Forecasting the storm

More than six weeks following the terrorist attacks on the US, economic pundits are expressing scepticism that Egypt will escape the economic fallout unscathed. Gamal Essam El-Din reports
Since the attacks on the United States on 11 September, local think-tanks and analysts have been busy assessing and predicting the consequences for the domestic economy. The initial optimism across the board that Egypt would suffer only a brief setback has been clouded by the emergence of a group of pessimists.
The optimists in this debate, primarily comprising cabinet ministers and leading businessmen belonging to the ruling National Democratic Party (NDP), continue to maintain that the negative impact of the attacks on the Egyptian economy will be limited and will be merely 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," Economy Minister Youssef Boutros Ghali told members of the NDP's Economic Committee two weeks ago. Ghali reckoned that at worst, the assault on America will cause losses amounting to approximately 7 per cent of GDP, or around LE6 billion.
The pessimists, comprising a mixed bag of economists at the state- supervised Institute of National Planning (INP) and the leftist-oriented Tagammu Party, argue that the attacks will have a long-term negative impact on Egypt's economy. "The consequences of Black Tuesday [11 September] are disastrous enough to call for mobilising the state for a war economy," asserted an INP economist. The INP this week released a report, entitled "The Consequences of 11 September's Terrorist Attack against America to the Egyptian Economy," in which it predicts that the attack on America will cause losses ranging from 10 to 12 per cent of GDP, or $11 billion.
The two camps, however, concur that four areas of the economy will be affected most: tourism, air and maritime transport, exports and investment.
There is a general consensus that tourism, which accounts for a quarter of Egypt's foreign exchange receipts, is at the forefront of the sectors to be hit by the assault on America. "The 11 September tragedy is the fifth deadly blow dealt to the Egyptian tourism sector in 16 years," Tourism Minister Mamdouh El-Beltagui told parliamentarians two weeks ago. El-Beltagui said that the inflow of tourists declined by 18 per cent over the period from 11 to 30 September. Prior to the attacks, the minister of tourism had suggested that tourism revenues would increase by $10 billion over the next five years. The ministry, which projected at the beginning of the year that tourism income for 2001 would be $4.3 billion, now expects that the figure will not be met. Projections were already lower than revenue for 2000, which amounted to $4.5 billion.
El-Beltagui is optimistic that the US- Afghan war will be over within three months. "In that case, I expect that by next spring tourism will be back to normal, although the fall in revenues is sure to rise from 18 per cent in September to 35 per cent or 40 per cent by the end of the next three months [compared to revenue last year]," El-Beltagui said.
In contrast, INP's economists are highly pessimistic about the immediate future of tourism in Egypt, predicting that the year beginning September will see tourism revenues drop by 70 per cent compared to last year -- amounting to a gargantuan loss of approximately $2.7 billion. "This is realistic because America's politicians and generals aim for a protracted and painful war on terrorism," INP's report said.
Another pillar of the Egyptian current account receipts is remittances from workers abroad. Government sources reckon that the current US-Afghan war will decrease these by 20 per cent, or more than $600 million. INP's report, paints an even gloomier picture, predicting that remittances will fall by 50 per cent, that is from $3.750 billion this year to $1.9 billion by the end of next year.
As for air and maritime transport, government sources expect income from this vital sector to decline by 35 per cent (around $350 million). Just a few days after Black Tuesday, a number of international maritime reinsurance companies classified Egypt, along with four other Arab countries, as "war zones." As a result, ships destined for these countries face an almost 50 per cent increase in insurance premiums. Minister Ghali said the decision was discriminatory because it excluded Israel, which is clearly in a state of war. Ghali revealed that the government is negotiating with reinsurance companies in London to reduce the increase. Should these negotiations succeed, Ghali added, the sectors losses are predicted to be 35 per cent compared to last year.
For the transport sector, INP's economists suggest that the possibility that the US war against terrorism would be protracted is more worrisome than increased insurance premiums. "As a result [of a protracted war], this sector's receipts will drop by almost 50 per cent [for the year] or from $862 million to $433," the INP's report said. Both the INP and government economists expect that transit fees generated by the Suez Canal will drop by 10 per cent, or $184 million on the basis of last year's total income of $1,840 billion.
These negative developments are expected to impact on the deficit in the balance of payments, which the INP is forecasting will climb from $853 million in fiscal year (FY) 2000/2001 to more than $1.8 billion in the next fiscal year. "This is a setback for the government, especially after it had managed to reduce the deficit by $2.1 billion (70 per cent) in one year." INP's report said. The government has not made any estimates in this regard.
INP economists reckon that the export sector will be severely affected by the war against terrorism. "Almost half of Egypt's exports go to the US and the European Union. There will be reduced demand from these markets, in addition to the fact that export earnings will be negatively affected by low oil prices," the INP report said. Oil exports last year accounted for 37 per cent of total exports.
Government sources have suggested that export earnings will drop by only 10 per cent. Minister Ghali believes that new export opportunities in the Arab market, particularly Iraq, coupled with the recent devaluation of the Egyptian pound, will buffer the impact of the attacks and subsequent war.
In terms of foreign direct investments (FDI), INP economists predict a decline of 50 per cent. INP's report noted that the flow of FDI into Egypt already fell from $1.6 billion in FY 99/2000 to $509 million in FY2000/2001. "This expected drop is based on the suggestion that the war against terrorism, coupled with the current recession in America, Japan and Europe, will scare overseas investors away from tapping Middle Eastern markets," INP's report said.
Government officials put the coming crunch in FDI flows at 25 per cent, suggesting that additional money from the Gulf businessmen will find its way to Arab markets at the expense of the American and European ones. Officials also cite the potential for FDI in liquefied natural gas (LNG) and petrochemicals schemes to offset the loss in investment by the major industrial powers.
Both the INP and government economists agree that Egypt is expected to lose $180 million in revenues on Egypt's holdings of the American state's treasury bills (estimated at $1.8 billion). "Each half a point cut introduced by America's Federal Reserve Bank in the interest rate will cost Egypt a loss of $180 million," the INP's report said. The American Federal Reserve Bank has made such a cut since 11 September.
To face the above challenges, INP economists called for the immediate adoption of extensive fiscal measures. "Early tentative assessments are necessary to induce us to find stringent and creative measures against them," said INP's director Osman Mohamed Osman.
Such measures include cutting taxes on personal incomes and on the profits of industrial and commercial enterprises, and keeping interest rates at only five per cent higher than the rate of inflation, which is currently 2.2 per cent. "This is necessary to spur demand, stimulate private domestic investment and thus end the recession," the INP report said. The report also argues that the current trade difficulties with America and Europe should provide a rationale for the government to reduce imports (by at least $3 billion) and encourage local production. "This is necessary if we want to turn around the situation so that the calamities of Black Tuesday ultimately work in favour of our nation," INP's report concluded.
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