Democracy and Governance in Egypt
The Development Challenge: Egypt, a strong moderating force in the Middle East, has long been an important U.S. ally. Egypt and the U.S. share strategic interests that include combating terrorism, resolving regional conflicts, advancing regional peace, ensuring domestic and regional security, and promoting economic development. USAID's continuing bilateral assistance program serves the national security interests of both countries. It promotes prosperity and stability in Egypt by assisting the country's ongoing, but incomplete, transition from a state-dominated economy and polity to a free market-oriented, participatory one. A key U.S. goal is for Egypt to become a fully integrated and competitive participant in the global economy.
The greatest threat to domestic stability results from popular frustration with recent economic performance and a persistent lack of economic opportunity. According to the World Bank's World Development Indicators, about 40% of the 70.5 million Egyptians live on less than $2 a day, despite a per capita gross domestic product (GDP) of about $1,470. Official figures put the unemployment rate at close to 11 percent in 2004; various independent estimates, however, place the real rate much higher, especially when underemployment is a factor.
The government recognizes the need for increased investment, both foreign and domestic, to create jobs for an estimated 750,000 new entrants to the labor market annually and, during the 1990's, it improved the investment climate and raised the private sector share in the economy. Reform then lagged starting in the late 1990s, and the economy slowed and suffered from external shocks. Notable problems include cumbersome customs and business registration processes, a growing fiscal deficit, lagging privatization (particularly in the financial sector), lack of transparency, and an educational system that does not meet Egypt's needs. Following the Government's January, 2003, announcement of its intent to free the foreign exchange rate, the Egyptian pound depreciated 25% against the dollar in six months, but it has stabilized over the past year and foreign exchange availability has steadily improved since early 2004. Challenges facing the Government of Egypt (GOE) this year included managing the inflationary impact of the initial effort to float the pound. Central Bank statistics showed the Consumer Price Index rising over the year ending in July 2004 by 10 percent, while the Wholesale Price Index climbed 18 percent over the same period. This impact inhibited full floating of the exchange rate. The budget deficit continued to grow as well, exceeding $1.62 billion, and economic growth slowed down to about 2.4 percent of GDP in 2004.
On the other hand, several favorable events in 2004 fed on important successes realized in the past two years - including advances in intellectual property rights protection, new legislation promoting business competition, and accession to several important trade agreements. In all of these areas, USAID worked closely with the GOE to reach these goals, each of which plays an important role in improving the country's investment environment and export prospects. Additionally the anticipated negative effect on the Egyptian economy from the Iraq war - especially on the vital foreign exchange earning tourism and Suez Canal sectors - was much smaller and briefer than expected, with both sectors recovering rapidly to see record earning levels in 2003, with even higher levels reached in 2004. Similarly, the trade deficit has reacted favorably to the pound's devaluation in both years, narrowing significantly, with 2004 seeing the addition of what will quickly become a major element among Egypt's exports - liquefied natural gas.
Perhaps the most important economic event of 2004 was the appointment of a new prime minister and cabinet in July. Emphasis was on younger, reform-oriented ministers, some with extensive private sector experience, taking up the posts with the greatest connections to economic performance. After July, there have been a number of steps, both large and small, implemented that seem to re-establish the GOE's economic reform credentials. Prominent among these was a restructuring of the tariff regime, with duties on many items eliminated and the average tariff level reduced by 40 percent, replacing exemptions and subsidies targeting the promotion of local production with reductions in corporate and income taxes, and renewed moves toward state enterprise privatization after a long period of dormancy. The GOE recently indicated that it expects growth to reach 5 % in FY2004/2005, a goal perhaps too optimistic, but there are many indications of improvement. The new government has now espoused and begun to implement financial sector, trade, foreign exchange, and other reforms which USAID and other donors have been advocating for years, with consequent improvements in economic growth, the balance of payments, availability of foreign exchange, and the overall business environment.
(Excerpted from the 2006 Congressional Budget Justification for Egypt)
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