The Tale of the Paper Tiger: Only a Few Short Years Ago, Financial Analysts Were Predicting Great Things for Egypt, Earmarking Its Economy as `an Emerging Tiger Economy'. Unfortunately, Things Didn't Work out That Way. Andrew Hammond Reports from Cairo on What Went Wrong. (Business & Finance)

By Hammond, Andrew | The Middle East, March 2002 | Go to article overview

The Tale of the Paper Tiger: Only a Few Short Years Ago, Financial Analysts Were Predicting Great Things for Egypt, Earmarking Its Economy as `an Emerging Tiger Economy'. Unfortunately, Things Didn't Work out That Way. Andrew Hammond Reports from Cairo on What Went Wrong. (Business & Finance)


Hammond, Andrew, The Middle East


In early 2000, Egypt was being pegged as the regional `one to watch'. The respected London financial analysts, ABN Amro, said in a special report that if the Egyptian economy performed as expected, the country would double its market capitalisation by the end of that year, adding between $7-20 billion to its value. Of course, `perform as expected' is the key phrase here. At the beginning of 2000, the prospects for prosperity looked good.

In 1999, the country had abolished taxation on Egyptian products destined for export, in a bid to improve its balance of trade. Plans were announced that key utilities, including State-owned banks and industries including national gas and cement, were to be privatised. A new, pro-reform cabinet was in place. The stage was set -- or so it seemed. But like the best-laid plans of mice and men, the predictions of the experts were doomed to go awry.

In what was regarded domestically as a recession, Egypt's economy already looked shaky at the beginning of 2001. But worse was to come. The attacks of 11 September have had the combined effect of hitting tourism receipts -- already affected by the Israeli-Palestinian situation -- oil prices and Suez Canal receipts, all major sources of foreign currency.

At the same time, the government continued its policy of using hard currency savings to prop up the Egyptian pound, blaming currency trader speculation for the failure of its central bank core rate to hold. Refusal to let market forces find a level for the currency via a free float or, alternatively, to re-peg the currency to a basket of currencies or the euro instead of the dollar, did not help the situation.

The central bank devalued three times during the year, to 3.85 in January, 4.15 in August, and 4.50 in December. After the December devaluation, black market rates continued to fluctuate widely. On the streets of Cairo, the unofficial rate was running at above five pounds to the dollar.

To help Egypt through the tough times, the United States announced it would speed up disbursement of annual aid and release other outstanding funds. Egypt was set to receive $2.5 billion, to fill an expected balance of payments deficit of around $2 billion by the end of June, from a World Bank-organised donor conference in Cairo in February 2002, at which the International Monetary Fund, Arab Monetary Fund, Islamic Development Bank and European Investment Bank participated, among others.

The Bush administration made clear during its post-11 September campaign against the Islamic militant network, Al Qaeda, that it considered Egypt's economic health to be a subject of strategic importance.

Many of Al Qaeda's leaders, as well as rank-and-file members, are thought to be Egyptian, and received wisdom has it, a prosperous Egypt is less likely to produce further recruits for the radical Islamist bandwagon.

Although Egypt's economic fundamentals are sound (low inflation, small external debt) and the country cannot be compared to heavily indebted economies like Argentina, concerns have remained about the way the government is managing economic policy.

In November, it attempted to introduce controls on certain forms of trade finance, mainly importing, but quickly withdrew the plan amid loud complaints from the business community.

The central bank governor, Mahmoud Abul-Oyoun, refuses to admit that there is an economic crisis and complains the media unnecessarily exacerbates the country's problems with its negative reporting. However, as long ago as last December, stock market traders complained market sentiment was dented by the government's `head in the sand' approach.

Analysts were also left scratching their heads the previous month, when a year of speculation about a cabinet reshuffle, possibly including Prime Minister Atef Ebeid himself, ended with the apparent demotion of the government's keenest proponent of economic restructuring, Minister for Economy and International Trade, Yousef Boutros-Ghali. …

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The Tale of the Paper Tiger: Only a Few Short Years Ago, Financial Analysts Were Predicting Great Things for Egypt, Earmarking Its Economy as `an Emerging Tiger Economy'. Unfortunately, Things Didn't Work out That Way. Andrew Hammond Reports from Cairo on What Went Wrong. (Business & Finance)
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