Despite recording the first significant surplus in years, the trends underlying the balance of payments remain a cause for concern, reports Sherine Abdel-Razek Egypt's transactions with the rest of the world are finally in the black. For 2004/2005 the balance of payments recorded a surplus of $4.5 billion as opposed to a deficit of $200 million during fiscal year 2003/2004. The deficit had been increasing since 1997, a trend bucked only in 2003 when a modest $0.5 billion surplus was achieved. Both components of the balance of payments -- the current account and the capital account -- recorded surpluses despite a ballooning import bill, higher oil prices and growing regional tensions in both Palestine and Iraq. The current account showed a surplus of $2.9 billion while the capital account recorded inflows of $3.4 billion. Over a comparable period last year the capital account showed outflows of $500 billion. In a report released earlier this year The Economist Intelligence Unit commented on Egypt's improved balance of payments figures for the first half of the fiscal year 2004/2005: "[Egypt] has benefited from the high global economic growth rates in 2004 reaching five per cent, the fastest rate of growth for 20 years." Invisible earnings contributed most to the surplus. Revenues from tourism and the Suez Canal both recorded significant increases, as did the level of remittances from overseas workers. The latter grew partly as a result of increased economic activity brought about by rising oil prices in the oil-rich Arab states and partly because of the improvements in exchange liquidity engineered by the government's monetary policy team since late 2003. Capital account trends supported those of the current account. Efforts to attract investment have intensified since Ahmed Nazif's government was appointed in July 2004 and are now beginning to reap fruit. Foreign Direct Investments (FDI) to Egypt reached $3.5 billion during 20004/05 compared with less than $500 million in the preceding period. A buoyant oil sector and fast moving privatisation programme has attracted a lot of foreign money in the last twelve months. In addition, several local banks attracted increased foreign interest, the largest deal being the French Société Générale Banque's purchase of an LE714 million stake in the National Société Générale Bank (NSGB). Greece's Piraeus Bank also spent LE133.4 million acquiring a stake in the Egyptian Commercial Bank. The upbeat performance was reflected in the stock market. According to Bloomberg Egypt's stock market has been one of the best performing markets of 2005 with a 110 per cent year-to-date dollar adjusted increase in the Cairo and Alexandria Stock Exchange's main CASE30 index. New investments pushed market capitalisation from LE172 billion in June 2004 to LE336.96 billion in June 2005. Despite the surplus the underlying trend in the visible portion of the balance of trade continues to give cause for worry. Egypt's imports rose 59 per cent to reach LE55.9 billion during the first half of 2005, pushing the visible deficit to LE29.8 billion with custom tariff reductions and faster economic growth expected to increase demand still further. There is no quick-fix in sight. According to the Ministry of Foreign Trade and Industry wheat, corn and oil accounted for the bulk of increased imports. While the economic rationale behind recent tariff reform, in the broadest terms, is to encourage the import of goods for use in domestic production while offering a degree of protection to finished products, export growth remains far more sluggish than was hoped, despite recording its highest growth rate for five years. Minister of Foreign Trade and Industry Rachid Mohamed Rachid announced in July that Egyptian exports had increased by almost 21 per cent to reach LE50 billion by the end of fiscal year 2004/2005. The bulk of the increase, though, came in the oil sector -- which accounted for LE30 million -- and was due mainly to increased international oil prices. Higher oil prices are a double-edged sword. While they represent a short-term gain, Egypt's production capacity is declining. They also contribute to slowing growth in the major economies which in turn can negatively effect demand for Egyptian exports and reduce the number of tourists visiting Egypt. Receipts from tourism, the Suez Canal and remittances from Egyptian workers overseas also remain vulnerable to a range of factors outside Egypt's control. The flow of tourists, and of containers through the Suez Canal could both be adversely effected by the fallout from the Mehlis report into the assassination of Lebanon's former prime minister Rafik Al-Hariri should that include the imposition of sanctions against Syria and increased regional instability. Borrowing in international markets, while boosting Egypt's capital account inflows, also brings high debt servicing costs and leaves the domestic economy vulnerable to any global economic shock. Egypt issued $1.25 billion of euro bonds, guaranteed by the US, in international capital markets last month, with the proceeds ear-marked to support economic reforms. The 10-year bond issue came just weeks after the state-owned Egyptian General Petroleum Corporation had issued $1.55 billion of bonds in international markets.
