A stronger than expected recovery has enabled Egypt to stay away from donor assistance tied to set policy prescriptions Click to view caption At the outset of 2002, the prospects for the Egyptian economy were bleak. A recession and a liquidity crisis, that had been persistent for two years, were compounded by the fallout from 11 September. A very modest growth rate of around three per cent in 2001 was expected to decline further in 2002 to two per cent. Tourism, one of Egypt's four major foreign currency earners, and a sector which was expected to see strong growth, was also severely hit, leading to a deficit in the balance of payments. The deficit was estimated at the time to be around $2.5 billion. The fallout from the tourism sector also took its toll on jobs and already meager foreign direct investments. In February, the World Bank's Consultative Group meeting for Egypt was held in Sharm El-Sheikh to address Egypt's economic problems. After two days of intense consultations, it was declared that Egypt would receive some $10.3 billion from various donors over the period 2002-2004. Of that amount $2.1 billion was earmarked as quick disbursement money designed to keep the Egyptian economy afloat and assist with recovery. But to date, a good portion of this quick disbursement money has not been received by Egypt. Negotiations continue over how Egypt will use $1 billion, jointly put up by the World Bank and the African Development Bank. A Compensatory Finance Facility (CFF) sum of $500 million was also to be part of the $2.1 billion package. However, the government has not requested the use of this money. The delay in disbursement has been partly due to the fact that the situation has turned out to be better than expected and experts had been too pessimistic. As things turned out, tourism recovered quickly and the balance of trade improved as imports decreased by over $1.5 billion. As a result, the deficit in the trade balance fell from $12.5 billion in FY 1998/1999 to $8 billion in FY 2001/2002. The improved trade balance reflected positively on the balance of payments making the need for cash less urgent. But this was not the only factor that led to Egypt not taking additional financial assistance. The conditionality attached to some of the money, specifically that of the CFF made the Egyptian government refrain from using it. To make use of the CFF would have committed Egypt to speeding up reform and liberalising the exchange rate and the financial sector. While the Egyptian government may have avoided taking any drastic reforms in refraining from using outside financial assistance, international pressure that it carry out these reforms has not ceased. The issues of increased reform, a faster pace of privatisation and the exchange rate has been a continuous thorn in the Egyptian government's side. Because of these issues, the Egyptian economy received a number of credit rating downgrades throughout the past year. The four international rating agencies, Fitch, Standard and Poor's, Moody's and Capital Intelligence, all downgraded Egypt's financial rating. The common line between them is that Egypt would benefit from a more flexible exchange rate. "It would allow for a quicker response to external shocks, and with further depreciation, would facilitate the development of a more diversified export base to reduce vulnerabilities to such shocks," a report by Fitch said. By Niveen Wahish
