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Cablegate: Egypt's Export Subsidies Are Here to Stay

VZCZCXYZ0000
PP RUEHWEB

DE RUEHEG #2321/01 3511601
ZNY CCCCC ZZH
P 171601Z DEC 09
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 4485
INFO RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L CAIRO 002321

SIPDIS

DEPT FOR NEA/ELA
DEPT PLEASE PASS TO USTR/SFRANCESKI

E.O. 12958: DECL: 12/17/2019
TAGS: ECON EG ETRD EFIN PGOV
SUBJECT: EGYPT'S EXPORT SUBSIDIES ARE HERE TO STAY

REF: CAIRO 899

Classified By: Econ-Political Minister-Counselor Donald Blome for reaso ns 1.4(b) and (d)
1.(C) Key points: - More Egyptian companies received export subsidies in 2009 than in previous years, and the size and scope of the subsidies increased. - Despite the GOE's assertions that export subsidies are targeted at companies with low profit margins and low energy consumption, private sector contacts say they receive export subsidies regardless of profit size or use of subsidized energy. - Despite some parliamentary opposition, the Ministry of Trade and Industry (MOTI) is pushing forward with plans to maintain current levels of export subsidies. --------------------------------- Export Subsidies Increase in 2009 ---------------------------------

2.(SBU) Mohamed Ragui, the Director of the Export Development Fund (EDF) in the Ministry of Trade and Industry (MOTI), told EconOff that the number of companies receiving export subsidies in 2009 increased by about 9% in 2009, from 1,657 to 1,800. (Note: Created by presidential decree in 2002, the EDF provides cash rebates to exporters ranging from 8-10% of the value of goods exported.)

3.(SBU) As part of the GOE's first stimulus package in response to the global financial crisis, the EDF's budget was doubled in FY 2008/09 to LE 4.0 billion (USD 730 million). With the additional funds, the GOE raised the rebates on exported goods by 12-15% from January 2009 to June 2009, and implemented other EDF subsidies on shipping and marketing costs for exporters. While the rebate size was reduced to the original levels of 8-10% in July, Ragui told us that the EDF's budget will remain well above pre-crisis levels at LE 3.7 billion (USD 680 million) in FY 2009/10, with shipping and marketing subsidies continuing --------------------------------------------- ----------- GOE, Business Tell Different Stories on Subsidy's Limits --------------------------------------------- -----------

4.(SBU) Ragui told us that companies earning more than a 10% profit on their exports are ineligible to receive EDF rebates, in order to keep successful companies from accessing a fund intended for exporters with small profit margins. Companies receiving subsidized energy are also prevented from receiving export rebates, Ragui said.

5.(C) Private sector contacts, however, dispute Ragui's assertion of tight limits on export subsidies. XXXXXXXXXXXX told us that his company receives EDF money regardless of whether its profits on exports rise above 10%, noting that the EDF does not require it to provide documentation of profits when claiming the rebate. XXXXXXXXXXXX added that companies operating in "free zones" (where many exporters are located, including her company) can purchase subsidized energy from the government, and that it does not prevent them from receiving EDF subsidies. --------------------------------------------- --------- Despite Criticism, Plans to Keep Export Subsidies High --------------------------------------------- ---------

6.(C) Despite some parliamentary opposition to the EDF, Minister of Trade and Industry Rachid appears determined to keep the EDF budget high. Speaking in general terms to the press on December 8, Rachid pledged to preserve government support for industry and exporters as part of Egypt's plan to stimulate the economy in 2010 and 2011. XXXXXXXXXXXX told us that Rachid privately assured a group of businessmen that he would seek to double the EDF's budget once again as part of his overall strategy to promote exports.

7.(C) A coalition in the Egyptian parliament including National Democratic Party (NDP) member Ahmed Ezz, who is Chairman of the Planning and Budget Committee, and Muslim Brotherhood MP Mohamed Farid Ismail, have opposed the EDF on the grounds that it is helping wealthy exporters at the expense of the poor. Despite their opposition to a high EDF budget, XXXXXXXXXXXX predicts that Ezz, despite his own reputation for corruption is the most voal opponent of the EDF, will cease his populist campaign after the 2010 parliamentary elections. ------- Comment -------

8.(C) Export subsidies in Egypt are becoming increasingly widespread, and are not likely to disappear anytime soon. Whether or not the GOE intended for the export rebates to reach a broad range of companies, the ability of producers with large profit margins to tap into the export subsidies ensures that nearly all exporters in Egypt will continue to receive significant government assistance. While some parliamentary opposition to the EDF remains, the strong support pledged to the fund by Rachid indicates that its budget is likely to remain high. Scobey

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