Sharm el-Sheikh plane crash dents Egypt's economic revival

09 November 2015

Egypt’s economy will struggle to make progress as Egypt’s tourism sector grinds to a halt,

  • Sharm el-Sheikh plane crash major blow for Egypt tourism
  • Tourism is the second biggest source of hard cash and foreign currency after the Suez Canal
  • Experts say Suez Canal development must now be the governments priority

Egypt’s economy is expected to suffer a major setback as the passenger plane that crashed in the Sinai Peninsula on 31 October threatens to cripple the tourism sector and deprive the country of much needed foreign currency.

The Egyptian government has been reluctant to comment on the possible cause of the crash. The UK and US have both said intelligence suggest that the Metrojet flight exploded in midair 23 minutes after takeoff.

The tourism sector has already been impacted. The UK and Russia have both suspended flights to Egypt, while there have also been reports of a British airliner avoiding a missile in August this year. “The damage has been done and the tourism industry may have been given its final blow,” says a Cairo-based analyst.

The direct contribution of tourism to Egypt’s gross domestic product (GDP) in 2014 was $16.5bn with the total contribution sat at 12.8 per cent of GDP. The crash will dent Egypt’s tourism ambitions. The government is targeting 20 million visitors by 2020. In 2010, Egypt attracted 14.7 million tourists, but by 2014, this number stood at just 9.9 million.

Crucially tourism one of the biggest source of foreign currency along with the Suez Canal, which brings in approximately $3bn a year according to central bank data. Although Egypt’s foreign reserves inched slightly to reach $16.4bn at the end of October, compared to $16.335 billion at the end of September. The rise in reserves in October is a turnaround after three successive months of declines, but still leaves reserves at a lower level than the $18.1bn recorded in August. Further to this the central bank’s foreign reserves capacity is now dominated by loans, therefore posing a problematic situation where Egypt it is left extremely dependent on tourism to boost the flow of foreign currency within the country.

“The Egyptians will now need to focus on how they will counter the impact of the recent events. They will need to do more than simply further devalue the currency in hope to improve the investment environment,” says Angus Blair, president of the Cairo-based Signet Institute. “Developing the Suez Canal zone will be extremely vital for Egypt now.”

If the Metrojet crash is confirmed as a terrorist attack the armed forces are likely to carry out more military operations on the peninsula. The government could also have to review its economic policies in an attempt to alleviate any damage done to the tourism sector.

“It is unclear what the strategy of the government will be. The president’s delegation in the UK went well and the appointment of the new central bank governor is a positive that people are looking forward,” says Blair.

In October MEED reported on Egypt’s progress since the economic development conference held earlier this year and, before crash of the Russian airliner local and foreign investors had told MEED that the government and the armed forces had so far managed to subdue the volatile security situation Egypt was facing 12 months ago.

Despite the progress made this year Al-Sisi’s focus is likely to turn back to security and ensuring that his government is able to offer the confidence required to maintain the investor interest established since the conference in Sharm el-Sheikh.

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