In the midst of the worst recession in America since 1929, Ben Bernanke, the former head of the Fed was asked simply, ‘When will this end?’.
This was his response:
The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis.
Sounds logical. Especially coming from the man who was considered the most powerful person in the U.S. working to save the economy, and eventually he did.
Yet, apply this logic to Egypt, which has for so long languished in its political mess, and you see it doesn’t fit. Policies have been made and then broken, currency devaluations have been enforced, slowed and then prevented, and interest rates have been held and occasionally cut, and still reserves are pretty much where they were four years ago – sitting at just over $16 billion, enough to cover about three months of imports—the minimum the IMF considers advisable.
Up till now, Egyptian tourism has survived big setbacks. If there was any trouble in the desert or along the Red Sea, it was small, and tourists were not the targets (at least, under Sisi.) Yet, memories of an Islamist uprising in the 1990s that took years for then President Hosni Mubarak to crush have been aroused of late. In September, Egyptian security forces mistakenly bombed a convoy of Mexican tourists in the western desert while pursuing militants. Last year, the bombing of a tourist bus in Sinai killed two South Koreans and an Egyptian.
The problem now is that Egypt’s economy is much weaker and cannot sustain a drop in foreign currency. Foreign direct investment (FDI) amounted to $6.4 billion in the last fiscal year (from the financial year running July until June), and the government is hoping (unrealistically) for $10 billion this year. Unemployment has hovered at a record high of over 12 percent since the beginning of 2011 and the biggest issue, the current-account deficit, is still high. That’s because Egypt is still spending a lot more (on oil, wheat, cars, metal and other goods totaling roughly $60.8 billion) than it is exporting (just $22 billion last year.) And that’s been happening for more than ten years.
Unlike the 1990s, Egypt’s economy is in a much more precarious position.
Take these graphs, from Capital Economics, on the number of tourists flying to Egypt and the foreign currency reserve level:
According to estimates from Jason Tuvey, a Middle East economist at Capital Economics, export revenues (because tourist receipts are counted as a service export) could fall by as much as $3.5 billion, or a massive 1.3 percent of GDP, over the next year. That is a huge chunk out of the tourism industry, which accounts for 6 percent of Egypt’s GDP already and 1.3 million jobs. It’s especially bad because the Red Sea resort towns of Sharm El Sheikh and Hurghada were among the most successful tourist sites, even more so than the desert destinations. Daily occupancy rates reach more than 70 percent here at the start of June. It even prompted the tourism minister, Hisham Zaazou to tell Reuters this in September:
“I will focus on the bulk of tourist movement. While desert tourism is important, the highest figure for it was 350 thousand (people a year). Sharm El Sheikh, on the other hand, received more than 4 million tourists at some point, on its own,” he said.
“I am going to work on everything related to those areas, from securing them and all else.”
Good job securing that…
The country is back to square one having barely recovered from the ‘second’ revolution of 2013, let alone the ‘Arab Spring’ uprising of 2011. And, somewhat more unsettling is the risk to the neighboring Suez Canal, the fastest shipping route between Europe and Asia and one of the country’s main sources of foreign currency.
Despite security efforts, there have been multiple attacks on the Suez Canal. In 2013, an Islamist terrorist group called Al-Furqan took responsibility for hitting merchant vessels passing through the Canal with rocket propelled grenades. This is a clear video of the attack, which happened in broad daylight:
It was the second attack in just under three days (the first was allegedly under the cover of darkness), and demonstrates one example of how Egyptian security forces have taken a reactive approach to military threats, rather than mitigating the risk. According to Stephen Starr, a journalist that wrote a summary of the security risks to the Canal, “the threat of serious attacks by militants—operations that could sink a major vessel and thus block the canal—is a real one.”
President Sisi has his eye on a mega $8-billion expansion of the canal that aims to double daily traffic by 2023 and increase annual revenues to more than $13 billion by 2023, from just over $5 billion in 2014. Yet, none of this is meaningful if the government continues to resist structural reform which has left the economy floundering for years. It is also resisting the simple fact that there was likely a bomb on flight.
Egypt will certainly need international support once again as foreign direct investment dries up, but officials are alienating themselves by mismanaging the crash inquiry. It is no secret that European countries are among the heavyweight influencers on the IMF board, a organization that has had on-and-off talks with Egypt for years. So, if Egypt really wants to dispel concerns from its donors, in the hope of sourcing funds, transparent investigations are required.
It is a dangerous time for Egypt. The latest reports to come out from Western governments blaming the crash on a bomb have shown Egypt’s worst fears may be true – the country has experienced one of its worst terrorist attacks. Now, the most likely scenario emerging is that a bomb was smuggled aboard the plane and exploded midflight, despite security and a relatively modern airport at Sharm El Sheikh.
At first, the death of 224 people in the plane crash was seen by the Egyptian government as a tragic accident, and at the very least a dent on the economy.
Egyptian officials’ vehemently denied any terrorist link, dismissing claims by a militant group linked to the Islamic State who said that they brought down the plane. In fact, their initial assessment was of no foul play, according to someone close to the Egyptian intelligence services who spoke with Rebel Economy earlier today, and they were especially certain that the plane wasn’t hit by a missile.
Yet, just a few days later, the same officials, with a growing sense of confusion, prompted an investigation into the flight, and began to survey the fuselage and other materials onboard, according to the same source. Egypt continues to outwardly deny any terrorist involvement.
However, one of the most lethal groups in the region are now within shooting distance of two of Egypt’s most important economic lifelines and foreign currency earners: the Suez Canal and Sharm El Sheikh, one of the last remaining tourist destinations considered an oasis away from the turmoil elsewhere in the country.
And despite Egyptian officials and political analysts insisting for so long that extremist groups in North Sinai, where the ISIS affiliate is hiding out, didn’t likely have access to surface-to-air missiles that could take down a commercial airliner flying at 30,000 feet, the worst case scenario – an onboard bomb – has occurred. Not only does this demonstrated that ISIS are getting more sophisticated, and bypassing controls and borders, but that the government had no clue it was happening.
After all, it’s not easy to get a bomb on a plane in 2015.
Sinai has always been a study of contrasts: in the south, it’s full of tourists, luxury resorts, scuba diving, and lots of foreigners. The north is shockingly different – rundown cities, outlaws and Islamic extremists hiding in the desert and in mountain encampments. But now, what’s worrying is the influence of ISIS in Sinai and their proximity to big targets. Up till now, ISIS’s ambitions were limited by their geography. The classic ISIS in Syria are a scary phenomenon, but they have had limited access to Western targets.
The Sinai contingent is like a pick and mix of targets for militant group. It’s physically close to Jordan, Israel and mainland Egypt – all of which have a lot of westerners coming through, including attractive targets for a group seeking to make a bigger name for itself on the world stage. What’s more, Sinai is somewhat lawless, and its coastlines are under-policed.
It is a very dangerous place for ISIS to have a foothold, and could turn the fortune of the country around within months.