Foreign Assistance: Observations on USAID's Commodity Import Program in Egypt
Published: 2004-06-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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.
subsections: section_title: Background
paragraphs: 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 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. Annual CIP appropriations are projected to remain constant until  fiscal year 2007 and decline to $150 million by fiscal year 2009 (see fig. 1).
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. 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 in Egyptian  pounds to a special account at the Central Bank of Egypt.
section_title: CIP Assists Egypt’s Private Sector and Supplies Funds to the Egyptian Government
paragraphs: 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 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.
subsections: section_title: CIP Financing Assists Egyptian Importers and U.S. Exporters
paragraphs: In fiscal years 1999-2003, approximately 650 Egyptian firms used the CIP  to import $1.1 billion worth of U.S. products.  Midsized to large firms  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.
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 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.
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.
section_title: Egyptian Government and USAID Jointly Determine Use of the Special Account
paragraphs: 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. 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.
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. 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.  Table 1 lists examples of activities funded with CIP-generated funds from  the special account during fiscal years 1999-2003.
section_title: Several Factors Limit CIP’s Ability to Strengthen Egypt’s Private Sector
paragraphs: 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.
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 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.
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.
section_title: Contacts and Acknowledgments
paragraphs: 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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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.
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