Terror in Sinai – Serious Threat to Egyptian Economy

Terror in Sinai – Serious Threat to Egyptian Economy

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The deteriorating security situation in Sinai has already damaged tourism in southern Sinai, which comprised almost a quarter of the entire Egyptian tourism market. This latest escalation of terror in Sinai is a severe threat to two much bigger and more important Egyptian economic systems: The production and transport of gas and oil is one; the Suez canal and the international transport and commerce systems associated with it are the other.

Ferries crossing the Suez Canal at Port Said
Ferries crossing the Suez Canal at Port Said

These two systems continued functioning properly during the entire period following the Egyptian uprising in early 2011. Their proper functioning allowed the Egyptian market to function properly as well, despite the severe budgetary and financial crisis Egypt has experienced since 2011, and keeping these systems working is considered to be Egypt’s highest economic priority.

The energy market is the most important. Egypt’s oil fields produce crude oil for local refineries worth about 30 billion dollars annually, as an alternative to importing oil. The natural gas production for local industries is worth another 7-8 billion dollars. In total, the gas and oil sectors comprise 40 billion dollars out of the entire Egyptian balance of payments, including gas exports. This is more than 50% of total Egyptian imports of produce and services.

In addition, local oil and gas production allows the government to subsidize public energy products and electricity costs. The vast volume of direct and indirect energy subsidies, comprising about a third of Egypt’s expenses in the national budget, is the toughest macro-economic challenge facing the country today. Subsidized energy prices and basic food products, however, has become a critical element of society in Egypt, a basic means of survival for millions of impoverished Egyptians. Even new programs being discussed, aimed at the reduction of energy subsidies while maintaining the necessary social balance, are based on the ability to keep producing fuel and electricity using Egypt’s own natural resources.

IHLS – Israel Homeland Security

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The rising terror in Sinai is a direct and immediate threat to these vital energy infrastructures, as most of the oil and gas fields are in the immediate vicinity of the peninsula. Most of the oil and gas reservoirs are underwater, and their associated transport and production facilities – located at sea – are especially sensitive to sabotage.

The rising terror in Sinai is also a direct and immediate threat to the Suez Canal, and to the international transportation and commerce systems which have developed around it. These systems are sensitive as well, and last month saw renewed efforts by Jihadist terror organizations operating in the Sinai to damage ships passing through the canal. The Suez Canal, along with the associated systems, is Egypt’s most important export, along with tourism; while oil and gas were the country’s most important export in the past, today their main importance is as an alternative to import. Egypt’s direct income from Suez Canal passage fees was 5.2 billion dollars in 2011, and again in 2012, 10% more in comparison to 2010 – the last year of activity prior to the uprising. Port Said, located at the canal’s northern exit, is the second largest naval port in the Mediterranean (as measured by container traffic). Egypt’s total export income from the Suez Canal, including associated logistics and transportation services, was 9 billion dollars in 2012 – compared to a little less than 8 billion dollars in 2010.

The harsh response by the Egyptian Army and its attacks against the Sinai terror elements reflect the severity of the threat to Egypt’s economic and political stability. The immense importance of the continued operation of these energy and transport infrastructures is expected to lead to further escalation in Egypt’s response. Security systems at hundreds of vital facilities, ground-based or at sea, are expected to undergo upgrade and expansion: In northern Sinai, in deep Egyptian territorial and economic waters in the east Mediterranean, in Port Said and along the Suez canal, and in the Suez Bay area.

Itzhak Gal, YGAL Consulting: Strategic-economic consulting and business consulting for Arab markets.