Country Report Egypt June 2008

Outlook for 2008-09

• Anger over the rising price of staple goods, which is undermining consumers' purchasing power, will continue to lead to sporadic outbursts of social unrest and demonstrations over the next 12 months.
• The constitutional amendments passed in March 2007 are being used to curb civil rights and prevent the banned but tolerated Muslim Brotherhood from gaining a political foothold.
• The government will continue to press ahead with its programme of economic reform, aimed at raising living standards and creating employment.
• The government's generous wage package for civil servants and increased food subsidies, announced on May 1st, will lead to a deterioration of the public finances, despite increased revenue from accompanying tax increases.
• Rising inflation is undercutting household demand, and the Economist Intelligence Unit forecasts that real GDP growth will slow to 6.9% in fiscal year 2007/08. Growth will ease to 6.8% in 2008/09 as investment gradually slows.
• In light of a further sharp rise in inflation in May, on the back of increases in regulated fuel and energy prices, we have made another upward revision to our inflation forecast. We now expect inflation to average 17.1% in 2008.

Monthly review

• At the end of May parliament extended the existing emergency laws for another two years, rather than pass new Western-style anti-terrorism legislation. The state of emergency has been in place since 1981.
• Disagreements over human rights issues led to a flare-up in tensions with the US during May, which partially overshadowed Egypt's hosting of the World Economic Forum on the Middle East at the Red Sea resort of Sharm el-Sheikh.
• The economic development minister announced that the real GDP growth assumption in the 2008/09 budget is 7.1%.
• A law to impose a new property tax of 10% was passed by parliament in early June. The threshold value above which properties will become subject to the new tax was raised to E£500,000 (US$93,500).
• Inflation climbed to new highs in May as the year-on-year headline rate reached 19.7%, up from 16.4% in April.
• Rising inflation has started to undermine consumer confidence.
• The surplus on Egypt's balance of payments widened in the first nine months of 2007/08 compared with the same period of the previous year.
• The trade deficit widened sharply in the first nine months of 2007/08.