Year of Mixed Blessings: The War in Iraq Has Been a Major Setback to Egypt's Economic and Political Reform Plans but the Later Half of the Year Showed Considerable Economic Buoyancy: James Badcock Reviews Egypt's Year

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Egypt's planned trajectory into the future of free markets and a liberalised economy generating wealth for its growing population faced hurdles during 2003. This was a difficult year for the government, both politically and economically, and it was epitomised by the recent downgrading of its credit rating by the influential Standard & Poor's Ratings Services which lowered the country's long term local currency sovereign credit rating from BBB to BBB minus.

Party-political hostility and growing popular dissent combined with poor economic performance make Egypt a less attractive destination for investors than a year ago. President Hosni Mubarak's recent call for a 'national dialogue', hinting at the possibility of political reforms, is an attempt to unify the country and steady the ship in the hope that calmer waters and more prosperous times lie ahead.

The government, controlled by the National Democratic Party (NDP), sought to increase economic stability at the start of the year with the decision to float the Egyptian pound (E [pounds sterling]) freely against the US dollar. The aim was to allow the national currency to drop to its real level against the dollar thus circumventing the extensive black market economy. This, it was expected, would bring more hard foreign currency into the official economy.

In effect the Egyptian pound dropped and continued to plummet from its old pegged level of E4.51 [pounds sterling] to around E6.20 [pounds sterling] at the time of writing. The value of the black market dollar has remained stubbornly higher, however, rising from E5.30 [pounds sterling]-5.40 to around E7 [pounds sterling] in the same period. The administration's currency crisis worsened as the US-led war against Iraq slowly developed from an ugly threat into a nasty reality.

Tourism, revenues from the Suez Canal, expatriate remittances and exports were all hit by the war and the resulting reduction in economic activity in the region.

However, the brief duration of the conflict meant that losses were perhaps not as great as the Egyptian authorities had feared. While the figure of $8bn in lost revenue had been bandied about before the war, October's Annual Economic Trends Report, produced by the American Embassy in Cairo, suggested that $1bn would cover actual losses.

The war also brought demonstrators out onto the streets for the first but not the last time this year. As a long-term strategic ally of the US, Egypt's position was compromised although it was not in favour of a pre-emptive attack against Saddam Hussein's regime.

From March 20, demonstrations and protests took place on a huge scale and with such intensity that the security forces were instructed to make arrests on a correspondingly huge scale. At least 800 people were detained under state of emergency laws.

After the fury over Iraq had died down, another cause roused people to run the risk of public protest: hunger. Due to a poor harvest in 2002, wheat supplies were low and extra imports meant using precious foreign currency reserves. In a totality accustomed to consuming 180m loaves of bread every day, price rises of 10% and shortages are a serious political issue. In 1977 there were riots when President Anwar Sadat's government attempted to remove the state subsidy on bread, which currently amounts to $600m annually.

A BRIGHT NEW FUTURE?

In September the administration was actually forced to revert to a fixed dollar exchange rate of E5.35 [pounds sterling] on imports of basic foodstuffs. It was against the background of so much discontent that the NDP's national party conference took place with the aim of restoring some prestige to the government. With the ruling party principally represented by party leader President Hosni Mubarak and his son Gamal Mubarak, there was a clear impression that mistakes of the past were being at least implicitly acknowledged and a bright new future promised. …