Regardless of the underlying motives behind the government’s amnesty, there is no doubt that Egypt's fragile internal security situation has a strong bearing on the nation’s economic performance. Following the November 1997 Luxor carnage, tourism (a vital source of foreign exchange revenues) virtually disappeared. During the past two and a half years of relative calm, however, levels of incoming tourism have steadily rebounded. Through the first nine months of 1999, 3,519,941 tourists visited Egypt, compared to 2,450,336 tourists during the corresponding period of the previous year. Macroeconomic data also reflects the positive outcome of extended tranquility. Recent government reports project an economic growth rate of nearly 7 percent in 2000.
Egypt’s financial well-being received a significant boost during the first week of 2000 with the discovery of oil reserves off Egypt's Mediterranean coast. Following this finding, the country's oil reserves more than doubled from 3.7 billion to 8.2 billion barrels, and its natural gas reserves augmented to 120 trillion cubic feet from 36.5 trillion. Oil Minister Sameh Fahmy announced that the natural gas reserves would cover Egypt's consumption and export requirements for over 100 years and the oil reserves would satisfy the state's consumption for 25 years. Oil output from the new field will commence during FY 2001/2002.
This lucrative energy discovery fortifies Prime Minister Atef Obied's financial accomplishments. Obeid has pledged to speed up privatization in the present year. The focus will be on sales to strategic investors and the auction of remaining state shares in firms that have already been privatized. The government will cautiously embark on a large flagship utility sale; bidding for state-owned Egypt Telecom’s 20 percent share offer will take place between September and November this year. This upcoming offer, to be managed by ABN-Amro, will include an initial public offering, a global depository receipt and a private placement.
Egypt’s economy, particularly its securities market, is projected to experience more liquidity following a law passed by parliament in May, which exempts indigenous firms from capital gains tax. The new legislation puts companies and banks on the same footing as retail investors and foreign companies and investors. Previously, Egyptian companies were liable to 42 percent capital gains tax on their investments in local securities, which all other investors were exempted from. Investors have welcomed this new move and expect it to inject much needed liquidity into Egypt’s stock market.
The decision to introduce the new capital gains tax followed the government’s admission that the economy is in fact experiencing a downturn. Publication of revised actual figured for the 1998/99 budget reveals a deficit more than four times higher than the previously announced figure. At 4.2 percent of GDP, the deficit is significantly higher than the 1 percent figure repeatedly quoted by government ministers as evidence of Egypt’s economic well-being. The revelation that the government was actually running a high budget deficit helps explain the severity of the recent liquidity crisis. A massive augmentation in capital spending was a major factor is this liquidity squeeze.
© 2000 Mena Report (www.menareport.com)