Economic Impact of the Crisis in Egypt

by Marsha Pripstein Posusney
published in MER168

Egypt was facing a severe foreign exchange shortage when the Gulf crisis broke out. Its debt arrears were piling up and it was finding it more and more difficult to obtain new loans. The Gulf crisis threatens to make this situation even worse. Here’s how:

Remittances sent home by some 1 million Egyptian workers in the Gulf amounted to at least $4.25 billion in 1989. About half of these workers have returned home, causing an estimated annual loss of $2.4 billion.

Suez Canal tolls were $1.38 billion in 1989. The government expects a 10-20 percent drop over a year due to the loss of Iraqi and Kuwaiti oil tanker traffic and the decline in shipments of goods to those two countries.

Tourism brought in $2 billion in 1989. Egypt expects a loss of about 25 percent, or $500 million, over the next year. Usually many Gulf tourists visit Egypt in the summer; this year there were 40 percent fewer. Winter is the major season for European, Japanese and North American tourists; cancellations from these countries are running at 50 percent.

Merchandise exports to Iraq and Kuwait were worth about $500 million last year, comprising about 20 percent of total non-oil exports.

Foreign exchange losses overall are put at $3.6 billion by the World Bank. Increased oil revenues will reduce this somewhat, but Egypt has limited ability to expand production. The annual gain from higher oil earnings will be about $600-$700 million. This may not even meet the additional costs to the government of feeding and housing workers returning from the Gulf. These losses put the country on the brink of economic collapse, and risk major political disruptions. Accordingly, the US and other Western nations and the conservative Gulf monarchies have rallied to Egypt’s aid. This rescue has taken these forms:

Direct Aid and New Loans France will provide $50 million in emergency funds and a $143 million concessional loan. Germany will grant $135 million to finance imports and a concessional loan of $159 million, and will release $365 million in project loans that had been blocked due to Egypt’s arrears in debt service. Increased aid has also been announced by Denmark, Canada, Japan ($2 billion, split among Egypt, Turkey, Jordan) and Italy. The US has not directly increased aid but has upped the cash portion of the aid package from the US Agency for International Development. Grants are also coming in from Gulf countries and the Kuwaiti government in exile. The Gulf Cooperation Council is preparing an emergency aid program worth some $1-2 billion a year. Egypt has reportedly already received $1.5 billion from Saudi Arabia and $600 million from the UAE.

International Monetary Fund Deal After years of pushing Egypt to implement reforms that would make life more difficult for the poor, the IMF, at Washington’s behest, may now be willing to give Egypt a standby agreement on more favorable terms. The Fund, along with the World Bank, is actively lobbying Western nations to increase direct aid to Egypt.

Debt Forgiveness The Bush administration has won Congressional support for its proposal to cancel Egypt’s $7 billion military debt to the US. The Gulf states have reportedly canceled debts worth $7 to $9 billion.

Debt Rescheduling An IMF accord will pave the way for a Paris Club deal with other creditor states worth around $7-8 billion. All told, this will stem the potential deterioration of Egypt’s balance of payments and could actually lead to slight improvement. But what has happened represents a fundamental shift in the components of the external accounts in a way that makes Egypt less reliant on its own resources and more dependent on foreign aid. Egypt has become a mercenary state; whereas before it exported workers to the Gulf, it is now exporting soldiers. This shift will also alter the distribution of income domestically. Worker remittances flowing into Egypt’s “hidden economy” were accessible to members of the lower classes, even in rural areas. Most of the funds made available as crisis relief will accrue to the state, where political and economic elites get first crack at them.

Sources: Middle East Economic Digest; Arab Economic Digest.

Filed under: