Shock-absorbent economy?

Egypt's economy is becoming increasingly vulnerable to external shocks, deputies have told the house. Now they want to know what the government is going to do about it. Gamal Essam El-Din reports
In his Labour Day speech, President Hosni Mubarak said, "It is unhelpful to say that the Egyptian economy was harshly rocked by the aftershocks of 11 September." The president went on to warn that Egypt "must not... make of these events a rack on which we always hang our economic hardships, or ignore the pressing need for Egypt to push forward with its plans for economic reform and industrial modernisation."
The 11 September attacks on the US were not the only events to rock the Egyptian economy. Economic pundits refer in particular to two other shocks, to which 11 September was merely the backdrop. The first is the US military campaign in Afghanistan. This was launched on 7 October, 2001, and is still raging. The second is Israel's savage war against the Palestinians, launched on 29 March of this year. And again, despite the canards of the Israeli government, army operations are still continuing.
Deputies speaking in parliament have complained that these dismaying developments have starkly exposed the vulnerability of the Egyptian economy to external disturbances. They have urged policy makers to devise long- term strategies aimed at cushioning the national economy from future trauma, especially in a region braced for greater political turmoil in the years to come.
In assessing the impact of the three shocks, MPs have looked at three prime sectors: services, trade and foreign direct investment (FDI). An exact assessment of these three sectors, they argue, clearly shows how the economy now fares in terms of balance of payments and the current account.
For the service sector, the People's Assembly held extensive debates on the sector's main pillar -- tourism. The Assembly's Tourism and Culture Committee has prepared a detailed report, while Tourism Minister Mamdouh El- Beltagui was summoned on 28 April to answer some 20 questions about the tremors felt in the industry during the past eight months.
In its report, the committee said the shocks had a clear effect on tourism in South Sinai. "South Sinai tourist areas account for 20 per cent of Egypt's income from tourist revenues and boast LE38 billion-worth of investments. The Palestinian intifada reduced tourist traffic into South Sinai by 5.7 per cent, but the following shocks of the past eight months have lowered it by 15 per cent," the report said.
El-Beltagui said the post-11 September disturbances affected tourism swiftly and harshly. In the second half of September 2001, tourism into Egypt dropped by 18.2 per cent. This rate increased to 41.8 per cent in October and 54.5 per cent in November, El-Beltagui said. The minister added, however, that tourism levels had slowly begun to recover to pre-11 September levels. "The drop was just 23.6 per cent in December, 11.8 per cent in February and stands now at 10 per cent," he said. "This means that we are moving back on track, unless other shocks come out of the blue."
The financials confirm El-Beltagui's remarks. Figures recently released by the Central Bank of Egypt (CBE) show that tourism revenues have been hard squeezed by the political strife in the Middle East. The figures show that in the first half of the financial year 2001/ 2002, tourism generated $1.7 billion, compared with $2.2 billion in the same period of 2000/200. Nevertheless, the drop was not as precipitous as some had feared. It was initially expected that the fallout from 11 September would leave tourism revenues languishing at a mere 30 per cent of usual figures. The CBE's report, however, show the drop was just 23 per cent in the first half of 2001/2002.
"This is good for the current account balance and the balance of payments," said El-Beltagui. He agreed, however, with MPs that the number of Egyptians travelling abroad for holidays must be curtailed because this adversely affects the balance of payments. El-Beltagui said he was informed by the British government that England alone received as many as 50,000 Egyptian tourists last year. The CBE's figures show that Egyptian tourists spent 15 per cent more in foreign countries last year than they had the year before.
Another pillar of the service sector is the Suez Canal. The chairman of the Suez Canal Authority (SCA), Ahmed Fadel, was called on to address the Assembly's Transport Committee, and told a similar tale of woe. He said traffic through the canal was drastically reduced by the post-11 September shocks. "This was largely due to some international maritime reinsurance companies increasing insurance premiums by almost 50 per cent for ships destined for some Middle East countries, including Egypt," Fadel said. Actually, CBE figures indicate that foreign exchange receipts from the Suez Canal were higher at $929 million for the period (compared with $894 million in first half of 2000/2001). But Fadel said that the post-11 September traumas had dashed the government's hopes of doubling transit fees for the long term.
"The government's strategy was long ago designed to augment Suez Canal fees to improve the balance of payments," Fadel said.
Remittances from Egyptian workers abroad also did less badly than feared. Some pessimists expected them to plummet by 20 per cent, or more than $600 million a year. This fear, however, was far from realised. Expatriate receipts, according to CBE figures, increased by 12 per cent in the first half of fiscal year 2001/2002, reaching $1.9 billion, compared with $1.7 billion for the first half of fiscal year 2000/2001.
All in all, the service sector generated a surplus of $2 billion in the first half of fiscal year 2001/2002. At first sight, this appears good. But in fact, CBE figures show that this is 31 per cent below what was earned last year in the same period when service sector secured a net $2.9 billion. MPs agreed that the drop was largely due to ailing tourism. "This is very bad because the service sector has always been relied upon to cover the deficit in the trade balance," independent MP Mohamed Qiwita said.
Intense debates in the Assembly's Economic Committee late last month considered how to deal with the fearsome trade deficit precipitated by this revenue shortfall.
Foreign Trade Minister Youssef Boutros-Ghali told the committee members that the governmnt is well aware of the need to turn the deficit in the trade balance into a surplus. "This will help protect Egypt from falling prey every now and then to external shocks," Boutros-Ghali said. He cautioned, however, that it would take some time to achieve this objective. "We face problems in quality, marketing and pricing," he said. "In addition, the trade sector has also become hostage to external shocks."
The minister also reminded MPs that the Egyptian economy was feeling the effects of the economic slowdown in the US "With the engine of the world economy stuttering, its commercial exchange with the outside world falling by seven per cent last year, many other economies around the world have been left in tatters," he said.
Again the figures tell the story. The CBE reports that in the first half of financial year 2001/2002, receipts from Egyptian exports pushed $3.4 billion, while payments for imports climbed to $7.7 billion. These two figures left the deficit in the balance of trade standing at $4.3 billion in the first half of 2001/ 2002. Boutros-Ghali said that this represented a decline in the trade deficit by 12 per cent compared with the first half of fiscal year 2000/2001, when the deficit was $4.9 billion. "This decline was largely due to a drop in imports, while exports faltered because of the decline caused by the post-September shock in oil prices," Boutros-Ghali said.
MPs, however, remarked that as long as exports cannot be substantially boosted in the foreseeable future, the volume of imports must continue to be repressed, especially as Egypt can do without so many "provocative" imports, such as pet food and flowers.
The debate then grew rowdy. One MP observed that Egypt imported eggs, honey and dairy products worth $60 million in the first half of fiscal year 2001/2002. Boutros-Ghali responded by arguing that not all 'luxury" imports should not be considered "provocative." He astounded MPs when he ventured that pet food was indispensable for the cats and dogs owned by foreign tourists who stay at five-star hotels.
Overall, the deficit in the trade balance and the modest surplus in the service sector (plus remittances from Egyptian workers abroad) left the deficit in the current account balance (which is the difference between visible and invisible exports) at a whopping $380 million (compared with about $280 million in the first half of 2000/ 2001).
Moving to FDI, MPs have always been concerned about the pace of the privatisation programme. As expected, however, the post-September shocks has scared foreign investors away from Middle East markets.
Public Business Minister Mokhtar Khattab, addressing the assembly on 28 April, indirectly acknowledged that the privatisation programme was mired in gloom. He insisted, though, that privatisation was moving at an "acceptable pace." "The picture as a whole is not so bleak," Khattab said. But the figures he released, however, told a different story. They show that 2001 was the worst year for privatisation since 1993. Out of a total 45 companies initially readied for sale in 2001, a mere 12 have been divested. This is compared with 23 in 2000 and 33 in 1999. Over the last eight months, just six companies have been either wholly or partially privatised. And none of them has been sold to a foreign investor.
The April bulletin of the Cairo and Alexandria Stock Exchange shows that the last time foreign investors showed interest in the Egyptian privatisation programme was when four international cement producers, from Portugal, England, Mexico and France, acquired four local producers in the period from November 1999 to September 2001. The bulletin said since the privatisation programme began in 1993, a total of 190 companies have been either entirely or partially privatised. Of the latter, the bulletin said, 28 were sold to anchor investors at a value of LE6.7 billion. The number of foreign anchor investors was just seven.
Khattab revealed that the government had been advised by its investment banks and other advisory bodies, to postpone privatisation of strategic bodies such as Telecom Egypt and other electricity distribution firms for a further period. "They told us if we privatised in the aftermath of 11 September shocks, they would be sold at a quarter of their target price," Khattab said.
Nevertheless, CBE figures show that FDI inflows in Egypt reached $334 million in the first half of fiscal year 2001/2002. This is almost the same amount generated in the first half of fiscal year 2000/2001. All in all, the capital account, which includes FDI with portfolio and other investments, secured a surplus of $765 million. CBE's biannual report, however, said the overall position on the balance of payments registered a $350 million deficit in the first half of 2001/2002. MPs in the economic committee did, however, applaud the government's success in persuading foreign donors to help avert the balance of payments crisis caused by the post-11 September effect on such major foreign currency earners as tourism.
But in the long run, that will not be enough. "We must hurry to address our economic imbalances to get out of these vicious cycles of payment deficits and foreign exchange shortages. Failing to do so means that external forces will remain capable of playing havoc with the lives of Egyptians," Qiwita said.
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