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Egypt: Spreading the Funds

As the Egyptian economy is tested by the global slowdown, the government is stepping up its public spending efforts. Major infrastructure and housing developments are already under way, but a new stimulus plan will inject more money, and hopefully more growth, into not only the construction sector but also the entire economy.

With the financial crisis deepening and Egypt's GDP growth expected to ease this year to 4%, down from 7% in recent years, the government has committed to doubling its initial stimulus plan. The expanded LE30bn ($5.3bn) programme will help to partially offset the effects of lower revenues from Egypt's major foreign currency earners: tourism, worker remittances and tolls from the Suez Canal. These normally reliable sources of revenue have already begun to decline, prompting the government to take immediate action - half of the money will be spent in the first six months of 2009.

While the exact recipients of the funding have yet to be announced, there are several projects that could use the additional capital, including ongoing transportation projects and housing shortages. Even before the recession prompted the government to increase spending, Egypt had a long list of infrastructure projects in the works.

In fact, while the new stimulus plan is certainly significant, it dwarfs the amount of investment that is expected in the transport and housing sectors over the next five years. As Egypt works to accommodate the needs of its growing population, the government has allocated substantial funding to infrastructure development. Approximately LE90bn ($15.9bn) is expected to be spent overhauling the nation's ports, road and rail networks. The government's plan calls for a mix of public and private investments, with the bulk directed to the country's port system. Over the next three years, LE50bn ($8.8bn) of private investments will help to build seven new Nile River ports and deepen the Suez Canal to allow loaded supertankers to navigate through.

Egypt's road network will see a similar expansion under the plan, with four new highways being built for LE30bn ($5.3bn). The government is expected to announce a tender for the Cairo-Alexandria Highway, a LE1.89bn ($335.6m) upgrade of the 231-km road linking Egypt's two largest cities. Requests for proposals for its construction are due to be announced in the upcoming months. Other highways that have been planned include the Mediterranean Coastal highway, linking Port Said with Marsa Matrouh ($262.8m); the Shoubra-Banha highway (LE710m, $126m); and the Kafr El Zayat-Alexandria highway ($266.3m).

Although rail's LE10bn ($1.77bn) allotment is less than the other segments, the funds will go a long way towards revamping and expanding the country's antiquated network. Three major lines are currently being planned: two in Cairo, which will link the capital to 10th Ramadan City and 6th October City, and another that will link Alexandria to Borg El Arab. Additionally, more lines are being added to Cairo's underground metro system, a project that began in 2008 and is set to reach the halfway mark by 2013.

One of the proposed lines for the metro will connect Heliopolis with Cairo International Airport, the target of still more infrastructure investment. Following the completion of a four-year, LE2bn ($354.6m) renovation this year, the airport will be able to serve 11m passengers a year. Egypt's National Tourism Development Plan has earmarked an additional LE5bn ($887.4) to improve existing airports over the next five years, and another LE6bn ($1.06bn) over the next six years to construct new airports. Plans have already been drawn up for the new LE2bn ($354.6m) Mubarak Airport, which will boast a capacity of 15m passengers annually.

The myriad transport projects are only a part of the government's initiatives to deal with Egypt's rapidly expanding population. The national housing plan will also address the country's chronic residential shortfall, while stimulating the economy. Although other segments are underdeveloped, housing has traditionally been the backbone of the real estate market and looks to remain so in the coming year. While up-market retail, office and tourism may be put on hold until the economic situation is more stable, the huge demand for affordable units will continue and the government has committed funding to ensure its development.

At the time of the most recent government census in 1998, Egypt's housing deficit stood at 4m units, with annual demand estimated at around 570,000 units. Since then annual production has averaged 300,000 units, leaving unsatisfied demand of around 270,000 units a year. Using these numbers as a guide, OBG estimates that the national shortfall has risen over the past decade to around 6m units. To satisfy demand over the next two decades, the government forecasts an annual production of 820,000 units a year.

The need for residential units is such that the matter has become a political issue. President Hosni Mubarak made the provision of 500,000 affordable housing units by 2011 one of his last campaign pledges. As part of the sixth five-year plan, the national housing policy aims to maintain private-sector implementation levels of at least 80%. Total investments in the housing sector for 2006-07 (the last year for which figures are available) reached LE15.65bn ($2.77bn), a slight fall on the previous year's figure of LE16.5bn ($2.92bn), but benefitting from a 95% private-sector implementation rate. While this level of financing might be harder to sustain in 2009, with a substantial waiting list and serious government support, affordable housing will continue to draw investments and stimulate the economy.

Until recently, Egypt's rapidly expanding economy was almost able to keep pace with its growing population. Projects conceived during the high-growth years sought to satiate rising demand, but similar programmes during these leaner times will also help to stimulate demand in the face of the global recession. By investing in transport and affordable housing, two of the country's most underdeveloped sectors, the government will build much-needed infrastructure while creating jobs and subsidising growth.

© Oxford Business Group 2009