2002-2003/EGYPT: War Drums Threaten Economic Recovery

By Cam McGrath Reprint | | Print |

Cam McGrath

CAIRO, Dec 23 2002 (IPS) - Egypt’s battered economy is showing signs of recovery, but a protracted war in Iraq would be a serious setback, analysts say.

A war would come as a second shock. The September 11 attacks sent shudders through Egypt’s economy this year, cutting into key revenue earners at a critical time.

"The attack on the U.S. came at a very vulnerable moment for Egypt when the recent improved monetary conditions had been signalling that the economic slowdown of the past 18 months was just beginning to reverse," the Ministry of Foreign Affairs said in a statement.

Tourism was hit hardest, but was the first to bounce back. "The initial impact was extremely negative," says Elhamy el-Zayat, board member of the Egyptian Federation of Tourist Chambers. "The lowest month was November 2001 when we lost 52 per cent of tourist visits. By July this year we were close to 2000 levels, which was a peak year."

Tourism was Egypt’s largest revenue earner in 2000 when a total of 5.4 million visitors generated 4.3 billion dollars. This year saw 4.9 million tourist visits during the first 11 months, exceeding the most optimistic forecasts.

Prospects for 2003 are "extremely good", El-Zayat says. Egypt is expecting also a resurgence in high-yield business as Cairo reappears on the conference and cultural travel circuit.

A short and decisive war in Iraq could cause a temporary setback, but "if the war is long, we’ll have to kiss everything goodbye," says El-Zayat.

Tourism was not the only sector hit by September 11. Oil revenues fell 27 per cent over the previous year to 1.9 billion dollars in 2001-2002.

"Oil prices are expected to stay where they are in 2003," economist Magdy Sobhi told IPS. "If you have a short war followed by a new pro-U.S. government in Baghdad, prices will stay low because they will inject much oil into the market. Egypt’s economy will not benefit."

A prolonged war could cost Egypt up to eight billion dollars and 200,000 jobs, officials say. Oil prices would climb, but benefits would be offset by losses to the tourism industry, Suez Canal receipts and export revenues. Iraq is Egypt’s number one trading partner. Exports exceeded 1.7 billion dollars last year.

Recovery has been slow on other counts. International donors pledged 10.3 billion dollars aid to Egypt in February over the next three years. But little has come through, as donors insist on faster privatisation, taxation reform, deficit reduction and industrial modernisation. They are particularly concerned about Egypt’s monetary and foreign exchange policy reform.

The local currency lost 25 per cent against the dollar in 2001 before the Central Bank of Egypt dug into foreign currency reserves last December to halt its decline at 4.51 Egyptian pounds to a dollar. The artificial rate made exports cheaper, but increased production costs and inflationary pressure. It also created a booming black market for dollars, with the unofficial rate reaching 5.30 Egyptian pounds to a dollar.

"We now have a stable market, not through the official rate, but rather through the black market," says Sobhi. "In the coming year, the government will want to synchronise the official and black market rates."

The government will also want to reconsider its customs system, analysts say. Egypt had to drop a 15-year ban on imported clothing in January but introduced massive tariffs and a new sales tax in its place.

"I expect we’ll see an opposite shift in 2003," says Sobhi. "Egypt has a new agreement with the European Union, which does not agree with this tariff policy."

While clothing traders got hot under the collar over tariffs, Egypt’s privatisation programme ran out of steam this year. Most top class state companies have already been sold, and finding investors for the remaining 178 is proving difficult.

"Results have slowed down in response to regional instability and local issues, but the efforts have increased," says Mohammed Hassouna, financial analyst at the Public Enterprise Office.

The government may have overvalued some companies, but the emphasis in 2003 will be on quality, not price, Hassouna says. "We are concentrating on finding the proper anchor investor; one who has promising credentials to take the company and turn it around," he says. "We need anchor investors because the stock market is not exactly an option right now."

The Cairo and Alexandria Stock Exchange (CASE) was ranked the worst performing bourse in the Middle East in 2001, dropping 42.7 per cent before recovering in 2002. Regional instability and poor economic performance prompted international ratings firms to downgrade their outlooks to negative. This kept foreign investors away.

The Capital Market Authority introduced new listing rules in August, readjusted the ceiling on daily price movements of the 12 most actively traded stocks and approved margin trading for the first time.

"The changes have not given much weight to the volume, but that’s due to the market conditions," says CASE spokesman Ayman Salah. "What we really need at this stage is investor confidence, new measures to increase investments, and more liquidity and depth in the market."

Salah says greater transparency, timely disclosure and good corporate governance will increase investor confidence. "Listed companies have until August 2003 to abide by the new rules," he says.

Institutional reforms may restore investor confidence, but the performance of the bourse is tied to the broader economy. "We’re not the sole player," says Salah. "We’re part of a team."

2002-2003/EGYPT: War Drums Threaten Economic Recovery

By Cam McGrath Reprint | | Print |

Cam McGrath

CAIRO, Dec 23 2002 (IPS) - Egypt’s battered economy is showing signs of recovery, but a protracted war in Iraq would be a serious setback, analysts say.
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