Foreign Assistance
Observations on USAID's Commodity Import Program in Egypt Gao ID: GAO-04-846T June 17, 2004The 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.
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.
GAO-04-846T, Foreign Assistance: Observations on USAID's Commodity Import Program in Egypt
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Testimony:
Before the House Committee on International Relations:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 10:30 a.m. EST:
Thursday, June 17, 2004:
Foreign Assistance:
Observations on USAID's Commodity Import Program in Egypt:
Statement of David Gootnick, Director, International Affairs and Trade
Team:
GAO-04-846T:
GAO Highlights:
Highlights of GAO-04-846T, testimony before the House Committee on
International Relations
Why GAO Did This Study:
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.
What GAO Found:
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 USAID-administered 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:
[See PDF for image]
[End of figure]
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 gootnickd@gao.gov.
[End of section]
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
1999-2003, 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:
* Traditional project assistance, managed by USAID, focuses on, among
other things, private sector development, health and education, and the
environment.
* The Development Support Program, or "cash transfer program," provides
assistance funding conditioned on the Egyptian government's achievement
of specific reform goals.
* 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 goods[Footnote 1]
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.[Footnote 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).
Figure 1: Planned Changes to Economic Assistance to Egypt:
[See PDF for image]
[End of figure]
CIP transactions have two main components (see fig. 2 for a depiction
of the CIP transaction flow).
* 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.
* 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.[Footnote 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 proceeds[Footnote 4] in Egyptian
pounds to a special account at the Central Bank of Egypt.
Figure 2: Flow of CIP Transactions:
[See PDF for image]
[End of figure]
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 rates[Footnote 5] 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.[Footnote 6] Midsized
to large firms[Footnote 7] 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.[Footnote 8] 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-users[Footnote
9] 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 finance market.[Footnote 10]
USAID also offers three incentive programs extending the interest-free
grace period to Egyptian firms that (1) are increasing their exports,
(2) 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 USAID Jointly Determine Use of the Special
Account:
In an annual memorandum of understanding, USAID and Egypt's Ministry of
Foreign Affairs jointly determine how much of the local currency from
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.[Footnote 11] For 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.[Footnote 12]
Figure 3: Egyptian Government's Special Account:
[See PDF for image]
[End of figure]
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.[Footnote 13] USAID also used about 9 percent
of this local currency to finance various projects, technical and
feasibility studies, 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.[Footnote 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:
Fiscal year: 1999;
Type of support/recipient: Sector Support/Ministry of Health;
Total funding (nominal dollars in millions)[A]: $10.3;
Purpose: Equip medical centers and public hospitals, as well as the
National Center for Liver and Communicative Diseases.
Fiscal year: 2000;
Type of support/recipient: USAID Activity/Egyptian Center for Economic
Studies;
Total funding (nominal dollars in millions)[A]: $14.4;
Purpose: Ensure the steady flow of resources to sustain the center's
operations.
Fiscal year: 2001;
Type of support/recipient: Sector Support/Ministry of Communications
and Information;
Total funding (nominal dollars in millions)[A]: $10.1;
Purpose: Train new graduates in information technology and
programming, purchase equipment and vehicles.
Fiscal year: 2002;
Type of support/recipient: Sector Support/Ministry of Public
Enterprise;
Total funding (nominal dollars in millions)[A]: $7.7;
Purpose: Fund (1) studies related to restructuring failing companies,
(2) leadership training for these companies, and (3) a technical office
in the ministry.
Fiscal year: 2003;
Type of support/recipient: USAID Activity/American University in Cairo;
Total funding (nominal dollars in millions)[A]: $34.2;
Purpose: Construct a new campus.
Source: Government of Egypt, Ministry of Foreign Affairs.
[A] Conversions 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).
[End of table]
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:
* 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.[Footnote 15]
* 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 percent[Footnote 16] 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.
* 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. Embassy report, two privatization transactions took place in
the first quarter of 2003.[Footnote 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.
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 Acknowledgments:
For questions regarding this testimony, please contact David Gootnick
at (202) 512-3149 or Phillip Herr at (202) 512-8509.
Other key contributors to this statement were Martin De Alteriis,
Kathryn Hartsburg, Julie Hirshen, Simin Ho, Reid Lowe, Seyda Wentworth,
and Monica Wolford.
[End of section]
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 1999-2003, 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.
FOOTNOTES
[1] Capital 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).
[2] The 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.
[3] Eligible 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).
[4] According 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.
[5] The 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.
[6] Sixty-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.
[7] According 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.
[8] Development Associates, Inc., Impact Analysis Study: USAID/Egypt
Commodity Import Program (Cairo: 2004).
[9] Traders resell the goods to other Egyptian firms. End-users are
producers or manufacturers that process or use the imported goods.
[10] In 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.
[11] The 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.
[12] For 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.
[13] In 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.
[14] H.R. Rep. No. 106-254, 106th Cong., lst Sess. 35-36 (1999).
[15] According to Egypt Ministry of Foreign Trade data, the private
sector's share of GDP has remained stable at about 70 percent since
2000.
[16] Egypt also reduced its 40-and 35-percent tariff rates to 30
percent.
[17] Embassy of the United States of America, Economic Trends Report:
Egypt, September 2003 (Cairo: 2003).
