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Tourism shortfall, capital flight
depress economy
The
latest economic figures from the Central Bank of Egypt (CBE) indicate
a mounting public sector debt and a balance of payments deficit,
despite efforts to control spending and a strategy – spearheaded by
the foreign trade ministry – to boost exports. The
Israeli-Palestinian conflict and the September 11 terrorist attacks in
the United States have made matters worse, especially as the
government tries to balance social expenditure with a drop in its
local- and foreign-currency revenues due to these external shocks and
a slump in the local economy.
Underlining
the financial problems the government faces amid the revenue falls, as
well as a drop in annual gross domestic product growth, the CBE
recently reported that domestic public debt increased in 2001 to £E
202.7 billion, up from £E 185.4 billion at the end of 2000. With the
state scrambling for revenue, the burden of government bonds and
treasury bills rose for the same period by a massive 73 percent, to £E
141 billion, while government borrowing from the National Investment
Bank grew from £E 92.6 billion to £E 107 billion. The net balance of
government debt to the banking sector likewise deteriorated, from a
positive £E 11.1 billion to a negative £E 45.4 billion in the same
period. Total external debt grew from $27.1 billion in 2000 to $28.2
billion in 2001.
Egypt
has had to look for greater international financial assistance –
remember the donor conference in February in Sharm Al Sheikh – to
cover the drop in foreign-exchange revenue and make up for the
shortfall in the current account. As a result, Egypt’s foreign-debt
obligations are expected to move higher.
The
government concluded two agreements in mid-April, one with the Arab
Monetary Fund (AMF) for a $118 million loan, and one with the World
Bank for a separate $50 million loan. Egyptian officials also held
talks with representatives of the World Bank and the African
Development Bank (ADB) to negotiate a joint World Bank-ADB $1 billion
loan.
Talks
with the international financial institutions have generally focused
on Egypt’s stalled liberalization process. “The donor community
wants to see more action on economic reform,” said Anthony
Smallwood, an official at the Egypt desk of the European
Commission’s directorate general for external relations. “For
example, a more flexible exchange-rate mechanism is certainly more
talked about than seriously implemented. Egypt was looking to meet its
immediate shortfall with advanced aid disbursements, the key agenda
item at Sharm Al Sheikh in February. But it’s not a long-term
solution – and the Government of Egypt knows that well enough.”
To
make matters worse, the CBE has also reported a deficit in the overall
balance of payments – $925 million for October to December 2001,
compared to a scant $156 million for the same period the previous
year. According to one Cairo-based economic analyst, the steep rise in
the balance of payments deficit reflects capital flight from Egypt
following the September 11 terrorist attacks, as investors got sketchy
about Middle East investment – a fact made worse by 18 months of
intense Israeli and Palestinian violence. The period between July and
September of 2001, meanwhile, saw a surplus of $545 million.
Cairo-based
EFG-Hermes provided two reasons for the sharp increase in the overall
balance of payment deficit. First, net errors and omissions – a
proxy for capital flight – exploded to negative $852 million for
2001, compared to negative $156 million for the same
period the previous year.
As
Smallwood commented: “Foreign investment decisions are complicated
animals, but the current state of the economy must be an important
factor for any investor who intends to trade in a local market.”
But, he added, “I would have thought that a far more important
factor at the moment is the perception of regional instability. And
because it is often perceptions that matter, the situation could
change very rapidly.”
The
second factor in the overall deficit, according to EFG-Hermes, is the
widening current-account deficit, which has grown 67 percent in the
last year, to $358 million. This, in turn, is generally attributed to
falling tourism revenue, which has dropped by as much as 43 percent in
the last six months. According to the CBE, around 244,000 people
visited Egypt in January 2002, down from 355,000 in January 2001.
Declining Suez Canal revenues – estimated at $151 million in January
2002, compared with $161 million in January 2001, according to Canal
Authority figures – don’t help either.
As
for Egypt’s capital-account surplus, the CBE reported an increase to
$285 million during October-December 2001, as the government looked
abroad for more funding, compared to $77 million the previous year.
“If you have a deficit in the capital account, this means that the
government is borrowing less,” Alaa El-Shazly, an economics
professor at Cairo University, explained. “However, with the capital
account going up, foreign-debt obligations are increasing. Also, if
the capital inflows don’t outweigh the balance of payment deficit,
the government has to draw down on its foreign-currency reserves.”
As
a result of such withdrawals, Egypt’s reserves fell to $13.81
billion in January, from $14.08 billion in December 2001, according to
CBE data.
There
was one bit of good news – sort of. The trade deficit fell 22
percent, with imports down 16 percent. According to analysts, though,
this is less due to increased exports and more to a slowing economy
and the attendant dampening of demand for imports.
GLEN
C. CAREY
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