[Congressional Record Volume 140, Number 30 (Thursday, March 17, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: March 17, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                    AID REPORTS ON EGYPT AND ISRAEL

                                 ______


                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                        Thursday, March 17, 1994

  Mr. HAMILTON. Mr. Speaker, the Subcommittee on Europe and the Middle 
East of the House Foreign Affairs Committee has recently received 
reports from the U.S. Agency for International Development on the 
economic situation in Egypt and Israel--the top two recipients of U.S. 
foreign assistance. The reports are submitted pursuant to section 
1205(b) of the International Security and Development Cooperation Act 
of 1985, as amended.
  I wish to draw to the attention of my colleagues the summaries of 
these reports. The full text will be made part of the record of the 
subcommittee's hearings on the fiscal year 1995 foreign aid requests 
for these countries. I hope my colleagues find the summaries of these 
reports of interest.

            Report on Economic Conditions in Egypt, 1992-93


                       i. summary and conclusions

       Participation in the Gulf War has proved to be a financial 
     boon for Egypt. Due to debt forgiveness and its own reforms, 
     Egypt's financial position has greatly improved. For the 
     three years prior to the War, Egypt's external current 
     account deficit had ranged between $2 and $3 billion annually 
     with no improvement in sight. The country was accumulating 
     large, unsustainable debt service arrears. The budget deficit 
     was about 20 percent of GDP. In 1990, total external debt 
     reached about $46 billion. Foreign reserves were down to 
     several weeks of imports.
       After the War, external financial resources were provided 
     to Egypt. The United States took the lead in a program of 
     debt reduction, writing off military debt of $6.7 billion. 
     Also, the Government of Egypt (GOE) embarked upon a wide-
     ranging program of economic reform under the auspices of 
     international financial institutions.
       As a result, Egypt's economy has stabilized. Though an 
     expected drop in real GDP for 1991/92 did not materialize, 
     the economy is stagnant. We estimate real GDP grew at the 
     annual rate of 2.8 percent in 1991/92 and only 1.5 percent in 
     1992/93. Various revenue measures and greater control of 
     expenditures have cut the budget deficit to 4.7 percent of 
     GDP in 1992/93. Egypt achieved a positive current account 
     balance (excluding transfers) in 1991/92 for the first time 
     in ten years, although the current account balance is now 
     expected to be slightly negative in 1992/93. Foreign reserves 
     are now quite healthy, over $15 billion dollars (equivalent 
     to over a year of imports). With the latest debt reduction, 
     Egypt's outstanding debt will amount to less than $35 
     billion. Egypt appears quite capable based on its relatively 
     healthy financial situation to meet all debt commitments, at 
     least over the short and medium term.
       Retarding Egypt's economic growth and development is the 
     structure of its economy. Despite the recent tendencies 
     towards the expansion of the private sector, the public 
     sector remains the major employer of nonagricultural workers. 
     The economy is still inward looking and highly regulated.
       Privatization, reduction of protection, and elimination of 
     unnecessary regulations controlling the private sector are 
     major themes of Egypt's structural reform program, together 
     with improving the organizational and management structure of 
     public enterprises. The new Public Investment Law 203 and its 
     executive regulations were issued in 1991, allowing greater 
     autonomy to public sector companies. A newly established 
     office for privatization has assisted in selling two 
     public enterprises and bringing twenty other enterprises 
     near to the point of sale. Nontariff barriers to trade and 
     the level of tariffs are being reduced. Unfortunately, 
     progress to date in each of these critical structural 
     reform areas is far short of what is needed.
       Notwithstanding the substantial financial progress over the 
     last couple of years, a fundamental problem is the inability 
     of the economy to absorb in a productive fashion new entrants 
     to the labor force. The economic and social stability of 
     Egypt is threatened by this problem. Official labor 
     statistics show a 12 percent unemployment rate, while other 
     estimates show significantly higher rates.
       Debt relief and large capital inflows have given Egypt an 
     unprecedented opportunity to restructure its economy with 
     donor support. It is critical that Egypt accelerate, within 
     the constraints of a delicate political climate, the reform 
     program that it has undertaken if it is to attain its long-
     term economic objectives. This is especially true of reforms 
     to reduce protection, privatize public enterprises, and 
     eliminate restrictions on the private sector. These reforms 
     will allow competitive market forces and private enterprise 
     into the largely state owned industrial sector, which should 
     increase productivity, exports, and domestic and foreign 
     investment.


                  II. UPDATE ON ECONOMIC DEVELOPMENTS

                         A. Balance of Payments

       The balance of payments recovery, which started in 1990/91 
     and continued in 1991/92, failed to persist in 1992/93. After 
     achieving a surplus current account balance (excluding 
     official transfers) in 1991/92 after many years of deficits, 
     the current account balance is estimated to have returned to 
     a deficit amounting to $0.3 billion in 1992/93.
       The current balance (including official transfers) showed a 
     surplus of $1.0 billion, down from $3.6 billion in 1991/92. 
     The major factors behind this deterioration are an increase 
     in imports of goods and services, a decrease in non-petroleum 
     exports, a decline in workers remittances from abroad, and an 
     increase in required interest payments. The overall surplus 
     in the balance of payments also witnessed a sharp decline, 
     from $6.9 billion in 1991/92 to $4.0 billion in 1992/93, a 
     reduction of about 42 percent.
       In the next few years, the services account is expected to 
     experience a slight improvement due to higher Suez Canal dues 
     and investment income. In addition, a continued high level of 
     worker remittances is anticipated. However, with the 
     projected growing trade deficit, the current account balance, 
     excluding official transfers, is expected to witness a 
     growing deficit.
       This sustained current account deficit, together with 
     stagnant official transfers and the projected decline in the 
     capital account, is expected to result in a decline in the 
     surplus in the overall balance of payments.

                         B. Government Finances

       Government revenues in 1992/93 grew by 11 percent to LE 
     45.9 billion. This is about one quarter the rate of nominal 
     growth experienced the previous year. However, revenues in 
     1992/93 remained at 35 percent of GDP, the same as last year.
       Tax revenues accounted for 60 percent of revenues (compared 
     to 58 percent last year), while non-tax revenues accounted 
     for 31 percent (compared to 28 percent last year).\1\ The 
     balance is accounted for by local government revenues and 
     investment self-financing.
---------------------------------------------------------------------------
     \1\Non-tax revenues include surplus of petroleum, Suez Canal, 
     other economic authorities, and the Central Bank of Egypt, 
     and the surplus and profit of public sector authorities and 
     companies.
---------------------------------------------------------------------------
       Breaking down tax revenues by source of tax indicates that 
     each tax basically maintained its share of total tax 
     revenues. However, the share of customs duties slightly 
     declined from 18.9 to 18.6 percent, while stamp duties 
     slightly increased from 7.6 to 8.2 percent.
       As for non-tax revenue, the share of transferred profits in 
     non-tax revenues significantly declined from 77 percent in 
     1991/92 to 39.6 to 63 percent in 1992/93. Current 
     expenditures increased to 80 percent of total expenditures 
     (31.7 percent of GDP) compared to 77 percent (30.6 percent of 
     GDP) last year. Reduced capital expenditures accounted for 
     the declining balance.
       Noticeable among current expenditures are the significant 
     growth in interest payments and wages, and the decline of 
     subsidies and transfers. Interest payments on debt increased 
     by about 42 percent to reach LE 13.8 billion or 10 percent of 
     GDP, largely due to an increasing stock of treasury bills and 
     high domestic interest rates. Wages increased by about 19 
     percent to LE 9.7 billion. Subsidies and transfers declined 
     by 55 percent to LE 4.5 billion.
       The resulting budget deficit decreased slightly from 5 
     percent of GDP in 1991/92 to 4.7 percent in 1992/93. 
     Excluding the earthquake relief outlays, the budget deficit 
     declined to 4.1 percent of GDP.
       In financing its budget deficit, the Treasury paid back the 
     banking system an amount equivalent to nearly 52 percent of 
     the deficit to partially retire outstanding government debt. 
     Nonbank finance of the deficit, coming from treasury bills, 
     insurance premiums and pensions, accounted for about 137 
     percent of the deficit (to offset the net negative bank 
     financing). External finance covered 15 percent of the 
     deficit. Most of the external finance was directed to 
     earthquake relief.

                  C. Population, Employment and Output

       Despite the substantial financial progress over the last 
     couple of years, a fundamental problem remains the ability of 
     the economy to absorb in a productive fashion new entrants to 
     the labor force. The economic and social stability of Egypt 
     is threatened by this problem. Official labor statistics show 
     12 percent unemployment rate while other estimates show 
     significantly higher rates.
       The public sector in Egypt produces many of the goods and 
     services that are generally produced by the private sector in 
     most capitalist economies. About 27 percent of total 
     employment is in the public sector. Excluding agriculture, 
     which consists largely of small farm owners and workers, over 
     half of the remaining jobs are in the public sector.
       Over the next decade Egypt will have to generate 4.5 
     million new jobs to provide work for the new entrants to the 
     labor force, assuming no change in today's unemployment rate 
     and labor force participation rate. Estimates of the number 
     of new jobs necessary to allow unemployment to drop 
     significantly range from 6 to 10 million. Continuation of 
     structural economic reforms will be key to any attempt to 
     achieve growth rates sufficient to accomplish the objective 
     of lowering unemployment.
       The problems of unemployment and poor living standards of 
     many Egyptians are exacerbated by rapid population growth. 
     Population has almost tripled since the early 1950s. This 
     growth has caused increased pressures for additional jobs, 
     social services, education and health services. In recent 
     years the labor force has grown at an average rate of 5 
     percent, or twice the rate of population growth. This high 
     growth rate reflects increasing numbers of women and children 
     joining the labor force. However, the population growth rate 
     has declined from about 2.8 percent in the early 1980s to 
     less than 2.5 percent today.
       From 1987 to 1992, Egypt's real GDP growth averaged about 
     2.7 percent per year, or about the same as population growth; 
     in 1993 it tapered off to 1.5 percent per year. . . .
                                  ____


            Report on Economic Conditions in Israel 1992-93


                              i. overview

       Israel, with a population of 5.4 million and a GNP of $69.5 
     billion in 1993, has a per capita income of nearly $13,000. 
     The Government of Israel (GOI) has been relatively successful 
     in stabilizing the economy in the face of a massive inflow of 
     immigrants which has increased the population by around 10 
     percent since the end of 1989. Real GDP growth has averaged 
     around 6 percent per year over the past three years, 
     employment has risen at an annual rate of 4 percent, the 
     market based exchange system has improved export 
     competitiveness, and inflation has been reduced to around 11 
     percent (see Table of Israeli Economic Indicators). However, 
     unemployment increased from 8.9 percent in 1989 to 11.2 in 
     1992 before declining to 10.5 percent in 1993. While GDP 
     growth has slowed to around 4 percent in 1993, expanding 
     business investment and governmental infrastructure 
     investment coupled with sustained export growth provide the 
     basis for a resumption of 6 percent average annual GDP growth 
     in 1994 and 1995.
       The GOI has appropriately adopted a strategy of abstaining 
     from direct intervention in the labor market and has instead 
     focused on providing the immigrants with housing and 
     subsistence grants and training while encouraging a more 
     favorable environment for private sector investment and 
     expansion. While government expenditures for immigrant 
     absorption increased, fiscal discipline in other areas, 
     including defense, provided for an overall reduction of 
     government spending as a percentage of GNP. The domestic 
     component of the fiscal deficit surged to l8.1 percent of GNP 
     in 1989, but it has since declined to 5.6 percent in 1992 and 
     3.2 percent in 1993.
       Basically sound monetary, exchange rate and debt policies 
     have contributed to rapid economic growth, a robust expansion 
     of exports and a shift to an overall balance of payments 
     surplus. Exports increased in real terms 12.7 percent in 1992 
     and are projected to grow at around 8 percent per year 
     beginning in 1993. While there has been a modest increase in 
     Israel's gross external debt to $33.9 billion at the end of 
     1992, relative to GNP these liabilities have declined from 72 
     percent in 1989 to 53 percent in 1992. All indicators of debt 
     service reflect the improving ability of Israel to manage its 
     external debt, including the ratio of gross debt service to 
     exports of goods and services which declined from 42 percent 
     in 1989 to 29 percent in 1992. With continued prudent 
     financial stabilization policies in the future, Israel should 
     be able to service the increases in its external debt which 
     have been facilitated by USG loan guarantee programs.
       Beyond maintaining a stable macroeconomics environment, 
     continued rapid growth and the reduction of unemployment will 
     require significant intensification in efforts to 
     structurally reform the economy. In particular, there is a 
     need to accelerate the privatization program, to continue 
     with financial sector reforms, to reduce labor market 
     rigidities, and to proceed with further trade 
     liberalization.
       Privatization has been slow and needs to be significantly 
     accelerated to improve domestic economic efficiency and to 
     attract direct foreign investment. The state has been 
     intensively involved in the banking, communications, 
     electricity, transportation and defense sectors. Public 
     enterprises which are considered eligible for privatization 
     have an estimated net worth of $17 billion. In 1991 and 1992, 
     the GOI had intended to sell around 20 companies, but only 
     sold 7, generating an average of less than $250 million per 
     year. The privatization of six major non-bank enterprises 
     anticipated in 1993 did not materialize.
       While extensive financial system reforms have been made, 
     more reforms are needed to make the system more competitive. 
     The financial system is highly concentrated and directly 
     involved in the real sector of the economy. In spite of 
     relatively successful privatization efforts, public ownership 
     of the banking sector remains significant.
       An improved functioning of the labor market is essential 
     for a sustainable reduction in unemployment. While 
     unemployment has increases and real private sector wages have 
     declined 7 percent over the past 3 years, real public sector 
     wages have increased almost 2 percent. The GOI needs to take 
     a firmer stance with regard to union wage settlements, 
     especially in the public sector, adopt a wage structure that 
     better reflects productivity differentials, and delink 
     government wages from those in the public enterprises. At the 
     same time, efforts should be made to build on earlier 
     reforms, including a review of minimum wage legislation.
       Further steps to liberalize external trade are essential to 
     increase domestic competition. While considerable progress 
     has been made with recent free trade agreements with the 
     United States, the European Community and the European Free 
     Trade Area (EFTA), much remains to be done. In particular, it 
     is essential to resist pressure from domestic producers to 
     slowdown the scheduled reduction in import duties to maximum 
     rates of between 8-12 percent over the next 5-7 years. Also, 
     while quantitative restrictions have been largely removed on 
     non-agricultural imports, they remain on most agricultural 
     products.


          II. Recent Immigration, Output and Employment Trends

       Since late 1989, Israel has been subjected to a significant 
     supply side shock in the form of the immigration of over 
     460,000 persons, mainly from the Soviet Union. Immigration, 
     which was 12,000 in 1989, shot up to 188,000 in 1990 and 
     176,000 in 1991.
       While 200,000 immigrants annually were initially projected 
     through 1995, actual immigration has been significantly less 
     than expected, with only 77,000 immigrants arriving in 1992. 
     The revised projection for 1993 calls for 80,000 immigrants, 
     but there were only 36,000 immigrants during the first six 
     months of the year. The immigration slowdown reflects both 
     the employment difficulties encountered by the immigrants in 
     Israel and the lessened felt need to emigrate by those in the 
     former Soviet Union.
       The basic GOI strategy toward absorbing the immigrants has 
     been one of avoiding direct labor market interventions, while 
     catering to their housing needs and providing them with 
     subsistence grants and training during their first year in 
     Israel. In addition, the GOI has attempted to provide 
     adequate infrastructure and a more favorable and less 
     uncertain environment in which the private sector would be 
     able to gradually absorb the extra supply of labor.
       The large influx of immigrants significantly increased 
     aggregate domestic demand, which is largely responsible for 
     the average annual GDP growth of 6 percent over the past 
     three years. Housing related spending was especially strong 
     over this period, but non-residential investment also 
     displayed considerable growth. During 1992, as the rate of 
     immigration subsided and the GOI withdrew from construction 
     activity, there was a slowdown in domestic demand growth. 
     However, this slowdown was offset by a rapid recovery from 
     the Gulf War-related slump of the export and tourism sectors. 
     With continued lower levels of immigration and the closure of 
     the occupied territories in early 1993, real GDP growth had 
     slowed to around 4 percent. An anticipated expansion of 
     business and infrastructure investment coupled with rapid 
     growth of exports provide the basis for a projected 
     resumption of 6 percent average annual GDP growth in 1994 and 
     1995.
       The viability of these projections depends significantly on 
     Israel's ability to expand exports. Israel's exports have 
     served as a major engine of growth in the past. Real exports 
     grew at 12.3 percent between the early 1960s and 1980. 
     However, export growth fell to only 2.5 percent between 1980 
     and 1991 in part due to high real wages. Recent rapid 
     expansion of the labor force and conservative macroeconomic 
     policies have produced real wage declines and a 12.7 percent 
     expansion of real exports of goods and services in 1992. 
     Realization of a continued export expansion at the projected 
     rate of 8 percent will require continued policy efforts to 
     contain real wages and improve the competitiveness of 
     exports.
       The rapid increase in the Israeli labor force brought on by 
     immigration outstripped employment growth that averaged 4 
     percent per year over the past three years, causing the 
     overall rate of unemployment to rise from 8.9 percent in 1989 
     to 11.2 percent in 1992 before decreasing to 10.5 percent in 
     1993. Among immigrants, the unemployment rate declined 
     from 38 percent in 1991 to 28 percent in 1992 and 17 
     percent in 1993. This relatively high immigrant 
     unemployment rate reflects the short period of residence 
     in Israel to date, a large proportion of older immigrants, 
     and a very high concentration in technical professions, 
     including engineering, medicine and academia. Immigrants 
     mainly found employment in industry (35 percent) and 
     construction-related activities (10 percent). The 
     composition of their occupations has changed as they have 
     had to adapt to domestic labor market conditions. Hence, 
     the percent of immigrants in scientific and academic 
     occupations dropped from 39 percent in 1990 to 33 percent 
     in 1992, while the percent in blue collar occupations 
     increased from 16 percent to 23 percent over the same 
     period.
       Unemployment declined in 1993 as immigration slowed further 
     to an estimated 36,000 in January-June and as Israelis took 
     jobs left vacant by Palestinians barred by the closure of the 
     occupied territories. The GOI's projected annual average 
     employment growth of over 4 percent for 1993 through 1995 is 
     consistent with a gradual reduction of unemployment from 10.5 
     percent in 1993 to around 9 percent in 1995.


                      iii. public finance policies

       Since 1989, Israeli general government activity has been 
     significantly affected by the objective of absorbing the new 
     immigrants. In spite of this, general government expenditures 
     as a percentage of GNP have steadily declined, from 59.8 
     percent in 1989 to 56.5 percent in 1992. With overall 
     receipts remaining relatively stable at around 54 percent of 
     GNP, the overall deficit (after foreign grants) has been 
     reduced from 6.2 percent in 1989 to an estimated 2.8 percent 
     in 1992.
       A. Expenditures: Public consumption of social services, 
     including for education, health and welfare have been a large 
     and growing component of government expenditures, increasing 
     from 30.1 percent of GNP in 1989 to 32.4 percent in 1992. In 
     particular, transfer payments, which are provided as cash 
     payments, have risen from 13 percent of GNP in 1989 to 15 
     percent in 1992.
       Immigrant absorption expenditures of around 5 percent of 
     GNP have been the main source of this expansion. The total 
     annual direct aid per immigrant family is somewhat over 
     $10,000. This includes an initial absorption cash grant plus 
     health insurance and unemployment benefits during the second 
     half of the first year in Israel. In addition, employers who 
     employ immigrants are eligible for subsidies of up to one-
     third the immigrants' salaries for the first year and one-
     fourth for a second year.

                          ____________________