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THE CREAKING Egyptian economy, showing signs of emerging from a two-year recession, was immediately hit by the attacks. The number of tourists visiting the country plummeted, causing a $2 billion shortfall in earnings. Thousands of Egyptians who work in the hotel sector have been laid off. Egypt’s other main sources of foreign currency earnings - revenues from the Suez Canal, oil and workers’ remittances - also fell as uncertainty gripped the world economy. The September attacks have also highlighted and exacerbated the government’s problems in managing the Egyptian pound.
In December, the government devaluated the official rate by more than 8 percent to a central rate of Egyptian pound 4.50 to the dollar with an upper limit of Egyptian pound 4.64. The pound has now lost a fifth of its value in the last year. Even the December devaluation was sufficient to stamp out black market trading in the pound as the authorities refused to pump dollars into the market.
Before the September attacks, the government had taken some long overdue measures that hinted that it still had the initiative to enact meaningful policy. But the attacks in the US paid to reform and wrong-footed the government whose reaction was simply to blame forces outside its control. The Egyptian economy is in a difficult, if not a desperate, position. The economy will still grows by 4-5 per cent this year is greeted with incredulity in the private sector.
The recession has gripped the country for nearly three years, which has been exacerbated by the fall-off in tourism, one of the mainstays of the economy, since last September. The stock market earlier this year hit an eight-year low and a parallel or black market in the Egyptian pound has opened up as local businessmen struggle to finance imports. While inflation remains subdued at under 3 per cent, medium term interest rates are high at around 11 per cent, as the government struggles to stave off dollarization and maintain some confidence in the pound.
Overall macroeconomic developments in 2001-02 were marked by sustained economic activity in the non-oil sector, improved fiscal and external positions, and declining inflation trends. Against a background of improved business confidence, the authorities continued to implement economic reforms in line with their Third Five-Year Development Plan. They also successfully issued a pound 625 million Eurobond, marking Iran’s return to international financial markets.
The real GDP growth in 200102 was strong and broad-based, with non-oil activities growing by 6 per cent in real terms. However, reflecting a decline in oil output owing to a downward revision in Opec production quotas, total real GDP growth decelerated to 4.8 per cent. The CPI inflation declined to 11.4 per cent. Registered unemployment remained high at 16 per cent at end-2001-02, as employment creation lagged behind the increase in the labour force.
The external current account position remained in surplus (4.8 per cent of the GDP) in 2001-02, lower than during the previous year. Exports declined, as lower oil export receipts were only practically offset by 5 per cent growth in non-oil exports, mainly representing chemicals and petrochemicals. At the same time, imports expanded by 20 per cent owing to buoyant domestic demand and progress in trade liberalization.
The decline in the current account surplus was partly offset by a significantly smaller deficit in the capital and financial account. This was attributable to a sizable decline in debt repayments and a sharp rise in capital inflows in the form of buybacks and oil pre-financing. The surplus in the overall balance was $4.9 billion, which financed the increase in gross official reserves to the equivalent of almost 10 months of imports of goods and services.
Growth of monetary aggregates remained relatively high in 2001-02, despite the central bank’s action to mop up excess liquidity . The money growth reflected the build-up of foreign exchange reserves, excluding the OSF, and a rapid credit expansion to public enterprises and the private sector. The real effective exchange rate appreciated by about 17 per cent in 2001-02, following an 18 per cent appreciation in 2000-01.
During 2001-02 and the first quarter of 2002-03, the authorities pressed ahead with their economic reforms. These included the exchange rate unification, the passage of the foreign investment law, on-going trade reform, changes in tax legislation, licensing of private banks and approval of private insurance companies. These steps have boosted business confidence and laid the ground the improved growth prospects.
The exchange rate unification was a landmark reform. The exchange rate was unified on March 21, 2002, with foreign exchange transactions now taking place in the inter-bank market. The authorities adopted a managed float exchange rate system. The transition has been smooth with the central bank seeking to maintain stability in the nominal rate during the period immediately following the exchange rate unification. Looking forward to 2002-03, the IMF notes that the growth outlook is relatively favourable, but that the expansionary policy stance could lead to higher inflation and put pressure on the real exchange rate to appreciate. The real GDP growth is projected at about 5.8 per cent, but the real oil GDP is likely to decline by one per cent as compared to the previous year. Growth in the non-oil GDP will rise by 6.3 per cent, underpinned by strong public sector demand, increased business confidence and gains in household disposable income. The fiscal position is expected to deteriorate significantly because of the expansionary spending in the 2002-03 budget and the cost of the exchange rate unification. The external current account surplus is estimated to decline to the equivalent of 1.5 per cent to the GDP. At the same time exports of oil and gas are expected to increase by almost 3 per cent. The average oil export price is projected at $22 per barrel for 2002-03 and $19.2 per barrel for 2003-04. A surplus in the capital and financial account is projected, Iran’s outstanding external debt is projected to increase slightly in 2002-03 to $7.3 billion, or 6.9 per cent of the GDP, but the debt service will continue to decline to about 4 per cent of exports of goods and services. Official international reserves are projected to rise to about $20.2 billion, equivalent to nine months of imports. Monetary growth is estimated to reach about 40 per cent in the absence of corrective fiscal measures.
The Economist Intelligence Unit (EIU) has lowered its forecast of the real GDP growth from 1.4 per cent to one per cent in 2002 and from 2.2 per cent to 1.5 per cent in 2003. The report attributed the forecast change to low private sector confidence and the poor state of public finances. It added that cuts in government spending and the impact of heavy public borrowing on private sector credit creation and investment will also impact growth. GDP growth figures could be higher. It also emphasized the importance of a political consensus among the ruling elite for economic reforms to progress.
The EIU urged the government to implement the first stage of its privatization programme to avoid a fiscal crisis within the coming 12 months. The report said the privatization process has been poorly managed so far, raising considerable uncertainty over how the expected telecom sale will be executed. It added that the sell-off of mobile phone licenses will occur too late to impact this year’s fiscal deficit but that, along with foreign financial support, it would allow Lebanon to access new and cheaper debt in 2003. However, it cautioned that the potentially lower cost of debt servicing will be largely offset by the growth of the public debt.
Economists warned that the Lebanese pound could come under pressure if the government shows signs of difficulties in financing the deficit and if higher interest rates in the United States narrow the differential between returns of local and foreign-currency instruments. It said that the introduction of the value-added tax in February raised prices, resulting in a forecast inflation rate of 4 per cent for this year before regressing in 2003.
The United Nations’ annual report on human development in 173 countries ranked Lebanon in 75th place worldwide and 8th among 17 countries in the Middle East and North Africa region. Lebanon ranked in 65th place in last year’s report, but a change in methodology and the addition of new countries to the index dropped its position to 74th place in the previous survey. The survey uses a Human Development Index to measure a country’s achievements in terms of life expectancy, educational attainment, and adjusted real income.
Lebanon ranked ahead of all non oil-producing Arab countries in the region, trailing only Saudi Arabia, Bahrain, Kuwait, the United Arab Emirates, Qatar and Libya. Worldwide, Lebanon was considered to have a “medium-level” of human development and came immediately ahead of Armenia and the Philippines and behind Fiji, Brazil and Suriname.
