Egypt's tourism industry

1) The impact of financial crisis on tourism

Egypt’s tourism industry, one of the main sources of hard currency has started to become affected by the global financial crisis with more than a 30% decline in hotel bookings in January 2009 when compared with January 2008. [1]

During the last two decades, the tourism industry in Egypt has proven to be one of the major industries and fast growing sectors in the economy, averaging about 25% increase in arrivals per year in the last 4 years and around 33% increase in revenues. 1

Egypt ranks the first according to the tourist destination in North Africa and is the 23rd in position amongst the best 50 international tourist centres. Egypt’s most important markets for tourism are the following countries: Britain, Italy, Germany, France, Poland, Russia, Ukraine, the United States, Libya and Saudi Arabia. Throughout the period from 2003 to 2008, there was an observed increase in number of tourists reaching 12.8 million people and adding to the country’s revenue by 11 billion US dollars. Also it added to the Egyptian GDP by 8.5% while creating job opportunities by 2.5 million people in 2007 and 2008.[2]

Nevertheless the position of Egypt as a result of the current financial crisis is the same as in many other countries: a smaller number of tourists led to holiday agencies, airlines and hotels to lose customers and make less money, and as a result some going bankrupt. Egypt has already felt the touch of the crisis, observing a decrease around 10 to 15% for Christmas reservations in 2008 as compared to the Christmas the year before. 1

The global financial crisis has largely affected economic conditions in most of the countries in which tourists come to Egypt from. The four top countries are Germany, Italy, Britain and Russia all of whose economies have been deteriorating and their currencies have been falling. [3]

According to EFG Hermes, Cairo’s investment bank, it expects a decline in tourists by 18% in 2009 and most of which come from eastern and western European markets. It says that the sector is already starting to cut back by dismissing temporary workers in some hotels who comprise 30% of the labour force.3

According to the chairman of the Egyptian Hotel Association, the beach resorts of Southern Sinai and the Red Sea are the most affected areas. These two regions stand for more than half of Egypt’s hotel size. As tourists used to come for Nile cruises and pharaonic sites of Cairo and Upper Egypt in the past, now most of the visitors only come for the normal sun, sand and the sea in resorts and usually ignore these cultural places.3

Again as stated by EFG-Hermes, last year’s average hotel reservations by the Red Sea was about 86% while in Southern Sinai was 77%. These figures now decreased to about 40 to 45%.3

Also Egypt’s local competitor, Turkey started becoming more attractive since the devaluation of its currency by a third. Egyptians predict that Turkey will still be a main competitor to Egypt next year as it started to attract people’s attention by advertising lower prices. 4

The effect of the economic crisis was also obvious in the construction projects related to tourism. Egypt’s rapid growth in tourism in the last few years helped in the expansion of Egypt’s real estate investment opportunities. Lately because of the crisis, these projects have witnessed a slowdown with various plans postponed for the time being.[4]

As predicated by BMI, growth rates are expected to become more negative in 2009 and only start to somewhat recover by 2010. In the tourism sector, employment is likely to fall according to WTTC by 1.47 to 1.39 million workers particularly if the sector faces any new dangers not to mention the global recession whose consequences are still developing. 4

In 2009, Egypt began a plan as a response to the threats of the crisis to the tourism sector, aiming to attract more tourists by offering them more free nights. Also the plan involves a stronger marketing scheme abroad in cooperation with travel agencies. In order to increase the number of planes travelling in the country, taxes on “charter” flights will be reduced. In addition, several services will be introduced to publicize the country’s tradition and culture to future tourists.4

In order for Egypt to maintain competition in the tourism sector, hotels must take actions to reduce their prices even further. However the ministry of tourism has been warning that from earlier experience, it is hard to return the price level as before, after a crisis has ended. The last time this happened, it took 6 years in order for prices to return back to normal.3

2) The actions taken by the government to overcome the crisis

Between 2007 and 2008, Egypt like any other small open economies faced an increase in food prices and the price of energy and other primary goods. The effect of the price shock was most evident on the low and middle income groups. This caused the need for economic policies to take a response to lessen the effect of the shock and maintain economic stability in the Egyptian society. In fact the Egyptian parliament authorized law number 114/2008 aiming to alleviate the crisis on low income groups while protecting finances to maintain fiscal balance.[5]

The increase in global prices by mid 2008 corresponded with the first round of the financial crisis resulting in domestic inflation and a decline in demand which led to a decrease in growth and created unemployment in Egypt. Because of early reforms and a strong supervision over the banking sector, the Egyptian economy was able resist these first round effects of the rapid decline of global financial markets. However when the second round effects of the global financial crisis started to begin, it induced the government to act by creating a package intended at maintaining demand. In addition it used other measures aiming to help the sectors that were directly hit by the crisis.5

This rescue package was entailed as a result of the negative effects of the global financial crisis on the Egyptian economy shown in the declining figures of the prices of stocks and prices of oil, exports, foreign direct investment and the inflows of the worker’s remittances. The measures contained in this package are aimed to sustain industry and exports, increase public spending and other fiscal and monetary actions. Most of these important actions work as follows: in the next 6 months, Egypt is planning to inject about 15 million EGP, in public investment and economic activities. This injection will provide jobs and there will be lots of money available as wages which will increase consumption and as a result will increase production and therefore enhance the economy. These investments are distributed in the following way: first, in order to raise public investment in some sectors, about 10.5 billion EGP is distributed. These sectors include: 7.2 billion EGP going to projects for water and hygiene, 1 billion EGP in building bridges and roads, about 900 million EGP for forming schools, developing exchange systems and creating health care centres, 800 million EGP for regional projects, 600 million EGP for expanding the east harbour of Port-Said and improving the rail infrastructure.[6]

Second, in order to sustain industry and exports of Egypt, about 2.8 billion EGP is distributed. These include: 2.2 billion EGP to enhance Egyptian exports whilst adding to their competition, between 1.5 and 1.7 billion EGP to decrease tariffs that are placed on intermediate goods and this helps particularly in international competition and also supports the investment zone, 600 million EGP to improve the domestic trade’s infrastructure and preserve industrial regions in the Delta and finally the sales tax will be comprised by the government.6

Another action that will be taken by the government is to invest 15 billion EGP in projects related to the public-private sector. These include creating hospitals, 345 new schools, stations to do with water sanitization and fertilizer components. 6

Also, by the end of next year the government wants to subsidize the prices of gas and electricity consumption while attaining stable energy prices for industrial use. In addition, the costs of the delivery of gas and electricity to new projects will be rescheduled for about 3 years.6

Moreover, Egyptians seek to attract investments from abroad particularly from the Arab countries by at least 10 billion US dollars every year. This can be attained by creating investment opportunities in some real sector projects. For example like some projects for gas and petrol in the oil sector which take place with an overall investment of 58 billion US dollars while there are projects in the irrigation and water resource sector located in North Sinai and other regions with total investment of 10 billion EGP. Also in the infrastructure sector, about 30 billion EGP is set to creating and expanding metro stations, railways and highways. In urban development sector, about 9 projects are aimed to form 4 new cities with a more than 1 million population for each city and a medical city with a total cost of 90 billion EGP for investment. In the agricultural sector, some projects are aimed to distributing 5000 feddans to every investor. Also more than 10 billion US dollars worth investment is planned to be allocated towards the information technology sector.6

In order to stir up economic activity, the Egyptian government plans to implement a legislation package. This includes modifications to legislation in order to support the creation of projects in public-private sector, managing bankruptcy by sketching bankruptcy law and developing stock market tools also by drafting a law.6

One of the main objectives of the Egyptian government is to promote the tourism sector in order to enhance growth rates. This is done by taking the following actions: strengthening campaigns to preserve Egypt’s share of the main markets, stir up charter airlines (those in North coast, Taba, Aswan, Marsa Alam) and supporting low charged airlines and finally giving all the attention in the next period on countries with high growth rates in general such as China and India.6

Another important objective the government aims to carry out is to support the export sectors by having the companies contribute in all services offered by the centre of industry modernization including training and technical support and by increasing the support to exporters financially in addition to raising the credit guarantee for exports.6

On top of that, the government aims to organize with the central bank of Egypt to give credit to finance small and medium enterprises so that production rises and to allow diversified funding resources to banks. 6

The provision of this package will help stimulate the Egyptian economy in a number of ways. By applying this crisis’ response program into action, Egypt expects to keep economic growth rates high over the next 2 years as this will help attain revenues for the country without having to increase taxes. The growth rates should be at least 5.5 %. Also it expects investments to be kept at a point that assures a fast development of recovery by the world economy. Furthermore it expects the effect of the recession particularly on low income people in Egypt to be reduced and a slow reduction in inflation rates. 6

The stimulus package will help increase demand domestically and prevent a large fall in economic activity and also it will speed up some infrastructure projects such as water, roads and hygiene. Also when the global demand recovers, these projects will help the home economy to get back to normal.5

Even though the Egyptian economy responded flexibly to the global crisis comparing to other developing countries, the long lasting gradual decrease in worldwide demand and the instability in some of the prices of basic commodity creates danger to economic growth and employment. The world output and trade figures are predicted to decrease in 2009 by 1.3% and 11% according to IMF World Economic Outlook. Because in the past years, external demand and foreign investment played an important part in increasing domestic growth, the current global financial crisis also has a significant effect on the domestic economy. The deterioration of foreign investment and exports is expected to cut off any achievements that happened in the previous 3 years and slow down economic growth. For the time being, the government stimulus policies are expected to stop negative economic conditions. 5

However the government is dedicated to continue with the reform program that took place since 2004. The speed of the reform is expected to be affected by the rapid decline in economic activities; yet it doesn’t weaken the obligation to the reform program. Because the economy and institutional units have improved considerably, the Egyptian economy is likely to stay flexible during the time of the crisis. 5

1. http://weekly.ahram.org.eg/2009/933/eg3.htm
2. First deputy of Egyptian minister of tourism, Hisham Zazouaa, Interview with Al Mal newspaper, April 11th, 2009.
3. http://www.ft.com/cms/s/0/00fa4d30-fddc-11dd-932e-000077b07658.html?ftcamp=rss&nclick_check=1
4. http://www.english.globalarabnetwork.com/200907241857/Travel/tourism-in-egypt.html
5. http://mof.gov.eg/English/Egypt%20Response%20to%20the%20Global%20Crisis.pdf
6. The Actual and Potential Impact of the Global Financial Crisis: A case Study of Egypt by Assem Reda Abu Hatab