April 5, 2021

MENA

EGYPT: Ever Given incident highlights Egypt’s vulnerabilities

BY Jon B. Alterman

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( 5 mins)
  • Ever Given ship accident in the Suez Canal highlights Egypt’s mixed economic picture.
  • Covid-19 effects will continue to cloud economic growth prospects.

The grounding of the Ever Given fixed the world’s attention on Egypt for more than a week in mid-March. While the stoppage in the Suez Canal highlighted Egypt’s geostrategic importance, the accident also highlighted some of Egypt’s economic vulnerabilities.

The accident reminded the world that more than 10% of global maritime trade passes through the Suez Canal, and it is especially important for trade between Asia and Europe. While Egyptian leaders have sought to stress that the canal’s global importance makes Egypt’s stability a global concern, the navigability of the canal has been taken largely as a given since it was reopened in 1975 following Egyptian-Israeli negotiations.

The Covid-19 pandemic has already demonstrated the fragility of global supply chains and put renewed emphasis on “nearshoring.” Although the Ever Given incident only disrupted canal shipments for about a week, the knock-on effects on ports will reverberate for months. Growing consumer demand was already straining shipping capacity, and containers on ships anchored off the shores of European ports waiting for berths are ones that cannot steam back to Asia to be refilled.

In the last decade, the advent of so-called Ultra Large Container Ships such as the Ever Given have posed a multi-dimensional challenge for Egypt. The ships, which are capable of carrying more than 20,000 20-foot containers (or their equivalents) at once, put downward pressure on Suez Canal tolls when the fuel costs of circumnavigating Africa are cheaper than paying tolls. When he first came to power in 2013, Egyptian President Abdel Fatah al-Sisi poured more than USD 8bn into widening the northern end of the Canal within a year. Although he promised the widened canal would double Egypt’s canal revenues, annual revenues for the Canal have stayed flat, at less than USD 6bn/year.

In addition, the 400m-long, 60m-wide ships create a growing physics challenge for a canal built for an earlier age, as larger ships create a different set of hydraulic pressures in narrow bodies of water like the canal.

An investigation of the grounding of the Ever Given will take some time, but it is likely to reveal defects in governance. In particular, the ship appears to have been traveling above the canal’s speed limit, and the Egyptian pilots may bear some responsibility for the grounding. In the last two decades, Egyptian cooperation in counterterrorism investigations following the downing of aircraft often has been incomplete, and Egyptian officials have insisted there are no weaknesses in Egyptian performance. There will be commercial scrutiny as much as governmental scrutiny of how much Egypt cooperates with this investigation, which is important to establish commercial liability.

Outside of the Ever Given incident, the Egyptian economy grew more than any other Middle Eastern regional economies in the last year, but this year’s growth will lag. Underpinning Egypt’s financial stability are billions of dollars in support from the Gulf. The rise in oil prices in 1H21 suggests that support will be sustainable in the near term. The development of the Zohr gas field in the Mediterranean, and the prospect of using Egyptian facilities to turn Israeli gas into LNG both augur well for national finances.

On the jobs, front, however, Egypt faces a steeper challenge. The investment climate in Egypt remains heavily skewed toward real estate. Official unemployment has crept upward, and more than half of the workforce is in the informal sector. While the military’s role in the economy is unclear—and beyond public scrutiny—it is probably about 30% of economic activity. As in neighboring countries like Jordan, the sale and development of previously state-owned land falls especially to retired officers, who benefit handsomely in the process.

The global downturn has trimmed Egyptian non-energy exports, and the Covid-19 pandemic has decimated Egyptian tourism. Last weekend the Egyptian government opened a new Egyptian museum on the pyramids plateau to great fanfare, transporting more than 20 mummies of Egypt’s past rulers from the old museum in Tahrir Square to the new site. While the celebration intended to send a message that Egypt is now open for tourism – which accounts for about 10% of Egyptian employment in normal years – the readiness of tourists to return to Egypt or any other international destination remains uncertain. Especially clouding the picture is skepticism that Egypt’s performance on the pandemic response has been as strong as it touts it to be.

Nearby Jordan, for example, has been very proactive in distancing measures and treatment, and nevertheless reports more than 625,000 cases and 7,130 deaths. Egypt, with much more lax measures, a weaker healthcare system, and ten times the population, reports a third the number of total cases and about 12,000 deaths. Some demographers examining Egypt’s population statistics claimed 60,000 excess deaths last year. That suggests the possibility that Egypt has had millions of unreported cases. In addition, Egypt’s vaccination program is in its infancy, with fewer than 10,000 doses reportedly administered. While the recovery of global tourism remains uncertain, there is a very real possibility that tourists will perceive that Egypt is an unsafe destination where Covid-19 is uncontrolled. A government effort to persuade the global public otherwise could be counterproductive if stories emerge that challenge the government’s credibility.

Unrest in Jordan over the weekend will certainly get attention in Egypt. Public discontent, rooted in economic dissatisfaction, has been prevalent in both places. Egyptian officials’ instinct has been to act early and firmly. If public discontent rises in Jordan as a consequence of this weekend’s crackdown, Egypt’s leadership is likely to seek to act decisively. The effectiveness of such measures, in Egypt and Jordan alike, is not guaranteed.

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