Egyptian exports and imports are expected to fall victim to the global economic slowdown

Like it or not, Egyptian exports and imports are bound to be affected by the current financial turmoil. Government officials, experts and exporters have all admitted that forecasts of lower demand on the back of a shortage in liquidity will mean a drop in the volume of Egyptian exports. In the meantime, imports on which Egypt depends to provide the bulk of its local needs -- including the raw materials necessary for local industry and commodities -- will also be harmed, as producers and exporters abroad are expected to reduce their production levels through the coming period. To try and ease the situation and identify areas where the government could help, Minister of Trade and Industry Rachid Mohamed Rachid met with representatives of Egypt's industrial and trade sectors as well as members from the banking community to discuss the potential impact of the unfolding situation on exports to the US and the EU, two of Egypt's main trade partners. "We all know that we will be impacted. The question is how much and what are the steps that we can take in order to minimise this impact. We have an advantage at the moment because we have a head-start over others who are still distracted by the banking crisis and are not yet focussing on the economic impact of the current events," he said. The slowdown in the global economy means Egypt will not be able this year to achieve its annual target of raising the volume of non-oil exports by 35 per cent. But a change in the Egyptian exports map may help relieve the problem. Over the past few years, Egypt succeeded in attracting new trade partners, among them Arab and Asian countries. According to Minister of Investment Mahmoud Mohieddin, a few years ago Egypt's trade volume with the US and the EU represented 90 per cent of its total trade volume, but today they represent 65 per cent. This means that one third of Egypt's trade relations is with states excluding the US and EU members. However, experts are not convinced with the government's rosy outlook. Nader Noureddin, professor of agriculture at Cairo University, asserted that Egyptian agricultural exports to the EU, estimated at $2 billion, will face a clear drop. He added that local agricultural production will also suffer. "The government is going to restructure its budget to overcome the crisis. It is expected that the budget allocated for land reclamation, 200,000 feddans annually and agricultural investments will be lower than before," Noureddin added. On the other hand, exporters are concerned about their business, particularly because experts are predicting low global growth rate figures for 2009. Naala Alouba, an exporter and advisor to the Export Committee at the Egyptian Businessmen Association (EBA) said, "What we are facing now is a direct consequence of globalisation. We are paying the price of others' mistakes." Alouba asserted that the volume of Egyptian exports will definitely be reduced since the majority of Egyptian exports are directed to the US and the European countries that have suffered the most harm from the financial crisis. "Our clients in these countries are expected to cut their needs," she said. To keep production at the same level, according to Alouba, producers who used to export should target the local market in order to cover the reduction in international demand. EBA board member Khaled Hamza said no one knows what the real impact of the crisis on Egypt will be. "These are all speculations," Hamza said. However, he expects the situation to be

worse for importers in terms of quantity and pricing. "The quantity of imports, which represents 70 per cent of Egypt's needs, will never be as before since the exporters we used to deal with are currently facing great financial problems. Some of them may well announce their bankruptcy," he added. The exchange rate is another factor that is expected to have an impact on the crisis. A more expensive dollar means an equally expensive import bill, Hamza noted. He added that looking for alternative import markets, such as Arab states, may well be the way out. At any rate, an effective escape plan must be accompanied by a clampdown on bureaucratic procedures and a boost in local production. In reaction to the global slowdown, the government provides more support to the industry The government is currently considering a package of measures that may help ease the negative impact of the financial crisis on the local industrial sector in general and on exporters in particular. Last week Minister of Trade and Industry Rachid Mohamed Rachid announced the government's decision to fix the price of energy provided to industrial factories during the coming period in an attempt to help them reduce their costs. A few months ago, the ministry had decided to gradually raise, over a three-year period, prices of electricity and natural gas provided to heavy energy consumption factories such as cement and fertiliser producers. The first phase of the plan, which aimed at cancelling subsidies and selling energy at international prices, was applied in July 2008. However, in response to the global slowdown, Rachid announced the application of the second phase will be put on hold for some time. Moreover, the additional export fees imposed on cement exports and steel products were also cancelled last week. Rachid announced the decision was taken in response to a study conducted by the ministry's external trade department, which asserted the financial crisis would lead to a slowdown in all economic sectors including exports. The study added this exceptional measure will help maintain local production and exports at their current level. Rachid explained the ministry will follow up the situation, and should there be any disturbance to the local markets, export fees will be imposed once more to stabilise the market. Meanwhile, the government is considering a comprehensive programme to support the industrial sector. This includes providing more facilities to investors to encourage them to establish new industrial projects, additional tax exemptions and a discount on sales tax. Rachid added that a reduction in shipping costs, an exemption on some port service fees related, and additional exports insurance support are among the measures currently being considered by the government. The Federation of Egyptian Industries, the Egyptian Federation of Chambers of Commerce and the Exports Councils have all been invited to present their views and suggestions relating to the government's plans to overcome the negative impact of the crisis. According to official figures, the global slowdown expected during the coming year will lead to a reduction in the state's total revenues by $4 billion and a decrease of the growth rate from seven per cent to less than six per cent. To contribute to alleviating the situation, the government will continue to take actions to ease the impact on the economy.

Minister of Economic Development Osman Mohamed Osman announced that an additional LE5 billion will be allocated to raise investments directed at infrastructure projects to LE42 billion, contrasting with the LE37 billion previously allocated in the government's plan. On the technical and technological levels, the Industrial Modernisation Centre (IMC) announced that it too will focus its future programmes on raising the productive capacity of factories and upgrading technology. The IMC will help attract foreign experts to work in Egyptian factories to raise their competitiveness. In a meeting held this week to discuss how the industrial sector can surpass the crisis, IMC Executive Director Adham El-Nadeem said the IMC will provide more support to factories to help open up new markets for Egyptian exports. He added the IMC will soon announce additional privileges to be provided to industrial companies to support and upgrade their performance.

The current financial turmoil may have a mixed impact on Africa,

The stigma associated in the past with poor integration into the world economy is nowadays understood to be a real blessing. Numerous African countries, for instance, were spared the heat of the current financial turmoil, simply because they are not substantially involved in trade relations with the US. On the short run at least, African countries will reap the fruits of an average growth that has been sustained for six consecutive years now, though a long-term impact on these economies is inevitable. According to Leonce Ndikumana, director of the development research department at the African Development Bank Group, it has been a long time since good news about Africa was heard. Now, however, the situation appears somewhat brighter, as indicated by the African Economic Outlook 2008 launched last week. For the sixth consecutive year, Africa's real GDP growth reached five per cent in 2007 and was forecast to reach 5.9 per cent in 2008. However, the effect of the repercussions of the present global crisis has yet to be evaluated. Nonetheless, the 2008 report showed that more African countries are joining the group of exceptional achievers as 31 countries this year registered a growth rate exceeding five per cent compared to 25 countries in 2007. "Had it not been for the current crisis, there were strong expectations that real GDP growth in 2009 would be sustained at 5.9 per cent. However, we have yet to evaluate the impact of the present circumstances on different economic areas in Africa," said Ndikumana. As a matter of fact, 2007-2008 was an exceptional year for African countries in many aspects. They experienced continuous, steady growth, an improved macroeconomic framework, progressively abated inflation rates as compared to previous years, a commodity boom of petroleum and non-petroleum products, in addition to an increase in machinery and transport imports from China and India, new propellers of African growth. Among the outstanding achievers of the oil-exporting countries stands Angola, with 11.8 per cent average growth from 2000 to 2007, and Algeria with four per cent average growth during the same period. Assets for an improving economy included a sustained and prolonged growth, upgrading macro- management and rising investment in non-oil sectors.

Of the oil-importing countries, Tanzania, Ghana and Tunisia performed best, experiencing an average growth of 6.7 per cent, 5.2 per cent and 4.9 per cent respectively from 2000 to 2007, thanks to prudent macro-economic policies, good diversification and decreasing poverty. However, Ndikumana underlined that both oil-importing and exporting countries will likely be affected by the current crisis. "Recent drops in oil prices will have their toll on the African oil exporting countries' balance of payments, which is likely to affect the growth rate in these countries," he said. Of course the present crisis is not all bad for Africa. As a matter of fact, many experts believe shaky markets in the US will push capital inflows towards new markets, of which Africa is no exception. "The possibilities here are boundless. There is a need for capital-intensive infrastructure projects. Moreover, the availability of land, raw material and cheap labour are all indispensable factors to encourage more foreign direct investment (FDI) inflows into the continent," said Ndikumana. Be that as it may, experts believe the appropriate institutional framework to make foreign investors more confident in investing in Africa is lacking. "There is no way for Africa to duplicate the Asian model unless it provides the private sector with a safer business environment," said Heba Handoussa, professor of economics at the American University in Cairo. She added that the majority of African nations have to work hard on meeting international standards for transparency and predictability. "These are two major elements that will be consistently looked at by foreign capitals considering doing business in Africa. Unfortunately, most African nations have corruption problems and much has yet to be done regarding freedom and accountability," she added. According to the latest African Economic Outlook, agriculture is one sector with exceptional growth prospects. However, the latest statistics released by the Organisation for Economic Cooperation and Development (OECD), indicate that African cereal production dropped from 144.1 million tonnes in 2006 to 135.6 tonnes in 2007. The latest economic outlook underlined that sub-Saharan Africa is a net cereal importer. "Although vulnerability varies among countries, there is a need for long-term solutions to the problem," the outlook stated. Handoussa predicts the current drop in cereal prices worldwide will not be sustained and that the food shortage will persist. "African countries still depend on rain and age-old agricultural systems that have perished elsewhere. The would-be food basket of the world should adopt integrated policies that could enable it to improve agricultural productivity," she said. Another major poorly developed asset is the African labour force. The latest outlook reports that half of Africa's youth, estimated at 133 million young people, are illiterate, the majority has few or no skills, and over 20 per cent of people in sub-Saharan Africa are unemployed. "Africa's youth are in dire need of vocational training," said Jose Gijon Spalla, head of the Africa and Middle East Desk at the OECD's development centre, who underlined that technical and vocational skills development in Africa suffers from a shortage of qualified staff, obsolete equipment, ill-adapted programmes and weak links with the job market. "Very few countries emphasise skills development in the informal sector, the largest employer and source of training in Africa," stated the report.

While economic prospects may appear gloomy, Mauro F. Guilln* believes one must not underestimate the ability of market economies to adjust
The global financial crisis is testing the world's most cherished institutions and the very sense of economic security. Although central banks have injected billions of dollars into the banking system around the world and governments have stepped in to buy troubled assets and acquire stakes in troubled banks, the crisis is not over. Each round of bad news has been met by decisive, though piecemeal, action by monetary and economic policymakers. The crisis continues to take its toll, and more countries are being sucked into the downward spiral. It is important to note that, while severe, the present crisis may not be as damaging to the global economy as the 1997 Asian flu or the Russian, Brazilian and Argentinean crises of the late 1990s and early 21st century. Although GDP growth has vanished in Europe and the US, the world is still far from seeing the economy really plummet as a result of the credit crunch. This is in part due to the swift and massive injections of liquidity, and to the general realisation that governments are unlikely to let financial difficulties infect the rest of the economy. Another frequent reference point for the current crisis is the Great Depression of the 1930s. The situation, however, could not be more different. First, we can count on competent central banks and various government programmes, including unemployment insurance, to avoid the kind of deflation that led to a 30 per cent loss in GDP. Second, financial markets are much more flexible and responsive today than 80 years ago, meaning that policies can have an immediate effect. And third, the world seems to be increasingly united in an effort to cope with the crisis, something that was ostensibly missing back in the 1930s. Still, this is not a time for complacency. In the US, more than half the population own shares in listed companies, up from less than one per cent in the 1930s. Mutual and pension funds have become such an important part of the economy, that dramatic downturns in stock prices have a large impact on consumer spending and lead people to postpone retirement. Companies are also much more dependent on all sorts of financial instruments for funding investments as well as day-to-day operations, ranging from commercial paper to bonds, and from bank loans to equity. Governments are also affected by the situation because tax revenue is sensitive to fluctuations in the business cycle and to sharp declines in capital gains. Above all, this crisis has destroyed wealth and lowered standards of living. Another factor to watch is the changing power dynamics in the global economy. If China emerges unscathed from the crisis, it would consolidate itself as a major economic, financial and trading power. While the malaise may still spread to the world's third largest economy, it is likely to weaken the US, Europe and Japan more than China or India, whose domestic markets are growing very rapidly. Observers also speculate over whether the dollar might lose its status as the world's reserve currency, something that would lower US standards of living by placing upward pressure on interest rates. This, however, is unlikely to happen because the dollar's main challenger is the euro. Europe too is suffering from the crisis, and so is its currency. The financial crisis is also damaging the chances of troubled companies to survive in the new competitive environment. The cases of GM and Ford in the automobile industry are perhaps the

clearest examples. After years of decline, they now find themselves in a dire situation, with declining sales and an inability to keep up with Toyota, Honda and the new Chinese manufacturers. Consumers in developed countries are postponing the replacement of their automobiles until the crisis subsides, and they are moving away from US-made gas- guzzling SUVs and embracing smaller, more efficient cars. Other consumer durable industries such as electrical appliances and computers are also feeling the clinch. It remains unclear just when real-estate prices will finally hit bottom in the US and around the world. Even the booming Middle East market is showing signs of fatigue. Stabilising home prices will be clear evidence that the crisis has hit rock bottom. We may be a couple of years away, however. While the situation is gloomy, one must not underestimate the ability of market economies to adjust. The US and EU have become much more dynamic over the last two decades. In spite of the crisis, mechanisms for relocating capital and labour from one set of declining activities to another of expanding ones are much more efficient today than two or three decades ago. This is especially true of most emerging and developing economies. It is truly important, now more than ever, to continue providing businesses and investors with clear and consistent macroeconomic policies focussed on facilitating investment and job creation. While the short-term challenges facing us are daunting, we must not forget that economies cannot embark upon a path of noninflationary economic growth without stability and productivity increases. This crisis should not prevent us from keeping the focus on education, training, and market development policies. They are the key to the future, regardless of the immediate problems confronting us.

Flagrant rates of inflation are the only thorn in Egypt's side as the economy shows positive signs of stability,
The financial monthly report of August, issued early this week by the Ministry of Finance, underlines overall signs of significant growth in fields of investment led by major income earners. A real growth rate of 7.5 per cent was seen in the period July-March 2007-2008. Notably, tourism led the growth as it contributed 4.4 per cent of GDP and recorded a 26.8 per cent growth, followed by the Suez Canal with 4.5 per cent of GDP and 18.7 per cent growth. Next up were the construction sector with 4.7 per cent of GDP and 15.5 per cent growth, and the telecommunications sector with 3.4 per cent of GDP and 14.6 per cent growth. "These were the prime driving engines for the robust growth realised during July-March 20072008," said the report. All this is thanks to a set of reform measures that have been enacted since fiscal year 2004-2005 which helped create a business-friendly environment. Among these were reforms covering the income tax regime, custom tariff reductions, stamp duty and sales tax administration. "The re- engineering of some spending programmes, including streamlining of energy subsidies and the interrelation between the treasury and social insurance funds and other public bodies, have improved fiscal balances, enhanced efficiency of expenditure and boosted confidence in the economy," said the report. A notable improvement in budget sector outturns for fiscal year 2006-2007 was sustained during 2007-2008. According to the Ministry of Finance preliminary data for 2007-2008, the overall deficit to GDP improved by 0.7 percentage points, reaching LE59.2 billion (6.8 per cent of GDP), compared to LE54.7 billion (7.5 per cent of GDP) in 2006-2007. In addition, the primary

deficit in relation to GDP stabilised at one per cent for the second year in a row during 20072008. Gross budget sector debt as a percentage of GDP declined to an average of 81 per cent at the end of June 2007, compared to 90 per cent at the end of June 2006. Budget sector net domestic debt increased by 7.5 per cent to some LE478 billion as of the end of 2006-2007, compared to LE445 billion at the end of 2005-2006. "All the increase in financing needs was funded from market forces," noted the report, which further indicated that the gross domestic debt of general government declined from 72.8 per cent at the end of June 2006 to 66.5 per cent at the end of June 2007, and net domestic debt of the general government to GDP declined from 53.8 per cent to 50.5 per cent. Rising inflation in food prices and non-food products was the main reason why the Central Bank of Egypt (CBE) raised overnight deposit and lending rates for the fifth time since February 2008 to 11 and 13 percent respectively on 7 August. Regrettably, inflation continues to hit unprecedented levels, as it reached 22 per cent during July 2008 compared to 20.2 per cent in June and 7.8 per cent during the same period last year. However, the significant increases in net foreign direct investments (FDIs), accompanied by non-oil exports and private transfers, each reaching $11.1, $11.9 and $6.3 billion respectively, have each helped boost the balance of payments surplus to reach almost $5.3 billion during 2006- 2007 compared to $3.3 billion in 2005-2006. Recent external-sector statistics showed that during the period July-March of fiscal year 20072008, the balance of payments surplus increased to $4.9 billion compared to a surplus of some $3.1 billion during the same period last year. During the same period, total commodity exports increased by 31.1 per cent to nearly $21 billion due to the increase in non-oil exports, accounting for $11 billion as well as the $10 billion increase in oil exports. On the other hand, commodity imports increased by 43.1 per cent to $37.6 billion, reflecting a growth in domestic demand. Consequently trade deficit increased by 61.6 per cent to $16.8 billion during July-March 2007-2008. A notable increase in tax revenues was recorded, as they reached LE137.4 billion with income taxes contributing LE67.1 billion. Meanwhile taxes on goods and services, and on international trade yielded LE50 billion and LE14 billion respectively. Meanwhile, total expenditure recorded at some LE277 billion during 2007-2008 compared to LE222 billion a year earlier. The cost of the subsidy bill surged by 56 per cent to LE84.2 billion compared to LE53.9 billion last year as a direct result of high international food and oil prices. As a result, total expenditure to GDP increased by 42.1 per cent to LE21.3 billion during July 2008 compared to some LE15 billion during the same month last year. Fiscal operations for July 2008 reveal an overall deficit of 1.1 per cent of GDP compared to 0.7 per cent during the same month last year. Foreign public debt as of the end of March 2008 increased to some $34.5 billion compared to $28.7 billion a year earlier, with only $2.8 billion of short-term maturity.