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. 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. 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. 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.