as mentioned in the footnote of table (2/1/1).

2008


Total Deposits in Local Currency 486490 502191 526000 545899 602279 624134 644719

1- Demand Deposits 59538 65923 60242 64845 73435 78831 77325

Public business sector * 6451 8698 5550 7145 7194 8938 7041

Private business sector 31263 34301 31208 33240 37947 41246 40626

Household sector 22628 24003 24180 25235 28852 29510 30240

Minus: Purchased cheques & drafts 804 1079 696 775 558 863 582

2- Time and Saving Deposits 426952 436268 465758 481054 528844 545303 567394




Source : Central Bank of Egypt

- 162 -

2009End of

* Including all public sector companies subject or not to Law No. 203 for 1991.

(2/1/3) Banking Survey: Deposits in Local Currency

(LE mn)

20102008


Total Deposits in Foreign Currencies 171467 159817 169617 167166 157464 158116 179868

1- Demand Deposits 35021 26581 30340 32050 33857 33901 46257




Minus: Purchased cheques & drafts 198 183 110 100 115 140 46

2- Time and Saving Deposits 136446 133236 139277 135116 123607 124215 133611




Source: Central Bank of Egypt


- 163 -

2009 End of

2010(LE mn)

(2/1/4) Banking Survey: Deposits in Foreign Currencies

2008


Net Foreign Assets 253506 303680 246338 254134 276379 282408 266036

1- Foreign Assets 354616 330770 277746 282914 312163 322209 311902

Central Bank of Egypt 181601 182021 178733 173055 18813 198605 175498

Banks 173015 148749 99013 109859 124031 123604 136404

2- Foreign Liabilities 101110 27090 31408 28780 35784 39801 45866

Central Bank of Egypt 67035 1688 * 1433 1323 8323+ 8371 8052

Banks 34075 25402 29975 27457 27461 31430 37814


* Due to the agreement between the CBE and the government, as mentioned in the footnote of table (2/1/1).

(2/1/5) Banking Survey: Foreign Assets and Liabilities

2008

+ According to the new classification of SDR allocations referred to in table (2/1/1).

- 164 -

2009End of 2010(LE mn)


1- Domestic Credit 595334 570953 690179 695326 750883 775268 870469

Net claims on the government (A+B-C) 206808 174005 269438 273122 320885 326141 419024

A-Securities 311321 271788 ** 371145 397804 437919 440410 520551

B-Credit facilities 57742 67732 72246 55939 68749 68140 97297

C-Government deposits 162255 165515 173953 180621 185783 182409 198824

Claims on public business sector * 27050 26897 30859 33146 36708 29985 33668

Claims on private business sector 289492 291719 301592 304470 303855 326350 321579

Claims on household sector 71984 78332 88290 84588 89435 92792 96198

2- Other Items (Net) -92287 -107969 -127914 -118249 -139086 -140217 -148429Capital accounts -127774 -135401 -142222 -148332 -150019+ -170877 -150701

Net unclassified assets and liabilities 35487 27432 ** 14308 30083 10933 30660 2272


* Including all public sector companies subject or not to Law No. 203 for 1991.** Due to the agreement between the CBE and the government, as mentioned in the footnote of table (2/1/1)+ According to the new classification of SDR allocations referred to in table (2/1/1).

End of 2010

- 165 -

2009

(2/1/6) Banking Survey: Domestic Credit and Other Items (Net)(LE mn)

2008


Total Saving Vessels 731738 742177 781092 803063 773954 794350 841105

Savings at the Banking System 598419 596085 635375 648220 686308 703419 747262

Time & saving deposits in local currency 426952 436268 465758 481054 528844 545303 567394

Demand and time & saving deposits in foreign currencies 171467 159817 169617 167166 157464 158116 179868

Net Sales of Investment Certificates 77367 79354 80059 81262 87646 90931 93843

Post Office Saving Deposits 55952 66738 65658 73581 Not Available Not Available Not Available


2008

-166 -

2009 2010(LE mn)

(2/1/7) Total Saving Vessels

End of


Total 26792 26652 30714 32881 36371 29812 33575

In Local Currency 19260 19475 21757 23725 27493 21051 24898

Agriculture 14 11 2 3 2 3 95

Manufacturing 9417 9066 10295 13167 12525 9258 10757

Trade 3400 4114 4297 4098 4722 1737 1077

Services 6429 6284 7163 6457 10244 10053 12969

In Foreign Currencies 7532 7177 8957 9156 8878 8761 8677

Agriculture - - - - - - -

Manufacturing 3611 3440 3819 4176 3832 3294 2751

Trade 719 709 1020 1282 1526 1566 968

Services 3202 3028 4118 3698 3520 3901 4958


*Including all public sector companies subject or not to Law No. 203 for 1991.

(2/1/8) Bank Lending and Discount Balances to Business Sector

End of

- 167 -

2008 2009 2010(LE mn)

Public Business Sector *


Total 256561 258087 272444 267885 265154 287148 282338


Agriculture 5302 5326 4544 4718 4051 4461 5373

Manufacturing 60668 62693 71853 74053 72292 76229 74829

Trade 37625 38342 40025 39881 39105 49486 37117

Services 61866 60897 62204 58455 55717 55518 62557


Agriculture 1103 843 2074 2145 1607 1534 2331

Manufacturing 38460 43349 42368 41240 47755 53355 52229

Trade 14131 14599 15095 13356 13525 13563 10685

Services 37406 32038 34281 34037 31102 33002 37217


(2/1/8) Bank Lending and Discount Balances to Business Sector (Contd.)

2010

- 168 -

2008 2009End of

(LE mn)

Private Business Sector

Total Number of Branches

Total Number of Banks Operating in EgyptEnd of

325240 March 2008

329740 June 2008

340739 March 2009

344339 June 2009

349039 March 2010

350239 June 2010

356239 March 2011

(2/2/1) Structure of Egyptian Banking System

Source : Central Bank of Egypt.

- 169 -

Fund Name Fund Manager Par Value (LE)Document Value

(LE) at End of June 2010

Document Value (LE) at End of Mar.

2011Open-end Balance Funds

National Bank of Egypt I + Al Ahly Fund Management 10 37.42 36.25Banque Misr I Concord International Investments 100 102.23 98.62National Bank of Egypt II Al Ahly Fund Management 100 81.60 78.87National Bank of Egypt III HC Securities 100 74.52 67.99El Watany Bank of Egypt Hermes Fund Management 100 126.95 121.34National Bank of Egypt V Al Ahly Fund Management 10 9.21 9.18Al-Massi Hermes Fund Management 100 99.65 92.74Kheir Fund Beltone Asset Management 10 9.91 8.79National Societe Generale Bank (Tawazon) Beltone Asset Management 100 - 93.05

Open-end Equity FundsCredit Agricole Egypt I * Hermes Fund Management 100 223.38 178.48Bank of Alexandria I Hermes Fund Management 100 214.12 169.37Arab Misr Insurance Group ** Prime Investments Fund Management 100 148.53 138.01Banque Misr II Concord International Investment 66.67 51.77 43.34Banque de Caire *** Hermes Fund Management 10 51.58 42.73Export Development Bank I ( El-Khabeer) ++ HC Securities 33.33 73.74 64.91Suez Canal Bank I HC Securities 500 290.34 261.76Credit Agricole Egypt II * Hermes Fund Management 100 103.68 86.76Egyptian Gulf Bank Hermes Fund Management 100 153.60 117.95Banque Misr III **** HC Securities 100 406.42 367.99Shield Fund ***** Arab African Investment Management 50 103.83 103.59Misr Iran Development Bank I HC Securities 100 339.53 306.30Commercial International Bank II (Istethmar) CI Capital Asset Management 100 74.81 63.56Piraeus Bank-Egypt I Phoneix Kato Asset Management 100 93.70 90.84Housing & Development Bank (Al-Taameer) Prime Investments Fund Management 100 99.07 90.01ABC Bank Delta Rasmala 100 84.66 77.64Suez Canal Bank II (Al-Agyal) Beltone Asset Management 10 10.40 8.76Blom Bank Prime Investment 100 94.99 89.46Pharos Fund I Pharos Asset Management 100 94.48 86.69Pioneers Fund I Amual for Financial Investments 100 - 88.57Belton Traded Equity Fund (Insight) Beltone Asset Management 10 - 8.19

Open-end Fixed Income FundsAl Rabeh Fund +++ Prime Investment Fund Management 100 101.81 100.84Credit Agricole Egypt III * Egyptian Fund Management Group 1000 1039.30 1017.20Misr Money Mareket Beltone Asset Management 10 16.20 17.12Commercial International Bank I (Osoul) CI Capital Asset Management 100 154.01 163.43Misr Iran Development Bank II HC Securities 1000 1037.12 1017.27Bank of Alexandria II EFG-Hermes 10 14.04 14.88National Bank of Egypt IV Al Ahly Fund Management 100 137.59 145.26National Societe Generale Bank (Themar) EFG-Hermes 100 134.83 142.65Export Development Bank II Delta Rasmala 100 133.55 141.38ABC Bank ( Mazaya ) Beltone Asset Management 10 10.95 11.55HSBC Egypt Bank Fund (Kol Youm) Beltone Asset Management 100 109.14 115.43AAIB( Juman) Arab African Investement Management 100 108.77 115.08Piraeus bank- Egypt II Phoneix Kato Asset Management 10 10.82 11.44Audi Bank Fund EFG-Hermes 10 10.81 11.42Banque du Caire II Beltone Asset Management 10 10.62 11.19Blom Bank Fund II CI Capital Asset Management 100 105.40 111.67Al Watany Bank of Egypt Fund (Eshrak) NBK Capital Asset Management Egypt 10 10.32 10.90Arab Bank Fund (Youmati) Beltone Asset Management 10 10.29 10.87Housing & Development Bank (Mawared) Prime Investments Fund Management 10 10.25 10.79Bank of Alexandria III EFG-Hermes 10 10.16 10.42Prinicipal Bank for Development & Agricultural Credit (Hasad) HC Securities 10 10.15 10.68Arab Investment Bank Fund EFG-Hermes 10 10.02 10.58Egyptian Gulf Bank Fund (Tharaa) Prime Investments Fund Management 10 - 10.13

Open-end Islamic FundsFaisal Islamic Bank EFG-Hermes 100 106.74 86.81Al Baraka Bank Egypt ++++ EFG-Hermes 100 75.60 63.25Faisal Islamic Bank - CIB (Al Amman) CI Capital Asset Management 100 57.58 46.58Banque Misr IV HC Securities 100 73.77 68.12Sanabel Fund Prime Investment Fund Management 100 80.52 73.58Egyptian Saudi Finance -National Bank of Egypt (Bashayer) Al Ahly Fund Management 100 73.22 71.99El Watany Bank of Egypt(Alhayah) El Watany Capital Asset Management 10 - 9.34

Open-end Islamic Balanced FundsAl Baraka Bank Egypt AT. Asset Management 100 - 95.32

Closed-end FundsOrient Trust Egyptian Investment & Finance Co. 1000 1207.21 1271.72Misr Direct Investment Fund Al Ahly Development & Investment 1000 1035.00 1035.00Arab Land Direct Prime Investment Fund Management 1000 707.33 703.69

Capital Guaranteed FundsMisr Bank Capital Guaranteed Fund Cairo Funds Management 100 218.96 229.05

Asset Allocator FundsSociete Arab Int'l Banque I +++++ Prime Investment Fund Management 100 427.07 392.91Societe Arab Int'l Banque II Prime Investment Fund Management 100 297.59 272.65

Capital Protected FundsHSBC Egypt Fund II EFG-Hermes 100 96.01 -CIB Fund (Hamaya) CI Capital Asset Management 100 - 101.06

Foreign Currency FundsMisr Money Market ($) Beltone Asset Management 10$ 10.66$ 10.69$Misr Money Market (Euro) Beltone Asset Management 10 € 10.70 € 10.73 €

Fund of FundsMisr Iran Development Bank III (Wafi) El Rashad Asset Management 10 9.88 8.50National Bank of Egypt VII El Rashad Asset Management 100 99.10 80.36

Source: Monthly Bulletin of the Egyptian Stock Exchange. + The fund's document has been split into a ratio of 1: 50 as of 29/11/2007. The fund has also changed its structure from Balanced to Equity during the period (12 March 2009 - 4 February 2010). ++ Two free documents have been distributed for each original document on 28/6/2007. +++ The fund's name has changed to Al Rabeh Fund instead of Societe Arab Int'l Banque III. ++++ Previously known as Egyptian Saudi Finance Bank. +++++ The fund's document has been split into a ratio of 1: 5 and the par value has also changed from LE 500 to LE 100 as of 29/3/2007.* The name of Egyptian American Bank Fund I, II, III has changed to Credit Agricole Egypt starting from 3/9/2006.** The document has been split into a ratio of 1:5 as of 10/11/2009. *** The price of issuing the document has also changed from LE 100 to LE 10 as of 3/6/2007.**** The name of Misr Exterior Bank fund has changed to Banque Misr III Fund starting from 16/9/2004 after the merger of Misr Exterior Bank with Banque Misr. The price of issuing the document has also changed from LE 1000 to LE100 after the amendment of Article (5) of the fund's prospectus as of 27/8/2006.***** The name of Misr International Bank fund has changed to Shield Fund starting from 2/4/2006 and the document has been split into a ratio of 1:2 on the same date. The par value has

also changed from LE 100 to LE 50.

- 170 -

(2/2/2) Local Mutual Funds Authorized and Operating as at 31/3/2011


Currency by Denomination + 106049 112430 121457 127625 138731 145914 177378

PT 25 160 147 169 160 189 184 168

PT 50 263 252 321 309 290 294 307

LE 1 633 608 828 772 797 845 917

LE 5 1204 1169 1360 1309 1646 1619 3083

LE 10 3119 2938 3108 2991 3061 2930 3313

LE 20 7716 7394 6784 6419 5926 5619 10524

LE 50 26402 25646 23855 23045 19360 18836 23650

LE 100 52447 54987 57436 61561 67161 69299 73408

LE 200 * 14105 19289 27596 31059 40301 46288 62008


+ Including coins of PT 25,50 and 100 denominations

* The LE 200 note has been in circulation as of May 2007.

End of

- 171 -

2008 2009 2010(LE mn)

(2/3/1) Note Issued, Including Cash in CBE Vaults, by Denomination


Total 104353 111412 120553 126268 136438 144253 175647

Subsidiary Coins & Notes* 273 275 284 287 301 306 319

PT 25 157 145 166 158 189 184 168

PT 50 258 242 316 308 290 292 306

LE 1 621 591 820 770 795 843 914

LE 5 1132 1105 1311 1257 1593 1495 2996

LE 10 2998 2845 3018 2911 2970 2844 3209

LE 20 7459 7194 6622 6297 5690 5480 10211

LE 50 25999 25422 23701 22898 19226 18704 23368

LE 100 51633 54529 57067 60867 65931 68641 72676

LE 200+ 13823 19064 27248 30515 39453 45464 61480


* Issued by the Ministry of Finance

+ The LE 200 note has been in circulation as of May 2007.

End of

- 172 -

2008 2009 2010(LE mn)

(2/3/2) Currency in Circulation Outside CBE by Denomination

During

2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2009/2010 2010/2011

Local Currency Transactions via RTGS*1- Automated Clearing House (ACH)

Number of transactions (thousand) 9508 10481 11724 12062 12994 9611 9641Value of transactions (LE mn) 288715 356900 483113 548038 584546 427649 463261

2- Other Transactions via RTGS** 404776 525236 700668 897205 1191374 865173 931291

Number of transactions (in unit) 1658794 2280198 3092401 5294357 13274676 10088079 13132273Value of transactions (LE mn)

Foreign Currency Transfers (Dollar Interbank Transactions) via the Fin-Copy System*** Number of transactions (in unit) 11049 12070 13925 12365 12204 8875 11596 Value of transactions (US$ mn) 39773 78997 105587 83019 70008 51039 71168

Source: Central Bank of Egypt.

* The RTGS was launched on 15 /3/ 2009. ** Including corridor operations and deposits for monetary policy purposes as of 15/3/2009.*** This service was introduced on 19/ 9/ 2004.

- 173 -

(2/3/3) CBE: Transactions via RTGS and SWIFT

July/March Fiscal Year


A- AssetsCash 9309 10261 10324 11128 10926 12448 16241

Securities & investments in TBs; of which: 198745 201858 296210 332597 372284 405895 451399

Balances with banks in Egypt 273652 278185 195102 173482 197135 200719 137191

Balances with banks abroad 145454 122792 74116 77120 87540 57371 92319

Loan and discount balances 394494 401425 430622 429957 441370 465990 469961

Other assets 81712 68790 85257 67709 88985 78232 106432

Assets =Liabilities 1103366 1083311 1091631 1091993 1198240 1220655 1273543B- LiabilitiesCapital 35279 37576 40779 41550 43571 46598 52508

Reserves 14514 19763 21703 21371 27432 28486 31031

Provisions 64093 62314 71556 69748 71168 70418 55338

Bonds & Long-term loans 22291 22285 19579 22045 21360 21697 25696

Obligations to banks in Egypt 99229 98699 24940 31004 47572 53881 26306

Obligations to banks abroad 22785 13327 21617 18195 18383 20305 20481

Total deposits 743843 747199 790521 809694 867053 892492 940849

Other liabilities 101332 82148 100936 78386 101701 86778 121334


2009

- 174 -

2008 2010( LE mn )

(2/4/1) Banks: Aggregate Financial Position

End of


Total Deposits 743842 747199 790521 809694 867053 892492 940849

Demand deposits 103850 100569 95920 102853 115031 119518 131661

Time & saving deposits and saving accounts 608292 612737 661466 673048 719306 738650 773146

Blocked or retained deposits 31700 33893 33135 33793 32716 34324 36042

1- Local Currency Deposits 537493 552079 578120 598587 664902 686052 706785

Demand deposits 66850 71971 64216 69262 79911 84152 83493



2- Foreign Currency Deposits 206349 195120 212401 211107 202151 206440 234064

Demand deposits 37000 28598 31704 33591 35120 35366 48168




- 175 -

2009End of

2010( LE mn )

(2/4/2) Banks: Deposits by Maturity

2008


Total Deposits 743843 747199 790521 809694 867053 892492 940849

Local Currency Deposits 537493 552079 578120 598587 664902 686052 706785

Government sector 46541 44789 48821 49564 59471 58496 58516




External sector ** 3697 4021 2669 2415 2652 2616 3018

Foreign Currency Deposits 206350 195120 212401 211107 202151 206440 234064





External sector** 1885 1916 1812 2360 2175 2566 3525


* Including all public sector companies subject or not to Law No. 203 for 1991 .

** Including counterpart deposits of USAID .

(2/4/3) Banks: Deposits by Sector - 176 -

2009End of 2010( LE mn )

2008


Total Deposits 743843 747199 790521 809694 867053 892492 940849

Local Currency Deposits 537493 552079 578120 598586 664902 686052 706785

Agriculture 4114 5673 6252 6323 4255 5072 4169

Manufacturing 32799 36169 38261 37537 39562 38302 40929

Trade 19937 23928 19872 20850 26353 27829 25216

Services 72811 59337 53846 53846 66373 64895 61779

Unclassified sectors 418832 426972 459889 480030 528359 549954 574692

Foreign Currency Deposits 206350 195120 212401 211108 202151 206440 234064

Agriculture 1214 1002 1275 904 658 930 863

Manufacturing 25627 26223 29755 27757 23449 23772 30046

Trade 9203 10263 10948 12046 12298 11065 14925

Services 40031 30202 28023 25848 26746 25767 27978



(2/4/4) Banks: Deposits by Economic Activity - 177 -

2009End of

2010( LE mn )

2008


Total 198745 201858 296210 332597 372284 405895 451399





Household sector - - - - - - -

External sector 17 30 57 57 97 91 90



Public business sector * - - - - - - -


Household sector - - - - - - -

External sector 15503 15226 14747 15820 16036 45885 20362


+ Excluding CBE notes.


(2/4/5) Banks: Portfolio Investments by Sector+ - 178 -

2009End of

2010( LE mn )

2008


Total 394495 401425 430622 429957 441370 465990 469961






External sector 907 897 930 2587 1307 1254 1060






External sector 7579 6299 6405 11268 16130 15600 18478


*Including all public sector companies subject or not to Law No. 203 for 1991.

- 179 -

2009End of

2010( LE mn )

(2/4/6) Banks: Lending and Discount Balances by Sector

2008


Total 593240 603283 726832 762554 813654 871885 921360






External sector 924 927 987 2644 1404 1345 1150






External sector 23082 21525 21152 27088 32166 61485 38840



2010

- 180 -

2009( LE mn )

(2/4/7) Banks: Credit by Sector

End of 2008


Total 394494 401425 430622 429957 441370 465990 469961


Agriculture 5398 5758 4965 5137 4419 4856 5508

Manufacturing 75750 76793 86078 94674 93480 94810 98412

Trade 41025 42456 44398 44079 43843 51241 38198

Services 72855 71208 73435 69766 70772 70931 81093



Agriculture 1103 863 2094 2165 1627 1554 2330

Manufacturing 61224 67690 68313 61808 69242 79423 72731

Trade 14860 15319 16123 14646 15058 15134 11653

Services 41595 35594 39439 39117 35901 38084 43977



- 181 -

2009End of

2010( LE mn )

(2/4/8) Banks: Lending and Discount Balances by Economic Activity

2008

More than one-month and less than or equal

to three- month deposits

More than three-month and less than or equal to six-year

deposits

More than six-month and less than or equal to one-year

deposits

Less than or equal to one-

year loans

SimpleReturn

of increasing certificate

value

January 2008 9.00 6.00 6.50 6.80 12.10 10.00 9.50 9.50February ,, 6.00 6.50 6.80 12.10 ,, ,, ,,

March ,, 6.00 6.50 6.90 12.20 ,, ,, ,,

April ,, 6.10 6.50 6.90 12.10 ,, ,, ,,

May ,, 6.30 6.60 7.10 12.00 ,, ,, ,,

June 10.00 6.50 6.70 7.10 12.00 ,, ,, ,,

July 10.00 6.60 6.80 7.20 12.20 ,, ,, 9.25August 11.00 6.80 7.00 7.30 12.30 ,, ,, ,,

September 11.50 6.90 7.10 7.40 12.40 ,, ,, ,,

October ,, 7.20 7.40 7.80 12.40 ,, ,, ,,

November ,, 7.30 7.50 7.90 12.50 ,, ,, ,,

December ,, 7.40 7.70 8.20 12.50 ,, ,, ,,

January 2009 ,, 7.30 7.60 8.30 12.60 ,, ,, ,,

February 10.50 7.30 7.60 8.30 12.60 ,, ,, ,,

March 10.00 7.10 7.50 8.30 12.40 ,, ,, ,,

April ,, 7.00 7.30 8.20 12.30 ,, ,, ,,

May 9.50 6.70 7.10 7.90 12.30 ,, ,, ,,

June 9.00 6.50 7.00 7.80 12.10 ,, ,, ,,

July ,, 6.20 6.90 7.50 12.10 ,, ,, 9.00August 8.50 6.10 6.60 7.30 12.00 ,, ,, ,,

September ,, 6.00 6.50 7.10 11.60 9.50 9.00 ,,

October ,, 5.90 6.40 6.90 11.40 ,, ,, ,,

November ,, 5.90 6.30 6.80 11.30 ,, ,, ,,

December ,, 5.90 6.30 6.70 11.00 ,, ,, ,,

January 2010 ,, 5.90 6.40 6.70 11.10 ,, ,, ,,

February ,, 5.90 6.40 6.70 11.00 ,, ,, ,,

March ,, 6.00 6.40 6.70 11.10 ,, ,, ,,

April ,, 6.00 6.40 6.70 11.10 ,, ,, ,,

May ,, 5.90 6.50 6.80 11.20 ,, ,, ,,

June ,, 6.30 6.90 7.30 11.10 ,, ,, ,,

July ,, 6.30 6.90 7.20 11.10 ,, ,, ,,August ,, 6.30 6.90 7.20 10.90 ,, ,, ,,

September ,, 6.40 7.00 7.20 10.90 ,, ,, ,,

October ,, 6.60 6.90 7.30 11.00 ,, ,, ,,

November ,, 6.60 6.90 7.30 10.90 ,, ,, ,,

December ,, 6.60 6.90 7.20 10.70 ,, ,, ,,

January 2011 ,, 6.50 6.90 7.30 10.70 ,, ,, ,,

February ,, 6.50 6.90 7.20 10.60 ,, ,, ,,

March ,, 6.50 6.90 7.30 10.70 ,, ,, ,,

Source: Central Bank of Egypt and the Egyptian National Post Authority* As of June 2010, maturities were changed and interest rate data (deposits and loans) were collected using the Domestic Money Market Supervision (DMMS) system.

** Up till June 2008, the deposits remaining for more than one year earned an additional 0.25% interest rate, but this was abolished as of July 2008.

(2/5/1) Discount and Interest Rates on Deposits and Loans

End of Discount Rate

- 182 -

(% Annually)

Interest rate on Post Office

Saving Deposits**

Average Interest Rate in Banks * Interest Rate on Investment Certificates

in Egyptian Pound

US Dollar Sterling Pound Euro

Min. Max. Min. Max. Min. Max.

January 2008 2.75 2.94 4.44 5.19 3.63 3.88February 2.56 2.75 4.56 5.31 3.63 3.88March 2.19 2.38 4.88 5.63 3.94 4.19April 2.42 2.62 4.63 4.88 3.82 4.07May 2.14 2.34 4.61 4.86 3.86 4.11June 2.46 2.66 4.7 4.95 3.96 4.21July 2.45 2.65 4.54 4.79 3.96 4.21August 2.46 2.66 4.50 4.75 3.96 4.21September 2.86 3.06 4.81 5.06 4.05 4.30October 3.12 3.32 4.69 4.94 3.85 4.10November 1.85 2.05 2.71 2.96 2.93 3.18December 1.12 1.32 1.65 1.90 2.01 2.26



January 2011 0.14 0.30 0.19 0.54 0.30 0.79February 0.14 0.31 0.20 0.56 0.31 0.83March 0.14 0.30 0.20 0.57 0.35 0.93

Source: National Bank of Egypt

End of

- 183 -

(2/5/2) Domestic Interest Rates on 3-Month Depositsin Major Currencies

( % Annually )

(%)

91 days 182 days 252 days 259 days 266 days 273 days 280 days 350 days 357 days 364 days 371 days

January 2011First week (4/1) 9.751 10.334 .. .. .. 10.675 .. .. .. .. ..Second week (11/1) 9.515 10.302 .. .. 10.457 .. .. .. .. .. 10.596Third week (18/1) 9.203 10.027 .. .. .. .. .. .. .. 10.444 ..Fourth week (25/1) 9.499 10.222 10.518 .. .. .. .. .. 10.587 .. ..

Monthly Average 9.492 10.221 10.518 0.000 10.457 10.675 0.000 0.000 10.587 10.444 10.596

February 2011

First week (1/2) .. .. .. .. .. .. .. .. .. .. ..Second week (8/2) 10.972 11.482 .. .. .. 11.657 .. .. .. .. ..Third week (15/2) 10.949 11.779 .. .. 11.676 .. .. .. .. .. ..Fourth week (22/2) 10.941 11.733 .. 11.743 .. .. .. .. .. 12.033 ..

Monthly Average 10.954 11.665 0.000 11.743 11.676 11.657 0.000 0.000 0.000 12.033 0.000

March 2011

First week (1/3) 11.097 11.906 .. .. .. 12.162 .. .. 12.198 .. ..Second week (8/3) 11.487 12.085 .. .. 12.473 .. .. 12.521 .. .. ..Third week (15/3) 11.456 12.090 .. 12.320 .. .. .. .. .. 12.409 ..

Fourth week (22/3) 11.349 12.081 .. .. .. 12.257 .. .. 12.459 .. ..

Fourth week (29/3) 11.201 11.994 .. .. 12.196 .. .. 12.395 .. .. ..

Monthly Average 11.318 12.031 0.000 12.320 12.335 12.210 0.000 12.458 12.329 12.409 0.000Source: Central Bank of Egypt.

- 184 - (2/5/3) Interest Rates on Treasury Bills

(Weekly Weighted Averages)

2011End of Mar. June Mar. June Mar. June Mar.

Number of Companies (in Unit) 426 377 351 333 219 215 212On the official schedules 138 121 120 119 114 115 -On the unofficial schedules 287 255 230 213 105 100 -On the temporary schedule* 1 1 1 1 - - -

Number of shares (mn) 18356 19809 22271 22430 26570 29002 32110 Nominal value of capital (LE mn) 137984 137974 150172 149587 130661 134748 Not Available** Market value of capital (LE mn) 874594 813341 393735 463644 460653 410144 407736

The Market of Medium and Small Enterprises (Nilex)***

Number of companies (in unit) 10 18

Number of listed shares (mn) 49 106

Total value of traded shares (LE mn) 83 25

Market value of capital (LE mn) 407 966

The Egyptian Exchange Indices****EGX 30 11357.4 9827.3 4193.9 5702.9 6806.1 6033.1 5463.7EGX 70 524.7 623.1 715.2 527.7 575.0EGX 100 1160.8 908.7 924.3

Source: Monthly Bulletin of the Egyptian Exchange.

the 30 constituent companies of EGX 30. EGX 100 was also introduced, encompassing those companies constituting EGX 30 and EGX 70, as of August 2009.

- 185 -

* Companies which have not adjusted their statuses according to the new listing rules.

*** Trading in the Nilex Started on 3/6/2010.

**** The Egyptian Exchange CASE 30 Index was renamed EGX 30, while the EGX 70 index was introduced as of March 2009 to cover 70 companies other than

2008 2009 2010

(3/1) Companies Listed on the Stock Exchange

** The number is not available because the Egyptian Exchange was closed during the period 28/1- 22/3/2011 in the wake of the revolution of 25th of January .

Number of Transactions

(Unit)

Amount (Thousand)

Market Value (mn)

Number of Transactions

(Unit)

Amount (Thousand)

Market Value (mn)

In Egyptian Pound 9357169 21968519 295568 4946027 16221578 108049

Floor Transactions 8761840 16876930 198057 4886748 14553611 98815

Over the Counter Trading 595329 5091589 97511 59279 1667967 9234

In Foreign Currencies (US Dollar) 255168 752024 1912 101411 383272 894



In Foreign Currencies (Euro) 23 3386 87 9 265 36

Floor Transactions - - - - - -


Source : Egyptian Financial Supervisory Authority (EFSA).

- 186 -

2009/2010

During July/March

(3/2) Trading in Shares on the Stock Exchange

2010/2011

Number of Transactions Amount Market Value Number of

Transactions Amount Market Value

(Thousand) (Thousand)

In Egyptian Pound 921 32076058 32936294 966 37248732 37433666Floor Transactions 921 32076058 32936294 966 37248732 37433666


In US Dollar 0 0 0 0 0 0



Source : Egyptian Financial Supervisory Authority (EFSA).

(Unit)

- 187 -

2009/2010 2010/2011

(Unit)

During July/March

(3/3) Trading in Bonds on the Stock Exchange

Egyptian Pound US Dollar Egyptian

Pound US Dollar

Net Number of Transactions (unit) 110028 4375 85527 5174

Purchases 767240 33898 592639 23306

Sales 657212 29523 507112 18132

Net Volume of Securities (mn) 211 1 130 10

Purchases 2455 132 2689 88

Sales 2244 131 2559 78

Net Value of Securities (mn) 3853 47 2768 -18

Purchases 45684 337 32814 154

Sales 41831 290 30046 172

Source : Monthly report of the Egyptian Financial Supervisory Authority (EFSA).

- 188 -

2010/2011During July/March

2009/2010

(3/4) Foreigners' Transactions on the Stock Exchange

June-10 Mar-2011 June-10 Mar-2011

Comercial International Bank / Egypt (CIB) July-96 Bank of New York CIB / HSBC 1.00 9999 12.20 5.49 67.55 32.65

Suez Cement July-96 Bank of New York CIB / HSBC 1.00 7310 5.80 6.05 35.73 40.67

Paints & Chemicals Industries (Pachin) Oct.-97 Bank of New York CIB / HSBC 3.00 6297 2.80 2.80 48.50 41.12

EFG-Hermes Aug.-98 Bank of New York HSBC / CIB 0.50 4324 11.10 7.38 29.20 21.90

Ezz Steel June-99 Bank of New York CIB / HSBC 0.33 573 32.50 32.50 17.58 10.43

Holding Company for Financial Investments (Lakah Group)* July-99 Bank of New York CIB / HSBC 0.33 35000 0.44 0.44 - -

Orascom Telecom Holding (OT)** July-00 Bank of New York CIB / HSBC 0.20 11713 4.40 3.69 4.98 4.35

Orascom Construction Industries (OCI)*** Aug.-02 Bank of New York CIB / HSBC 1.00 50 38.70 41.99 227.44 246.06

Egypt Lebanon Ceramics (Lecico) Nov.-04 Bank of New York CIB / HSBC 1.00 8796 3.00 4.10 13.02 17.44

Telecom Egypt Dec.-05 Bank of New York CIB / HSBC 0.20 8522 15.50 14.10 15.74 17.26

Naeem Holding Feb.-08 Bank of New York CIB / HSBC 0.25 5625 1.72 1.76 0.43 0.44

Palm Hills Development May-08 Bank of New York CIB / HSBC 0.20 5435 4.70 5.30 4.89 2.58

G B Auto May-09 Bank of New York CIB 0.20 100 34.43 22.59 39.22 26.92

Remco for Touristic Villages Construction May-10 JPMorgan HSBC 0.20 1000 - - 3.90 2.98

Source: Monthly Bulletin of the Egyptian Exchange.

* Last closing price was on 3 March 2005 as no trading has occurred after this date.

** The conversion ratio has changed to be 5 shares: 1 GDR, as of 12 April 2007.

*** The conversion ratio has changed to be 1 share: 1 GDR, as of 7 May 2009.

(3/5) Global Depository Receipts (GDRs)

- 189 -

GDRs Listed on Global Exchanges Corporate Stocks Issuedon Egyptian Exchange

Company Order & Date of Offering

Price ($) at end of Price (LE) at end ofDepository Bank

Sub Custodian

Bank

Conversion Ratio

Volume on Offering Date

(000s)

(LE mn)

End of 91 days 182 days 252 days 259 days 266 days 273 days 280 days 350 days 357 days 364 days 371 days Total

2005

March 0 34550 - - - - - - - 82358 - 116908

June 2750 23900 - - - - - - - 98257 - 124907

Sept. 8900 22350 - - - - - - - 71726 - 102976

Dec. 5500 22600 - - - - - - - 67816 - 95916

2006

March 6000 24100 - - - - - - - 69016 - 99116

June 7100 26500 - - - - - - - 69544 - 103144

Sept. 9900 27500 - - - - - - - 69957 - 107357

Dec. 8200 27000 - - - - - - - 71157 - 106357

2007

March 11000 26000 - - - - - - - 73657 - 110657

June 9000 27500 - - - - - - - 82157 - 118657

Sept. 8500 31500 - - - - - - - 90657 - 130657

Dec. 12000 33000 - - - - - - - 100957 - 145957

2008

March 10500 32500 - - - - - - - 106457 - 149457

June 6800 33000 - - - - - - - 106639 - 146439

Sept. 17000 42500 - - - - - - - 105940 - 165440

Dec. 14500 48500 - - - 28000 - - - 114940 - 205940

2009

March 9500 51500 - - - 55500 - 6000 - 97940 - 220440

June 6021 43119 - 6000 - 77500 - 15000 3000 88440 - 239080

Sept. 11000 28990 - 6000 - 88500 - 18000 15000 82890 - 250380

Dec. 8480 32767 - 6000 10025 79442 - 18000 32419 64618 - 251751

2010

March 20000 47264 6000 - 16025 69442 - 19000 39419 68118 - 285268

June 13000 46867 6000 3000 27025 45442 - 15000 45169 64618 - 266121Sept. 19000 45000 15000 3000 26000 39000 - 21000 42169 58618 - 268787

Dec. 9975 54250 12000 3000 27500 42500 3500 31500 38250 59390 - 281865

2011

March 22500 71250 15000 7000 28500 39000 3500 31500 41750 56890 3500 320390Source : Central Bank of Egypt.

(3/6) Outstanding Balance of Treasury Bills (Quarterly)

- 190 -

(LE mn)

91 days 182 days 252 days 259 days 266 days 273 days 280 days 350 days 357 days 364 days 371 days Total

January 2011First week (4/1) 9975 54750 12000 3000 24500 42500 3500 31500 38250 59390 - 279365Second week (11/1) 9475 55250 12000 3000 27500 42500 3500 29500 36250 56390 3500 278865Third week (18/1) 9475 55250 12000 3000 27500 42500 3500 29500 36250 59390 3500 281865Fourth week (25/1) 8475 55750 15000 3000 24500 39500 3500 29500 39750 59390 3500 281865

End of Month 8475 65750 15000 3000 24500 39500 3500 29500 39750 59390 3500 291865

February 2011

First week (1/2) 7475 65750 15000 3000 24500 39500 3500 29500 39750 59390 3500 290865Second week (8/2) 13475 69750 15000 0 24500 38500 3500 26500 36750 56390 3500 287865Third week (15/2) 15975 71250 15000 0 28000 38500 3500 26500 36750 56390 3500 295365Fourth week (22/2) 16975 70750 15000 3500 28000 38500 3500 26500 36750 59890 3500 302865

End of Month 16975 70750 15000 3500 28000 38500 3500 26500 36750 59890 3500 302865

March 2011First week (1/3) 18975 70750 15000 3500 26000 38500 3500 26500 40250 59890 3500 306365Second week (8/3) 19475 71250 15000 3500 28000 38500 3500 28000 38250 56890 3500 305865Third week (15/3) 20475 71250 15000 7000 28000 38500 3500 28000 38250 59890 3500 313365

Fourth week (22/3) 21000 71250 15000 7000 25000 39000 3500 28000 41750 59890 3500 314890

Fourth week (29/3) 22500 71250 15000 7000 28500 39000 3500 31500 41750 56890 3500 320390End of Month 22500 71250 15000 7000 28500 39000 3500 31500 41750 56890 3500 320390Source: Central Bank of Egypt.

(3/7) Outstanding Balance of Treasury Bills (Weekly)

- 191 -

Tranche Date of Value Interest Maturity &

Issue (LE bn) Rate% Due Date Bonds under the Primary Dealers System **

Eleventh 10/26/2004 5.0 11.500 7 years 10/26/2011

Twelveth 11/16/2004 5.0 11.625 10 years 11/16/2014

Fourteenth 1/18/2005 1.0 11.400 20 years 1/18/2025

Eighteenth 9/20/2005 6.0 9.100 7 years 9/20/2012

Twenty First 11/15/2005 5.0 9.300 10 years 11/15/2015

Twenty Third 1/24/2006 6.0 8.850 7 years 1/24/2013

Twenty Seventh 5/29/2007 2.0 9.450 7 years 5/29/2014

Twenty Eighth 9/25/2007 2.0 203.700 7 years 9/25/2014

Twenty Ninth 10/23/2007 2.0 8.600 8 years 10/23/2015

Thirtieth 11/13/2007 5.0 8.550 6 years 11/13/2013

Thirty First 1/22/2008 3.0 8.700 8 years 1/22/2016

Thirty Second 2/12/2008 1.5 9.150 10 years 2/12/2018

Thirty Third 2/19/2008 3.0 9.200 6 years 2/19/2014

Thirty Fourth 5/27/2008 3.0 10.650 7 years 5/27/2015

Thirty Fifth 6/10/2008 2.0 10.950 8 years 6/10/2016

Thirty Sixth 1/13/2009 6.0 12.000 3 years 1/13/2012

Thirty Seventh 2/10/2009 6.0 12.000 5 years 2/10/2014

Thirty Eighth 4/14/2009 5.0 10.550 5 years 4/14/2014

Thirty Ninth 4/28/2009 6.0 10.350 3 years 4/28/2012

Fortieth 6/9/2009 6.0 11.000 7 years 6/9/2016

Fourty First 7/7/2009 3.5 10.600 2 years 7/7/2011

Fourty Second 7/28/2009 6.0 10.800 4 years 7/28/2013

Fourty Third 8/11/2009 6.0 10.450 3 years 8/11/2012

Fourty Fourth 9/15/2009 5.1 10.900 5 years 9/15/2014

Fourty Fifth 9/29/2009 6.0 10.900 4 years 9/29/2013

Fourty Sixth 11/24/2009 2.0 12.170 4 years 11/24/2013

Fourty Seventh 12/8/2009 6.5 12.500 5 years 12/8/2014

Fourty Eighth 12/15/2009 5.1 12.800 6 years 12/15/2015

Fourty Ninth 1/5/2010 8.0 12.350 3 years 1/5/2013

Fiftieth 2/16/2010 13.5 12.600 7 years 2/16/2017

Fifty First 3/2/2010 10.0 12.250 5 years 3/2/2015

Fifty Second 4/6/2010 9.5 11.350 3 years 4/6/2013

Fifty Third 7/6/2010 10.0 11.550 3 years 7/6/2013

Fifty Fourth 7/20/2010 7.5 12.550 5 years 7/20/2015

Fifty Fifth 8/3/2010 5.5 13.000 10 years 8/3/2020

Fifty Sixth 10/5/2010 11.5 11.600 3years 10/5/2013

Fifty Seventh 10/19/2010 7.5 12.350 5 years 9/14/2015Fifty Eighth 1/18/2011 3.0 11.630 3years 1/18/2014

Total 206.7* According to Law No. (4) for 1995.

** This system was put into force as of July 2004, in virtue of the Minister of Finance's Decree No. 480 for 2002 and the provisions governing

it, issued by the Minister of Finance's Decree No. 723 for 2002, in accordance with the provisions of Article (7) of Law No. 92 for 2004.

End of March 2011(3/8) Outstanding Balance of Treasury Bonds*

Duration

- 192 -

( LE mn )

Total Revenues 285810 322732 144323 168125Tax Revenues 200424 200424 109369 109369

Taxes on income, Profits 88656 88656 39294 39294From EGPC 35765 35765 9792 9792From SCA 10666 10666 7500 7500From CBE 0 0 0 0From other units 22961 22961 9048 9048Payable by individuals 19264 19264 12954 12954

Taxes on Property 12306 12306 6983 6983Taxes on Goods and Services 80920 80920 51114 51114Taxes on International Trade 15500 15500 9989 9989Other Taxes 3042 3042 1989 1989

Grants 5156 5156 807 807Current 1458 1458 226 226

Capital 3698 3698 581 581Other Revenues 80230 117152 34147 57949Property Income 53588 60538 21314 24430

From EGPC 25099 25099 5085 5085From SCA 14033 14033 11312 11312From CBE 805 805 498 498From economic authorities 2661 2661 987 987From companies 5340 5340 1153 1153Other (TML)* 1280 1280 800 800Other 4370 11320 1479 4595

Sales of Goods and Services 14871 14871 8128 8128Financing Investment 7596 7596 2917 2917

Other 4175 34147 1788 22474Source : The Ministry of Finance .

The Budget Sector

2010/2011

* third mobile license

- 193 -

The Budget Sector, NIB

& SIFs

The Budget Sector

Estimates

(4/1) Consolidated Fiscal Operations of the General Government ( The Budget Sector, NIB and SIFs )

9 Months (Actual)

(Total Revenues)


& SIFs

( LE mn )

Total Expenditures 403168 438619 239798 267555Compensations of Employees 95308 96525 64273 65176

Salaries and wages 76334 77445 53076 53871Social contributions 9445 9531 6226 6288Other 9529 9549 4971 5017

Purchases of Goods and Services 28857 29103 13736 13901Goods 13228 13250 5722 5734Services 11140 11309 6433 6520Other 4489 4544 1581 1647

Interests 91143 81922 60831 46150Foreign interests 4497 4497 2762 2762Domestic interests: 86646 77425 58069 43388

To NIB& SIFs 19283 0 14682 0To others 67363 77425 43387 43388

Subsidies, Grants and Social Benefits 116616 159622 54491 95607Subsidies 101272 101272 45281 45281

To GASC 13585 13585 20416 20416

To petroleum 67680 67680 16990 16990

To others 20007 20007 7875 7875

Grants 5114 5114 3996 3996Social Benefits 6283 49289 4886 46002Contribution to SIFs 4100 0 2660 0

Other 2183 49289 2226 46002

Other 3947 3947 328 328

Other Expenditures 31125 31201 22720 22854Defense 25215 25215 19500 19500

Other 5910 5986 3220 3354

Purchases of Non-Financial Assets(Investments) 40119 40246 23747 23867

Fixed assets 36263 36390 21248 21368

Others 3856 3856 2499 2499

Source: The Ministry of Finance .


& SIFs

The Budget Sector


& SIFs

Estimates

2010/2011

- 194 -

The Budget Sector

(4/2) Consolidated Fiscal Operations of the General Government ( The Budget Sector, NIB and SIFs )

9 Months (Actual)

(Total Expenditures)

( LE mn )

Total Revenues 285810 322732 144323 168125Total Expenditures 403168 438619 239798 267555Cash Deficit 117358 115887 95475 99430Net Acquisition of Financial Assets -8283 -5751 -1455 -2221Overall Fiscal Balance Finance 109075 110136 94020 97209Financing Sources 109075 110136 94020 97209Domestic Financing 118479 119540 116846 116478Banking Financing 53150 47474 54383 57746

Central Bank -52707 -52708 27491 27491Other Banks 105857 100182 26892 30255

Non-Banking Financing 65329 72066 62463 58732NIB 900 0 2821 0SIFs 0 0 8308 0Other 64429 64429 51033 51033NIB Borrowing 0 7637 0 7398Special Accounts for Economic Authorities 0 0 301 301Blocked Account Used in Amortizing part of CBE Bonds 0 0 0 0

Foreign Borrowing 0 0 0 0Arrears -9654 -9654 3007 3007Others, of which: 0 0 0 0

Special Accounts for Budget Entities -671 -671 1659 5215Financing Effects for Eliminations 0 0 0 1Exchange Rate Revaluation 0 0 3907 3907Net Privatization Proceeds 250 250 22 22

Privatization Proceeds 500 500 22 22Treasury Contribution to the Fund 250 250 0 0

Difference between Treasury Bills Face Value & Present Value 0 0 -2533 -2533Foreign Debt Reclassification Diff. & FX Diff. Related to it 0 0 0 0

Discrepancy 671 671 -28888 -28888Cash Deficit (surplus) as a percentage of GDP 8.5% 8.4% 6.9% 7.2%Overall fiscal balance as a percentage of GDP 7.9% 8.0% 6.8% 7.1%Revenues as a percentage of GDP 20.7% 23.4% 10.5% 12.2%Expenditures as a percentage of GDP 29.3% 31.8% 17.4% 19.4%Source : The Ministry of Finance .

Estimates

The Budget Sector, NIB &

SIFs

The Budget Sector

The Budget Sector, NIB &

SIFs

The Budget Sector

- 195 -

(4/3) Summary of Consolidated Fiscal Operations of the General Government ( The Budget Sector , NIB and SIFs )

9 Months (Actual)

2010/2011

(LE mn)June March June March2009 2010 2010 2011 2009/2010 2010/2011

Gross Domestic Debt (1+2+3-4) 755297 863297 888661 1001927 108000 113266

1- Net Domestic Debt of Government (A+B+C+D) 562327 667249 663818 778884 104922 115066

A- Balances of Bonds & Bills 681838 780042 779232 879155 98204 99923 Treasury bonds with the CBE 121708 124559 121533 130596 2851 9063

Local currency bonds with public sector banks 4000 4000 4000 4000 0 0 Bonds offered abroad *: 0 0 0 0 0 0

US$ 4036 4144 6005 7316 108 1311

LE 3773 3752 3808 3953 (21) 145

Egyptian treasury bonds 92500 141767 159767 206767 49267 47000

Government notes to compensate for the actuarial deficit in social insurance funds 2000 2000 2000 2000 0 0

Housing bonds 116 114 114 115 (2) 1

Foreign currency bonds with public sector commercial banks 11677 11487 11883 0 (190) (11883)

The equivalent of the retained 5% of corporate profits to purchase government bonds 1700 1703 1764 1781 3 17

Bonds of the Insurance Funds (against the transfer of NIB debt to the Treasury) 201248 201248 202237 202237 0 0

Treasury Bills 239080 285268 266121 320390 46188 54269

B- Borrowing from other entities 0 0 0 2000 0 2000

C- Credit Facilities from the Social Insurance Funds 2343 2343 2343 2343 0 0

D- Net Government Balances with the Banking System -121854 -115136 -117757 -104614 6718 13143

2- Borrowing of Economic Authorities (Net) 52255 53473 67771 67645 1218 (126)

Net Balances of Economic Authorities with the Banking System 2193 2424 16302 14981 231 (1321)

Borrowing of Economic Authorities from NIB ** 50062 51049 51469 52664 987 1195

3- NIB Debt (Net) 200754 207918 222205 224550 7164 2345NIB Debt 205560 211293 227715 229136 5733 1421

Deposits of the NIB with the banking system (-) 4806 3375 5510 4586 (1431) (924)

4- NIB Intradebt 60039 65343 65133 69152 5304 4019

Government debt to the NIB (investments in government securities) 9977 14294 13664 16488 4317 2824

Loans of economic authorities to NIB 50062 51049 51469 52664 987 1195

Source: Central Bank of Egypt - Ministry of Finance - National Investment Bank. * ( Holdings of resident financial institutions in Egypt represented in the banking system and the insurance sector ).

(4/4) Gross Domestic Debt

** Apart from the interest payments due on the NIB.

End of Change + (-) during July/March

- 196 -

(LE mn)June March June March

End of June 2009 2010 2010 2011 2009/2010 2010/2011

Liabilities :of which 205560 211293 227715 229136 5733 1421

. Social Insurance Fund for Gov. Employees 29638 29638 31613 31613 0 0

. Social Insurance Fund for Pub. & Priv. Business Sectors Employees 24895 24895 27384 27384 0 0

. Proceeds from investment certificates 81454 88184 91134 94165 6730 3031

. Accumulated interest on investment certificates (Category A) 8654 8615 8648 8660 (39) 12

. Proceeds from US dollar development bonds 11 10 10 9 (1) (1)

. Post office savings 54487 57987 64837 65837 3500 1000

. Others* 6421 1964 4089 1468 (4457) (2621)

Assets :of which 205560 211293 227715 229136 5733 1421. Loans to economic authorities 50062 51049 51469 52664 987 1195

. Investments in government securities (bills and bonds) 9977 14294 13664 16488 4317 2824

. Deposits of the NIB with the banking system 4806 3375 5510 4586 (1431) (924)

. Lending to holding companies and affiliate units, concessional loans, and others 140715 142575 157072 155398 1860 (1674) (NIB debt minus its intradebt)* Including deposits of the private insurance funds, saving certificates, and loans & deposits of various entities.

Change + (-) during July/March

(4/5) National Investment Bank ( Resources and Uses)

- 197 -

(US$ mn)

Change

Value % Value % (-)

Balance of Current Account (2606.2) (2400.1) 206.1

Balance of Current Account (Excluding Transfers) (9774.9) (11566.1) (1791.2)

Receipts 34709.0 100.0 36171.0 100.0 1462.0

Export proceeds** 16967.1 48.9 18911.1 52.3 1944.0

Transportation, of which 5229.7 15.1 6018.0 16.6 788.3

Suez Canal dues 3366.1 9.7 3737.4 10.3 371.3

Travel 8722.9 25.1 8735.0 24.1 12.1

Investment income 661.5 1.9 296.4 0.8 (365.1)

Government receipts 136.9 0.4 89.6 0.3 (47.3)

Other receipts 2990.9 8.6 2120.9 5.9 (870.0)

Payments 44483.9 100.0 47737.1 100.0 3253.2

Import payments** 35504.1 79.8 37325.8 78.2 1821.7

Transportation 920.0 2.1 1062.6 2.2 142.6

Travel 1778.3 4.0 1619.9 3.4 (158.4)

Investment income, of which 2949.1 6.6 4612.4 9.7 1663.3

Interest paid 473.5 1.1 462.9 1.0 (10.6)

Government expenditures 1126.1 2.5 961.0 2.0 (165.1)

Other payments 2206.3 5.0 2155.4 4.5 (50.9)

Transfers 7168.7 100.0 9166.0 100.0 1997.3

Private (net) 6275.6 87.5 8944.7 97.6 2669.1

Official (net) 893.1 12.5 221.3 2.4 (671.8)

* Preliminary figures.

** Including the exports & imports of free zones.

- 198 -

(5/1) Balance of Payments

2009/2010* 2010/2011*

July/March

(US$mn)

2009/2010* 2010/2011*Value Value

Capital & Financial Account 5163.0 -1776.4

Capital Account -16.8 -24.2Financial Account 5179.8 -1752.2 Direct Investment Abroad -648.6 -729.0 Direct Investment in Egypt (Net) 4332.0 2089.6 Portfolio Investments Abroad (Net) -692.6 -112.9 Portfolio Investments in Egypt (Net), of which : 7111.2 -968.9 Bonds -255.8 343.8

Other Investments (Net) -4922.2 -2031.0 Net Borrowing 2234.6 418.6

Medium -and Long-Term Loans -1058.9 -1390.0

Drawings 494.5 337.6

Repayments -1553.4 -1727.6

Medium-Term Suppliers' and Buyers' Credit -10.8 -45.3

Drawings 44.6 63.8

Repayments -55.4 -109.1

Short-Term Suppliers' and Buyers' Credit (Net) 3304.3 1853.9 Other Assets -8419.0 -2514.7 CBE -34.0 -27.1

Banks -2898.5 -1152.8

Other -5486.5 -1334.8

Other Liabilities 1262.2 65.1

CBE 1180.3 -10.0

Banks 81.9 75.1

Net Errors & Omissions 549.2 -1322.8Overall Balance 3106.0 -5499.3Change in Reserve Assets, Increase (-) -3106.0 5499.3Source: CBE.

* Preliminary figures.

- 199 -

(5/1) Balance of Payments (Contd.)

July/March

(US$ mn)

Value % Value % Total *** 16967.1 100.0 18911.1 100.0 1944.0Fuels , Mineral Oils & Products 7348.2 43.3 8630.5 45.6 1282.3

Crude oil 2842.0 16.8 3451.0 18.2 609.0Petroleum products **** 4208.0 24.8 4810.7 25.4 602.7Coal & types thereof 60.4 0.4 52.8 0.3 (7.6)

Raw Materials 939.8 5.5 956.4 5.1 16.6Cotton 87.7 0.5 141.5 0.7 53.8Potatoes 17.1 0.1 21.1 0.1 4.0Edible fruits & nuts 95.7 0.6 100.5 0.5 4.8Oil seeds & oleaginous fruits, medicinal plants & plants for manufacturing 35.0 0.2 43.5 0.2 8.5

Spices&vanilla 5.6 0.0 4.9 0.0 (0.7)Medicinal plants 15.5 0.1 9.4 0.0 (6.1)Citrus fruits 6.0 0.0 13.4 0.1 7.4Raw hides & tanned leather 10.9 0.1 29.8 0.2 18.9Flax, raw 11.6 0.1 0.8 0.0 (10.8)Edible vegetables roots & tubers 79.9 0.5 142.6 0.8 62.7Dairy products,eggs & honey 82.2 0.5 118.2 0.6 36.0

Semi-finished Goods 1206.4 7.1 1460.6 7.7 254.2Carbon 57.7 0.3 85.0 0.4 27.3Essential oils & resins 12.9 0.1 28.1 0.1 15.2

- 200 -

Change(-)

(5/2) Exports by Degree of Processing *

July/March2009/2010 2010/2011**

(US$ mn)

Value % Value % Cotton yarn 95.2 0.6 160.3 0.8 65.1Aluminium, unalloyed 33.4 0.2 37.6 0.2 4.2Animal & vegetable fats, greases & oils & products 95.7 0.6 91.4 0.5 (4.3)Synthetic fibers 24.7 0.1 58.8 0.3 34.1Organic & inorganic chemicals 384.0 2.3 411.4 2.2 27.4Cast iron & semi-finished products & rolled iron 274.0 1.6 304.3 1.6 30.3Leather, tanned 14.0 0.1 35.6 0.2 21.6Tanning or dyeing extracts 47.0 0.3 78.2 0.4 31.2Plastic & articles thereof 163.2 1.0 147.7 0.8 (15.5)Finished Goods 7238.3 42.7 7829.4 41.4 591.1Milk & condensed cream 37.9 0.2 14.2 0.1 (23.7)Dried onion 4.6 0.0 8.2 0.0 3.6Rice 135.9 0.8 18.1 0.1 (117.8)Vegetable & fruit preparations 12.4 0.1 30.7 0.2 18.3Miscellaneous edible preparations 380.3 2.2 264.7 1.4 (115.6)Manufactured tobacco and tobacco substitutes 60.0 0.4 60.3 0.3 0.3Sugar and its products 56.6 0.3 98.9 0.5 42.3Pharmaceuticals 313.8 1.8 333.4 1.8 19.6Fertilizers 534.3 3.1 873.6 4.6 339.3Cement***** 146.5 0.9 101.2 0.5 (45.3)

- 201 -

(5/2) Exports by Degree of Processing * (Contd.)

July/MarchChange(-) 2009/2010 2010/2011**

(US$ mn)

Value % Value % Extracts of essential oils & resins 66.8 0.4 60.4 0.3 (6.4)Leather products 27.4 0.2 22.1 0.1 (5.3)Rubber & articles 30.2 0.2 26.5 0.1 (3.7)Paper, cardboard paper & articles thereof 158.8 0.9 231.9 1.2 73.1Ceramic products 135.6 0.8 180.5 1.0 44.9Cars, bicycles & tractors 207.9 1.2 160.4 0.8 (47.5)Cotton textiles 326.3 1.9 459.8 2.4 133.5Carpets & other floor coverings 133.6 0.8 144.2 0.8 10.6Shoes & accessories 1.3 0.0 3.2 0.0 1.9Ready-made clothes 494.9 2.9 550.0 2.9 55.1Glass & glassware 160.8 0.9 208.9 1.1 48.1Copper & articles 47.1 0.3 141.6 0.7 94.5Aluminium articles 283.7 1.7 213.2 1.1 (70.5)Articles of iron and steel 373.5 2.2 395.7 2.1 22.2Wood & articles thereof and charcoal 19.2 0.1 12.0 0.1 (7.2)Marble & granite 45.5 0.3 71.8 0.4 26.3Articles of base metals 177.9 1.0 165.6 0.9 (12.3)Optical appliances 42.1 0.2 70.1 0.4 28.0Soap & Detergents, fabricated candles 149.7 0.9 231.3 1.2 81.6

Miscellaneous Goods (Undistributed) 234.4 1.4 34.2 0.2 (200.2)Source: Central Bank of Egypt.* According to the Harmonized System.** Provisional.*** Include exports of free zones. **** Include natural gas, and bunker & jet fuel.***** Taking into consideration the Ministerial Decree No. 340 for 2009 Banning Cement Export from April,13,to Sept. ,1 , 2009; and Decree No. 604 for 2009 Regarding the Continual Ban of Cenmet Export till Oct. , 1 , 2010.

- 202 -(5/2) Exports by Degree of Processing * (Contd.)


(US$ mn)

Value % Value % Total *** 35504.1 100.0 37325.8 100.0 1821.7Fuels, Mineral Oils & Products 2439.0 6.9 3414.9 9.2 975.9

Petroleum products **** 2096.9 5.9 2920.2 7.8 823.3Coal & types thereof 46.9 0.1 154.6 0.4 107.7

Raw Materials 3868.1 10.9 5030.3 13.5 1162.2Crude oil 1166.0 3.3 1215.6 35.6 49.6Wheat 1020.0 2.9 1695.7 4.5 675.7Maize 359.9 1.0 545.0 1.5 185.1Tobacco 410.7 1.2 430.8 1.2 20.1Metal ores 111.5 0.3 109.7 0.3 (1.8)Iron, ore 189.3 0.5 286.4 0.8 97.1Seeds & oleaginous seeds 308.0 0.9 333.4 0.9 25.4Cotton 77.2 0.2 77.0 0.2 (0.2)

Intermediate Goods 11810.1 33.3 11606.2 31.1 (203.9)Sugar, raw 184.5 0.5 232.5 0.6 48.0Animal and vegetable fats, greases & oils and products 899.6 2.5 996.2 2.7 96.6Cement 517.3 1.5 351.9 0.9 (165.4)Organic & inorganic chemicals 1242.0 3.5 1147.6 3.1 (94.4)Fertilizers 174.6 0.5 209.6 0.6 35.0Tanning & dyeing extracts 221.1 0.6 214.6 0.6 (6.5)Essential oils & resinoids 55.7 0.2 80.9 0.2 25.2Plastic & articles thereof 1080.9 3.0 929.9 2.5 (151.0)

(5/3) Imports by Degree of Use *

- 203 -


(US$ mn)

Value % Value % Wood & articles thereof 630.4 1.8 695.2 1.9 64.8Paper, cardboard paper & articles thereof 815.2 2.3 784.9 2.1 (30.3)Cotton textiles 171.2 0.5 129.4 0.3 (41.8)Synthetic fibers 344.9 1.0 412.3 1.1 67.4Ceramic products 240.2 0.7 238.8 0.6 (1.4)Glass & articles 193.2 0.5 92.5 0.2 (100.7)Iron & steel products 2374.6 6.7 2109.4 5.7 (265.2)Copper & articles 222.3 0.6 250.6 0.7 28.3Rubber & articles 331.2 0.9 314.0 0.8 (17.2)Aluminium & articles 260.1 0.7 236.1 0.6 (24.0)Articles of base metals 371.1 1.0 445.8 1.2 74.7Parts & accessories of motor vehicles***** 1327.5 3.7 1558.5 4.2 231.0

Investment Goods 7488.7 21.1 7777.8 20.8 289.1Pumps, fans & parts thereof 669.3 1.9 453.2 1.2 (216.1)Machines and apparatus for ginning and spinning & parts thereof 109.3 0.3 87.1 0.2 (22.2)

Computers 736.0 2.1 602.5 1.6 (133.5)Motors, generators, transformers & parts thereof 543.7 1.5 572.8 1.5 29.1Parts of railway and tramway locomotives or rolling stock equipment 81.0 0.2 193.0 0.5 112.0

Tractors 25.7 0.1 20.6 0.1 (5.1)Vehicles for transport of passengers 19.7 0.1 32.9 0.1 13.2Vehicles for transport of goods 57.7 0.2 32.3 0.1 (25.4)

(5/3) Imports by Degree of Use* (Contd.)

- 204 -


(US$ mn)

Value % Value % Tools, implements, cuttery & spoons 223.4 0.6 220.0 0.6 (3.4)Air conditioners 125.9 0.4 196.6 0.5 70.7Cranes and bulldozers & parts thereof 843.3 2.4 1231.3 3.3 388.0Agricultural machinery 84.0 0.2 120.6 0.3 36.6Printing machinery & parts 65.1 0.2 55.8 0.1 (9.3)Electric appliances for telephones & telegraph 580.7 1.6 524.6 1.4 (56.1)Optical appliances 476.4 1.3 368.7 1.0 (107.7)

Consumer Goods 8979.1 25.2 9298.0 24.9 318.9A - Durable Goods 2359.1 6.6 2307.0 6.2 (52.1)

Household refrigerators & electric freezers 164.1 0.5 152.6 0.4 (11.5)Televisions & parts thereof 59.1 0.2 87.1 0.2 28.0Vehicles for transport of persons 909.9 2.6 784.6 2.1 (125.3)Household electric-motor appliances 425.2 1.2 447.0 1.2 21.8

B - Non-durable Goods 6620.0 18.6 6991.0 18.7 371.0Meat and edible offals 459.1 1.3 822.9 2.2 363.8Fish, crustaceans, molluscs and others 221.9 0.6 214.2 0.6 (7.7)Dairy products, eggs, poultry and honey 283.3 0.8 346.8 0.9 63.5Edible vegetables roots & tubers 225.6 0.6 420.1 1.1 194.5Tea 125.5 0.4 114.7 0.3 (10.8)


- 205 -


(US$ mn)

Value % Value %Miscellaneous edible preparations 588.4 1.7 645.3 1.7 56.9Pharmaceuticals 1564.8 4.4 1410.9 3.8 (153.9)Insecticides 19.7 0.1 15.2 0.0 (4.5)Residues of foodstuff industries & animal fodder 115.7 0.3 250.7 0.7 135.0Live animals 37.7 0.1 92.3 0.2 54.6Ready-made clothes 630.2 1.8 565.1 1.5 (65.1)Cotton textiles 329.7 0.9 394.1 1.1 64.4Sugar, refined and products 27.4 0.1 34.4 0.1 7.0Lentils 39.2 0.1 53.4 0.1 14.2Soap, detergents & artificial wax 97.6 0.3 88.9 0.2 (8.7)

Miscellaneous Goods (Undistributed) 919.1 2.6 198.6 0.5 (720.5)Source: Central Bank of Egypt.* According to the Harmonized System.** Provisional.*** Including imports of free zones, and commodity grants & loans.**** Including gas, and bunker & jet fuel.***** Exclnding vehicles for transport of persons included in the consumer goods group

- 206 -



(US$ mn)

2009/2010 2010/2011** 2009/2010 2010/2011** 2009/2010 2010/2011**Total *** 16967.1 18911.1 35504.1 37325.8 (18537.0) (18414.7)

European Union 6113.8 7727.1 13395.6 13487.8 (7281.8) (5760.7)Other European countries 763.1 1144.8 4371.5 3980.5 (3608.4) (2835.7)Russian Federation & C.I.S 87.7 113.2 999.7 649.8 (912.0) (536.6)United States of America 3411.1 2712.4 3803.0 4241.0 (391.9) (1528.6)Arab countries 3372.7 3486.1 3562.2 4472.9 (189.5) (986.9)Asian countries (Non Arab) 2333.1 2874.5 7343.5 8211.2 (5010.4) (5336.7)African countries (Non Arab) 250.0 429.0 363.6 445.7 (113.6) (16.7)Australia 13.2 11.2 162.2 302.9 (149.0) (291.7)Other countries & regions 622.4 412.8 1502.8 1534.0 (880.4) (1121.1)

Source: Central Bank of Egypt* Including commodity grants and loans.** Provisional.*** Including exports & imports of free zones.

- 207 -

(5/4) Regional Distribution of Exports and Imports

July/MarchProceeds of Exports Payments for Imports* Trade Balance

End of

Minimum

Maximum

Weighted average

Second: Market Rates Buy Sell Buy Sell

US Dollar 568.07 570.96 595.39 598.30

Euro 697.53 701.48 846.88 851.27

Pound Sterling 853.02 857.64 957.74 962.73

Swiss Franc 525.31 528.28 650.77 654.31

100 Japanese Yen 640.44 643.77 718.89 722.85

Saudi Riyal 151.46 152.24 158.76 159.54

Kuwaiti Dinar 1948.12 1966.12 2146.38 2160.02

UAE Dirham 154.63 155.48 162.11 162.91

Chinese Yuan 83.76 84.19 90.94 91.43


The interbank system started at 23/12/2004.

(In piasters per foreign currency unit)

(5/5) Average Foreign Exchange Rates

- 208 -

569.70

569.52

June 2010 March 2011

569.40 596.20

597.00

596.80

First: Interbank US$ Rates

(US$ mn)End of

%Value (-)%Value%Value3.41147.0100.034841.2100.033694.2Total External Debt **

3.41040.391.231779.791.230739.41- Medium & Long term debt :0.340.436.212639.737.412599.3 Rescheduled bilateral debt +

1.5107.120.57161.720.97054.6 ODA(1.2)(66.7)15.75478.016.55544.7 Non-ODA10.1473.714.85166.113.94692.4 Other bilateral debt10.6400.012.04174.711.23774.7 Paris club countries8.073.72.8991.42.7917.7 Other countries39.3123.11.3436.60.9313.5 Suppliers' & buyers' credit6.8675.430.610652.929.69977.5 International & regional organizations(6.9)(213.9)8.22865.69.23079.5 Egyptian bonds and notes(75.6)(58.4)0.118.80.277.2 Private sector (Non-guaranteed)3.6106.78.83061.58.82954.82- Short term debt :

(12.6)(171.5)3.41188.04.01359.5 Deposits17.4278.25.41873.54.81595.3 Other Facilities

Source: Loans & External Debt Department- CBE* Provisional.** The difference from World Bank data is in short-term debt.+ According to the agreement signed with Paris club countries on 25/5/1991

ChangeMarch 2011*June 2010

- 209 -

(5/6) External Debt by Type

(US$ mn)

ChangeEnd of (-)%Value%Value

1147.0100.034841.2100.033694.2Total(634.4)39.813858.843.014493.2US dollar **

0.70.4144.70.4144.0Canadian dollar6.40.3113.40.3107.0Australian dollar

39.01.6548.01.5509.0Swiss franc19.30.7234.30.6215.0Sterling pound160.812.64372.812.54212.0Japanese yen10.00.3122.00.3112.0Danish krone0.90.04.90.04.0Norwegian krone2.00.128.00.126.0Swedish krona

125.46.02098.45.91973.0Kuwaiti dinar28.90.261.90.133.0Saudi riyal(2.2)0.127.80.130.0UAE dirham

1054.328.49889.326.28835.0Euro20.82.1742.82.2722.0Egyptain Pound315.17.42594.16.82279.0SDRs

Source: Loans & External Debt Department- CBE* Provisional.** Including other liabilities due in US dollar

- 210 -

March 2011 *June 2010

(5/7) Distribution of External Debt by Main Currencies

Periodical Publications of the Central Bank of Egypt

Periodicity Language Name of Publication

Monthly Arabic and English 1 -Monthly Statistical Bulletin

Quarterly Arabic and English 2 -Economic Review

Every fiscal year Arabic and English 3 -Annual Report

Quarterly English 4 -External Position of the

Egyptian Economy

Note: - All publications of the Central Bank of Egypt are available on the CBE's

website: www.cbe.org.eg

Documents

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