Economists and the business community agree that a US attack on Iraq could spell disaster for the Egyptian economy, but disagree on the extent of the damage. Al-Ahram Weekly investigates As the tension between the US and Iraq escalates, Egypt's economic well being is beginning to look increasingly fragile. Its principle foreign currency earners; tourism, the Suez Canal, oil and the remittances of expatriate workers, are politically sensitive and will be the first sectors to be affected should the US decide to carry out its threats to attack Iraq. The memory of the effects of a similar situation, resulting from the 1991 Gulf War, are still vivid. Then, any additional earnings from a rise in the price of oil were offset by a sharp drop in revenues from tourism and remittances. In the aftermath of the war, hundreds of thousands of workers fled Kuwait and Iraq. It took a massive debt write-off and a far-reaching economic reform programme to resuscitate the Egyptian economy in the years that followed. As the threat of war looms large once more, academics and businessmen are warning that a US attack on Iraq would have serious repercussions for Egypt in particular and the region in general. Fouad Sultan, a former minister of tourism, expects that the Egyptian tourism sector will be hit the worst. "The expected slowdown in tourism will spread to the transportation sector in general which, I believe, will be seriously affected," said Sultan. He added that the whole region will be considered a hotspot. "It is natural that people avoid conflict areas during times of crisis," he said. Egyptian exports to Iraq were highlighted by Sultan as another vital area that will be adversely affected. "The flow of exports will stop for a while. At present, it is hard to anticipate how long this will last. It primarily depends on the intensity and longevity of the expected strike against Iraq," he added. Sultan Abu Ali, former economy minister, warns that the sector hardest hit by a US attack on Iraq would be Egyptian expatriate workers in Iraq. "Many Egyptians will return for fear of the ongoing war, while others might be dismissed by the Iraqi authorities," he said. This will, in turn, lead to a sharp decline in their remittances, he said. While Abu Ali expects that the revenues from the Suez Canal will not be affected by the crisis, he indicated that international insurance companies will increase the premiums on overseas shipments. Oil prices may also witness a sharp fluctuation. "This widely depends on whether Iraq will stop pumping oil and, in the event that it does, whether the other petroleum producing countries will make up for the shortage," said Abu Ali. He added that, as a petroleum producing country, Egypt stands to benefit from an increase in oil prices. However, Helal Sheta, deputy chairman of the exporters division at the Federation of Egyptian Chambers of Commerce (FECC), said that if the United States attacks Iraq, Egyptian exports will lose a large and important market. Sheta estimates the value of Egyptian exports to Iraq within the UN's "Food for Oil" programme at $1 billion. Sheta warned that finding alternative markets for these products may be easier said than done. Although Egyptian exporters are able to compete in the Iraqi market, he explained. "The big problem is that it is not easy for them to find other markets since Egyptian exports are still unable to compete in international markets." Sheta added that this figure was expected to increase in the coming years, after the implementation of a Free Trade Agreement (FTA) signed between Egypt and Iraq in July 2001. The FTA was ratified by the People's Assembly last January but has not been put into effect yet. Indeed, the mere threat of war has been enough to disrupt business with Iraq. Abdel-Aziz Goueda, export manager at the International Group for Investment (IGI), a company that exports foodstuffs and heavy machinery to Iraq, said that his company's business with Iraq has already decreased due to a reduction of oil production by Iraq. Goueda added that the costs of insurance and shipment to Iraq have increased by 60 per cent. This is because many shipping companies refuse to ship to Iraq, fearing war. "These high costs will inevitably lead to higher prices for Egyptian products, which in turn erodes their competitive edge, making it difficult for Egyptian exporters to procure new contracts," Goueda said. According to Goueda, the Iraqi market, despite the political tension, is a very competitive one. For example, there are 150 international companies competing to get deals in the food sector within the framework of the "Food for Oil" agreement. The difficulties of dealing with the Iraqi market are exacerbated by the fact that Iraqi ports are not operating at full capacity. According to Goueda, shipments can wait for days in ports waiting to be unloaded. In these cases, the exporter pays about $1000 per day as a fine. The Federation of Egyptian Industries (FEI) held a meeting recently to discuss the negative impact to the Egyptian economy of a possible US strike on Iraq. It estimated that the Egyptian economy would lose, in total, about $5-7 billion, of which about $2.5 billion would be lost by Egyptian companies. In a press release issued after the meeting, the FEI warned that a military attack against Iraq would effectively put an end to trade relations between the two countries, estimated at $3 billion annually. The FEI also estimated that a war in the region would raise the cost of insurance by about 20 per cent. In terms of indirect repercussions, the FEI warned that an attack on Iraq would negatively affect industry by disrupting the flow of imports, such as raw materials and other production requirements. Increased insurance and shipment costs could also increase the price of these imports. Factories producing exports to Iraq will be severely affected, the FEI cautioned. Federation members also said that they feared an attack on Iraq could lead to a depreciation of the Egyptian pound, indirectly raising the prices of goods and services. Commenting on the effects of a US attack on Iraq on the region in general, Emad Eldin Shahin, a professor of political economy at the American University in Cairo (AUC), said it would have a serious economic impact on the region. In the oil sector, Shahin predicted that prices will rise in the few weeks before the attack is launched. This would be beneficial for oil exporters. "Once the war takes place, prices will start to stabilise because of many things," he said. "Political agreements will have to be made by oil exporting countries to make up for the shortage or the lack of Iraqi oil. The pressures will work themselves out and then there will be price stabilisation after a while." How will that affect the oil producing countries? "That should be a positive sign," said Shahin. "However, if [and most probably they will], they take part in the war against Iraq most of the gains that they make from oil will be paid in war costs." Shahin added that the revenues of many labour exporting Arab countries could be affected by another war in the region. Patterns of inter-Arab labour remittances were dramatically affected by the Iraq-Kuwait war, Shahin said. For political reasons, many countries, such as Saudi Arabia and Kuwait, replaced Yemenis, Jordanians and Palestinians with Asian workers. He warns that financial pressures on host countries, as a result of a new war, could cause a further reduction in the number of Arab workers. As for the effects of a war on the flow of Foreign Direct Investment (FDI) to the region, Shahin argues that compared to Latin America, Middle East countries have been attracting very low levels of FDIs. He argues that FDIs to Iraq itself may increase after the war to fund reconstruction efforts. Shahin said that the US will force the Gulf states to share in the reconstruction of Iraq, and that whatever income the Gulf states make from increased oil prices will be channelled into Iraq after the war. However, Adel Beshai, professor of economics at AUC, said that he believes Egypt, in the event of an attack on Iraq, will be the region's least affected country. "Egypt will not collapse economically," Beshai said. "We are a diversified economy. We are not Saudi Arabia, living only on oil. The Egyptian economy has a sophisticated agricultural sector, a rather good industrial sector, a skills base, and a huge informal economy which will keep this country moving." Beshai played down the possible effects of a war in Iraq on the remittances of expatriate Egyptian workers in the Gulf. He argues that an unrealistic exchange rate, which has created a large black market, has done more damage to Egypt's foreign currency earnings from remittances than an attack on Iraq. "Remittances do not depend on Iraq," said Beshai. "Remittances depend on internal economic policy. Because naturally a worker from Suhag in Upper Egypt, will not change dollars at the bank for LE4.52. He will sell them on the black market at a rate of LE5.22. If the government works towards having a unified exchange rate, remittances will increase." Beshai feels that the West has as much to lose from an attack on Iraq as the Arab states do. "If Iraq is attacked, the West will have to worry for many years about their oil supplies from the Gulf countries," Beshai said. "From the point of view of the price of oil, the best thing would be not to attack Iraq at all, as far as I am concerned. An attack could lead to a host of unpredictable events. Iraq is a very complicated country. It is an Arab country, an oil country, and it is in the Middle East. Attack Iraq and you open a Pandora's box," he added. Reported by Mona El-Fiqi, Shereen Nasr and Maha Saleh
