Economic Crisis in Egypt

Egypt appears to be in the throws of an economic crisis. The macroeconomic situation has deteriorated after the September 11. In particular, Egypt is undergoing a severe liquidity crisis caused by the loss of hard currency from four sources:

• The tourism was a key source of foreign exchange and the main engine of growth. Expected losses in the sector range from $2-3 billion
• Airline and shipping. Besides the decline of passengers, primarily tourists, the industry was hit by 50% increase in insurance premiums. Revenues from Suez Canal have also declined
• Oil prices have declined after September 11 because of the deepening recession in the U.S.
• Remittances from Egyptians working abroad have declined from $3.8 billion in 2000 to $3 billion in 2001, and further declines are projected

Egypt is therefore seeking immediate balance of payments support from its traditional donors and, in this instance, from the International Monetary Fund. However, unlike the situation in Argentina whose economy has recently suffered severe shocks, a similar situation in Egypt will have far-reaching political, security and strategic implications for the entire Middle East and beyond. The United States, the European Union and the international financial institutions are cognizant of the situation and most of them are providing assistance to relieve the pressures on the Egyptian economy. Thirty seven donors (states and financial institutions) are scheduled to meet in Sharm Al-Sheikh on February 5-6 to review the aid program for Egypt for the current year. Egypt expects to raise enough assistance to cover its current account deficits without having to dip any further into its dwindling foreign currency reserves, provided it can stabilize its national currency, and soon.

What is encouraging in this situation is the serious debate which is taking place in Egypt, involving the political and economic leadership of the country about the nature of crisis and the measures needed to deal with it. What is less encouraging is the absence of the political will to translate such measures into a viable economic reform program. As the Egyptian government's newspaper, Al-Ahram, wrote recently: "The year 2002 will confirm to us that there is a price to be paid as a result of hiding our heads in the sands for too long."[1]

Reserves Declined by 50% in 5 Years
Ahmad Al-Wakil, the deputy chairman of the Egyptian chamber of commerce said in an economic symposium held in Alexandria on January 12 that the foreign exchange reserves have declined from $30 billion to $15 billion between 1997-2001. He attributed the decline to the government's conflicting economic policies regarding the Egyptian pound which was devalued several times in the last 6 months, and it is now traded at 5 pounds to the dollar in the black market [Most recently, it has hit a new low of 5.35 pounds to the dollar.] To underscore the enormity of the problem, the chairman of the National Federation of the Chambers of Commerce, said that the Egyptian pound declined by 4% against the U.S. dollar during 1991-2000 but 40% during 2000-2001.[2]
Others expect the pound to lose 50% of its value against the dollar by April.[3]

Causes of Illiquidity
Despite government efforts to inject $2 billion into the foreign currency market since September 11, the dollar has continued to rise against the Egyptian pound. According to Dr. Nabil Hashad, Director of the Arabic Center for Financial and Banking Studies, the rise of the dollar against the Egyptian pound is neither surprising nor unexpected. The reason is the inability of the commercial banks to meet the demand for foreign currency fully. As a result, those who have a legitimate need for dollars, e.g., importers and travelers, and those who wish to convert their savings into dollars for greater security, resort to the black market which is not bound by the ceiling on the exchange rate established periodically by the Central Bank of Egypt. Foreign exchange reserves have declined to $14 billion which leave little flexibility for the central bank to intervene in the market.

Dr. Hashad expects the black market to persist and the dollar to continue to rise if the customers' demands for dollars at the commercial bank are not met. Dr. Munir Hindi, Professor of Financial Administration at Tanta University adds: "Egypt is facing a genuine economic crisis which requires serious efforts lest things get so out of hand that we will find ourselves, in a short while, in a serious crisis no less severe than the one faced by Turkey…" The article provides a number of reasons for the liquidity crisis:

• Structural weaknesses in the state's sources of foreign exchange and a lack of competence in managing fiscal policy.
• Two thirds of exports in the last 3 years have been in oil and oil derivatives but there are not sufficient reserves of oil that can be depended on in the long run. In fact, Egypt's oil imports exceed its export by approximately $0.5 billion a year.
• A decline in the transfers by Egyptian workers abroad from $3.8 billion in 1999 to $3 billion in 2001. There would be a larger decline in the future because the Gulf countries are increasingly relying on their own workforce.
• A decline in foreign direct investment from $1.6 billion in 1999-2000 to $507 million in 2000-2001.
• Income from the Suez Canal has declined.

[Surprisingly, the article does not mention the sharp decline in income from tourism estimated at $2-3 billion in 2001]

In the face of unsettled economic environment, the article asserts, the demand for the dollar will continue to be strong. On the other hand, the high rate of interest on the Egyptian pound charged by commercial banks limits the opportunities for investment. The article concludes as follows:

We believe that facing the crisis requires non-traditional solutions that focus on activities in which we have a comparative advantage and which could become a fertile source of foreign exchange such as tourism and agriculture, in addition to necessary structural changes in the economic and social environment.[4]

Governor of CBE: No Plan to Devalue Currency Now During his visit to Kuwait, the Governor of the Central Bank of Egypt (CBE), Mahmood Abu Al-'Eyoon, declared that there was no intention at the moment at devalue the Egyptian pound but added: "there is no central bank in the world who would announce its intensions in advance."[5]

A few days later, it was revealed that the governor of CBE has asked Kuwait to deposit $150 million in the Egyptian central bank to bolster its foreign currency position.[6] It was also revealed that Egypt was seeking in Kuwait buyers for some of its state-owned banks.[7]

Governor of CBE Meets with Economic Reporters
In his meeting with economic reporters in Cairo, the Governor of the Central Bank of Egypt made the following points:

• Egypt will be able to absorb a deficit of $2 billion in its current accounts through the end of this calendar year. Dollar deposits by individuals are protected. There will be no limit on cash withdrawals from banks because Egyptians prefer to deal in cash [often an indication of tax evasion].
• If Egypt is to emerge from its current stagnation individual consumers must begin to spend to generate economic activities, e.g., employment and production. Government and the CBE alone cannot restart the economy; there is a need for the private sector to contribute toward this effort.
• Commercial banks should reduce interest rates on loans and at the same time improve their efficiencies to reduce the cost of doing business. For example, it takes 19 days for a check clearance, and this period should be reduced to five days.
• The privatization of banks should be encouraged.
• Changes in the rate of exchange are not a matter of honor and dignity but of economic reality. Lowering the value of the Egyptian pound would help exports
• Untying the pound from the US dollar and tying it to a basket of currencies is under consideration.
• Speculation in the dollar has become a source of profiteering. CBE will supervise the activities of the foreign exchange companies.
• CBE will not print more pounds because of the risk of inflation.
• Argentina has a crisis; Egypt has problems. There is no shortage of money to meet Egypt's external obligations in a timely fashion.[8]

Senior Adviser at CBE Warns of Fires Ignited under the Pound
The Senior Advisor in the Central Bank of Egypt, Muhammad Al-Barbari, indicated that additional devaluation of the pound in the near future was "generally conceivable." He warned, however, against "some international organizations [unspecified by name] that seek to ignite fire under the foreign exchange policy to force the [Egyptian] monetary authorities to decide on a large devaluation of the pound."[9]

Parliament Calls for a long-term Strategy to Deal with Crisis
A report issued by the Economic and Financial Committee of the Egyptian parliament warned against "a continued dependence on the foreign exchange reserves to close the gap between supply and demand for foreign currency," and called for a long-term strategy. It says the country has witnessed "a sever crisis" recently which caused the dollar to disappear from the market.

The report attributes most of the liquidity problem to a severe imbalance between exports and imports in favor the latter in the tune of $12.5 billion in 2001. It says that the economic slump has caused many industrial enterprises to stop operating, in addition to rising cases of bankruptcies and a sharp decline in the prices of real estate. The report contends that $9 billion of imports last year could have had domestic substitutions. It calls on the government to come up with an effective long-term strategy to encourage exports.[10]

Monetary Options
Economic circles in Egypt maintain that the government has two options to deal with the crisis of the Egyptian pound. One option, demanded by the donors, is to let the pound float, falling eventually to its real value. Otherwise, small devaluations, without sufficient resources to back up lingering demand for foreign exchange, will be interpreted by currency speculators that further devaluations would follow.

The second option is to let the pound decline to the free market level but allow the banks some freedom in trading without having to drain all their dollar reserves. [11][In other words, the commercial banks will determine how much of the demand they can meet from their foreign exchange resources. This is a half-baked measure because in the event the banks cannot meet such a demand, in full or in part, the black market may fill the gap.]

Rise in Dollar Won't Affect Subsidies
In his policy statement to parliament, the Prime Minister, Atef Ebeid, reassured the public that the government intends to continue subsidizing essential commodities and services. Ebeid said the government pays 18.8 billion pounds (approximately $4 billion) annually to provide the entire array of subsidized goods and services to the public, including health care, education, electricity, gas cylinders and foodstuffs.

The Minister of Domestic Trade and Supply confirmed that government subsidies for bread and for the rationing coupons for sugar and oil would not be affected by the current situation.

The size of the subsidies was estimated at 4.0-4.5 billion pounds annually (about $ 1 billion in the current official rate of exchange.).

The minister said that there would be active supervision in the markets by the ministries concerned to control the prices and "protect the consumer interests from speculation, exploitation and monopoly."[12]

Notwithstanding these assurances, Al-Ahram has reported that prices in the supermarkets have gone up between 15 and 60 percent.

USAID Praises Egyptian Efforts for Economic Reform
The Administrator of U.S. Agency for International Development (USAID), Willard Pearson, said in Cairo that the American assistance is in response to the Egyptian efforts to reform the economy. [It will be recalled that the U.S. has decided to extend $959 million in cash to help with the liquidity problem]. Mr. Pearson emphasized that this was not a new assistance but simply existing assistance whose disbursement was expedited following President Bush's commitment to help Egypt overcome its economic problems.

Egypt's allocation of U.S. financial aid this year is set at $655 million, normally released over the period of a year. The remaining $304 million comes from accumulated undisbursed aid money from recent years.[13]

Attempts to Cover Budget Deficit
The Egyptian Minister of Finance, Dr. Midhat Hasanayn, informed members of the Egyptian parliament that the government will use one of three options to cover the budget deficit for 2002, estimated at 20 billion Egyptian pounds (a little over $4 billion.), none of them entails "the issuing of new banknotes."

At the top of the options, is to reschedule the internal debt to reduce interest and service charges from 23 to 20 billion Egyptian pounds ($5-4.4 billion) a year. [Egypt domestic debt is quite high, and is estimated at more than $160 billion equivalent, in addition to external debt of $26-27 billion.]

The second option is to borrow from international financial institutions, to be discussed at the donors' conference in Sharm Al-Sheikh, mentioned above. The third option is to reconsider the legal status of 59 agencies and economic authorities which operate on budgets that are independent of the national budget. The government will be seeking to convert these agencies into financing agencies, contributing directly to the national budget. [A candidate for this conversion will be the Suez Canal Authority.]

Investors Ignore State Enterprises Available for Sale
Egyptian and foreign investors have ignored offers by the Egyptian Government to sell (privatize) 36 companies on advantageous terms, including a long-term rent deal and a tax holiday for 5 years.

A spokesman for the ministry of public works attributed the lack of interest in these companies to the unsettled economic conditions in the world, the decline of foreign investments in the Middle East since September 11 and the security concerns, should the war on terrorism expand.[14]

A Seminar on Unemployment
Egypt's Prime Minister Atef Ubaid, intellectuals and university professors held a seminar on January 14 under the auspices of the government newspaper Al-Gumhuriya on unemployment in Egypt and the methods to deal with it. As usual, the prime minister was upbeat about the prospects of the Egyptian economy while promising to provide loans on concessionary terms to investors, both national and expatriate, who are prepared to create new jobs.

One of the participants was forthcoming in his realistic assessment of the situation. He said the population of Egypt will reach 123 million in 2019. There are 800,000 new job seekers every year, and the number will rise together with the growth of population. He estimated the cost of creating one job in industry at 100,000 pounds ($20,000) and in agriculture 50,000 Egyptian pounds ($10,000). The total cost of job creation for 800,000 would be 36 billion Egyptian pounds, or more than $7 billion. Realistically, he could not see where this investment in job creation would come from.

Since there is no unemployment insurance in Egypt there was a tacit warning regarding social and political unrest if the problem of unemployment persists. [15]

Egypt Receives a Loan from Canada
The Canadian Government will extend $Can. 73 million (US$50 million) at a low interest rate to allow Egypt to purchase Canadian goods and equipment. The Canadian Minister of Immigration, Ms. Kaplan, has visited Egypt recently to affirm her government's encouragement of Canadian tourism to Egypt. [16]

Egypt Defers Request from Iraq for a Quadripartite Market
Egypt has asked Iraq to defer the latter's request for a meeting, at the level of heads of government, to create a quadripartite market between Egypt, Iraq, Syria and Libya. Egypt said the time was not ripe for this initiative. However, bilateral trade relations should, instead, be strengthened. [17]

Egypt Faces Challenges in Food Production
The Director General of the International Center for Agricultural Research in Dry Areas, 'Adel Al-Biltagui said in a speech in Cairo that Egypt has been able to reduce the gap in food production from 26 million tons in 1982 to 4.5 million tons in 2000 despite increases in population. He projected an increase in food of production of 2% annually between now and 2020. However, if the consumption pattern in the future remains similar to the one in 1995 the increase in food production will have to be higher than 2%. Also, if individual food consumption were to increase by 2020 (as a result of changes in the diet or higher personal income) the challenge facing the country will be even greater. [18]

Economic News

Syria: Population Challenges
In a population conference, held in Damascus recently under the auspices of the President of Syria, some data on Syrian population have emerged.

Population planning was introduced in the 1970s but it has remained limited to the domain of the educated people in the urban areas. While the number of children in cities has declined to an average of 4-6 per family it has remained high in the rural area, at 10 children per family.

The population in Syria has increased from 6.3 million in 1970 to 16.3 million in 2000 and expected to reach 26.5 million in 2025 despite the decrease in population growth from 3.8% in 1981-1994 to 2.6% in 2000 despite the rise in marriage age from 25.9 to 29 for males and from 20.6 to 25.1 for females. At the same time, fertility has declined from 7.5 births in 1978 to 3.6 in 1999 births in 1999.

The population growth poses economic and environmental challenges particularly in view of its uneven distribution, with 52% of the Syrian population distributed among four provinces--Damascus, Reef, Aleppo and Hums. It has magnified the environmental, service, and economic pressures and affected the natural resources. It was reported that the country was suffering from creeping desertification, deterioration of soil, decline in agricultural land, haphazard human settlements and many types of pollutions. [19]

Syria: Economic Reforms Exclude Privatization of Public Sector
The Minister of Industry, Dr. Issam Al-Za'im said that the economic growth in Syria has been in decline in recent years "reaching below zero in 2000 [negative growth] and [registering] 1% in 2001." Current economic indicators show a slow rise from economic stagnation. Hence, there is a need for a quick action to revitalize the Syrian economy.

According to al-Za'im, the new government faces a challenge of "closing the growing gap between the strategic strength and the economic strength." He said the economic reform would exclude the privatization of the public sector to protect 200,000 workers who support 1 million people, adding that the policy against the privatization has come down from "the political leadership." He also said that the plan for economic reform would not utilize formulae provided from outside and, in particular, from the World Bank.[2] [This is not surprising because the Minister is aware that the World Bank will tie any lending for structural reforms in Syria with major reforms in the public sector which may include privatization but also a reduction in the size of the work force.]

Syria: A Fair Water Share Necessary for Production of Food
The Syrian Minister of Irrigation, Radhwan Martini, said his country depends on a fair share from its joint international rivers with Turkey to produce the food and meet the other vital needs of the country. Reaching this objective is not unattainable in view of the international law principles on joint water resources. He called [on Turkey] to apply the principles of international law and the practices derived from more than 300 international agreements which govern joint water resources in 215 international water basins.[21]

Syria Reduces Retirement Age
President Bashar Al-Assad has issued a decree reducing the retirement age for men to 55 and for women to 50, provided they have served 20 years. The purpose of the decree is "an attempt to suck up unemployment."[22]

Saudi Arabia – A Model of Ideal Investment Environment
Saudi Arabia's deputy prime minister, Prince Abdallah bin Abd Al-Aziz, said that his country has taken "a strategic decision to attract national and foreign investments and provide all the necessary incentives, securities and facilities" in all sectors, including the agricultural sector "with its unlimited possibilities." He added: "Saudi Arabia which Allah has blessed with enormous discovered and undiscovered natural resources, and on which Allah has bestowed safety, security and political and social stability, and given its rising population and unlimited consumer markets, offers an ideal investment environment and provides the investor the opportunities to make a profit."[23]

Two Saudi Banking Companies Deny Allegations against the Aqsa Bank
Two Saudi banking companies, Dallat Al-Baraka and Shakir, which own shares in the Islamic Aqsa Bank in Gaza whose assets were frozen by the U.S. on suspicion of terrorist financing, asserted that their investment in the bank was made during the revival of the peace efforts in 1998. Dallat Al-Barakah retains one seat, out of nine, on the bank's board. [24]

Jordan: Unemployment Stabilizes at 14%
According to a recent census, conducted by the Jordanian Central Bureau of Statistics, unemployment for the second half of 2001 was 14.9%, equal to that of August, the year before, while the average unemployment for entire 2000 was 13.7%, divided between males (13.9%) and females (20.2%). Unemployment in the rural areas was 16.9%.[25]

Iraq: Oil Production Capacity Rises
According to the Middle East Economic Survey (an oil bi-weekly research report issued in Cyprus) the production capacity of Iraq will increase from 2.8 million b/d in the last two years to 3.1 million b/d in 2002. The increase is attributed to the purchase by Iraq, under "the oil for food" program, of spare parts to rehabilitate the oil installations in the country.[26]

The Economic Dimensions of the Intifada

The Economic Consequences of the Intifada for Israel--An Arab Perspective
Mahmoud Swaid, Director of the Center for Palestinian Studies in Beirut provides a detailed, and well-documented, review of the military, political, social and economic consequences of the Intifada for Israel. We will focus on the last one, namely the economic consequence.

The author identifies two primary factors for the losses suffered by the Israeli economy during the last year: one factor is related to the slowdown in the American economy that affected primarily the high-tech industry. The other factor is related to the Intifada that affected tourism [We have no way of determining how much of the decline in tourism is attributable to the Intifada and how much is attributable to other factors, such as September 11 which has devastated the tourism industry in many countries in the Middle East.]

In 2001, the GDP in Israel registered a decline of 0.5% compared with 6.4% increase in 2000. David Klein, the Governor of the Bank of Israel, has recommended to the government to factor into the 2002 budget a rate of economic growth of 2% which, according to the author, is a negative growth, given that the population growth plus immigration will be higher than 2%.

Foreign investment has also declined in 2001, recording $1,310 million in the last half of 2001, which is the lowest level in the last 3 years. The decline is attributed to the crisis in the high-tech industry in the U.S.

Industrial production declined by 2% in 2001 compared with 2000. As a result, 41% of the factories have reduced their production and 25% of the factories have reduced the working force.

The exports of goods and services declined by 26.5% in the first half of 2001 against an increase of 30.5% in the comparable period of 2000. At the same time, imports in the first half of 2001 declined by 9.1% against an increase of 10.5% in the first half of the previous year.

Unemployment rose to 9% by the end of 2001, and the number of the unemployed reached 235,000. As a result, there is an emigration of professionals and university graduates seeking work abroad.

Income from tourism had declined by 50% in 2001, resulting in the loss of 50,000-60,000 jobs in this sector. El Al, the national airline company, registered a loss of $160 million in 2001 compared with a loss of $109 million in 2000.

Finally, the budget deficit has doubled from $1.8 billion in 2000 to $3.8 billion in 2001. In 2002, the deficit will amount to 2.4% of GDP compared with 1.4% in the previous year. [27] [As a matter of fact, the budget deficit was even larger. According to the preliminary figures issued by the Israeli Ministry of Finance, the budget deficit in 2001 will be 4.6% of GDP (or $4.8 billion equivalent) against a planned (targeted) deficit of 1.75% of GDP (or $2.5 billion equivalent.)[28]

Bank of Israel Estimates Direct Losses of Intifada
The Bank of Israel (central bank) has estimated the direct losses, resulting from the Intifada, at 13 billion shekel (approximately $3.8 billion) between October 2000 and December 2001, or 4% of GDP. The Bank of Israel estimates the indirect losses at a higher rate because of the decline in both the private consumption and investments. The Intifada, according to the bank, has caused sharp declines in tourism, export to areas under the control of the Palestinian Authority, construction and agriculture in addition to the creation of "uncertain political-security situation which harms the business environment."[29]

Intifada Hurting Palestinian Businesses
According to survey conducted by the Palestinian Private Sector Development Center, 97% of private Palestinian companies have posted a decline in profit and 94% have posted a fall in sales since the outbreak of the Intifada.

Dr. Hisham Awartani, a senior economist with the Palestinian Authority, who conducted the survey, said, "The private sector's situation is extremely difficult, and we appear to have hit rock-bottom. The economy's stabilization of such a level is catastrophic. Many companies have gone bankrupt, and many others are effectively closed. The private sector, the Palestinian economy's lynchpin, is virtually dead, and at the moment it doesn't appear that anything can be done to improve the situation."[30]

Heavy Losses to Palestinian Agricultural Sector since Intifada
The Ministry of Agriculture of the Palestinian Authority estimates the losses in the agricultural sector from October 2000 through the end of 2001 at $482 million. These losses cover decline in exports (including to the Israeli market), destruction of farms and wells and the uprooting of trees by the Israeli authorities.[31]

PA Asks Arab Countries to Open Markets to Palestinian Products
The Palestinian Minister of Industry, Sa'adi Al-Karnaz, called on the Arab countries to open their markets before the Palestinian products in order to help the Palestinian economy which suffered losses of $6 billion "because of the Israeli aggression and the Israeli punitive actions against the Palestinian Authority." He also called on the Arab countries to remove the barriers that impede the flow of the Palestinian products "which possess a high competitive quality."

Mr. Al-Karnaz said that the Palestinian industry had a steady growth of 8% annually in the 3 years prior to the Intifada. During the same time, the average growth of the Palestinian economy was 6%. However, the number of workers in the industrial sector has only declined from 92,000 to 80,000 because the Palestinian private sector "feels a [sense] of belonging to his country and believes in the proverb: "my livelihood and your livelihood [depend] on Allah."[32]

PA: Relations with Saudi Arabia—Strategic
Saudi Arabia has decided to make a grant to the Palestinian Authority of $45 million to be disbursed over 3 months, beginning January, to relieve the financial difficulties of the Authority. The grant was made in response to a plea by the Minister of International Cooperation, Nabil Sha'ath, who briefed the Saudi leadership on the inability of the Authority to pay salaries to its employees.

In a statement to the newspaper Al-Hayat, Sha'ath said that "this urgent grant comes in the framework of the consistent Saudi support to the Palestinian people and its just cause." He described Saudi Arabia "as a strategic ally of the Palestinian" similar to that of Egypt.[33]

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