Its finances in crisis, Egypt’s government is promising a major round of economic reforms, its most ambitious in 12 years. Unfortunately, this time around the economic environment is nowhere near as friendly as it was during the reforms of 2004. It will not be an easy ride.
In the past few months, the government has replaced a 10 per cent sales tax with a 13 per cent valued-added tax, raised water and electricity prices and increased the tax on tobacco and alcohol, among other measures. Rumoured to be in the pipeline are further increases in the price of diesel and petrol, a new real estate tax and a tax on capital gains. And of course there is the widely anticipated currency devaluation, likely to be steep.
On Wednesday, the central bank governor and the finance minister were carrying their reform plan to Washington, where they are expected to formally request a US$12 billion loan package to the IMF at its October 7-9 annual meeting.
Egypt’s financial problems today are very similar to those that confronted the government of Ahmed Nazif when it came to power in June 2004: a high budget deficit and a current account deficit brought on by an overvalued currency. Almost immediately after taking the reins of power, Mr Nazif’s government slashed tariffs and income taxes, and a few months later it floated the pound.
But unlike now, Mr Nazif’s government was blessed at the time with particularly favourable economic conditions, albeit some with remarkable parallels to what is happening now.
As with today, tourism had been devastated by terrorist attacks and unrest elsewhere in the Middle East. But unlike today, tourism revenue in 2004 was already recovering – in fact surging by double digits each year.
The massacre of 60 tourists in Luxor in November 1997 and the outbreak of the second Palestinian intifada in 2000 had caused tourism to plunge. But helped by a weaker pound and a massive push to build new hotels in Sinai and along the Red Sea coast, revenue climbed from $3.42bn in 2002-03 to $10.49bn in 2007-08.
The current round of reforms, to the contrary, is taking place at a time when tourism revenue, at $3.8bn in 2015-16, has collapsed to its lowest in at least 14 years, the result of five years of political instability at home, civil wars elsewhere in the Arab world and last year’s downing of a Russian plane over Sinai. Perhaps the most optimistic thing that can be said is tourism has fallen so low it can probably only improve.
The 2004 reforms likewise began while Egypt was on the cusp of natural gas boom. The country had just discovered world-class natural gas reserves off its Mediterranean coast and was building two giant liquefaction plants to export part of the bonanza. A plant at Damietta delivered its first liquefied gas shipment in December 2004 and a plant at Idku delivered its first in May 2005. Egypt’s net exports of petroleum products surged as a result, rising from $1.8bn in 2004-05 to $5.1bn in 2006-07.
But by 2011, Egypt had become a net importer of petroleum products for the first time in a decade. In the financial year that ended in June, it imported a net $3.62bn, a major burden for a government planning reforms.
Still, much as in 2004, Egypt is now on the cusp of a natural gas boom, but one that won’t really get going for at least a year or two. BP expects its giant West Nile Delta project, which sits on about 5 trillion cubic feet of gas, to begin producing next year, with production eventually reaching 1.2 billion cubic feet a day (cfd), or 30 per cent of all Egypt’s current output.
Italy’s Eni plans to start delivering gas from the super giant Zohr field in deep waters north of Port Said by the end of next year, with production rising to as much as 2.7 billion cfd in 2019. With 30 trillion cubic feet, Zohr is the Mediterranean’s biggest gasfield.
Suez Canal revenues, which were roaring ahead in 2004, are now stagnant. They nearly tripled to $5.16bn in 2007-08 from $1.2bn in 2001-02.
The one major bright spot is remittances from workers abroad, which, like in 2004, are booming. Barely $3bn in 2003-04, they were $19.3bn in 2014-15, although that number slipped by 17 per cent during 2015-16, mainly because workers were transferring their funds through the black market to take advantage of its massive premium over the central bank’s artificial bank rate.
Patrick Werr has worked as a financial writer in Egypt for 26 years.
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