AmCegypAmerican Chamberof Commerce in Egyptw w w. a m c h a m - e g y p t . o r g

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PartnershipÓEgypt Reforms

ECONOMIC OUTLOOK:

Year 2005 presented a turning point in Egypt’s economy. The aggressive economic reform measures together withthe series of sweeping political reforms pushed the economy up.

GDP GROWTH Export-led GDP growth reached 5.1% in 2004-05, up from 4% in 2003-04. The World Bank expects it to reach8% in the coming three years, up from previously targeted 6% growth. The fastest-growing sectors in 2005 wererestaurants and hotels, Suez Canal earnings and petroleum.

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TOURISM Despite several shocks in 2005, including bombings in Cairo (April) and Sharm Al Sheikh (July), tourism arrivalsupheld their increase reaching 7.2 million from January to October 2005 compared with 6.8 million in the sameperiod the previous year.

In the quarter following the Sharm Al Sheikh attack, tourist arrivals fell by only 7% compared to a drop of 45%in tourist arrivals following the Luxor attack of 1997.

INTERNATIONAL TRADE Egyptian exports grew by 32% resulting primarily from the hike in non-petroleum exports, which recorded a 31%increase over the previous year to settle at $13.8 billion. Major exports include petroleum, textiles and apparel,and processed food and plant products. The current account remains firmly in surplus, but the 2005 year-end fig-ure came in considerably lower than expected because of a surge in the oil imports bill.

• Inflation rates have maintained a single-digit rate since January 2005. CPI inflation continued to slide,reach-ing 3.8% in September 2005, compared to 17.3% in September of the previous year.

• Nominal and real effective exchange rates both continued their downward trend following the stabilizationof the pound and the convergence of the official and parallel market rates in December 2004, reflecting a realdepreciation of the pound, and increased competitiveness.

• Foreign direct investment (including the oil sector) reached $3.9 billion in 2004-05, a $900 million increase on theprevious fiscal year. In 2005 alone, Egypt received approximately $2.6 billion in FDI. Investments in the oil sec-tor increased by 11%, totaling $920 million, while investments in non-oil sectors grew to $1.65 billion from $249million in 2004. New investments in all sectors were valued at $1.2 billion and the government’s revitalized pri-vatization program brought in $400 million from the sale of state-owned assets.

• Privatization proceeds totaled LE 6.5 billion in 2004-05. During 2005 alone, proceeds reached LE 15.5 bil-lion. Egypt’s privatization program was back on track in 2005 and the Ministry of Investment showed com-mitment to activate it through the stock exchange.

For the first time in five years, 2005 witnessed three major IPOs of public companies – SIDPEC, AMOC andTelecom Egypt – worth more than LE 7.6 billion. Telecom Egypt’s privatization alone generated proceeds ofmore than LE 5.1 billion.

FINANCIAL SECTOR DEVELOPMENTS:

In February 2005, Standard & Poor’s revised Egypt’s long-term foreign and local currency outlooks to stable.On September 28, 2005, Egypt issued its third sovereign Eurobond, which was backed by the full faith and cred-it of the United States of America acting through USAID. The issue was awarded triple-A and Aaa ratings byStandard & Poor’s and Moody’s respectively.The establishment of a well-functioning formal interbank market for foreign exchange at the beginning of 2005has helped create a very liquid foreign exchange market.

BANKING SECTOR RESTRUCTURINGThe banking sector restructuring program commenced in September 2004 aiming at strengthening the bankingsector and increasing its robustness to enable it to face global and regional competition effectively, and helpachieve targeted economic growth.

The Banking Reform Unit (BRU) within the Central Bank of Egypt (CBE) had previously introduced a plan,which comprised four main pillars: 1. Privatization and consolidation of the banking sector2. Addressing the issue of non-performing loans (NPLs)3. Financial and managerial restructuring of state-owned banks4. Upgrading CBE banking supervision

CAPITAL MARKET DEVELOPMENTS• The Cairo & Alexandria Stock Exchanges (CASE) broke new records in 2005, outperforming both developed

and emerging markets as per Standard & Poor’s and Morgan Stanley indices, which pushed Newsweek mag-azine to choose Egypt as one of the 10 best stock markets in the world in 2005.

• The World Federation of Exchanges (WFE) chose Egypt to be the first Arab country to enjoy full membershipin the federation.

• ABN-Amro Bank issued open-end certificates related to the CASE 30 index, to make CASE the first Arab stockexchange to issue derivative products on its in-house index.

• At the end of October 2005, an intra-day trading system was introduced, allowing investors to buy and sellactive stocks on the same day.

• Dow Jones and the CASE signed an agreement to launch the Dow Jones CASE Egypt Titans as a new index,reflecting the performance of Egypt’s market and making Egypt the first African country to cooperate with theNew York-based company.

CUSTOMS REFORM:

• The World Bank has announced that Egypt ranks first worldwide in customs procedures reform. Egypt has facil-itated commercial documentation procedures and reduced the number of required customs approvals from 26to five.

• Advanced Customs Centers have been established at the ports of Alexandria, Suez and Cairo to complete cus-toms documentary procedures, determine customs tariffs and issue release permits.

• The government has slashed tariffs and continues to streamline red tape. Tariff brackets have been reduced from27 to six. The weighted average tariff rate was reduced from 14.6% to 9% and all surcharges and service feeswere abolished. Presidential Decree No. 410/2004 further lowered tariffs on inputs with a view to increase thecompetitiveness of domestic industry.

• All tariffs on inputs for medical equipment, printing, foodstuffs and poultry were slashed by 50%. Tariffs oninputs for the garments industry fell from 40% to 22% and 12%. Significant reductions on inputs for theleather industry were also introduced. Tariffs on inputs for the steel industry were eliminated.

• All customs directorates at the national level shall be connected by means of an electronic network. Electronicoperation has already been implemented at the ports of Alexandria, Port Said, Suez, Ain Al Sokhna, Cairo andDamietta. This has had positive impacts, the most important of which has been the reduction of time taken tocomplete customs procedures from 17 days to only two hours.

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LEGISLATIVE:

“ONE-STOP SHOP” FOR INVESTMENTIn an effort to support the investment climate and attract more foreign and local investment, the government inDecember 2004 added a new chapter to Investment Guarantees and Incentives Law 8 of 1997 to facilitate invest-ment procedures. This included the establishment of a number of “one-stop shops” in various governorates, accel-erating the establishment of new companies to a maximum of 2-3 days, as well as unifying dealings under a sin-gle organization, the General Authority for Investment & Free Zones (GAFI).

ANTITRUST LAW NO. 3/2005Law 3 of 2005 on Protection of Competition and Prohibition of Monopolistic Practices was passed onJanuary 17, 2005 followed by its executive regulations on August 25, 2005. The law stipulates that entities par-ticipating in economic activities should not prevent, restrict or cause damage to free competition. It also stipu-lates the acts that constitute anti-competitive behavior. The Egyptian Competition Authority was established as a public body with responsibility for receiving notifica-tion of acquisition of assets, property rights, and establishment of unions or mergers, and to prepare a databaseand information about the economic activities of the concerned parties, undertake research and studies on anti-competitive practices, and implement the law.

UNIFIED TAX LAW NO. 91/2005The new tax law was passed in June 2005, making the Egyptian tax system more transparent for both nationaland foreign companies looking to invest in Egypt. Personal and corporate income taxes were slashed by half,introducing a 50% reduction in personal and corporate income taxes to a maximum rate of 20%. Executive regulations of the new tax law were issued in December 2005, including all implementation aspects ofthe law such as self-assessment statements and tax returns.A Large Taxpayers’ Center (LTC) was inaugurated by the prime minister on September 19, 2005 to encouragetimely and complete tax returns from the highest-paying individuals and corporations. The LTC will be respon-sible for collecting LE 40 billion annually, or roughly 75% of the state’s combined sales and income tax revenues.

Decree 770/2005 to amend the Executive Regulations of Export-Import Law No. 118/1975 was passed inAugust 2005. The new import/export regulations transferred responsibility for issuing and reviewing certificates-of-origin from the General Organization for Export & Import Control (GOEIC) to the Egyptian CustomsAdministration, introduced a mechanism for enforcing intellectual property rights (IPR) at borders, and extend-ed the preferential inspection treatment given to inputs for manufacturing to include inputs for the service indus-try. An explicit list of the chemicals that cannot be imported into Egypt was issued with the new regulations, thusclarifying a previously ambiguous procedure.

Law No. 97/2005 enacted the budget for 2005-06 according to the IMF 2001 Government Finance StatisticsClassification Standard (GFS). The new system ensures more consistent reporting during the year. Under the new sys-tem, the budget will, in the medium term, be guided by macroeconomic and financial objectives and constraints.

CUSTOMS LAW NO. 14/2004 AND ITS EXECUTIVEREGULATIONSThe first executive statute of the customs law was put into effect on January 8, 2006. The new statute incorpo-rates the spirit of more than 5,000 decisions in order to optimize customs performance.

POLITICAL:

CONSTITUTIONAL REFORMParliament recently approved the amendment of Article 76 of the Constitution to allow for direct, multi-candi-date elections for the first time in Egypt’s history. A general election saw President Hosni Mubarak’s party, theNational Democratic Party (NDP), retain the presidency for a fifth six-year term. Meanwhile, NDP candidateswon 68.5% of the seats in parliamentary elections held in late 2005.

NEW CABINET TAKES OFFICEA new cabinet was sworn in on December 31, 2005, headed by Prime Minister Ahmed Nazif and retaining 23ministers from the old government. The new cabinet, which reduced the number of ministries from 34 to 30,includes more businessmen drawn from the private sector. The maintenance of the economic portfolio of July2004 bodes well for maintaining the rapid pace of the Nazif government’s bold economic reforms.

PETROLEUM INDUSTRY DEVELOPMENTSIN EGYPT

DECEMBER 2005

A Comprehensive Study of the Latest Developments in the Oil, Gas, & Petrochemical Sectors

American Chamberof Commerce in Egyptw w w . a m c h a m . o r g . e g

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