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Tuesday, 12 November 2019

Egypt celebrates new Suez Canal, but real challenges lie ahead

Deya Abaza , Waad Ahmed , Thursday 6 Aug 2015
Suez Canal
A cargo ship is seen crossing through the New Suez Canal, Ismailia, Egypt (Reuters)
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Egypt will open an expansion to the Suez Canal on Thursday, marking an important step in President Abdel Fattah El Sisi's plans to restore confidence in the country's economy but he is likely to face some stiff challenges to fully execute his ambitious plan. 

World leaders, including dignitaries from neighbouring Arab nations such as King Abdullah II of Jordan, and Western countries such as French President Francois Hollande, are expected to attend the $30 million celebration Thursday.

A 150-year-old presidential yacht, El-Mahroussa, the first ship to cross the canal when it was first opened in 1869, has been specially commissioned to ferry El Sisi and his guests across the waterway.

The new shipping lane, which is expected to boost revenues from the international waterway, is El-Sisi’s flagship major project as his government seeks to restore confidence in an economy battered by more than four years of political upheaval.

The canal holds great symbolic importance in the minds of Egyptians, who came out en masse to finance its expansion with LE64 billion ($8.2 billion) collected in just over a week through local currency investment certificates. The collected sum is divided between the 72-kilometre expansion project and the digging of six new tunnels under the canal.

The Suez Canal has been a source of national pride since President Gamal Abdel-Nasser nationalised it as a gesture of defiance to Western powers in the Cold War era almost 60 years ago.

“Egypt proved its ability to depend solely on domestic resources, whether for funding or expertise, to undertake mega projects,” Samir Amin, political economist and director of the Third World Forum, opined in Al-Ahram daily newspaper Tuesday.

Completing the expansion in one year is “astonishing,” Peter Hinchliffe, the secretary General of the International Chamber of Shipping has recently told media outlets.

What remains to be seen is the extent to which the new channel and the industrial and trade hub project to be built around it will bring about a turnaround in the country’s economy.

Egypt’s gift to the world

“Egypt’s gift to the world,” as it is being hailed by Egyptian media outlets, is projected to boost receipts from the Suez Canal, a main source of foreign currency for Egypt, from $5.3 billion in 2014 to $13.2 billion in 2023.

Slashing transit times by seven hours and deepening the canal to accommodate ships with up to a 66 feet draft for the first time will attract more traffic from other global shipping routes, such as the Cape of Good Hope, Ashraf Salman, the Egyptian minister of investment projected in an announcement on Tuesday.

But the world may not be ready for Egypt’s gift, as world trade growth trends are unlikely to buttress a dramatic rise in traffic, argue some economists.

The projections “appear to be based on implausibly optimistic assumptions about world trade,” William Jackson, senior emerging markets economist at London-based Capital Economics, said in an emailed statement.

When world trade value more than doubled in the first decade of the millennium, Suez Canal revenues also witnessed a more than twofold increase.

However, in order for Egypt to reach its revenue target from the new canal, global trade volume would need to rise by nine percent a year, higher than the three percent average seen over the past four years and the 7.5 percent average yearly growth seen during the boom years of 2003 to 2007, says Jackson.

“This seems unlikely,” he said.

“We are optimistic that world trade will pick up,” Yehia Rushdi, deputy director for planning and research at the Suez Canal Authority, told Ahram Online in a telephone interview when asked to comment on the government’s target.

The expansion of the canal “was a necessity to maintain the attractiveness of the Suez Canal,” Michael Storgaard, a spokesman for Maersk Line, one of the world’s biggest container shipping company, told Bloomberg. 

Towards a bigger challenge

One year after it came to power, El-Sisi’s government is hard-pressed to prove that it can deliver on its promise to restore economic growth and raise the standard of living for Egyptians, a cornerstone of its post-30-June mandate.

The government plans to attract foreign direct investment worth $60 billion and to reach an average growth rate of seven percent over the next four years, Ashraf El-Araby, the country's planning minister said in March.

The real potential lies in the industrial and logistics hub that Egypt plans to establish along the improved canal, with some publicly-funded infrastructure and large private investments.

The development plan will require $15 billion to be spent on utilities and will cover an area of 500 square kilometres, including six seaports, according to statements made in March by Yehia Zaki, managing director for the Egypt arm of Dar Al-Handasah, the main consultant on the megaproject.

Although little has been publicly revealed about the fineprints of the project, officials and project planners have iterated that it will eventually make up between a third and half of Egypt’s economy once it is completed.

The hub will be established as a special economic zone under a recently amended law, to ensure that it bypasses the usual bureaucratic and legal hurdles encountered by investment in Egypt, explained lawyer Hani Sari El-Din, chairman of Sari El-Din & Partners, a legal consultant on the project.

The zone, which will be managed by a designated authority, will act as a one-stop-shop for investors and include concessions such as sales tax and export tax exemptions, and no restriction on the foreign ownership of companies.

Egypt's government will need to plan strategically on a grand scale and establish a solid legal framework and the required infrastructure in the hub area to make the projects possible, says Hany Farahat, senior economist at Cairo-based CI Capital.

Even then, to pin all hopes for economic development on the hub project and its likes is myopic, says Ahmed Galal, former finance minister and World Bank economist.

“Successful mega projects are welcome,” says Galal, “but serious and sustainable development will require exploiting existing resources more fully, having the right policies and institutional set-up to motivate entrepreneurship and hard work, and by adopting policies that ensure prosperity for all Egyptians."

Security concerns

The planned hub stretches all the way to Al-Arish, across the northwest corner of Egypt’s Sinai peninsula, where Egypt’s military has been fighting for several years to quelsh an insurgency by Islamic State-affiliated militias.

“We remain concerned that Egypt’s security situation and poor business environment may deter investment,” says Jackson.

Meanwhile, Egypt’s security apparatus will be on high alert Thursday with more than 10,000 security personnel assigned to the site of the celebration, as well as six other governorates through which officials are expected to pass to reach the new canal.

 

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Elliott
07-08-2015 03:15pm
19-
4+
A Western economist
The contract price of US crude oil for delivery in December 2020 is currently $62.05. In order for Saudi Arabia to balance its budget the price of a barrel of oil must not fall below $ 106. If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. Saudi Arabia will be in existential crisis by the end of the decade. Without Saudi financial support there will be serious fissures in the Egyptian economic structure. The time to recoup the costs of the Suez Canal expansion optimistically is ten years out. Unless there is a major privatization of most business in Egypt over the next two years, including the sale of assets to Western nations who have fully capitalized enterprises, the ramifications to the Egyptian economy will be dramatic and destructive.
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