Channel of concern

Weak shipping markets affect the Suez Canal’s plan to bring in higher revenue

One year after Egypt’s celebrated expansion of the Suez Canal, the project has failed to yield the “exponential” revenue increase promised by the government.

Revenue figures differ because of fluctuating currencies and a devalued Egyptian pound (E£), but broadly speaking, the project has yielded disappointing results, at least when compared with the great expectations built by a government-led campaign.

On August 6 last year, President Abdel Fattah al-Sisi inaugurated the US$8bn expansion of the canal after a huge fundraising campaign that encouraged citizens to buy investment certificates to finance its construction.

As Egyptians were called on to raise E£64bn for the national mega-project, officials said the expansion would double daily traffic and increase annual revenue to more than $13bn by 2023.

Over the past year, however, revenue from the canal, which is of one of Egypt’s main sources of foreign currency, has either declined or recorded a very slight increase, adding to the woes of Egypt’s struggling economy.

In 2015, annual Suez Canal revenue of $5.17bn was recorded, down from $5.46bn the previous year, according to the canal authority.

In August 2015, coinciding with the launch of the expanded canal, the highest revenue since the beginning of that year was recorded, an amount of E£3.56bn.

However, that figure has not been reached again.

In February, Suez Canal revenue fell to E£3.11bn, down from the previous month’s E£3.18bn, before seeing a slight uptick in March to reach E£3.47bn.

From this year the canal authority is no longer reporting revenue in US dollars, but instead lists revenue only in Egyptian pounds and the IMF’s special drawing rights.

Hany Farahat, senior economist at Cairobased investment firm CI Capital, says low canal revenue puts pressure on Egypt’s balance of payments. But Farahat says such cycles are “inevitable, and naturally the Suez Canal would be exposed to that like any other project”.

He adds that investment planning cannot be based solely on perceived short-term risks (like the effect on the balance of payments). The longer-term value of an infrastructure project could outweigh immediate economic results.

Egypt’s economy has been hurt by lower tourism revenue and foreign investment, and remittances have also declined. The dearth of foreign currency has depleted Egypt’s foreign reserves and weighed on the value of the Egyptian pound, pushing inflation to record highs.

“The hit coming from tourism and the pressure from the widening trade balance or lower remittances are certainly much more critical than the drop in Suez Canal [revenue],” Farahat says.

International analysts were sceptical about the need for the expansion project, saying that the expected slowdown in global shipping traffic would make the targeted revenue increases unfeasible.

Ahead of the launch, Bloomberg ran an analysis with the headline: “Egypt shows off $8bn Suez Canal expansion that the world may not need”.

In the report, Bloomberg cites analysts who warn of slower global trade growth, adding that the IMF expects it to “average 3.4% in the period 2007-2016, compared with 7% over the previous decade”.

Farahat expects that when canal revenues pick up as global trade rebounds and oil prices recover over the longer term, “even a 10% increase in revenues attributed to the expansion would translate into an attractive dollar-denominated return for Egypt”.

The expansion of the canal is the first step in a broader plan to develop the area around it into a logistics and trade hub.

Farahat says Egypt’s IMF-backed reform programme will be “an inflection point” that will encourage the government to expedite currency and investment reform as prerequisites to attracting foreign inflows.

Egypt is on the verge of closing a funding deal of $12bn from the IMF over three years. The loan — which Egypt has negotiated on and off in the past five years — has overshadowed a potential assessment or celebration of the anniversary of the Suez Canal expansion.

In a note, UK-based Capital Economics says: “Egypt needs $25bn of financing from abroad in order to finance its current account deficit and to roll over maturing external debt this year alone.

“In that context, the $4bn annually that Egypt appears to be seeking from the IMF doesn’t seem particularly large.”

The “mere existence” of a deal with the IMF would help to unlock other sources of funding, it says.