For Egypt, this week’s donor conference in Sharm El-Sheikh offers an opportunity to kickstart a languishing economy. Foreign currency reserves are falling, the balance of payments deficit is increasing, oil prices are low and, thanks to Sept. 11, tourism is down. External debt stands at $27 billion, or 27 percent of GDP. Foreign exchange reserves have diminished by nearly half in three years to $12 billion. Meanwhile, banks are short on dollars, which are finding their way in ever greater quantities to the black market.

 

The conference, organized by the World Bank and officially dubbed the Consultative Group for Egypt, will be held on Tuesday and Wednesday in the resort city on the banks of the Red Sea. A similar conference was held three years ago in Paris, raising $1.5 billion in grants and soft loans for Egypt, in addition to $1 billion in long-term development loans. Cairo hopes to secure a similar amount this year, according to Egyptian Minister of State for Foreign Affairs Faiza Aboul Naga.

 

According to Hanan Dowidar, external affairs coordinator at the World Bank in Cairo, the conference has two goals. “One is to provide Egyptian authorities with the opportunities to share short- and medium-term plans for macroeconomic and social development. Another is to allow the country to raise additional financial resources from donors.”

 

Foreign aid has already started pouring in. The Arab Monetary Fund has granted Egypt $300 million, the African Development Bank has approved a $1.6 million, three-year soft loan, and the United States has announced accelerated disbursement of some $959 million in assistance.

 

Roughly 40 nations and financing institutions are scheduled to attend this year’s donor conference. Participants include representatives from the United States, Canada, France, Finland, Denmark, Japan, Germany, Sweden, Norway, Switzerland, the United Kingdom, the African Development Bank, the Arab Monetary Fund, the European Union, the International Monetary Fund, the Islamic Development Bank, the Saudi Fund for Development, and different UN agencies.

 

“Any country that is interested in pledging to or supporting Egyptian economic reform might be sending a delegation,” said Philip Frayne, press attaché at the US Embassy in Cairo. “None of these delegations are going to say in advance what amount they are pledging or if there are conditions attached.”

 

Ahmed Galal, the executive director of the Egyptian Center for Economic Studies, an independent think tank, said that Egypt would probably get the money it is looking for.

 

“Egypt is likely to get most of what Egypt wants,” he said. “The government will probably convince the donor community that they are serious about reform, and they have some sort of program worked out.”

 

In return for financial assistance, major international donors may press fiscal policy makers to adopt a more flexible exchange rate regime. They also may ask the Egyptian government to hurry up with privatization and economic reform. Recently, the rating agency Fitch gave Egypt a negative outlook, citing the government’s lackluster efforts to manage exchange rate and enact meaningful reforms.

 

Meanwhile, analysts are forecasting a future devaluation of the Egyptian pound, as speculators have pushed the black market value of the Egyptian pound to 5.7 to the US dollar. This increasing speculation is why Central Bank Governor Mahmoud Aboul Oyoun recently said that Egypt is considering pegging the pound to several currencies rather that just to the US dollar. But he also said that devaluation was not imminent.

 

On Jan. 14, the Central Bank set a new core rate of 4.51 pounds per dollar (just above the previous rate of LE4.50 to $1), and maintained a 3-percent trading band by which exchange rates may fluctuate. The adjustment follows an 8 percent devaluation in December, and another 7 percent devaluation in August. (The local currency has depreciated by roughly 24 percent over the past year and a half.)

 

Many economists are behind moving away from the dollar peg, since Egypt trades more with European and other Arab countries than with the US.

 

“Given that the US dollar has been appreciating against all other currencies for the last eight years, any country tied to a US dollar peg is losing competitiveness against other currencies. That is why Egypt continues to have balance of payments problems,” argued Anais Faraj, economist at Nomura International’s equities division in England. “An adjustable peg, including a smaller percentage of US dollars weighting, would restore that competitiveness, raise exports, reduce imports, and get growth rising again.”

 

The “currency basket” under consideration would include the US dollar, the euro, the British sterling, and the Japanese yen. Currencies of neighboring Arab states ­ Lebanon, Jordan, Syria, and Iraq ­ may also be included in the basket of currencies in small percentages, since these currencies move in relation to major currencies. Eventually, economists argue, the pound should be floated to give it a value representing market forces. “(This) should have been started back in 1998, but it’s never too late,” added Faraj.

 

Many officials in Egypt have a hard time coming to grips with the country’s poor economic prospects. Last month, Prime Minister Atef Obeid painted a rosy picture of the Egyptian economy: “Egypt is not facing an economic crisis,” he declared in a nationally televised address. “Our economic foundations are secure. Our foreign currency reserves are sufficient to cover imports for one year. Our growth rate stands at 4.8 percent ­ twice as high as our population growth rate.” He added that GDP would grow by 5 percent next year.

 

Independent MP Kamal Ahmed interrupted this improbable forecast, saying it was “bogus” and censuring the prime minister for “lying” and “leading the country into an abyss.”

 

At the Sharm El-Sheikh donor conference, government officials are likely to present Egypt’s economic woes as short term, and manageable. But while donors may pour more money into the faltering Egyptian economy, they do so fully realizing that the economy needs a lot more than a quick bailout.