What price Saddam?

As the US ponders an Iraq attack, the Egyptian economy is already feeling the pinch. Jasper Thornton looks at the dangers
Foggy Bottom is a delightful area in the heart of Washington DC. Lime-green trees line wide, well-kept streets, public parks break the skyline, and on holidays tourists stream out of the subway to gaze in awe at the pale stone and Doric majesty of the Lincoln memorial. It is all a far cry from the Soviet tenements and choked streets of down-town Baghdad. But the two are linked; for Foggy Bottom is also home to the US Department of State, and it is from there that the decision will come to rain ruin on Iraq. If it does, the economies of the region may not escape the storm.
Standing squarely in the path of danger is Egypt's tourism industry. It is already teetering on the edge of a precipice. Revenue from tourism will be $1.8 billion for the fiscal year 2001-2002, estimated Minister of Tourism Mamdouh El-Beltagui in January: a huge fall from the $4.3 billion earnt in 2000. El- Beltagui has, however, spied the green shoots of recovery; he announced in Berlin in March that he expects an upsurge late 2002.
But what if the US and Iraq are at war? Even those hopeful signs may be swept away. Elhamy El-Zayyat, chairman of the travel agents' association, is deeply worried. He told Al-Ahram Weekly that during the war between Iraq and Iran, US travellers dreaded the region so much that they refused to come to Egypt, even though the US was not directly involved, and even though Cairo is three hours' flight from Baghdad. "Their geography can be a little hazy, they think we and Iraq are too close," he says, ruefully. And should war erupt? "We can kiss our US business good-bye. They may only account for four per cent of tourists, but they spend so much on luxuries and high class travel that they provide eight per cent of our income. We simply cannot afford to lose them." It is not only the Americans. "Sixty eight per cent of our trade comes from Europeans, and if they don't come, we're in deep, deep trouble. We've hardly recovered from 11 September. This is the high season and we're well short of capacity as it is." (21 per cent short in the first two months of this year, compared to last).
The picture for oil is not much brighter. Since the start of the year, analysts agree that oil has traded at a premium of two to three dollars, in anticipation of imminent war. In the event of a war breakout, they are divided about how high the oil price will go, but certainly it will rise, as Iraqi production (2.3 million barrels a day under the oil-for-food programme) stops. Unlike the Gulf War, however, oil will still flow from Kuwait, and shortfalls can be met by Saudi Arabia, which is operating at least two million barrels a day shy of capacity, and Russia. Most analysts think that the price will go up to around $30 a barrel for Brent crude, which, inflation adjusted, is less than the heights it nudged just before Operation Desert Storm.
Egypt as a country is an oil exporter. But under its agreements with international oil companies, the state has title to only two- thirds of the oil that is extracted. Sometimes it buys oil from the third held by international oil companies to meet domestic demand. In the year 2000, Egypt ran an energy balance of payments deficit in its current account. Matters were worsened by the developing gas industry, the cost of which the state must share with international companies under the terms of concession agreements. Egypt also refines close to as much oil as it produces, and sometimes buys lighter oil from abroad to put in its refineries. This is also used to meet domestic demand. The new MIDOR refinery, for example, refines oil from the Gulf. Amr-Kamal Hammouda, director of strategy and energy think-tank Al-Fustaat, told the Weekly that this all means that Egypt may suffer in the event of war. "The price of input into our refining industry will rise, and if there is a war, the cost of importing machinery, industrial equipment, spare parts, shipping, and of insurance, will go up. A rise in oil prices is not good for Egypt."
Oil also affects trade between Egypt and Iraq. Since the start of the oil for food programme in 1996, Iraq has been permitted to use oil revenue to import goods, and its trade with Egypt has thrived. Last week, the Egyptian government finalised a free trade agreement with Iraq, amid much bonhomie and comments that bilateral trade between the two countries has become an economic priority. This was not just oratory. Since the oil-for- food programme began, Egypt has exported close to four billion dollars worth of goods to Iraq, including sugar, cooking oil, soap, motor vehicles, chemicals, medicines and building materials. The trade is currently worth around a billion dollars a year, 22.6 per cent of all trade between Arab countries. Iraq pays in hard currency, contributing to Egypt's foreign currency reserves. An Iraqi businessman active in trade between the two countries told the Weekly that he and his peers were deeply depressed about prospects for the trade should war break out (with the proviso that this was nothing compared to their fears for the Iraqi people). One positive sign, depending on how you look at it, is that Saddam Hussein expelled most of the Egyptians working in Iraq during the Gulf War (up to 700,000 according to the UN Research Institute for Social Development). That means a sudden and calamitous drop in expatriate remittances is not a danger Egypt faces.
Nevertheless, the net economic effect of all this is baleful. Ahmed Galal, director of the Egyptian Centre for Economic Studies, told the Weekly that war is always destabilising; it scares investors and slows economic growth. More specifically, any fall in tourism revenues or collapse in the trade with Iraq will affect foreign currency reserves, and this is one of a few factors that affects the strength of the much-beleaguered Egyptian currency.
So what can be done to forestall economic disaster in the event of war? Precious little, it seems. El-Zayyat hopes the government will again subsidise travel companies running charters in Egypt, as it did after 11 September. El-Zayyat told the Weekly that half of the tourists visiting Egypt do so under chartered arrangements. Charters are extremely difficult to start once they have been cancelled; they require detailed arrangements with airliners, hotels, etc. El-Zayyat told the Weekly that the tourism industry has been kept alive by government help for charters since 11 September, which have thus been able to run at 50 per cent capacity. He hopes for similar help in the event of war. He also feels that Egyptian travel companies should continue their efforts to woo local or Gulf customers, poor substitute though they are. Galal puts it in economic terms: "You need foreign exchange from abroad. Domestic clients are no substitute for money from France or Germany. It is the difference between a domestic reallocation and a foreign injection." The only other possible emollient is more aid.
Apart from these few steps, not much can be done. It may seem perverse to worry about economic matters when lives are at stake, but the two are not mutually exclusive. If the US and Iraq open hostilities, people will suffer. It is now in the hands of the diplomats -- and a few of the burghers living and working in a venerable old area of downtown DC. On their decisions rests the fate of many.
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