Do the latest figures on the Egyptian economy herald recovery or signal crisis? asks Salah El-Amrousi Official statements and figures have painted a rosy picture of the Egyptian economy, particularly concerning its relations with the international economy. Early in September, Central Bank of Egypt (CBE) Governor Mahmoud Abul-Oyoun announced that all economic indicators for 2002-2003 pointed towards a clear upswing in the economy. Abul-Oyoun reported a surplus in the balance of payments and a rise in total exports, which, in his opinion, was one of the most important results of the deregulation of the exchange rate. In a similar vein, Ministry of Foreign Trade reports tout of a rise in exports and a decline in imports, with a consequent 37 per cent drop in the balance of trade deficit over the first five months of this year (ie since the floating of the pound) compared to the same period last year. Is this the beginning of a miraculous turnabout for the Egyptian economy? More specifically, have we really passed the watershed in the process of recovering from the chronic deficits in our balances of payments and trade, and is the floating of the pound one of the heroes in this story? Or, is the reverse true? Is the economy still floundering and did the float aggravate the crisis rather than alleviate it? The average Egyptian must have taken cheery official statements and figures with a grain of salt. There is a blatant contradiction between the government's reports and what everyone can see for themselves: rising inflation, unemployment, and economic stagnation. Prime Minister Atef Ebeid blamed the rising prices on the time-honoured scapegoat of greedy merchants. Similarly, CIB Governor Abul-Oyoun expressed his astonishment at the continued existence of a black market for hard currency, in spite of all the positive economic indicators and the pound's successful flotation, and fingered currency speculators as the responsible party. Such attitudes suggest a tendency to avoid an objective analysis of the economic situation, which, in turn, could lead people to believe that the statistics they hear are fraudulent and meant to serve purely propagandistic purposes. I do not believe matters have yet reached that point, which is not to rule out some possible inaccuracy in the figures. I do believe, however, that a certain optimism shaped a superficial reading of statistics at the expense of some more fundamental facts that come to light through a more objective approach. To begin with, we must remember that Egypt's primary quandary in its economic relations is its trade deficit. Egypt is a net service exporter. Some of these services are unique or relatively unusual: the Suez Canal, tourism, and expatriate labour which accounts for the lion's share of remittances from abroad. For this reason, Egypt has always had a surplus in its balance of services, which contributes greatly to offsetting the deficit in the balance of trade by reducing the deficit in the running balance of payments. The balance of financial and capital transactions also obtains a surplus. Egypt is a net capital importer (through direct foreign investment, short term investments in the stock exchange or so-called "wallet investments", foreign loans and government loans). These resources are registered in the accounting ledgers as revenues, not deficits. These ledgers only begin to show in the red when debt service payments and transfers on the profits on foreign investments exceed incoming resources, a fate that occurred to many countries in the 1980s but one which Egypt avoided when it had a portion of its debts written off for political reasons. In all events, this means that a surplus in the overall balance of payments may go hand in hand with mounting debt and direct foreign investment, but not be a reflection of actual economic performance. Rather, the crucial factor has always been the balance of trade, which reflects the economic performance of the various branches of material production. The most important of these is industry, which is the primary means for obtaining equilibrium or a surplus in the balance of trade since it is the branch of production that is theoretically capable of unlimited expansion. Returning to the stated 37 per cent reduction in the balance of trade deficit during the first five months of this year from its level in the same period last year, the possible causes of this improvement are: a growth in exports, a reduction in imports, or a combination of the two. According to the figures, there has been a 26.3 per cent rise in exports during this five month period this year. This is undoubtedly positive, however, it does not necessarily follow that this reflects an upswing in the economy or a positive impact of the floating of the pound. Indeed, the greatest portion of this increase in exports is in the petroleum and petroleum products sectors, the operable factor for which was the rising in the international prices of oil, rather than the floating of the pound or any improvement in economic performance. If petroleum exports rose by 57 per cent over last year, the absolute volume of this increase is more significant: they amounted to $364 million, or two-thirds of the total increase in exports which came to $544 million. Of the remaining rise in exports, a considerable proportion is accounted for by exports in cotton and other raw materials. Again, rather than the floating of the pound, international prices in conjunction with ideal weather conditions this year for cotton production and the high competitiveness of Egyptian cotton were the operable factors. As for industrial exports, which form the true criterion for the success of any export strategy, they accounted for less than a quarter in the rise in export trade. Moreover, this quarter was made up of increases in the export of semi-finished goods, such as crude aluminum, carbon and textile fibers. Exports in finished goods actually dropped. Nor does this mean that there has necessarily been an improvement in the production of semi- finished goods and a decline in performance with regard to finished goods. Such trends are neither stable nor long-lasting, but rather the product of fluctuations that have occurred frequently for some time. For example, in 1996, exports of both semi-finished and finished products dropped, while in 1997 they both increased. Then, the following year, they parted ways, with exports of finished products rising and semi-finished products . Such fluctuations obviate the claim to any systematic improvement in the export trade of manufactured goods. It is also a stretch to claim that the net effect of the currency float has been positive. Indeed, there is reason to suspect that the opposite might be the case. As production requirements and capital goods (equipment and machinery) are largely imported, the effect of the declining value of the pound was to push up the costs of production and, consequently, reduce competitiveness. Enhancing the competitiveness of Egyptian manufactures is the main avenue towards increasing their export potential and, consequently, eliminating the deficit in the balance of trade. It is obvious that we are a long way from this goal and that petroleum exports remain the major factor in the computation of the balance of trade. The five month period from January to May brought an 11 per cent drop in imports. Generally this is presented as something positive. However, it is one thing when the decline is in luxury imports and another thing entirely when it is in imports connected to production requirements or general consumption needs. The Egyptian industrial structure is formed by a range of light industries which are heavily dependent on the import of intermediate goods and wares and capitalist goods vital to the import structure. The aforementioned period brought an 18 per cent drop in raw material imports, a 12 per cent drop in intermediate goods, a 14 per cent drop in investment goods, a 23 per cent drop in non- durable consumer products (mostly for essential consumption) and a 22 per cent drop in durables (mostly luxury items). This latter decrease, however, was quickly offset by the consumption of locally assembled products; items that used to be imported as finished products are now merely imported in parts. What is more significant, however, is that the decreases in the imports of raw materials, and intermediate and investment goods represent more than 70 per cent of the total reduction in imports. The obvious combined effect of such reductions is to aggravate stagnation, which flies in the face of the much touted banners of "the modernisation of Egypt" and, more to the point, "the modernisation of Egyptian industry." Thus, the contribution of the reduction in imports to the decline in the balance of payments deficit cannot be said to reflect an improvement in economic performance. Moreover, that essential consumer goods accounted for 27 per cent of the total reduction in imports is detrimental to the standard of living of the vast majority of the Egyptian people which, moreover, can only impact negatively on productivity and economic growth in general.
