Light at the end of the tunnel
Four months after the end of the war on Iraq,
Sherine Abdel-Razek discovers that worries about the war's impact on the Egyptian economy were exaggerated
During the build up to the war on Iraq, economists, businessmen and most Egyptians were holding their collective breath for fear of the negative impact the war would have on the local economy.
The economy was already reeling in the aftermath of the pound devaluation and many feared the additional impact of the war would kill off any hope of a revival in the near future. Government officials gave gloomy predictions of seven- digit losses caused by the war.
However, four months after the fall of Baghdad, the economy does not seem that dismal after all. While the exact cost the economy weathered is still unknown, it definitely will not reach the figure of $6-8 billion regularly cited before the war.
Government economists based these predictions on an expected four-fold shock -- a sharp drop in tourism revenue, diminished Suez canal traffic, the end of the Oil for Food programme temporarily eliminating all Iraqi-Egyptian trade, and foreign investors shying away from FDI in the Middle East.
However, in one of those unusual cases where the reality is rosier than government statements would suggest, dire forecasts proved unfounded and the outlook for the rest of the year seems even better.
During a recent press conference, Tourism Minister Mamdouh El-Beltagui was relieved to report that war-related financial losses in Egypt's vital tourism industry were far less than the $2 billion he had forecast on the eve of war in March, but he declined to give a figure for the actual shortfall.
"The second half [of 2003] will be better than the first," he told a Foreign Press Association briefing. "We are going to receive maybe five million visitors by the end of this year."
Egypt had some 5.2 million foreign tourists in 2002, after attracting a record 5.5 million in 2000. The number of tourists visiting Egypt dropped by 22 per cent in March compared to the same period last year. While April's and May's figures were less than last year's by 15 and 10 per cent respectively, figures for June were actually an improvement from 2002. Analysts believe that the sector became accustomed and well prepared for such shocks. "Now we know how to offer good deals at times of tension, having learnt the lessons well after the 1997 Luxor massacre and 11 September," says a tour operator who asked to remain anonymous.
And while the losses of the tourism sector were more modest than expected, revenues from the Suez Canal surpassed all expectations. The canal's revenue in the first five months of the year reached $1.04 billion, up almost 40 per cent from $752m during the same period of 2002.
"This sharp rise is attributed to the exporters' rushing to deliver their shipments before the war started and then the large number of US and British warships passing through the waterway en route to the Gulf during the war," said Lieutenant General Ahmed Ali Fidel, the Suez Canal Authority's chairman.
As for the exports to Iraq, which had ranged between $1.2-$2 billion annually in the two previous years of the now-defunct Oil For Food programme, their loss is believed to have been partially offset by an increase in the value of oil exports. "We saw a 24 per cent increase in oil prices since the war, a factor that definitely helped the exports side on the balance of payments," said Joseph Iskandar, an investment analyst at Prime Securities.
On the micro-level we find that dozens of Egyptian companies are currently bidding for subcontracts to participate in the post war reconstruction of Iraq. While the number of companies submitting bids from all involved sectors is not known, in the construction industry alone there are 60 companies seeking contracts. While it may end up that only 30 or so win contracts, for now Egyptians are optimistic about their chances.
"We [Egyptian companies] have more potential than American or British companies to win a contract. We have experience in the region, we know the language and more important we enjoy a competitive edge cost-wise due to our proximity," said Saad Hamza, head of investor relations in Arab Contractors, the country's largest contracting group and a contender in bidding.
The stock market is the best available indicator for measuring the pulse of these potentially expanding companies. Iskandar commented that "the market had a pat on the back after the war. This was due to the fact that main market movers have good potential in Iraq. Speculation that these companies will be able to secure some contracts in Iraq pushed the shares upwards."
"We have OTH, the market biggest share in terms of value of transactions, which is seen to be among the front runners for the first GSM licence in Iraq -- it started the year around LE13 and we see it shooting in some sessions up to LE40," Iskander pointed out.
Another Orascom group member Orascom Construction Industries (OCI) has fared well in the wake of multiple visits of company president, Nasif Sawiris, to Iraq amidst strong rumours that it will secure several contracts. OCI has a US-based affiliate, giving it better access to USAID projects, and has close ties with one of the eight companies who won the main contracts for the reconstruction project.
Iskander also believes that some pharmaceutical companies are also looking ahead to the resumption of medicinal exports to the Iraqi people, a trade valued at $25 million before the war.
Different bodies are trying to coordinate Egyptian efforts to secure a bigger slice of the reconstruction pie. The Federation of Egyptian Industries is organising meetings for the representatives of different contracting companies to guarantee that only qualified companies will be bidding. The meetings also aim at convincing companies not to launch price wars amongst themselves. "We have to take a lesson from what happened when unqualified Egyptian companies started what is considered a bidding war among for the reconstruction of Kuwait after the second Gulf War [1990-1991]. This resulted in a loss of confidence in the Egyptian companies and losing a lot of contracts," explained Ahmed El-Sayed, head of the Holding Company for Construction and Urbanisation in a recent meeting.
However, the turnover in the wake of regime change naturally has its winners as well as its losers. The companies which had signed contracts to export their products to Iraq within the framework of the Oil for Food programme before the war stand to lose the money they had sunk into longer-term contracts. A Foreign Trade Ministry source admitted that "the number of these companies and exact value of their contracts are still unknown."
The UN-affiliated Office for Iraq Programme has made a list of such contracts arranged according to the urgency of its implementation but no action has yet been taken. Also, the Ministry of Foreign Affairs has announced that it is currently negotiating in hopes of reaching agreements to pay the due arrears back to the Egyptian companies.
