Foreign Assistance: Observations on USAID's Commodity Import	 
Program in Egypt (17-JUN-04, GAO-04-846T).			 
                                                                 
The Commodity Import Program (CIP), managed by the U.S. Agency	 
for International Development (USAID), is intended to foster a	 
competitive private sector in Egypt, in addition to assisting	 
U.S. exporters. The program also supports the government of Egypt
and USAID activities and expenses in Egypt. Since 1992, Congress 
has appropriated at least $200 million per year for the CIP. In  
1998, the United States negotiated a reduction in its economic	 
assistance to Egypt, including the CIP, through fiscal year 2009.
In this context, GAO was asked to discuss its ongoing analysis of
(1) program participants' use of the CIP and the Egyptian	 
government's and USAID's use of program funds and (2) factors	 
that have affected the CIP's ability to foster a competitive	 
private sector in Egypt. We received comments on a draft of this 
statement from USAID, which we incorporated where appropriate. In
general, USAID agreed with our observations.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-846T					        
    ACCNO:   A10555						        
  TITLE:     Foreign Assistance: Observations on USAID's Commodity    
Import Program in Egypt 					 
     DATE:   06/17/2004 
  SUBJECT:   Federal aid to foreign countries			 
	     Foreign aid programs				 
	     Foreign corporations				 
	     Foreign economic assistance			 
	     Foreign financial assistance			 
	     Foreign governments				 
	     Foreign sales					 
	     Foreign trade agreements				 
	     International cooperation				 
	     International economic relations			 
	     International trade				 
	     Program management 				 
	     AID Commodity Import Program			 
	     Egypt						 

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GAO-04-846T

                    United States General Accounting Office

GAO Testimony

Before the House Committee on International Relations

For Release on Delivery

Expected at 10:30 a.m. EST FOREIGN ASSISTANCE

Thursday, June 17, 2004

           Observations on USAID's Commodity Import Program in Egypt

Statement of David Gootnick, Director International Affairs and Trade Team

GAO-04-846T

Highlights of GAO-04-846T, testimony before the House Committee on
International Relations

The Commodity Import Program (CIP), managed by the U.S. Agency for
International Development (USAID), is intended to foster a competitive
private sector in Egypt, in addition to assisting U.S. exporters. The
program also supports the government of Egypt and USAID activities and
expenses in Egypt. Since 1992, Congress has appropriated at least $200
million per year for the CIP.

In 1998, the United States negotiated a reduction in its economic
assistance to Egypt, including the CIP, through fiscal year 2009. In this
context, GAO was asked to discuss its ongoing analysis of (1) program
participants' use of the CIP and the Egyptian government's and USAID's use
of program funds and (2) factors that have affected the CIP's ability to
foster a competitive private sector in Egypt.

We received comments on a draft of this statement from USAID, which we
incorporated where appropriate. In general, USAID agreed with our
observations.

www.gao.gov/cgi-bin/getrpt?GAO-04-846T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact David Gootnick at (202)
512-3149 or [email protected].

June 17, 2004

FOREIGN ASSISTANCE

Observations on USAID's Commodity Import Program in Egypt

The CIP provides loans to Egyptian importers of U.S. goods and, through
loan repayments, supplies funds to the government of Egypt. During fiscal
years 1999-2003, about 650 Egyptian firms used the CIP to import $1.1
billion in U.S. products from approximately 670 U.S exporters. In a 2003
USAID survey, about two-thirds of CIP importers said that they would have
imported U.S. goods without the program, but half said that it helped
increase their firm's production capacity and one-third said that it
helped increase their firm's employment levels. The Egyptian government
and USAID jointly determine the uses of the funds from loan repayments. In
fiscal years 1999-2003, about three-quarters of these funds supported
Egypt's general and sector budgets and about 15 percent supported
USAIDadministered activities and operating expenses in Egypt.

Despite the positive results reported by some CIP users, various factors
have limited the program's ability to foster a competitive private sector
in Egypt. According to the State Department, the slow pace of Egypt's
economic reforms has created a climate not conducive to private
enterprise. Further, according to several U.S. government studies, the
Egyptian government's inconsistent foreign exchange policies have hampered
firms' ability to do business in Egypt, limiting the extent to which the
CIP can relieve the country's foreign currency needs. In addition, because
of experience with bad loans, the recent economic slowdown, and the
resulting increased risk of nonrepayment, bank officials told us that they
are generally reluctant to provide loans to entrepreneurs. Finally,
because the CIP is not designed to reach firms in Egypt's large informal
economy, the program's ability to foster a competitive private sector is
necessarily limited.

Flow of CIP Transactions

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss our ongoing work on the Commodity
Import Program (CIP), a component of U.S. economic assistance to the Arab
Republic of Egypt. U.S. policy objectives in Egypt include supporting the
country's economic growth and development and strengthening its investment
environment. The CIP is intended to further these objectives by fostering
a competitive private sector in Egypt, in addition to assisting U.S.
exporters. The program, managed by the U.S. Agency for International
Development (USAID), enables Egyptian firms to obtain loans with favorable
financing terms to import U.S. goods. The Egyptian government and USAID
use importers' loan repayments for budget support and operating expenses,
respectively, among other activities. Since 1992, Congress has
appropriated at least $200 million per year for the CIP.

In 1998, the United States negotiated a reduction in its economic
assistance to Egypt, including the CIP, through fiscal year 2009. In this
context, you asked us to examine the extent to which the CIP contributes
to the Egyptian private sector's growth and development. Today, I will
discuss (1) program participants' use of the CIP and the Egyptian
government's and USAID's use of program funds and (2) factors that have
affected the CIP's ability to foster a competitive private sector in
Egypt.

We analyzed data on trends in the use of the CIP during fiscal years
19992003, as well as the results of a USAID-sponsored 2003 survey on the
CIP's impact. (We determined that these data were sufficiently reliable
for our analysis.) We also collected and analyzed documents describing
program operations and outcomes. In addition, we interviewed officials
from USAID and other government agencies; Egyptian government officials;
representatives of Egyptian companies and banks; and experts on private
sector development in Egypt. (See app. I for a more detailed description
of our scope and methodology). We performed our work between January 2004
and May 2004 in accordance with generally accepted government auditing
standards.

Summary 	The CIP provides loans to Egyptian importers of U.S. goods and,
through the loan repayments, supplies local currency (Egyptian pounds) to
the government of Egypt. During fiscal years 1999-2003, about 650 Egyptian
firms used the CIP to import $1.1 billion in U.S. products from
approximately 670 U.S exporters. Two-thirds of respondents to a 2003 USAID
survey said that they would have imported U.S. goods without the

program, half said that the CIP helped increase their firm's production
capacity, and one-third said that it helped increased their firm's
employment levels. The program gives Egyptian importers access to the
foreign currency they need to finance U.S. imports; it also provides them
a fixed exchange rate and interest-free loan repayment grace periods. In
addition, USAID offers several incentive programs-for example, for
importers in Upper Egypt-that extend the loan's grace period for
qualifying Egyptian firms. USAID and the Egyptian government jointly
determine the uses of local currency from loan repayments, based on an
annual memorandum of understanding. From 1999 through 2003, about
three-quarters of CIP-generated local currency supported Egypt's general
budget and the budgets of various government ministries, and about 15
percent supported USAID-administered activities and operating expenses in
Egypt.

Despite the positive results reported by some CIP users, various factors
appear to have limited the CIP's ability to foster a competitive private
sector in Egypt. First, the slow pace of the Egyptian government's
economic reforms has created a climate not conducive to private
enterprise. According to a senior USAID official, there are also concerns
that the CIP may have reduced pressure on the Egyptian government to speed
economic reforms. Further, the government's inconsistent foreign exchange
policies have hampered firms' ability to do business in Egypt and limited
the extent to which the CIP can relieve the country's foreign currency
needs. For example, a private sector representative estimated that the
private sector requires about $15 billion in foreign exchange annually;
however, the CIP provides less than 2 percent of this amount. In addition,
because of the recent economic slowdown and the increased risk of
nonrepayment, Egyptian banks have been reluctant to provide loans to
entrepreneurs. Egyptian bank officials stated that they generally provide
CIP loans only to well-established customers with proven credit. Finally,
because the program is not designed to reach firms in Egypt's large
informal economy, which comprises 80 percent of the country's businesses,
its ability to foster a competitive private sector has necessarily been
constrained.

Background 	The U.S. government's economic assistance in Egypt focuses
primarily on partnering with the Egyptian government to promote economic
growth and development. This support has three core components:

o  	Traditional project assistance, managed by USAID, focuses on, among
other things, private sector development, health and education, and the
environment.

o  	The Development Support Program, or "cash transfer program," provides
assistance funding conditioned on the Egyptian government's achievement of
specific reform goals.

o  	The CIP supplies financing to Egyptian private sector importers of
U.S. goods and funding to the Egyptian government that is not specifically
conditioned on any reforms.

Between 1975 and 1986, the CIP funded only public sector imports. In 1986,
USAID established a private sector CIP, providing foreign exchange to
finance imports of capital and noncapital goods1 from the United States.
Since 1986, the CIP has facilitated more than $3.1 billion in loans to the
private sector for the purchase of U.S. exports. In 1991, USAID ended the
public sector CIP.

In 1998, the U.S. and Egyptian governments agreed to reduce U.S. economic
support from $815 million to $407 million per year in fiscal year 2009.2
Annual CIP appropriations are projected to remain constant until fiscal
year 2007 and decline to $150 million by fiscal year 2009 (see fig. 1).

1Capital goods (e.g., construction equipment) are used to produce other
goods or services. Noncapital goods include raw materials (e.g., plastics)
and intermediate goods (e.g., air conditioner compressors).

2The planned changes also include establishing an enterprise fund-an
independent corporation authorized by the U.S. Congress that primarily
makes loans to, or invests in, businesses in which other financial
institutions are reluctant to invest. As of May 2004, the United States
had not established a fund in Egypt, although USAID funding was set aside
for this purpose.

Figure 1: Planned Changes to Economic Assistance to Egypt

CIP transactions have two main components (see fig. 2 for a depiction of
the CIP transaction flow).

o  	First, USAID issues letters of commitment to participating U.S. banks
(nine as of 2004). These letters authorize the banks to pay U.S. exporters
that sell goods through the CIP. After the goods are shipped and the
exporter provides the required documentation, the U.S. bank pays the
exporter and requests reimbursement from USAID.

o  	Second, the Egyptian importer seeks a loan, denominated in Egyptian
pounds, from 1 of 31 participating local banks (27 private and 4 public),
which assumes the credit risk for the loan amount. The importer must

document a reasonable number of bids and certify that the goods are new
and unused; made in, and shipped from, the United States; and consistent
with the U.S. government's list of eligible commodities.3 Before the

Egyptian bank issues a letter of credit authorizing the transaction, USAID
again reviews the application. Regardless of whether the importer repays
the loan, the local bank is required to send the net proceeds4 in Egyptian

pounds to a special account at the Central Bank of Egypt.

3Eligible commodities include capital and intermediate goods and raw
materials. Ineligible commodities include military and surveillance
equipment and luxury goods. USAID also generally prohibits the importation
of bulk grain commodities, such as wheat and corn. See U.S. Agency for
International Development, Commodity Eligibility Listings, rev. ed.
(Washington, D.C.: 1988).

4According to USAID, Egyptian banks have not defaulted on any loan
repayments to the Central Bank of Egypt. The net proceeds equal the loan
principal plus interest, minus the local bank's administrative costs,
which vary between 2 and 4 percent depending on the type of commodity
purchased.

                       Figure 2: Flow of CIP Transactions

  CIP Assists Egypt's Private Sector and Supplies Funds to the Egyptian
  Government

The CIP provides favorable financing to importers of U.S. goods and,
through the loan repayments, supplies funds to the Egyptian government.
From fiscal years 1999-2003, about 650 Egyptian firms used the CIP to
import just over $1 billion in U.S. products from approximately 670 U.S
exporters. The program gives Egyptian importers access to foreign currency
at fixed exchange rates5 and offers varying interest-free grace periods
and repayment periods, as well as incentive programs that extend the grace
periods. To ensure that all transactions comply with CIP rules and
regulations, USAID has established several management controls. USAID and
the Egyptian government mutually determine the uses of the local currency
from CIP loan repayments, which are held in a special account at Egypt's
Central Bank.

CIP Financing Assists Egyptian Importers and U.S. Exporters

In fiscal years 1999-2003, approximately 650 Egyptian firms used the CIP
to import $1.1 billion worth of U.S. products.6 Midsized to large firms7
accounted for 75 percent, or about $850 million, of CIP transactions.
During this period, an average of 90 new Egyptian importers used the CIP
each year; the average and median loan values were $300,000 and $153,000,
respectively (CIP loans can range from $10,000 to $8 million). Egypt's
industrial sector accounted for about two-thirds of CIP loans, with most
of the remaining loans used for agriculture, construction, and health care
equipment imports. During fiscal years 1999-2003, commodities imported by
Egyptian businesses included items such as computer systems, diesel
engines, hydraulic pumps, irrigation equipment, and chick incubation
systems. In addition, according to USAID, approximately 670 U.S. exporters
from 43 states, plus the District of Columbia and Puerto Rico, used the
CIP to export to Egypt in fiscal years 1999-2003.

In a 2003 USAID-sponsored survey, 66 percent of Egyptian importers
surveyed said that they would have imported U.S. goods without the CIP.8

5The exchange rate is fixed at the Egyptian bank's rate at the close of
business the day before the bank issues the letter of credit.

6Sixty-four percent of the importers were end-users, 23 percent were
traders, and 12 percent were both end-users and traders. The remaining one
percent did not identify themselves as belonging to either category.

7According to the Organization for Economic Cooperation and Development,
midsized to large firms as those with 50 or more employees. More than 90
percent of Egyptian companies have fewer than 50 employees, according to
Egypt's Ministry of Foreign Trade.

8Development Associates, Inc., Impact Analysis Study: USAID/Egypt
Commodity Import Program (Cairo: 2004).

However, 49 percent of survey respondents said that the CIP helped
increase their firm's production capacity and 32 percent said that the
program helped increase their firm's employment levels. The importers
surveyed reported that they used the CIP chiefly because of three program
features-the fixed exchange rate, interest-free grace periods, and the
ability to repay loans in Egyptian pounds. Although three-quarters of the
U.S. exporters surveyed indicated that they would have exported goods to
Egypt without the CIP, almost half said that the CIP helped their firm
increase its exports to Egypt.

CIP financing helps Egyptian firms obtain from Egyptian banks the foreign
currency loans needed to import goods. Representatives of several Egyptian
firms told us that the CIP had helped them procure part or, in some cases,
all of the foreign currency they needed for U.S. imports. Foreign currency
can be difficult to obtain because, according to bank officials we
interviewed, Egyptian banks often receive more requests for foreign
currency loans than they can accommodate. In addition, Egypt's Central
Bank instructed banks in 2003 not to make foreign currency loans unless
their clients are able to repay the loans in foreign currency.

The financing terms that the CIP offers Egyptian importers depend on the
type of commodity and how and where it will be used. Under the program's
standard terms, USAID allows participating Egyptian banks to extend the
interest-free grace period to traders and end-users9 for noncapital goods
for up to 2 and 4 months, respectively; for capital goods, the grace
period may be extended for 9 and 18 months, respectively. Egyptian
importers can take 6 months to 8 years to repay their loans after the
grace period ends. The terms of CIP loans have been adjusted in response
to changes in demand for the CIP. For example, when demand for the program
has been high, USAID shortened the duration of the interest-free grace
period to reduce distortions of the commercial trade

10

finance market.

USAID also offers three incentive programs extending the interest-free
grace period to Egyptian firms that (1) are increasing their exports, (2)

9Traders resell the goods to other Egyptian firms. End-users are producers
or manufacturers that process or use the imported goods.

10In August 2002, USAID shortened the duration of the interest-free grace
period for noncapital goods from 6 months to 2 months for traders and from
9 months to 4 months for end-users.

invest in Upper Egypt, or (3) invest in environmentally friendly
equipment. According to USAID, during calendar years 1999-2003, about 12
percent of CIP's resources ($133 million) supported imports by firms that
qualified for these programs. Over the last 5 years, nearly half of all
loans related to the special incentive programs, or $60 million, went to
importers who increased their exports, $45 million went to Upper Egyptian
importers, and $28 million went to importers of environmentally friendly
equipment.

Officials from USAID's Office of the Inspector General told us that the
percentage of fraud in the CIP is relatively low given the high volume of
transactions in the program. To ensure that the CIP complies with the
agency's rules and regulations, USAID uses a series of management
controls. These include site visits and physical checks to ensure that
goods are used for their intended purpose, as well as posttransaction
reviews to detect overpayment for imported goods and noncompliance with
program requirements. USAID conducts 25 end-use checks in Egypt annually
to ensure that commodities purchased through the program meet these
requirements-for example, that goods are used promptly for their intended
purpose. Importers who have not complied with CIP requirements have been
debarred from the program for 3 months to 3 years. According to USAID
officials, seven importers have been debarred from the CIP since 1999. In
addition, USAID requires that U.S. suppliers refund overcharges for
transactions in which goods were not made in and shipped from the United
States. From 1999 to 2003, USAID obtained 120 refunds totaling about $4.7
million.

Egyptian Government and In an annual memorandum of understanding, USAID
and Egypt's Ministry USAID Jointly Determine of Foreign Affairs jointly
determine how much of the local currency from Use of the Special Account
the repayment of loans in the special account will support Egypt's general

and sector budgets and USAID's activities. (See fig. 3 for a depiction of
the account's funding flow). The special account comprises multiple
discrete accounts for the CIP as well as for the cash transfer program.11
For

11The cash transfer program receives an annual appropriation of $200
million. The government of Egypt may use up to 25 percent of cash transfer
appropriations, or about $50 million, to support its budget deficit (this
portion does not generate local currency). Egypt must use the remaining 75
percent to import U.S. goods. However, this funding is conditional on
Egypt's completing comprehensive economic reforms agreed to by USAID and
the Egyptian government. Once USAID has certified that the government has
met these conditions, the agency transfers additional dollar disbursements
to the government, which uses the funds to purchase U.S. goods. The
Egyptian government must then deposit into the special account Egyptian
pounds equivalent to the dollar value of the cash transfer.

planning purposes, these are considered one large account, but USAID and
the Egyptian Foreign Affairs Ministry can track the funding to a CIP or
cash transfer deposit from a prior year. Although the Foreign Assistance
Act and the annual memorandum give USAID a role in determining the uses of
the funds in the account, the local currency belongs to the Egyptian
government.12

12For example, see P.L. No. 108-199, 118 Stat. 178-79, and USAID
implementing guidance, Automated Directives System, sections 624.3.2 and
624.3.3. These provide that host country-owned local currency generated
through the Foreign Assistance Act (including the CIP) must be deposited
into a separate account and not commingled with funds from other sources.
As may be agreed by USAID and the foreign government, the local currency
may be used only for project or sector assistance activities, debt or
deficit financing, or the administrative requirements of the U.S.
government.

Figure 3: Egyptian Government's Special Account

For fiscal years 1999-2003, about three-quarters of the CIP-generated
funds

from the special account were used for general and sector budget support

to help reduce Egypt's budget deficit. In addition, USAID used about 6

percent of CIP-generated funds in the special account for some of its

operating expenses.13 USAID also used about 9 percent of this local

currency to finance various projects, technical and feasibility studies,

13In fiscal year 2003, about 80 percent of USAID's $14.5 million in total
operating expenses in Egypt were paid for with CIP-generated funds.

evaluations, and assessments, among other things; the remaining 8 percent
covered other disbursements such as refunds for cancelled transactions.
Over the years, congressional committee reports have encouraged USAID to
use funds from the account to support specific projects, such as the
construction of a new campus for the American University in Cairo.14

Table 1 lists examples of activities funded with CIP-generated funds from
the special account during fiscal years 1999-2003.

Table 1: Examples of Projects and Activities Supported by CIP-generated
Funds from Egypt's Special Account, Fiscal Years 1999-2003

Total funding Type of support/ (nominal dollars Fiscal year recipient in
millions)a Purpose

1999 	Sector Support/Ministry of Health

10.3 	Equip medical centers and public hospitals, as well as the National
Center for Liver and Communicative Diseases

                          2000 USAID Activity/Egyptian

Center for Economic Studies

14.4 	Ensure the steady flow of resources to sustain the center's
operations

           2001   Sector Support/Ministry   10.1       Train new graduates in 
                    of Communications and          information technology and 
                              Information               programming, purchase 
                                                       equipment and vehicles 

            2002   Sector Support/Ministry   7.7  Fund (1) studies related to 
                   of Public Enterprise             restructuring failing     
                                                    companies, (2) leadership 
                                                      training for these      
                                                     companies, and (3) a     
                                                   technical office in the    
                                                           ministry           

2003 	USAID 34.2 Construct a new campus Activity/American University in
Cairo

Source: Government of Egypt, Ministry of Foreign Affairs.

aConversions from Egyptian pounds to U.S. dollars for fiscal years
1999-2003 were calculated with the annual average exchange rate (see
International Monetary Fund, International Financial Statistics, January
and May 2004).

14H.R. Rep. No. 106-254, 106th Cong., lst Sess. 35-36 (1999).

  Several Factors Limit CIP's Ability to Strengthen Egypt's Private Sector

Various factors have limited the CIP's ability to foster a competitive
private sector in Egypt. First, the CIP has been operating in a policy and
economic climate not conducive to business activity. Although the
government of Egypt took steps, beginning in 1991, to shift from a
centrally planned economy to one more hospitable to private enterprise,
the pace of reforms slowed in the late 1990s. For example:

o  	Subsidies and government spending. The budget deficit as a percentage
of gross domestic product declined from more than 17 percent in the early
1990s to 3 percent at the end of the decade. However, the deficit
subsequently increased steadily, reaching 6.3 percent in 2002-2003. The
Economist Intelligence Unit forecasts that Egypt's budget deficit will
widen to about 7 percent in fiscal years 2004 and 2005, mainly because of
subsidies to protect citizens from price increases and slow private sector
economic activity. According to the State Department, Egypt's real gross
domestic product growth slowed from nearly 6 percent in fiscal year 1999
to roughly 3 percent in fiscal year 2003, and the private sector's share
of this growth fell.15

o  	Tariffs and custom duties. In the early 1990s, Egypt agreed with the
World Trade Organization (WTO) that it would abide by multilateral trade
rules and liberalize its trade policies. Accordingly, by the end of the
1990s, Egypt reduced the maximum tariffs for most imports from 50 percent
to 40 percent16 and lifted a ban on fabric imports, among other actions.
However, many high tariffs persist-for example, on products related to the
automobile and poultry industries and on some textiles. The full
implementation of the Egyptian government's WTO commitments is expected to
take several more years.

o  	State-owned enterprises. The Egyptian government's pace in privatizing
government-owned enterprises also slowed. According to Egypt's Ministry of
Public Enterprise, 191 of more than 300 state-owned enterprises were
privatized between 1993 and 2002. Although the number of entities
privatized each year increased from 6 in 1993 to a high of 32 in 1998, it
steadily declined to 6 in 2002. According to a September 2003 U.S.

15According to Egypt Ministry of Foreign Trade data, the private sector's
share of GDP has remained stable at about 70 percent since 2000.

16Egypt also reduced its 40-and 35-percent tariff rates to 30 percent.

Embassy report, two privatization transactions took place in the first
quarter of 2003.17

Further, according to a senior USAID official, there are concerns that the
CIP may have eased pressure on the Egyptian government to speed the pace
of economic reforms. Although the $200 million that the CIP brings into
the country is relatively small-roughly 0.3 percent of the gross domestic
product-the funds generated by the program represent, on average, 4.2
percent of the government's budget deficit in the last 5 years. Because
CIP funding is not tied to specific conditions, the funding may ease the
government's resource constraints without requiring it to reform.

A second factor affecting the CIP's ability to strengthen the private
sector has been the perceived inconsistency in the government's foreign
exchange policy, according to several U.S. government studies and a senior
Egyptian economist. For example, between 2000 and 2003, the government
devalued the Egyptian pound several times; in 2003, it announced that it
was adopting a free market exchange rate but subsequently continued to try
to support the value of the pound. These actions have undermined the
confidence of foreign and domestic investors and contributed to the
persistence of a parallel "black" market for foreign currency and to
foreign currency shortages, hampering firms' ability to do business in
Egypt. In this context, the CIP can provide only limited relief to the
country's foreign currency needs. A representative from the Egyptian
Chamber of Commerce stated that the private sector requires about $15
billion in foreign exchange annually, but the CIP supplies less than 2
percent of this amount.

A third factor limiting the CIP's effect on the private sector has been
Egyptian banks' hesitancy to provide financing. Because of experience with
bad loans, the recent economic slowdown, and the resulting increased risk
of nonrepayment, Egyptian banks are reluctant to finance entrepreneurial
activity, according to the Economist Intelligence Unit. Egyptian bank
officials told us that they generally provide CIP funds to firms they deem
creditworthy, usually well-established customers with proven credit
records. Further, officials at one bank indicated that the bank is moving
away from corporate lending in general, including use of the CIP, to
concentrate on "less risky" activities such as consumer lending.

17Embassy of the United States of America, Economic Trends Report: Egypt,
September 2003 (Cairo: 2003).

Finally, the CIP's impact on the private sector has been constrained by
Egypt's large number of informal businesses, which the program is not
designed to reach. These businesses, which make up more than 80 percent of
the country's 1.4 million firms, generally have no access to formal
sources of credit such as the CIP, because they are unable to use their
assets as collateral for loans. Until broader reforms bring the informal
sector into the legal and economic mainstream, the CIP's ability to foster
a competitive private sector in Egypt will likely remain limited.

In conclusion, Mr. Chairman, while the CIP provides benefits to program
participants and supports the Egyptian government's budget, several
factors have affected its ability to foster a competitive private sector
in Egypt. In this context, it is important that policymakers continue to
evaluate whether this program offers the most effective means to achieve
U.S. policy goals in Egypt. This completes my prepared statement. I would
be happy to respond to any questions you or other Members of the Committee
may have at this time.

Contacts and	For questions regarding this testimony, please contact David
Gootnick at (202) 512-3149 or Phillip Herr at (202) 512-8509.

  Acknowledgments

Other key contributors to this statement were Martin De Alteriis, Kathryn
Hartsburg, Julie Hirshen, Simin Ho, Reid Lowe, Seyda Wentworth, and Monica
Wolford.

Appendix I: Objectives, Scope, and Methodology

At the request of the Chairman of the House International Relations
Committee, we examined the Commodity Import Program (CIP) in Egypt. For
fiscal years 1999-2003, we analyzed (1) program participants' use of the
CIP and the Egyptian government and USAID's use of program funds and (2)
factors that have affected the CIP's ability to foster a competitive
private sector in Egypt.

To determine the CIP's goals, we examined the U.S. Agency for
International Development's (USAID) Congressional Budget Justifications
for this timeframe. We reviewed various laws and congressional reports
that mentioned the CIP as part of the overall mandate for economic support
funds to Egypt, and we also reviewed applicable international agreements.
We spoke with representatives from the Department of State, the Department
of Agriculture's Foreign Agricultural Service, and the Department of
Commerce's Foreign Commercial Service. We also reviewed and analyzed
applicable USAID regulations, program documentation and descriptions, as
well as USAID-sponsored reports and analyses. In addition, we interviewed
USAID officials in Washington, D.C., and Cairo and Alexandria, Egypt, and
officials of the Egyptian ministries of Foreign Affairs and Finance. We
obtained from the Egyptian Ministry of Foreign Affairs data on Egyptian
government projects and activities supported by CIP-generated local
currency. To determine the reliability of the data provided by the
Ministry of Foreign Affairs, we questioned officials at USAID in Egypt,
who informed us that they had seen bank statements confirming deposits and
releases of funds and that they had a sufficient level of confidence in
the data. We determined that the data were sufficiently reliable to
indicate the general purposes for which special account funds were used
and to provide illustrations of the sums allotted to particular types of
projects. We also interviewed eight Egyptian companies from various
sectors (e.g., industry and agriculture) and 6 of the 31 participating
Egyptian banks that used the CIP during fiscal years 1999-2003. Finally,
we spoke with industry and bank representatives from the Egyptian Chamber
of Commerce in Cairo who are familiar with the program.

Specifically, to determine trends of the program's users and uses, we
analyzed USAID data on CIP transactions during these 5 fiscal years. In
addition, to obtain information about participants' experiences with, and
opinions of, the CIP, we analyzed data from surveys, conducted by a USAID
contractor, of (1) firms that export to Egypt from the United States and
(2) Egyptian firms that import from the United States under the CIP. To
calculate the number of firms that used the CIP in fiscal years 19992003,
the average and median value of the transactions, and the annual

number of first-time CIP users, we analyzed USAID data on individual
export and import transactions.

To examine the internal controls that USAID uses to manage the CIP in
Egypt, we reviewed reports of USAID's Office of the Inspector General from
1999 through 2003. We also interviewed officials from the Inspector
General's office in Washington, D.C., and the Regional Inspector General's
office in Cairo. In addition, we spoke with officials from USAID's Office
of Management Planning and Innovation in Washington, D.C., regarding the
actions that USAID had taken to address recommendations from the Inspector
General's office during this time frame.

To assess the reliability of the survey data, we reviewed the contractor's
description of the methodology, queried the contractor and USAID officials
in Egypt, and examined the data electronically. We determined that most of
the survey responses were sufficiently reliable to report on respondents'
opinions and experiences; however, we noted that we could not generalize
from the survey respondents to all CIP participants. Furthermore, because
the survey was designed to collect the opinions of firms that participated
in fiscal years 1994-2002, we could not focus our analysis exclusively on
1999-2003.

To assess the reliability of the transactions data, we performed basic
reasonableness tests and queried USAID officials in Egypt. In the course
of our assessment, we found a relatively small number of data entry
errors. We were able to correct these errors in the importers' transaction
data, and we were also able to combine data for firms that were clearly
linked, such as firms with a parent-subsidiary relationship. However, we
were not able to make these corrections for the exporters' database and,
as a result, the figure reported likely includes a small number of
duplicate firms. Nevertheless, we determined that the importers' and
exporters' transactions data were sufficiently reliable for the purposes
of this report.

To gain a better understanding of Egypt's macroeconomic environment during
fiscal years 1991-2003, we conducted a literature review and interviewed
researchers in Egypt, Egyptian government officials from the Ministry of
Finance, and officials from Egypt's private and public banks. For the
statistical analysis, we used data from Egypt's Central Bank and other
official sources, as well as country reports provided by the U.S. Embassy
in Cairo and independent economic forecasting agencies.

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