The Suez canal: the only lifeline left for Egypt's much needed economic revolution?
Economists estimate eight per cent of global seaborne trade transits via the Suez Canal “from the Med to the Red”. The Suez Canal has been the stage for the most decisive moments in Egypt’s economic evolution. Khedive Ismail’s debt default to his London bankers led to a British colonial protectorate, President Nasser’s nationalisation decree triggered an Anglo–French invasion of the Canal Zone, President Sadat’s troops crossed the Suez in the first chapter of the October 1973 war.
A successful militant attack on an oil tanker in the Suez Canal would have a catastrophic impact on the international oil and gas markets. The Suez Canal and the Suez med pipeline account for four million barrels a day of crude oil, LNG and petroleum products shipments. The Suez Canal is as vital to the twenty first century US Navy’s Fifth Fleet as it was to Victorian British’s lifeline to its “jewel in the crown” Indian empire. This geostrategic reality, along with the peace treaty with Israel is the reason Washington has gifted Egypt $78 billion in economic and military aid since President Sadat signed the Camp David accords with Israel.
Egypt was the Arab world’s growth engine in the early 2000s thanks to a surge in foreign capital inflows into the Cairo and Alexandria Stock Exchange (CASE), President Mubarak’s ambitious privatisation programme and the devaluation of the Egypt pound. Gulf investors, notably Saudi Arabia, Kuwaiti and Abu Dhabi institution, bought strategic stakes in Egypt’s leading telecoms, banks, property development final, construction and energy companies. Egypt’s EFG Hermes became the leading investment bank in the Arab world, a catalyst for Egypt’s biggest FDI and portfolio inflows since the 1952 free office’s coup that deposed the pro–West monarchy of King Farooq.
Egypt was hailed as the “Arab tiger on the Nile” by the global financial media even though president Mubarak’s rule was marred by a rising inflation, terrorist attacks on foreign tourists in Luxor and Sharm El Sheikh, industrial unrest in factories and “crony capitalism” that enabled businessmen close to the regime to become dollar billionaires, Unfortunately foreign investors and bankers ignored the rising political risk in Egypt in the twilight of the Mubarak era, including bread riots when the IMF forced Cairo to slash bread subsidies.
In early 2011, the Tahrir Square street riots culminated in the resignation of President Mubarak and a loss of investor confidence in Egypt even before the election of a Muslim Brotherhood government under Dr Mohammad Mursi. Central bank reserves fell from $30 billion to less than $4 billion. Tourism, one tenth of GDP, was crippled by the protracted unrest and the bloodshed that followed the 2013 military take over. Egypt’s energy infrastructure broke down once it was deprived of foreign investments. The Sinai LNG plants could not export output. Gas pipelines to Israel and Jordan were attacked. As natural gas output fell, power cuts became routine in Egyptian cities. The military government that succeeded Mursi, despite $12 billion in pledged aid from Saudi Arabia, the UAE and Kuwait, was unable to finance Mubarak era subsidies to cement and steel industries.
Egypt’s military regime faces a deteriorating security environment in the Sinai Peninsula after repeated attacks on the army and police from militants and restive Bedouin tribes. Political violence in the Sinai is a threat to Suez Canal shipping, Egypt’s vast LNG plants and loading terminals on the Red Sea and, above all, to the security of foreign tourists in Sharm El Sheikh, President Mubarak’s showpiece resort. Egypt’s energy infrastructure in the Sinai and Sue Canal Zone necessitates a rapprochement between Cairo and the major Bedouin tribal networks in the North Sea, who were excluded by President Mubarak’s development agenda, the inflow of migrants from the Nile Valley and decree rule by military governors.
Egypt has 3.7 billion reserve of crude oil and 66 trillion cubic feet of natural gas. However, without FDI, Egypt could will become an importer of crude oil by 2015 as its natural wells atrophy and depletion ratio rises. Cairo must also lift excessive subsidies on gasoline and diesel. Artificial pricing set by a monopsonist government buyer is a recipe for economic catastrophe.
By: Sarie Khalid
The writer is a Dubai-based research analyst in energy and GCC economics.
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