Where has all the money gone?

As figures dribble out revealing how badly Egypt was hit by 11 September, Jasper Thornton looks at the state of Egypt's foreign revenue earnings
The government is beginning to release the figures needed for analysts to see how badly Egypt's economy was affected by 11 September. It is too soon for a complete picture, but the omens are not good. Analysts are especially worried that Egypt's ability to earn foreign currency has drastically shrunk; all four of the main sources for foreign currency earnings in Egypt (tourism, expatriate worker remittances, oil, receipts from the Suez Canal), are extremely vulnerable to the effects of world economic dislocation. Of those income sources, three (Suez Canal receipts, oil revenues, and worker remittances) rely on a strong oil industry. Tourism depends on perceptions of how safe the region is. On all counts, Egypt is right in the firing line.
Foreign currency earnings allow the Egyptian economy to cover its import bill. Its reserves act like collateral on a mortgage, persuading international donors that Egypt is worth lending money to. Finally, it allows the government to protect the currency. The donors who meet in Sharm El-Sheikh this week will be carefully scrutinising Egypt's ability to earn foreign currency before deciding whether to hand out the cash. And to many analysts, things are looking gloomy.
First off: oil. In 2000, the sector earned the country $2.6 billion. Figures for 2001 have been released only until July (up till when Egypt has earnt some $1.8 billion). But Egypt's energy industry has surely suffered from the collapse in oil prices since 11 September (down a third from pre-11 September rates -- now hovering just under $20 per barrel of Brent crude). This fall has eradicated any benefits Egypt might have accrued from an increase in oil production for the last quarter of last year (November production, for example, rose by 6,000 barrels a day to around 639,333 barrels a day). The Ministry of Foreign Trade has put losses in oil revenue at 13 per cent.
The big danger, according to analysts, is that any price recovery will come too late, and in the meantime, international oil companies (IOCs) will abandon or postpone production plans, retarding long-term prospects. Egypt's oil industry would then stagnate and the "petrodollar" might seek better investment elsewhere.
For the moment, that possibility remains remote. Tom Fyfe, vice-president of British Petroleum Egypt has told Al- Ahram Weekly that the oil industry makes long-term plans, and these were not affected by the events of 11 September, a one-off episode. Eamonn Gearon, a close watcher of the industry and chief editor of Oil and Gas North Africa Magazine, confirmed to the Weekly that IOCs are declaring their continued commitment to Egypt -- so far -- and that Apache and Ocean Energy have both reported discoveries after 11 September. He did comment, though, that continued exploration was most likely fuelled by demand in the domestic market. "Declining oil reserves motivate oil companies to search for more oil to satisfy the needs of the Egyptian market which consumes more than 60 per cent of local production." Local sales, of course, do not earn foreign currency.
The performance of the oil industry also affects Egypt indirectly. Many expatriate Egyptians work in Gulf countries (two million, according to government figures). Last year they sent home net receipts of just under $3 billion. Many of these workers are employed directly by the oil industry; almost all depend on it indirectly, as do most people in the Gulf countries.
Although from time to time, Gulf governments moot plans to reduce their dependence on Egyptian workers, replacing them with cheaper Asian migrants, Negad Sharaawi, an expert on the pharmaceutical industry, who has been involved in World Bank discussions about migrant labour issues in the region, told the Weekly that Egyptian workers still held the advantage: "They speak Arabic, are often well-educated, and can adapt to the cultural and religious milieu of Gulf countries easily," he said.
But despite that, the number of Egyptians working in the Gulf was gently falling, even before 11 September. In Saudi Arabia, what figures are available suggest that the number of Egyptian migrant workers fell below a million some time at the end of the last decade. The effect of 11 September may speed that fall.
The key index here, a London banker who covers the region but who preferred not to be named, told the Weekly, is the Saudi Arabian economy, which sets the pace for other Gulf economies. Saudi Arabia, the largest employer of expatriate Egyptians, released its budget in December 2001. It made sobering reading. Saeed Al- Shaikh Sharaawi, chief economist of the Saudi National Commercial Bank, told Gulf News that the budget assumes an oil price of between $16 and 17 a barrel, and cuts in output of about 300,000 barrels a day. Revenue from oil, which last year accounted for 77 per cent of the kingdom's income, is forecast to fall by 44 per cent. The deficit is forecast at $12 billion. Total revenue will be down from 215 billion riyals to 157 billion.
These losses will come mainly from a lower oil price; and cowed oil prices, says the banker, will eventually mean that IOCs postpone or shelve projects. The other part of the revenue loss comes from an anticipated cut in production. OPEC has already committed itself to lowering production by 1.5 million barrels a day. Cuts in production mean cuts in the number of man-hours needed for that production. That means cuts in jobs; and many of those jobs now go to Egyptians. Analysts think the kingdom's estimate errs on the conservative side -- conservative, but not outlandish.
Nevertheless, Sharaawi is bullish. "There will be no great effect on worker remittances," he argues. He pointed out to the Weekly that many Egyptians in Saudi Arabia are employed as teachers, for example, and a look at the Saudi budget indeed reveals that education will continue to enjoy the biggest government subsidy -- $14.5 billion next year. More tellingly, Sharaawi argues that Egyptians are employed in the Gulf economies for political as much as economic reasons. He argues, "Egypt has skilfully positioned itself as a cornerstone of the region's economic and political system." In other words, the Gulf states will not repatriate Egyptians peremptorily, lest this upset relations with their regionally pivotal neighbour. But the price the Gulf States are prepared to pay for cordial relations remains to be seen. Tellingly, this year's Saudi budget requires the government to approve all foreign workers.
Revenue from the Suez Canal also depends on an oil industry on a firm footing. On 9 December, the Cabinet Information and Decision Support Centre released figures showing a rise in receipts from the canal for October, reaching $161.5 million, up $1.9 million from the previous month. But worryingly, the volume of traffic had fallen (tariffs are charged on cargo, rather than ship tonnage). In the medium term, analysts expect canal receipts to drop as world economic malaise blights the volume of world shipping.
Tourism is not affected by oil; it does suffer, though, from perceptions that the region is unsafe. In 2000, Egypt took $4.3 billion from tourists. Mamdouh El-Beltagui, minister of tourism, has said that in October 2001, figures were down by 40-45 per cent from the previous October. Informal soundings within the tourism industry suggest the situation may have got worse during the winter season (see box). In November, the Ministry of Foreign Trade estimated that 10 per cent of employees in the sector had been laid off.
How much should all this worry Egyptians? Ahmed Galal, director of the Egyptian Centre for Economic Studies, told the Weekly how Egypt might suffer. "The shortfall will be not less than $2.5 billion. That was money the country was counting on," he said. He went on to explain that Egypt now had two choices: either it must adjust the exchange rate in full to balance the current account, or find a way of making up the revenue shortfall, either from international donors, or reducing imports and raising exports. "But business cannot carry on as usual," he told the Weekly.
Galal would like to see a blended policy; some exchange rate adjustment and money from international donors, combined with a sustained growth programme. Recent efforts to reduce imports, he observes, have not helped stimulate the economy for long-term wealth generation. "Industrialists," he comments, "who rely on intermediate imports to make Egyptian goods, are now uncertain," he said. He cautions about too much focus on the short term at the expense of the longer vista. "We need a coherent reform programme," he remarked, "we can't always be putting out fires. There will always be another fire."
That leaves generosity from abroad at Sharm El-Sheikh. And if the donors are less generous than Egypt hopes? "The exchange rate will need to adjust, but maybe too much. Prices for imported goods will rise, and the exchange rate will then suffer inflationary pressure from outside," said Galal. Memories return of the dark days of high inflation that Egypt seemed to have beaten.
Sharaawi also has words of caution. He observes that Egypt can't take much more ungoverned pressure from speculators on the pound. He told the Weekly that a big risk is that unscrupulous money-changers will "exploit the tight economic situation, as they did in the 1970s and 1980s." Sharaawi fears that they will target expatriate remittances and, rather than sending them through the banks, might dispense them at a favoured rate, creating a secondary market and pressuring the pound. This, he thinks, will make macro-economic management impossible, preventing the Central Bank of Egypt from steadily navigating any crises.
Since 11 September, moves have been made at home and abroad to stop the economy slipping into a terminal condition. Pounds have been devalued, the cabinet shuffled and international donors petitioned. The economies ailment, and the proper remedy is fairly clear. Much rests on whether Egypt gets the cash it needs at Sharm El- Sheikh, and what it does with the money. The other worry must be the oil price. All else depends on its return to health -- that, and no more terrorist attacks.
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