Egypt’s Dinosaur Economy Lumbers On With Aid

Mohammed Abdu needs only $65 a month to cover his expenses. But these days, even that seems out of reach. The government never came through with the job it promises every college graduate, and it’s about to strip away the sole source of income he managed to find: hawking cheap imported clothing on the street.

There are lots of people like Abdu in this “duty-free” city on the Suez Canal. Hundreds of thousands, in fact. And after it became clear this year that their town was about to lose the special economic status it’s enjoyed for more than 25 years--and with it a lucrative trade in imports--a riot broke out. Anger coursed through the streets as people hurled stones, lighted fires and chanted anti-government slogans.

“Everyone here feels choked,” said Abdu, 30, who witnessed the fray. “We have no confidence in this country. It is every young man’s dream to emigrate.”

The violence was a shock to a nation that prides itself on stability and gives authorities unrestrained power to maintain that stability. Squads of riot police did restore order, dragging more than 100 demonstrators off to jail. But there is little chance the police can calm an entire population angered by rising prices, soaring unemployment and a growing belief that the government is neither in control nor telling them the truth.

Egypt’s economy is a faltering, state-managed dinosaur. After a decade of ostensible liberalization, the government has failed to attract adequate investment, keep local money working at home or build a dynamic private sector. Instead, the country has survived--and at times prospered--by capitalizing on its strategic importance to the West, burning through about $50 billion in aid and loans since making peace with Israel a quarter of a century ago.

And once again, Egypt is poised to cash in on its geopolitical value. At a recent donors conference, wealthy Western nations eager to ensure stability in the Arab world’s most populous country--especially during the U.S.-led war on terrorism--pledged an additional $10 billion in loans and aid over the next three years.

“When we were doing well, it was not because we had a solid economy,” said Samiha Fawzy, deputy director of the Egyptian Center for Economic Studies, a Cairo-based think tank. “It was always dependent on external sources.”

Egyptian authorities insist that although the economy is stressed, it remains “robust.” People who talk of their personal experiences, however, have trouble seeing the upside. Unemployment is unofficially estimated at about 20%. The value of savings is depreciating as the currency declines on the black market. The prices of staples have increased as the government tries to back away from subsidizing commodities. The average income is about $1,300 a year, and more than half the population lives near or below the poverty line.

“I am dependent solely on my family,” said Ahmed Farghaly, 24, a college-educated accountant who can’t find work in Cairo. “What worries me is finding an opportunity.”

The nation’s underlying weakness was revealed for all to see after the Sept. 11 attacks on the United States. Egypt was already in the throes of a two-year recession, and its foreign currency reserves were depleted, when the attacks bit into three of its most vital sources of income: tourism, remittances from abroad and Suez Canal revenues.

With annual imports in recent years totaling about $17 billion and exports about $6 billion, Egypt has a huge trade imbalance. It desperately needs hard currency to pay for the imports and shore up the value of its own currency. But tourism alone, which has brought in as much as $4 billion a year, dropped by about 50% in the months after the attacks.

“After Sept. 11, our problems became very serious,” Fawzy said.

Currency Concerns

The most pressing problem was the currency. With the Egyptian pound trading at six to the dollar on the black market, or 29% above the official rate, the government stepped in early this year with its strong-arm style of economic management. It arrested unlicensed money changers and slapped high tariffs on imports. The strategy worked for a time. But it also created an even greater demand for dollars, undermined public confidence in the monetary system and made it harder for small businesses to function. Recently, the black market price was back to 5.9 pounds to the dollar.

“All they did was make it difficult and dangerous to change money,” said a commodities exporter who spoke on the condition that he not be identified. He said buying and selling dollars have become a cloak-and-dagger enterprise. “We used to go to the shop and change money. Now we pick them [traders] up in a car, drive a kilometer away and trade packages. It is as if we are getting drugs.”

A Western diplomat based in Cairo, who also spoke on condition of anonymity, said the government often makes things worse.

“They have some real problems they have to deal with, but it is not a crisis,” the diplomat said. “The main problem is the way the government acts. In some ways, the government magnifies the problem with some of its actions. . . . Egyptians want economic reform, but they don’t want there to be any pain with it. They want things to change, but they want them to stay the same.”

Many of Egypt’s economic troubles have converged in Port Said, a city of about 600,000.

In the 1950s, Egypt imposed a ban on all textile imports as a way of supporting a fledgling textile industry of its own. The ban helped protect the jobs of state workers who did everything from harvesting cotton to selling shirts.

But Port Said, whose economy was devastated by the 1967 Middle East War with Israel, had neither cotton farms nor shirt factories. So authorities granted the city an exclusive status enabling it to import textiles tax-free. The idea was to create a lucrative revolving door: Ready-to-wear clothing could be manufactured from imported material and then exported. Instead, the city became the locus of a thriving smuggling trade, where tax-free goods were sold at a tremendous profit.

“Port Said has become a nickname for smuggling,” said Badri Farghaly, a leftist lawmaker who represents the city in parliament. “That is what the government has labeled it.”

City of Smugglers

For decades, the city flourished. The streets are lined with stores selling Adidases and Levi’s, Reeboks and Wranglers. The smuggling worked several ways. Cairo residents, for example, would make the 2 1/2-hour drive to Port Said, buy clothing, put it all on, then drive out past the checkpoints ringing the city. Factories, according to businesspeople, would contract to produce 1,000 shirts with imported material but would make 1,200--and sell the surplus in other cities.

The Port Said operations, however, undermined national efforts to protect domestic industry by keeping out imports, and they used up hard currency. With the economy sagging, authorities looked for a way to crack down.

They found the answer in the World Trade Organization. As a WTO member, Egypt is obliged to lift its ban on clothing imports by 2005. President Hosni Mubarak’s strategy was to lift the ban this year and then slap hefty import duties on garments, such as 1,000 pounds per men’s suit and 1,400 pounds on women’s formal wear. That in effect kept the import ban in place.

The adverse results are readily apparent here. Retail clerks have time to close for lunch and the five-times-a-day Muslim prayers because there are so few customers. Store owners complain that they are going to be forced to sell Egyptian products because imports will be too expensive, and shopkeepers call that troublesome because coddled domestic industries produce low-quality goods that are relatively expensive.

Manufacturers outside Port Said, however, are happy. High taxes on imported clothing, including leather goods, will allow the owner of a small tannery to continue selling high-quality products abroad and reserving his low-grade output for sale at home.

“This is a very good thing for us, and we encourage putting high taxes on imports,” said the factory owner, who would speak only without attribution. “Soon they will put taxes on shoe imports as well, and that will be a great thing. This will help to refresh the leather industry and create jobs in Egypt.”

This is not how world lenders want Egypt to be creating jobs. But given the backdrop of political turmoil in the region, no one is objecting too strenuously. This month, Egypt hosted a conference at the Red Sea resort of Sharm el Sheik for 37 donor nations and international financial groups. The government said it needed about $2.5 million in monetary aid to ease its immediate woes. President Mubarak acknowledged some of the country’s fiscal problems but blamed them mostly on outside factors and asked for patience.

“We should understand that economic reforms take time,” Mubarak told the conferees. “You cannot press a button to reform the economy.”

Though the donors insisted that Egypt move ahead with plans to open up the economy--for example, by privatizing the banking sector--there was never any doubt that Egypt would walk away with enough cash to stabilize itself, at least in the short run. And although officials say that some small banks have been privatized, the four that control almost 80% of Egypt’s wealth remain in government hands.

Once again, Egypt found that its most valuable commodity is not its cotton but its politics.

“Egypt was given all this money for purely political reasons,” said Emad Shahin, a political science professor at the American University in Cairo. “It’s a strategic decision. Egypt is a strategic country.”