27 Sep. - 3 Oct. 2001
Issue No.553
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Al-Ahram Weekly Online 27 Sep. - 3 Oct. 2001 Issue No.553 |
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New difficulties, more time
The fall-out from the worst terrorist attack in US history has been far reaching -- with some unexpected results, as Gamal Essam El-Din writes
Egypt's attention, along with the rest of the world's, was completely diverted on 11 September to the deadliest terrorist attack in history against the United States. On that same day, the government of Prime Minister Atef Ebeid was scheduled to hold a long-awaited meeting with President Hosni Mubarak to present him with a full account of its performance over the last year. The meeting was held, but its agenda was changed to focus on the local repercussions of the attack and means of dealing with them.
Ebeid's hopes for higher growth rates could be dashed
The performance of Ebeid's government has recently come under fire in parliamentary and press circles. Gamal Heshmat, a prominent member of the Muslim Brotherhood's 17-seat bloc in parliament, submitted a request to People's Assembly Speaker Fathi Sorour that Ebeid be asked to resign or else be fired by President Mubarak. Heshmat cited rising inflation rates (13.5 per cent), a worsening liquidity crisis and chronic corruption in the banking sector as the major reasons for his request.
Interviewed by Al-Ahram Weekly, Heshmat asserted that the attack on the US could not have come at a better time for the government. "In a rare coincidence, the anti-American hostilities broke out on the same day Ebeid's government was expected to be replaced by a new one. Instead of coming under sharp scrutiny, it was given a new lease of life," he said.
Economic pundits, however, think Ebeid's government had already begun to move in the right direction. Abdallah Tayel, chairman of parliament's economic affairs committee, told the Weekly that the government has managed, over the last four months, to introduce four long-awaited key market reforms. "The greatest move was the one taken on 5 August when the Central Bank of Egypt (CBE) announced its new official and flexible exchange rate of LE4.15 to the dollar. This has led to stabilising the dollar exchange rate and has effectively prevented further devaluation of the Egyptian pound. This was the government's most difficult test and it managed to pass it successfully," Tayel said.
Tayel cited parliament's approval of a new mortgage law, the signing of a trade partnership agreement with Europe and injecting new life into the privatisation programme as the other three anti- recessionary reforms. "As a result, the growth rate registered an average of 5.5 per cent while inflation dropped to 2.5 per cent," he said.
Although the tragedy in America might have given the government a new chance to prove itself, the question now is how it will be able to weather the detrimental economic effects of this incident.
Economic experts point to three crucial sectors that are expected to be affected most: foreign exchange revenues, investment and exports.
"America is the dynamo of the world economy and last week's tragedy will mean disastrous economic implications for all countries of the world," Tayel said.
However, he argued that Egypt could turn the effects of this catastrophe into benefits. "In my opinion, the government needs to carry out some quick short-term moves," Tayel said. In the foreign exchange area, Tayel believes the government should take advantage of the current rush to sell dollars. "This wave was reinforced by last week's decision by America's Federal Reserve Bank to cut the interest rate by half a point," he said. The move, the eighth in a year, lowered the interest rate on dollar deposits from 6.7 per cent a year ago to almost three per cent at the present time. It also increased by seven per cent the difference in interest rates between the US dollar (three per cent) and the Egyptian pound (9.5 per cent for short- term deposits and 10 per cent for long- term deposits). "The government can complement this measure by raising the interest rate on local currency banking deposits by a mere half a percentage point to further discourage people from hoarding dollars. It will induce them to change their deposits from dollars into local currency," Tayel said.
Mustafa El-Said, a former economy minister, suggested other measures to prop up CBE's reserve of dollars. First, he said, the Egyptian pound should be pegged to a basket of European currencies rather than to the dollar alone. Besides, the government should devise a new strategy aimed at curbing imports by at least LE3 billion per year (bringing them down from $18 billion to $15 billion this year). It should also make use of any possible hike in oil prices to accumulate as many dollar revenues as possible. "All these measures combined can bring our dollar reserves back to their level in 1996, when they topped $23 billion," El-Said said.
El-Said believes the government's reaction to the possible repercussions of the terrorist attacks on the economic level has been tepid, "although their shock waves are widely expected to reverberate in different ways in the Middle East markets in particular." This will be quite evident in the area of investments. Economic experts are afraid that overseas investors will brand Middle East countries as high-risky markets. If so, Ebeid's hopes for an annual LE25 billion (around $5.8 billion) in investments necessary to raise growth rates will be severely dashed. Last year, a United Nations report on Africa said Egypt generated overseas investments estimated at $2.2 billion.
"We have to draw a distinction between European and American investment flows. I think the Americans will completely turn away from investing in the Middle East, even in friendly countries like Egypt. As for the Europeans, there will be a drop, but not to a frightening extent. Egypt is an attractive market to investors in England, Italy and France and it will remain so in the long term irrespective of any terrorist shocks," El-Said said.
El-Said urged Ebeid's government, however, to concentrate on Arab Gulf investors. "After the huge losses these investors incurred due to the attacks [initially estimated as ranging from $40 to $200 billion for Saudi Arabia and from $40 to $60 billion for Kuwait], the government should move fast and aggressively to persuade them that Egypt is a safer haven for their investments than America and Europe," El-Said argued. "These investors can play a very significant role in accelerating the privatisation programme, which has been stalled for a long time due to public sensitivity to overseas ownership," he added.
In export terms, the ramifications of the attacks on America were extensively discussed by the General Union of Chambers of Commerce's Division of Investors. In a meeting held last week, the division's chairman, Mohamed Abul- Enein, emphasised that the attacks damaged an already vulnerable world economy. "America was already in recession and now it will also suffer a sharp decline in consumer spending," said Abul-Enein.
Luckily, though, he said, Egypt's trade with America accounts for 25 per cent of its total foreign trade, compared to 40 per cent with the European Union. "We will, however, suffer more if a wide- scale war against terrorism is launched. In this case, we might face a significant drop in our textile exports to the American market," Abul-Enein said.
So as not to remain exposed to fluctuations in demand by Western consumers, El-Said believes the government should readjust its policies to focus more on Arab markets. "The Arab common market is the future for Egyptian exports. Now is the right time to open up this market by accelerating the implementation of complete free trade zones with Arab countries and putting the common Arab market into effect," El-Said said.
A good example is Egypt's free trade zone with Iraq, he said, which is expected to raise our exports to this Arab country to more than $3 billion by the end of this year.
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