The 9/11 heat is still on
The effects of the 11 September attacks in the US, and subsequent wars in Afghanistan and Iraq, are still taking their toll on the Egyptian economy.
In the two years since the 11 September 2001 attacks on the US, economic pundits have been divided in their assessments of its consequences on the Egyptian economy. On one hand, Prime Minister Atef Ebeid and leading officials of the perennially optimistic ruling National Democratic Party (NDP) predicted the negative impact of the attacks would be limited and short-term.
The pessimists, a mixture of leftist and independent economists, warned the attacks would have disastrous long-term consequences unless a package of measures aimed at bolstering the economy was quickly adopted, especially aiming at boosting exports and foreign exchange revenues.
It was two years last week since the terror attacks on the World Trade Centre and the Pentagon. The question now is: Which camp was more prescient about the impact of the attacks?
Addressing Parliament's Economic Affairs Committee on 10 September, PM Ebeid maintained that the fallout of the attacks on Egypt's economy was mild, and quickly dissipated. "The last three years witnessed the Egyptian economy achieving a miracle of its own," said Ebeid. "Not only was it able to counter the negative impact of a series of external shocks, especially the 11 September attacks, but also to expand and achieve higher rates of growth." This performance, Ebeid added, is encouraging the government to stay on the path of economic liberalisation.
The official figures released by the Central Bank of Egypt (CBE) last week on the financial year (FY) 2002/ 2003's balance of payments testify to a strong recovery.
The CBE's report shows that net receipts generated by service exports (tourism, the Suez Canal and transport facilities) surged from $3.8 billion in FY 2001/2002 to $4.9 billion in FY 2002/2003. This strong showing helped reduce the trade deficit by 12 per cent, from $7.5 billion last year to $6.6 billion this year. CBE's Governor Mahmoud Abul-Oyoun, however, indicated that the total value of imports inched upwards by almost $200 million, from $14.64 billion last year to $14.82 billion this year. Of the net imports, refined oil imports fell from $12.48 billion to $12.31 billion, but commodity imports increased from $12.2 billion to $12.5 billion, he added.
According to Abul-Oyoun, while these figures show that the government's efforts to reduce imports are not yet in full swing, the increase in commodity imports is significant because it shows that the local market has at last managed to survive the external shock of the 11 September attacks. Hopefully, this is an indicator that the economy is beginning to emerge from its five-year long recession.
CBE figures also show the current account balance has achieved a surplus since FY 1997/1998. From a deficit of nine million dollars last year, figures indicate, the current account balance now shows a surplus of $1.9 billion. Concerning the overall balance of payments, Abul-Oyoun said it turned around from a deficit of $450 million last year to a surplus of $550 million this year.
But the picture is not as rosy as these official figures might suggest, argue independent economists. They believe the Egyptian economy is dogged by structural flaws which were aggravated by the 11 September attacks. The chairman of the Economic Affairs Committee, Said El- Alfy, told Al-Ahram Weekly that the poor performance of the export sector is the major weakness of the Egypt economy. Egypt, according to El-Alfy, imports almost triple what it exports, a trend which could worsen given demographic realities.
"The 11 September attacks helped expose this grave fact and showed the Egyptian economy to be highly vulnerable to external shocks," El-Alfy alleged. He said the invasion of Iraq, coming in the aftermath of the 11 September attacks, has stripped Egypt of around one billion dollars in export revenue to Iraq. At the same time, El- Alfy added, Egypt has not been able to compensate for the loss of the Iraqi market by reaching a free trade agreement with America. "Not only have the Americans stripped Egypt of Iraqi export revenues, but they also stand against any Arab participation in the reconstruction of Iraq or approval of a free trade agreement with Egypt," El-Alfy said.
Minister of Planning Osman Mohamed Osman, in statements to the press last week, argued that the one billion dollars lost from the closure of the Iraqi market was offset by a 16 per cent increase in Suez Canal transit receipts in FY2002/2003. This rise is largely attributed to the fact that large number of American and British warships crossed the Suez Canal in last year, in support of the Anglo-American invasion of Iraq. However, this change was belittled by El-Alfy as "a transient factor" that cannot be relied on to permanently raise foreign exchange revenues.
Fayeka El-Rifaie, deputy chairman of the Plan and Budget Committee and former deputy CBE governor, told the Weekly the impact of the 11 September attacks is quite clear in the area of overseas investments. "This shock has dissuaded investors from America and Europe from tapping the Middle East and the Arab world markets. The most severe effect of this was an acute slowdown in the privatisation programme which primarily depended on overseas anchor investors for moving forward," El-Rifaie said.
According to the latest issue of the stock market bulletin (June 2003), the 11 September attacks brought the privatisation process to a crawl. Figures show that the period following the attacks until the end of last May was the worst ever for the Egyptian privatisation programme since 1993. Out of a total 45 companies initially prepared for sale in 2001, a meagre 13 have been divested. Worse still, a mere seven companies were partially or wholly privatised between January 2002 and the end of May 2003, and none of them was sold to a foreign investor. This is compared with 23 in 2000 and 33 in 1999 (with 14 of them sold to foreign investors). El-Rifaie believes that a severe drop in overseas investments, a chronic shortage of commodity exports and a deterioration in public finances, such as swelling budget deficits and domestic debts, have all conspired to bring the Egyptian pound under unprecedented pressure, the most obvious signal of which is that the government has been compelled to devalue the Egyptian pound four times since November 2001, or just two months after the 11 September attacks.
Government officials agree the external shock of 11 September dried up the flow of overseas investments into Egypt. "In this respect, however, Egypt was no exception," Osman said. He argued that the 11 September shock and the economic slowdown in America with its commercial exchange with the outside world falling by seven per cent, have caused a dramatic drop in the volume of overseas investments flowing to 180 countries all over the world. Osman said the volume of overseas investments coming to Egypt has begun to rebound, rising from $430 million last year to $650 million this year. A recent report by parliament's economic committee said the government has to adopt three basic measures in order to attract greater overseas investments. These include amending custom and investment laws, eliminating discrimination between local and overseas investors in terms of investment incentives, and focussing on export-led investments.