Dr. Abdel-Hamid El-KassasThe Institute of National Planning, Nasr City, P.O.Box 11765, Cairo

Email : kassas44@hotmail.com

On Current Status of

ECONOMY and ENVIRONMENT in Egypt

By

Table of Contents

1- Summary

2- Economy

2-1 Brief Information a About the Egyptian Economy

2-2 Existing Economic Models for Egypt

3- Environment

3-1 Natural Resources

3-2 Environmental Issues

4- A Proposed Model Base for Egypt

1- Summary

- Most of the population live on less than 5% of the land area (995.450 km2 ). About 95% of the land is desert and is therefore dependent on the Nile River for its existence. Less than 4% of the land is suitable for agriculture.

- Egypt's natural resources base is very limited and need to be managed & utilized more efficiently.

- Curruntly ( 2003/2004) the Egyptian economy is in a recession state and suffer from the problems of : Unemployment, Deficit of trade balance, Decline of national saving rate, Decline of foreign investment rate, Debt , Inflation, Instability of exchange rate.

- Egyptian economy affected by external (global and regional ) shocks. The combination of shocks in 97/98 (terrorist attacks, oil price collapse, Southeast Asian economic crisis) and 2001 ( September 11 ) with a slowdown in reform efforts has reduced growth sharply since 1999.

- Population of Egypt is estimated at about 67 million person in 2003.

- The main sources of foreign exchange to the Egyptian economy are:

• tourist revenues

• oil exports

• suez canal tolls

• worker remittances

- Egypt's human resources is the most promising resource. If it qualified and utilized more efficiently it can be a substitute to the scarce physical capital stock. Unemployment, especially among university graduates, is one of the major problems of Egypt. Essentially, it results because skills and educational qualifications do not match the actual needs of the labor market. In fact, training and education in public institutions in Egypt are not linked to the human resources needs of the various sectors of the economy.

2- ECONOMY

Economic Reforms since the 1990s

- In 1991 the Government started a comprehensive economic reform program that successfully achieved macroeconomic stability. Other objectives of the program were the development of free markets, the promotion of private sector based resource allocation, and the stimulation of export-based trade.

-Under the economic reforms initiated in 1991, Egypt has relaxed many price controls, reduced subsidies, and partially liberalized trade and investment.

Manufacturing is still dominated by the public sector, which controls virtually all heavy industry. A process of public sector reform and privatization has begun, however, which could enhance opportunities for the private sector.

Agriculture, mainly in private hands, has been largely deregulated, with the exception of cotton and sugar production. Construction, non-financial services, and domestic marketing are largely private. This has promoted a steady increase of GNP and the annual growth rate.

2-1 Brief Information a About the Egyptian Economy

- Central to the success of the reform program were three elements: a major fiscal adjustment, exchange market reform, and a supportive monetary policy. The combination of these elements brought about a significant reduction in inflation and a fundamental improvement in the external position. Between fiscal years 1990/91 and 1995/96, the budget deficit declined from 20.2 percent to 1.3 percent of GDP. Inflation rates declined from over 14.5 percent to 7.3 percent, and the budget deficit from 20.2 percent of GDP to 1.3 percent. Foreign debt service fell from 25.8 percent of current account receipts to less than 11 percent. As a percentage of GDP, foreign debt fell from 107 percent to 45.9 percent.

- Egypt’s economic performance between 1996/1997 and 1998/1999 has also been relatively good despite three exogenous shocks—the Asian crisis, the Luxor incident and the deterioration of international oil prices. Economic growth was sustained at about 5.5 percent. Over the same period, inflation continued to recede from 6.2 percent in 1996/97 to 3.8 percent in June 1999 (comparable to levels in major industrial economies), and unemployment declined from 8.8 percent to 8.2 percent.

- Other external indicators are also positive. In June 2002, foreign debt service as a percent of current account receipts was 9.3 percent, while total external debt relative to GDP was some 32 percent. International reserves cover more than 11.5 months of imports and more than 6.5 times the stock of short-term debt. The current account deficit was largely in balance, with a mere deficit of US$9 million, for end-June 2002, while the overall balance was significantly smaller than projected.

- Nevertheless, the liberalization of trade, the promotion of exports and foreign direct investment, and institutional development have been paramount on Egypt’s priority list of reforms during recent years, and are viewed as important foundations for sustained economic growth and investment.

-INDUSTRIES : textiles, food processing, tourism, chemicals, petroleum, construction, cement, metals

-Exports – commodities : crude oil and petroleum products, cotton, textiles, metal products, chemicals

-Imports – commodities : machinery and equipment, foodstuffs, fuels, chemicals, wood products

Major Economic Issues

* A recession crisis

* Unemployment (especially among university graduates)

* Decline of national saving rate

* Decline of foreign investment rate

* Debt ( government & foreign )

* Inflation rate

* Instability of exchange rate

Table (1) Key economic indicators year

Indicator1997/

19981998/

19991999/

20002000/

20012001/

20022002/

2003

Population ( million )60.062.063.364.565.967.3

Employment ( thousands)163441687417419179841973018179

Unemployment rate (%)8.58.27.98.49.09.9

Real growth rate of GDP (%)4.15.45.93.43.23.2

National saving / GDP (%)16.717.216.316.317.617.9

National investment / GDP (%)21.521.719.618.317.816.4

Government Debt / GDP (%)48.048.048.054.358.061.6

Foreign debt / GDP (%)34.031.428.228.533.742.4

Debt service/ Exports (%)9.39.59.68.711.911.7

Annual inflation rate (%)3.83.82.82.42.43.2

Exchange rate (L.E./ US $)3.3883.3963.4463.8704.5206.033

Structure of the Economy

GDP at factor cost ( current Prices , mil. LE. )

266757.7282577.9315667.0332543.8354563.8

( % of GDP ) Agriculture Industry Services

17.130.952.0

17.330.951.8

16.733.150.1

16.633.350.1

16.533.250.3

( % of Investment ) Agriculture Industry Services

13.334.552.2

13.132.954.0

12.630.656.8

12.932.754.4

13.532.653.9

( % of Employment ) Agriculture Industry Services

29.619.650.7

29.320.150.6

29.120.350.6

28.720.850.6

28.621.150.3

Table (2) Main sources of foreign exchange

2000/20012001/20022002/2003 *

Oil exports 2,632.42,381.03,160.8

Cotton exports144.583.2199.2

Suez Canal tolls1,842.51,819.82,236.2

Tourist revenues4,316.93,422.83,796.4

Transfers 3,742.24,252.43,609.3

Total12,678.511,959.213,001.9

(US$ mn)

* Preliminary figures

2-2 Existing Economic Models for Egypt

- A lot of economic models have developed for Egypt, but very few of them has been used for actual policy analysis and/or decision making in Egypt.

- Most of the economic models developed for Egypt are SAM-Based CGE Models, comparing to the other modeling approaches (macroeconometric and Input-Output models).

- Most of the economic institutions and ministries in Egypt responsible about preparing predictions of the future of the Egyptian economy does not depend on specific economic models, namely : Ministry of planning, Information & Decision Support Center (IDSC) of the Egyptian Cabinet.

- Unfortunately, non of the economic models developed for Egypt is in a continuous update.

- The models can be classified to four major categories, namely:

* General purpose models : see [1], [2], [5], [6], [8], [11], [14], [18], [20]

* Energy models : see [2], [3]

* Agriculture models : see [12] , [16], [17]

* Other special purpose models : see [7], [15]

• [7] : was used for analyzing the macro and sectorial impacts of the partnership agreement between Egypt and the European Union

• [15] : was used in Egyptian Human Development Report for measuring the impact of government social expenditure on the standard of living.

- Major reasons of not depending on economic models in Egypt:

• unreliability of parameters and elasticities (most of these models borrow values of elasticities from previous studies applied for similar countries, while parameters are calibrated from one year data set (mostly SAM)

* goodness of data : inconsistency of time series data

* the final user(s) of the model does not participate in developing the model from the beginning.

* For most of the CGE models developed for Egypt, there is no agreement among modelers which closure adequately describes the Egyptian Economy. Another drawback of most of the models is its short-term focus.

* Most of these models have been developed without pre-studies to determine :

the major purpose of the model the questions to be answered by the model the major economic issues to be considered the disaggregation levels (eg. the no. of sectors, the no. of commodities) of the model the space and time dimensions of the model

4- El-Kassas, A.H. (1996). Studies of Submodels For Use in A Future Decision Making Information Support System For Analysing Complex Economic-Environmental Dynamic Problems .(Ph.D. thesis), Math. Dept., Faculty of Science, Ain Shams Univ., Cairo, Egypt.

5- Institute of National Planning. (1998). “A Macro-Econometric Model for Indicative Planning in Egypt”. Planning and development Issues Series #123, INP, Cairo, Egypt ( in Arabic).

3- Choucri, N. and S.Lahiri (1990). "Short-run Energy-Economy Interactions in Egypt ", in Taylor, L. (ed.) . Socially Relevant Policy Analysis : Structuralist CGE Models for the Developing World. Cambridgem Mass. , MIT Press, pp. 177-196.

2- Charles, R.B. et al. (1990). "An Economy-Wide Energy Policy Model for Egypt". J. of Int. Input-Output Association, Vol. 2, No. 2.

1- Ahmed, S., A. Bhattacharya, W. Grais and B. Pleskovic (1985). Macroeconomic effects of efficiency Pricing in the Public Sector in Egypt. The World Bank Staff Working Paper No. 126, Washington D.C.

Biblography on Economic Models For Egypt

9- Lofgren, H. (1994). " Egypt Experience from CGE Modelling : A Critical Review". Working paper 9411, Economy Research Forum for Arab Countries, Iran and Turkey..

10- Lofgren, H., S.Robinson and D. Nygaard (1997). "Tiger or Turtle, Exploring Alternative Future for Egypt to 2020". in R.Safadi (ed.). Trade in the 21st Century:Opportunities and Challenges for Countries in the MENA Region. Economic Research Forum for the Arab Countries, Turky and Iran, Cairo..

11- McCarthy, F.D. (1983). " General Equilibrium Model for Egypt". In A.C. Kelly, W. Sanderson and J.G. Williamson eds), Modelling Growing Economics in Equilibrium and Disequilibrium, Duke Press Policy Studies, N.C., pp. 71-102

8- Khorshid, M.H. (1994)." A Dynamic Multi-Sector Economy-Wide Model for Egypt : Database, Structure and Policy Analysis". The IBK Papers, The Industrial Bank of Kuwait, No. 41 : 1-68..

7- Kheir-Eldin, H. et al. (2001). A Report on Analyzing the macro and sectorial Impacts of the Partnership Agreement between Egypt and the European Union. (unpublished report).

6- Institute of National Planning (2000). “Building-up A CGE Model for Egypt – Using A Hercules/GAMS Approach”. Planning and development Issues Series #129, INP, Cairo, Egypt ( in Arabic).

14- Nugent, J. B. (1988). Foreign Aid, Economic Development and Income Distribution: Some Inferences from a CGE Model for Egypt. In J. Sengupta and G. Kadekodi (eds.). Econometrics of Planning and Efficiency. Kluwer Academic Publishers, Dordrecht, pp. 63-90.

15- Osman, M.O., H. El-Laithy and S. Aboul-Enein . "Measuring the Impact of Government Social Expenditure on the Standard of Living : A General Equilibrium Models Approach". Research Papers Series, Human Development Report, Institute of National Planning, Cairo, Egypt.

16- Robinson, S. and C.G. Gelhar (1996). Impacts of Macroeconomic and Trade Polices on a Market-Oriented Agriculture. In L. Fletcher (ed.). Egypt's Agriculture in a Reform Era. Iowa State University Press, Iowa, pp. 271-293.

13- Nassar, A. and A.H. El-Kassas (1996). “Experience of Egypt in Modelling”. In : A Workshop about “ Basis of Building-Up a Standard Regional Model for Evaluating the Economic Policies “, Part II, The Arab Institute of Planning at Kuwait, Held in Cairo, 20-22 May 1996 ( in Arabic).

12- Ministry of Public Works and Water Resources (1991). The Egyptian Agricultural Sector Model (ESAM91) , Cairo, Egypt.

19- Thissen, M. (1998). "Two Decades of CGE Modelling Lessons from Models for Egypt". SOM Research Report 99C02, Univ. of Groningen. The Netherlands..

20- Zeineldin, A. (1987)." The Egyptian Economy in 1999: An Input-Output Study". Economic Modelling, Vol. 3, No. 2., pp. 140-146.

21- World Bank (1980). Arab Republic of Egypt Domestic Resource Mobilization and Grwoth Prospects for the 1980's. Report No, 3123-EGT, Dec, 10, 1980.

18- Thissen, M. (2000). Building Finantial CGE Models : Data, Parameters, and the Role of Expectations – A Financial CGE Model for Egypt. (Ph.D. thesis ), Univ. of Groningen. The Netherlands.

17- Taylor, L. (1979). Macroeconomics of Egyptian Food Subsidies. Macro Models for Developing Countries. McGraw-Hill, New York, pp. 58-66.

3- ENVIRONMENT

3-1 Natural Resources

1 -Water resources

2 -Land

3- Energy resources : petroleum , natural gas.

4 -Other mineral resources : iron ore, phosphates, manganese , limestone, gypsum , talc, asbestos, lead, zinc

3-2 Environmental Issues

a. Air pollution

The main sources of air pollution in Egypt are:

- Stationary sources : industrial activities, thermal power stations and some commercial and residential activities.

- Mobile sources : passenger cars, buses, trucks and motorcycles.

- Other sources : open burning of garbage and agricultural residues.

b. Water issues

- Water quantity : The fresh water resources is limited, while water demand by the different sectors is increase every year as a result of the population growth .

- Water quality : water pollution from agricultural pesticides, raw sewage, and industrial effluents.

Table (3 ) Water supply in Egypt ( in billion m3 / year )

Source19902000

QTY%QTY%

1- Conventional water sources58.692.363.988.8

River Nile55.587.455.577.1

Ground water ( Nile valley and Delta)2.64.14.96.8

Deep Ground water0.50.82.53.5

Saving from water management00.011.4

2- Non-conventional water sources4.97.78.111.3

Agriculture drainage reuse4.77.479.7

Treated Municipal sewage water0.20.31.11.5

Total63.5100.072.0100.0 Table (4 ) Water demand by sector ( in billion m3/year )

Use19902000

QTY%QTY%

Irrigation49.784.059.986.3

Municipal uses3.15.23.14.5

Industry4.67.86.18.8

Navigation and others1.83.00.30.4

Total59.2100.069.4100.0

c. Land issues

- A best fertile agricultural land is being lost due to urbanization - land quality degradation due to soil salinization and water logging problems,

as well as soil pollution.- and desertification problems

d. Energy issues

Energy is another critical resource in Egypt. Fossil fuels (oil & gas) are still the primary sources of commercial energy. For future energy

planning the following issues should be taken into consideration :

-oil is one of the main sources of foreign exchange. The proven reserve of oil is not large. Emissions resulting from consumption of oil products is one of

major air pollution sources in Egypt.

-Natural gas is less polluting than oil products. The proven reserve of natural gas is increasing every year due to the new discoveries. There are a step-wise substitution between Natural gas and oil in the industrial and transportation sectors

-A small quantity of coal exist in Sinai. -The new and renewable energy sources are not economically utilized yet.

- The decision maker in Egypt are challenged by :

* step-wise transfer to alternative types of non-polluting new and renewable resources - solar energy, wind energy and Biomass energy .

* optimally utilizing the proven reserves of oil and gas to conserve the share of future generations .

e- Coastal Areas and Marine resources

oil pollution threatening coral reefs , beaches, and marine habitats

f- Solid waste

Table (6 ) Land Area ( in feddans, 1 feddan =1.038 acres = 0.42 ha )Crop intensity

Crop area Cultivated

areayear

1.89811129907 5865330 1980

1.91511259536 5879948 1981

1.91411167049 5833751 1982

1.90511138748 5846289 1983

1.89111026534 5830130 1984

1.86911174729 5978968 1985

1.85511136685 6003810 1986

1.86311126949 5972418 1987

1.83211325848 6182595 1988

1.83811525479 6270149 1989

1.76112181114 6917883 1990

1.76612405950 7023201 1991

1.75412489454 7120332 1992

1.78012779968 7178688 1993

1.81313002596 7172805 1994

1.76813814461 7812743 1995

1.81313709684 7563494 1996

1.79013829030 7725927 1997

1.78613858655 7761133 1998

1.77613938535 7847873 1999

1.77813920866 7831710 2000

1.76514027576 7945574 2001

Source : Ministry of Agriculture and Land Reclamation *The reclaimed area during the period 1952 to 2000/2001 reached 3199

thousand feddan.

Table (7) Energy resources

TypeAvailable resources

Non-renewable resources

1- Non-renewable resources

Crude oil proved reserves ( in BBOE) 2000

2001Natural gas proved reserves ( in BBOE) 2000

2001

3.7113.682

8.98010.640

CoalThe coal reserves in Egypt are estimated 27 million tons, of which 21 million tons could be extracted using modern machinery.

2- New and Renewable resources

Solar energy

Wind energy

Biomass energy

3- Hydropower

Source : Organization for Energy Planning, "Energy in Egypt", different issues.

Table (8) Primary Energy Production )MTOE(

Primary energy97/1998

98/1999

99/2000

2000/2001

Crude Oil40.09139.31836.40232.115

Natural Gas14.75716.16420.02225.344

Hydropower2.6813.3653.2402.997

Coal0.0670.0670.0260.039

Total57.59758.91459.69060.495

Table (9) Primary Energy Consumption

Primary energy97/1998

98/1999

99/2000

2000/2001

Crude Oil24.45425.09924.52023.330

Natural Gas11.68412.79915.70019.770

Hydropower2.6813.3653.2403.000

Coal1.1300.9260.5940.562

Total39.94942.18944.05046.660

)MTOE(

Table (10) Electrical Energy Generation and Consumption

(TWh) Item97/199898/199999/20002000/2001

Thermal50.11452.70058.96164.309

Hydro12.22215.30014.65913.697

wind--0.0230.137

Total electricity production62.33668.00073.64378.143

Total electricity consumption

Industry share (%) Agriculture share (%) Residential (%) Public utilities (%)

52.97741.74.0

38.615.7

56.60040.53.9

41.014.6

60.86338.53.9

41.815.8

64.33037.83.8

39.119.3

4 -A Proposed Model Base for Egypt

One of the major areas that lack experience in Egypt and can be covered via the cooperation with IIASA is to built-up a model base for Egypt that contains a system of submodels for the social, economic and environmental dimensions. The major aim of the proposed set of submodels is to provide the decision-makers in Egypt with tools that can support them in :

- Managing the above mentioned population-economic-environmental issues .

- To be used for measuring sustainable development.

[1 – ]Population

A multi-state population projection model To estimate the population by age, sex and level of education. The model distinguish between

seven major regions : 1. Urban governorates ( Cairo, Alexandria, ort-Said, Suez)2. Lower Egypt,urban 3. Lower Egypt, rural 4. Upper Egypt, urban 5. Upper Egypt, rural6. Frontier Govs, urban 7. Frontier Govs, rural

-One of the important demographic variables that need to be taken into consideration is the migration – both internal and external .

- In addition to the the conventional output of the population model from demographic indicators , there is a need for estimating the following variables for the case of Egypt – to help decision-makers in labour market planning :

• the human and/or social capital of Egypt• the labour demand by level of education and economic sector ( economic model )• labour supply by level of education• unemployment by level of education

[2 -]Economy

A General Purpose Dynamic Economy-Wide CGE Model

• Conducting a pre-study about the Egyptian economy to be a base for

building the model. • establishing recent SAM based on the availability of national accounting data ( the last SAM prepared by CAPMAS was for 1991/1992. )• estimating the elasticities of the model functions (CES or Cobb- Douglas functions) using statistical techniques.• estimating the parameters of the model using statistical techniques (e.g. Linear Expenditure System (LES))

[3 -]Environment

The following models have the priority for the case of Egypt :

a. Water resources management model

- water demand by sector - water supply

b. water quality management

- River Nile - Ground water

- Lakes - Costal areas and marine resources.

c. Air pollution model

d. Energy model

- energy resources - energy supply

- energy demand by sector