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Will EgyptAir Survive?

The future of the Egypt’s national airline is in question after another major security breach, the third in less than a year, caused the crash of an international flight.

In an era of heightened global sensitivity among travelers, EgyptAir does not bode well.

Just in March, a ‘psychologically unstable’ man forced an EgyptAir flight en route to Cairo from Alexandria to divert to Cyprus, signaling a worrying absence of simple safety measures. That was a mere five months after a terrorist bombing brought down a Russian plane, killing 224 people over Sinai.

The immediate response was heightened security at Cairo Airport, a commendable, if superficial solution. Patrick Werr, an economics and finance journalist based in Egypt for 25  years, shared this scene:

I’ve never seen such security at Cairo Airport! Long lines in front of check points. They made me take off my shoes twice and run them through the scanners. There was a showdown between the police officer and two angry Coptic priests, but in the end he won and they had to take off their turbans and run them through the scanner. All the police were stern. I, a non-expert, have never seen security so tight.

While it’s already clear that the lack of a sufficient security protocol is a death knell for the tourism industry – where the number of visitors to Egypt has fallen to 9 million in 2015 from a record 14 million in 2010 – there are questions over the survival of the nation’s flagship airline. The fate of EgyptAir is inextricably linked to Egypt’s tourism industry and, unfortunately the other problem plaguing Egypt: oil. As a result, the company has suffered considerable losses since the beginning of the uprising in 2011 – incurring losses of nearly $1 billion since the beginning of the 2011 – partly due to an increase in fuel prices, the devaluation of the Egyptian currency and continuous strikes within the company.

What’s worse, EgyptAir is actually self-financed. Although the airline is 100 percent state-owned, it has a special agreement with the government that allows the management to operate as if the company were privately owned. That means the company claims it has no financial backing from the Egyptian government. That contract has already caused problems. Last year, it was forced to hire an American firm to restructure. Over the course of the last few years, it has had to slash prices for tickets several times and it’s goal now for the fiscal 2016 year is to merely break even.

The question is, can EgyptAir sustain repeated losses and reputational damage as a result of mounting security threats? It’s not just the recent years. EgyptAir’s track record is appalling – just think back to 1999, when an EgyptAir flight from Los Angeles to Cairo, with a stop at a New York airport, crashed into the Atlantic. Back then, the airline absolved responsibility, and it does today, hiding behind the shroud of terrorism.

Yes, this may be down to a terrorist threat, but at what point will the airline be accountable for its lack of security? There may be a point where the government is forced to fully takeover EgyptAir, dipping into the state coffers to support it financially. But that doesn’t change its operations and the responsibility of the management over their company. If a tragedy such as what happened this week had affected an airline such as RyanAir in England or United in the U.S., calls for resignations would come fast and hard.

However, Sameh Hafni, the president of EgyptAir, has not uttered a word.

Guest Post: “Sharia Law Is Out of Date”

Rebel Economy spoke to Timur Kuran, a Turkish economist and professor of Islamic studies at Duke University, on the role of Sharia law in the Middle East and North Africa. He is the author of The Long DivergenceHow Islamic Law Held Back the Middle East.

  • 1. Egypt’s new government is dominated by the Muslim Brotherhood, who have suggested an increased use of Islamic finance and Islamic economic principles as one of their solutions to the country’s economic woes. Considering what you know of the state of Islamic finance in the world today, do you think this is a valuable option? What could be gained from such a shift?
[caption id="attachment_1249" align="alignright" width="240"]Duke University Duke University[/caption]

Timur Kuran: What are now known as “Islamic economic principles” were first articulated in the 1940s by Indian Muslims trying to define a unique Indo-Muslim identity. It is then that the absence of interest came to be viewed, through the writings of Islamists, as the sine qua non of a properly Islamic economy. Within a generation there emerged banks meant to accept deposits and make loans on an interest-free basis. These banks were to make funds available to cash-starved small businesses that lack political connections and to promising entrepreneurs without a track record. They were also to serve as instruments of economic Islamization.

Whether the Qur’an bans all forms of interest, or specifically its exploitative forms, was a matter of controversy in the early decades of Islam. It still remains in doubt. What is crystal clear is that what passes as Islamic finance is anything but interest-free. Almost all of the Islamic banks in existence, including those in Egypt, charge their borrowers what any economist would call interest; they also pay their depositors interest as a matter of course. This is not surprising, for interest continues to provide tangible benefits to both lenders and depositors.

For these reasons, I would not expect the spread of Islamic finance in Egypt to have significant economic consequences. Tripling the share of deposits in Islamic banks would not change how Egyptian entrepreneurs finance their activities. Those without connections would continue to find it enormously difficult to obtain capital. The main effect of giving priority to Islamic finance would be to polarize Egyptian society further. Secular and non-Muslim Egyptians, including those who realize that the differences between conventional and Islamic banks are symbolic, would view the growing emphasis on Islamic finance as a sign of creeping Islamization.

Having suggested that in its present form Islamic banking would not solve any of Egypt’s pressing economic problems, let me acknowledge that Islamic banks might bring benefits by abiding by their stated mode of operation. The charters of Islamic banks instruct them  to lend on the basis of “profit and loss sharing” rather than for a fixed return. They are to operate like the venture capital companies that have financed the global high-tech industry. Venture capital firms lend to promising entrepreneurs, for a share of any profits, without regard to collateral, track record, or connections. They take genuine risks, losing money when investments that they finance fail.

With its young population and high unemployment, Egypt desperately needs more venture capital. That is why genuine Islamic finance could bring major benefits to Egypt. Alas, there are no signs that the Muslim Brotherhood intends to establish banks prepared to engage in profit and loss sharing. It will probably promote more interest-based banking in Islamic garb. Interest-based banking does not do harm. But giving it an Islamic veneer will not improve the Egyptian economy in any measurable way.

A better alternative to more Islamic finance would be to improve the rule of law and open Egypt up to global venture capital industry.

  • 2. The Long Divergence, your recent book, goes into a lot of the historical detail of how the countries of the Middle East and North Africa failed to keep up with the innovations in finance and business over the centuries. What is your assessment of the situation in modern times? Have these structural issues related to Sharia’s lack of modernization abated at all or are they still a major obstacle to economic growth?

Timur Kuran: By the 1850s, leaders of the Middle East and North Africa realized that the region’s traditional commercial and financial institutions had become a handicap in the rapidly evolving global economy. It was not possible to form large and perpetual companies through Islamic partnerships that had not changed form since the Middle Ages. Accordingly, the region’s peoples could not take part in the emerging industrial sectors, or in the modern financial sector, except by operating under the legal system of a European power. Another serious problem is that public services were provided through the traditional waqf, which was meant to be an inflexible organization. The vast resources of established waqfs could not be used to provide modern municipal services.

The response, beginning in Egypt and Turkey, was to adopt French commercial law, to establish secular commercial courts, and to start providing public services primarily through European-style municipalities established as corporations. These reforms drew only the mildest objections at the time; no one made it an issue that the corporation, which is absent from Islamic law, became a key element of Muslim economic life. To this day not even Salafists object to the Western-inspired organizational forms introduced the region since the 19th century.

The Middle East and North Africa has thus managed, quite smoothly, to overcome the organizational disadvantages that left the region behind. Hence, there remain no legal obstacles to forming a giant firm in Egypt, or to supplying water to Egyptian cities through the latest technologies. The Sharia no longer keeps the region behind directly, for the simple reason that in the present, economic life is regulated by laws developed outside the restrictive framework of the Sharia.

However, it matters enormously that the Egyptian economy was governed, until recently, under the Sharia. This history delayed Egypt’s transition to democracy by keeping its civil society chronically weak. Democracy is a system that involves more than fair elections held periodically. It involves limits on the governing coalition. The powers of government are limited partly through private organizations, including unions, professional associations, independent media, and political advocacy groups. Together, such private organizations form civil society. A strong civil society emerges under a market economy served by perpetual autonomous organizations. Hence, the long delay in the Middle East’s economic modernization set back its political development. This delay allowed autocratic leaders to gain power and then rule for decades on end. These leaders used their powers partly to keep civil society from developing.

If Egypt remains politically unstable in spite of having a democratically chosen government, a key reason is that its civil society remains weak. Precisely because of this weakness, Egyptians fear a return to autocracy. This situation is among the delayed consequences of the Sharia.

  • 3. In all countries of the Arab Spring, there is talk of a “renaissance” founded in Islamic principles. Do you believe that such a renaissance is possible? Where do Islamist thinkers, including Islamic economists, need to focus their efforts to bring Sharia up to date?

Timur Kuran: Although a renaissance is possible, it is unlikely to be founded on Islamic principles. On the contrary, it is likely to arrive when a critical mass of Muslims recognize that to make the Arab world and the wider Muslim world economically competitive, intellectually vibrant, and well governed, it is necessary to abandon the fixation of looking for all answers within the confines of the Sharia.

It has been almost two centuries since the Sharia played an important role in any major economic system. It was out of date, then. That is why, outside a few domains involving family matters, it was effectively abandoned in country after country, with general agreement. To make the Sharia useful in economic and political life of the twenty-first century, it would have to be altered so extensively that it would cease to be recognizable as such.

Sooner or later Islamists will start debating, in earnest, the limits of the Sharia. Intellectual life in the Middle East and North Africa will then start flourishing once again. Solutions to many economic and political problems will emerge through free discourse, as opposed to discourse sterilized by concerns of what is properly Islamic.

Port Said: Egypt’s Statue of Liberty

[caption id="attachment_1177" align="aligncenter" width="580"]Port Said, postcard 1915 Port Said, postcard 1915[/caption]

After yesterday’s deadly clashes with as many as 30 killedIt’s hard to imagine how the Port Said of today was once the object of a sculptor’s fascination.

In the 1850s, French sculptor Frederic Auguste Bartholdi planned to build what is now known as the Statue of Liberty at the entrance to the newly constructed Suez Canal at the coastal city of Port Said.

He fell in love with the colossal statues in Luxor on the Nile, the Wall Street Journal’s William McGurn wrote in February 2011 when Egypt’s revolution signified children on their parents shoulders at Tahrir Square, not masked men.

Inspired by Egypt’s granite beings, he proposed a huge statue of a robed woman.  It was to be called “Egypt Bringing Light to Asia”:

Like our Lady Liberty, the Egyptian version featured a woman holding aloft a torch. Like our Lady Liberty, the Egyptian woman was to stand on a large pedestal. Where ours has rays of light coming out of her crown, however, the Egyptian woman has light emanating from under a headdress.

 But the Egyptians would not pay, McGurn writes:

Eventually Bartholdi made his way to America. Here he discovered an island off Manhattan that would make an ideal site for a grand statue. Though he would deny any relationship between the two, a comparison suggests otherwise.

A century later, the sculptor’s instincts would be proven correct and the city would thrive on being a duty-free port and tourist resort, where people would flock to see the town’s exceptional 19th Century Italian and Greek architecture.

The city grew to become one of the richest governorates in Egypt with an economy built on fishing and industries such as chemicals, processed food, and cigarettes. It was also a critical harbour for exports of Egyptian cotton and rice.

Of course, like any developing city dependant on tourism and specific industries, it faced many problems that threatened the livelihood of Port Said’s citizens, including attacks to the city’s architecture and the prospect that city’s free-zone status would end.

But a deadly brawl last February changed the image of the city forever. 

A riot at a Port Said football game between rival groups of hard-core football fans from Cairo and Port Said ended with 74 people dead and 1,000 wounded.

It was the worst soccer riot in Egyptian history and among the worst in the world. At the time there were conspiracy theories about former members of Hosni Mubarak’s regime hiring thugs to disrupt the country’s transition to democracy.  But then the people of Port Said became blamed for the incident.

As if bowing to these rumours, an Egyptian court sentenced 21 people to death on charges related to the violent clashes between rival football fans last year.  At least 30 more people were killed and 250 injured in Port Said over the weekend in riots sparked by the death sentences.

Most had expected an acquittal.

Today Port Said is an isolated city-state that has broken from the rest of the country, as David Kirkpatrick writes in the New York Times:

 Egypt’s new government lost control of a major city, Port Said, on Saturday as rampaging soccer fans attacked the main jail, drove police officers from the streets and cut off all access to the city.

The streets are lawless, and residents feel more isolated than ever believing that the country has turned against them.

Port Said, a relatively well-to-do city that registers one of the highest gross domestic product per capitas among Egypt’s cities, is an example that even financial stability cannot bring comfort if a society feels targeted by the government.

Egypt’s administration, by sentencing to death 21 Port Said football fans, has driven a wedge between the residents and the capital of Cairo, which is still seen as the base of a centralised government that dictates the fate of 83 million people across Egypt.

Not only will the livelihood of Port Said’s residents suffer if that division continues, but the whole of Egypt, which relies on Port Said for important exports, imports and foreign currency from the Suez Canal.

If the state is interested in any kind of economic revival, it will have to include and involve cities like Port Said that have a rare combination of economic, historic and architectural attributes which the government would be hard-pressed to find elsewhere.

Breakfast Wrap: IMF “Deal or No Deal”, We wON’T PRODUCE SALAFI AHMED EZZ, Salafis say

Speculation over when an agreement between Egypt and the International Monetary Fund will be locked down has reached boiling point with various forecasts being made.  The most likely at the moment sees the nation securing the loan in December, and the first tranche of a $4.5 billion (state-run newspaper Al Ahram said last week the loan amount was reduced from $4.8 billion – probably because of currency fluctuations) to arrive in January 2013.

Ashraf Swelam, the former economic advisor to failed presidential candidate Amr Moussa, says the debate is healthy, in this opinion piece featured in Ahram:

The back and forth isn’t in itself a bad thing. For one, it shifts the focus from the political to the economic sphere which is in dire straits. In addition, public debate of the sort unfolding around the issue of the IMF deal is characteristic of democratic societies, and as such it should be celebrated and encouraged. 

But he does repeat a mantra often spoken about the Egyptian government: be more transparent about your negotiations.

The complete absence of information about the details of the agreement… in turn opens the door wide open for unfounded suppositions and conspiracy theories.

Swelam also repeats the political bullet points brought up under his tenure as economic advisor to Moussa: Hasn’t the day come for Egypt to seriously consider decentralization and the financial and administrative empowerment of local communities? And, how are we going to address the mounting challenges of water, food, energy and environmental security?

His economic programme includes reviewing past privatisation deals, shifting emphasis to the private sector and moving money-losing state-owned institutions under a mega state-owned holding company with a chief executive. Such a programme would signal a move to a more profit-driven, capitalist model.  

That certainly won’t sit easy with those (and there are many of them) against the IMF loan, who associate the international bank with harsh austerity measures years ago.

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The BBC expose on Mubarak’s billions has been translated into English. This thrilling (though at times sensationalist) BBC documentary about the Mubarak-era and Egypt’s Stolen Billions

(N.B. Without stating the obvious, it should be noted that though many journalists work to high levels of integrity and morality, sometimes mistakes happen and reporters are careless.  This has led the BBC’s director general, effectively the BBC’s editor-in-chief, George Entwhistle to resign over the weekend after a BBC Newsnight film alleged child abuse by an unnamed Conservative politician – which was proved to be unfounded.  Such a huge accusation is a dangerous one to make.  So, former Egyptian president Hosni Mubarak may be accused of having $70 billion stashed away in hidden accounts, but that would also make the man accused of chronic “mediocrity” the richest man on Earth. Doesn’t quite gel.)

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Egypt’s inflation rate widened significantly to 7% in the 12 months to October 2012, from 6.2% in September, according to the government statistics agency.  Though food prices rose, which is the standard cause for rising inflation, this time fuel prices played a big role.

The increase in natural gas and butane prices were the main driver behind the rise in inflation, staging a monthly increase of 57.8%  in October 2012 from September 2012, and 175% since October 2011.

The Egyptian government has signalled it would start raising the price of energy consumed domestically and this indicates it may have already happened.

Egypt is struggling with a gas shortage because of an addiction to energy subsidies that has wiped out its resources domestically and forced it to use energy at home that it would have exported for much-needed hard currency.

One way to counter that is to immediately raise the price of fuel.

Though just anecdotal, there have been instances of increasing electricity bills and gas bills in households.  Perhaps the government is quietly enforcing targeted price hikes in some areas to avoid public anger. 

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Some welcome relief came to Egypt when it completed its first  licensing round since the 2011 revolution in a sign that international oil firms are (mostly) undeterred by a payment backlog of billions of dollars.

Royal Dutch Shell, RWE and TransGlobe Energy were among energy companies that won concessions in Egypt.

The results for this tender were seven months after the closing bids, after the date had been delayed to March 29 from January 30 to allow more companies to take part.

Though it’s an indication that Egypt’s energy reserves are too lucrative to miss out, it doesn’t mean the country is out of the woods just yet.  Delays on tenders were because international interest wasn’t that high after Egypt built up a backlog of payments to oil producers and premiums for fuel imports skyrocketed. It’s another consequence of a deep crisis impacting the energy sector in Egypt. 

Iran, a country that has had to cope with severe international sanctions, has temporarily banned the import of some “luxury goods” including foreign-made cars and mobile phones to save billions of dollars for essential products in the face of worsening sanctions.

The currency has slid dramatically over the last 15 months as exports have fallen because of tighter and tighter Western sanctions.

The government has responded to a wave of dollarisation, where Iranians have scrambled to convert their savings into dollars [and euros], by restricting access to hard currency, rationing the dollars which it supplies to companies and individuals through the central bank, and setting up an official foreign exchange centre.

If you thought transparency wasn’t good enough in Egypt, take Iran where among the “Secrets” held by the government is the level of reserves.

The reserves stood at $106 billion at the end of last year, according to the International Monetary Fund. But some analysts estimate they may have dropped by several tens of billions of dollars as the sanctions have cut oil income, according to Reuters and Bloomberg.

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“We will not produce a Salafi Ahmed Ezz,” said Bassam al-Zarka, who serves as vice president of the Salafi House of Business’s board of trustees and president of its executive committee.
The House of Business is a Salafi idea that will “connect investors with ideas, train entrepreneurs, and reinvest revenue in social-development projects, according to Salafi leaders associated with the organization,” reports Ben Gittleson for Egypt Independent.
An interesting story on how Egypt’s Salafis are branching out into business, and bringing their ultraconservative teaching of Islam into the world of modern finance.

Chinks in the Armour

The revelation last week that Saudi Arabia’s Aramco – valued at $781 billion as the world’s most valuable company because of its massive oil concessions – had been infiltrated with a computer virus should be a wake-up call for the region’s top businesses and governments. It’s not yet clear what the virus was, but there has been speculation that it was the data wiping Shamoon. The company isolated the system that was affected and cut off the spread of the virus. Surely, Aramco has some high powered firewalls and computer engineers on its staff, which raises the question: is the region prepared for highly sophisticated cybersecurity threats?

Any visit to a government office in Cairo leaves you with the impression that the answer is no. Aging desktops with outdated Windows operating systems fill the offices of Egypt’s bureaucracy, each entirely vulnerable to an attack. Can you imagine the generals of the Supreme Council of the Armed Forces even being familiar with the concept of encryption? By many accounts, they still receive official messages by fax.

By now, the Stuxnet virus that disrupted Iran’s project to enrich uranium is well known. But there are a range of other viruses that have been trawling the Middle East networks. One of the most interesting ones to emerge has been Gauss, which can spy on banking transactions and steal login information from social networking sites. According to Kaspersky, it may have emerged from the same US and Israeli laboratories that built Stuxnet and was in part directed at Lebanon.

There’s no doubt that cyber war is a theme of our times and the Arab World, with all its critical infrastructure, is far behind in its ability to defend itself.