By Cam McGrath
CAIRO, Sep 11 2002 (IPS)

Economic forecasts painted a gloomy picture for Egypt in the wake of September 11, but analysts say worst case scenarios failed to materialise.

“It was a tough year, but there are clear signs that the worst is behind us,” says Ahmed Galal, executive director of the Egyptian Center for Economic Studies.

Egypt’s four main sources of foreign revenue – Suez Canal receipts, expatriate worker remittances, oil revenues and tourism – suffered a serious blow in the aftermath of the September 11 terrorist attack on the United States. Analysts rightly predicted that the unprecedented event would damage the Egyptian economy, but may have overestimated the extent.

Government figures show Suez Canal revenues down just two per cent, or 22 million U.S. dollars, in the first seven months of 2002 compared to the same period the year before. The losses, a fraction of what was expected, reflect a general trend of diminishing tanker traffic brought on by low oil prices and a global economic slowdown.

Falling oil prices were expected to cut deeply into expatriate remittances, which amounted to nearly three billion U.S. dollars in 2001. Some two million Egyptians working in the Arab Gulf states, mainly in the oil industry, were considered at risk of losing their jobs. Yet despite OPEC’s decision to cut oil production, Arab states say they prefer to hold onto skilled Egyptian labour for the time being.

Similarly, fears that international oil companies operating in Egypt would cut back production until oil prices improved, or withdraw their investments altogether, also proved untrue.

“Oil companies are committed to Egypt, as Egypt is to them,” assured a senior petroleum ministry official, adding that no foreign oil companies have pulled out of Egypt in the past year. He explained that oil company decisions are based on long-term strategies, not one-off events like September 11, and no policy changes were needed to keep them.

Falling oil prices did, however, have a substantial effect on Egypt’s oil revenues, which dropped by 13 per cent before making a steady recovery. When Brent crude prices plummeted to below 20 dollars per barrel in November, Egypt compensated by increasing oil production. The price of Brent has since bounced back to 28 dollars per barrel, augmenting state revenues. If the U.S. declares war on Iraq, oil prices – and revenues – could shoot up further.

A war would, of course, be terrible news for the tourism sector which was the hardest hit by September 11 events. Initial forecasts saw Egypt’s largest foreign revenue earner losing 2.5 billion dollars, but the sector has proven itself to be remarkably resilient.

According to the Ministry of Tourism, the tourist activity dropped off sharply in the months following September 11, bottoming out at 54.5 per cent below normal in November before making a swift and steady recovery. Newly released figures indicate that 495,000 tourists visited Egypt in July, an increase of six per cent over the previous year. The statistic is an important one, because it marks the first time that tourist activity has exceeded pre-September 11 levels.

“We have worked hard to promote tourism in European markets, offering big discounts on air travel and accommodation,” says Ahmed el-Khadem, general manager of the Egyptian Federation of Tourism Chambers. “We have also sought to attract Arab tourists, who no longer (feel comfortable) to travel to the United States and Europe,” he said referring to Arab discomfort with the increased suspicion and harassment they have received while travelling abroad since September 11.

With its four main revenue earners struggling, the government has been forced to deal with issues it might otherwise have ignored, namely forex liberalisation. The Central Bank has been reluctant to devalue the local currency, which is artificially propped under its so-called “managed peg” system, for fear that devaluation will create inflationary pressure and make foreign debts more expensive. It nevertheless lowered this peg by 8.5 per cent over the past year in a desperate bid to attract foreign investors and boost economic growth.

Unfortunately, the move came too late for international ratings agencies. Standard & Poor’s, Moody’s and Fitch all downgraded Egypt’s financial rating to BB+, one notch below investment grade, citing the country’s forex policy as a main reason for the change. The IMF was equally unimpressed, nudging Egypt to make its exchange rate more elastic as a condition for economic assistance.

“We think Egypt has made good progress in terms of opening up its exchange rate system, making it more flexible,” IMF spokesman Thomas Dawson said in March. “We think that flexibility would in fact be important to ensure a strong recovery in balance of payments and address other issues, and we look forward to the authorities continuing to move in this direction.”

The IMF has blocked much of the 10.3 billion dollar in economic aid promised to Egypt at an international donors conference in February. Officials say the funds, intended in part to help Egypt recover from revenue losses due to September 11 events, will be released only when Cairo demonstrates its commitment to carrying out wide-scale economic reforms.

Political considerations may force the IMF to reconsider its stance. Egypt has recovered well since September 11, but without this aid the country’s troubled economy could stall.

“Ultimately, a worsening economic crisis (in Egypt) could lead to internal political instability, a prospect that is clearly not in the interests of the international community,” says one political analyst.

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