The 11 September attacks have certainly affected Egypt's economy, but not as badly as expected. Gamal Essam El-Din investigates Click to view cartoon In the year since the 11 September terrorist attacks on the US, Egyptian analysts have been busy assessing and predicting the consequences to the nation's economy. In their debates, two camps have emerged: optimists and pessimists. The optimists, comprised primarily of the cabinet's economic ministers and leading figures of the National Democratic Party (NDP) maintain that the negative impact of the attacks will be limited and short-term. "The economic reform programme, launched in the early 1990s, has placed Egypt on economic ground solid enough to weather any international financial storms," Foreign Trade Minister Youssef Boutros Ghali said one month after the attacks. Ghali reckoned that, at worst, the assault on America would result in losses of approximately $2 billion, or around 3 per cent of GDP (Gross Domestic Product). The pessimists, a mix of economists at the state-supervised Institute of National Planning (INP) and the leftist-oriented Tagammu Party, argued that the attacks would have a long-term impact on Egypt's economy. "The consequences of Black Tuesday will be disastrous and glaringly expose the high vulnerability of the Egyptian economy to external shocks," said chairman of the Tagammu's economic committee, Gouda Abdel-Khaleq. A report released by the INP under the title "The Consequences of 11 September's Terrorist Attacks Against America on the Egyptian Economy" has painted a very gloomy picture. The report predicted that the attacks on America would cause losses ranging from 10 per cent to 12 per cent of GDP or around $11-12 billion. On 11 September 2001, the manager of INP was Egypt's distinguished economist, Osman Mohamed Osman. Two months later, Osman, was promoted to minister of planning. In an exclusive interview with Al- Ahram Weekly, Minister Osman said none of the above assessments were particularly accurate. This, he added, was supported by figures recently released by the Central Bank of Egypt (CBE) on the Financial Year (FY) 2001/2002 balance of payments. These show that Egypt's foreign exchange losses were a paltry $446 million, or around 0.5 per cent of GDP. However, Osman added that this must not lead to the hasty conclusion that the Egyptian economy has escaped 11 September's economic fallout completely unscathed. Osman argued that the 11 September attacks have definitely left a negative impact on the Egyptian economy, just not as bad as we expected a year ago. "The main negative impact of these attacks was that they exerted a brake on domestic growth rates. In 2000, it was expected that Egypt would fully recover from 1997's terrorist attack on tourists in Luxor and move from a real GDP growth of 3.9 per cent, to at least 4.3 per cent in 2001, and 5.3 per cent in 2002," Osman said. The 11 September attacks, Osman added, crushed these growth targets. "Real GDP growth in FY 2001/2002 was a mere 2 per cent. In FY 2002/2003, we decided that the first year of the new five-year development plan allocate LE73 billion to implementing investment projects with the objective of overcoming 11 September's negative effects and attaining a 4.5 growth rate," Osman said. Osman expressed fears that a worsening global slowdown and an American war against Iraq could leave the government's hopes for higher growth rates completely dashed. One year ago, the INP's report stated that four critical areas of the national economy would be hardest hit by the 11 September attacks: exports, tourism, air and maritime transport, and investment. The INP's economists also reckoned that export revenues would be reduced by at least 40 per cent, exacerbating the deficit in the balance of trade. CBE figures, however, tell another story. The CBE reports that export receipts dropped by $435 million, or from $7.078 billion in FY 2000/2001, to $6.643 billion in FY 2001/2002. This was largely due to a drop in oil prices, which has caused oil export revenues to shrink from $2.632 billion in FY 2000/ 2001 to $1.903 billion, or by $729 million. However, the drop in oil export revenues was covered by a drop in imports, which declined by a remarkable $1.797 billion, or from $16.432 billion in FY 2000/2001 to $14.644 billion in FY 2001/2002. As a result, the deficit in the trade balance plummeted from $12.5 billion in FY 1998/1999 to $11.4 billion, $9.3 billion and $8 billion in FY 1999/2000, 2000/2001, and 2001/2002 respectively. Osman indicated that the new five-year plan aims to reduce the trade balance deficit to $3.7 billion. "Speaking optimistically, we hope that the deficit in the trade balance will ultimately turn into a surplus of about $500 million," Osman said. In the service sector, the INP's economists predicted that tourism, which accounts for almost a quarter of Egypt's foreign exchange receipts, would be most affected by the 11 September attacks. They said that the attacks would cause a decline in tourist revenues of over 70 per cent, or a loss of approximately $2.7 billion (out of a total revenue of $4.3 billion). Nowhere was the INP's pessimism further from the truth than in the tourism sector. According to CBE governor Mahmoud Abul-Oyoun, tourism was the first sector to swiftly bounce back to pre-11 September levels. Tourism revenues, Abul-Oyoun said, dropped by around $900 million or from $4.3 billion to $3.4 billion. Ministry of Tourism figures even show that last August's tourist traffic into Egypt registered an increase of 15 per cent, compared with August of last year. The major reason, Tourism Minister Mamdouh El-Beltagui said, is that Egypt has successfully managed to attract greater numbers of Arab tourists who have been scared away from visiting America and Europe by the 11 September attacks. In this respect, El- Beltagui said, the 11 September attacks have had a positive impact on Egyptian tourism. The number of Arab tourists visiting Egypt has increased for the first time in many years. Suez Canal transit fees are also an important source of service sector revenue. Both INP and government economists expected that transit fees generated by the canal would drop by 10 per cent, or $143 million. Again, CBE figures tell a completely different story. The CBE's, Abul-Oyoun, said Suez Canal transit fees dropped by a paltry $24 million. This, according to the chairman of the Suez Canal Authority, Ahmed Fadel, represents a drop of between 2 and 4 per cent. Fadel also indicated that Suez Canal transit fees have begun to recover to pre-11 September levels. "The impact of 11 September was that it killed our hopes of raising our transit fees revenues to more than $2 billion," Fadel said. Remittances from Egyptian workers abroad also did better than feared. The INP's pessimists expected them to plummet by 20 per cent, or more than $600 million. This fear, however, was unfounded. Expatriate receipts, according to CBE figures, dropped by a paltry $44 million or from $2.973 billion in FY 2000/2001 to $2.929 billion (less than 0.5 per cent). All in all, the surplus in the service sector dropped from $5.9 billion in FY 2000/2001 to $3.9 billion. The drop, said CBE's Abul-Oyoun, was largely due to a decline in tourist receipts. Overall, Abul-Oyoun said, the deficit in the trade balance and the modest surplus in the service sector (plus remittances from Egyptian workers abroad) led the deficit in the current account balance (the difference between visible and invisible exports and imports) to shrink from $33 million in FY 2000/2001, to $8.5 million. Abou-Oyoun explained that the service sector has always been relied upon to cover the deficit in the trade balance. "Things have now turned around. It is the reduction in the trade balance deficit which covered the worsening of the deficit in the service balance," Abul- Oyoun said. Moving to the capital account balance, Abul-Oyoun indicated that net foreign direct investments (FDI) dropped from $509 million in FY 2000/2001, to $428.2 million in FY 2001/2002. At the same time, the return on Egypt's foreign investments (mostly in American treasury bills) dropped from $1.8 billion in FY 2000/2001 to $900 million in FY 2001/2002. This, Abul-Oyoun added, was largely due to the American Federal Reserve Bank cutting interest rates on dollar deposits. Osman agreed that the 11 September attacks have adversely affected the flow of foreign investments, not only in Egypt, but in the Middle East in general. "Despite the government's tremendous efforts, foreign investments have never been relied upon to boost growth in Egypt. Our emphasis from now on will be to raise foreign investments in the promising field of liquefied natural gas discoveries," Osman said. Osman said the ease with which the economy has safely absorbed the external shock of the 11 September attacks has reduced pressure on foreign exchange reserves. "Our objective is to secure greater stability in the foreign exchange markets through boosting receipts from commodity and service sector exports, focusing on local production capacities to raise growth rates and reduce imports," said Osman. In contrast to Osman's optimistic remarks, leftist economists maintain that the national economy is still highly vulnerable to external shocks. The Tagammu's Gouda Abdel-Khaleq, said the impact of the 11 September attacks was cushioned because of foreign borrowing in the form of eurobonds issues and foreign assistance. "The Egyptian economy is no longer a gem on the Nile as the government once alleged. Rather, it is an old elephant on the Nile: slow- moving, bloated and with a thick skin on which swarms of insects feed," Gouda added.
