1 year on: Where does ‘New Suez Canal’ stand?
 
 
Courtesy: Official Suez Canal Facebook Page
 

A year ago President Abdel Fattah al-Sisi inaugurated an expansion to the Suez Canal. The celebrations were endless, expensive and unceasingly nationalistic. It was hailed misleadingly as the “New Suez Canal,” despite the project featuring work to expand the existing canal by 35 kilometers, while deepening an already existing 37-kilometer-long stretch.

Egyptian officials made staggering and unrealistic promises, claiming that the expansion would more than double annual revenue, bringing it from US$5.5 billion in 2014 to $13.5 billion by 2023.

The state propagated other more grandiose statements, following its predicted financial gains. At the time of the project’s inauguration, Suez Canal Authority head Mohab Mamish compared the expansion’s opening to “the passing of the nation from darkness into light.” A billboard in New York City reportedly statedthat the new expansion would “change the map of the world.”

In all the celebration, it was lost that this is not the first time that the canal has undergone expansion, as bypasses were completed in 1955 and 1980 – although, neither of these improvements were hailed as Egypt’s “gift to the world.”

In the year since its unveiling, many of the promises have proven hyperbolic. Revenue has fallen in step with the decline in global trade and the losses suffered to the International Monetary Fund’s Special Drawing Rights (SDR), the asset of account that is collected as a tariff by the Suez Canal Authority. The authority has also reduced the toll paid for certain classifications of ships. While in some months since the expansion there has been an uptick in maritime traffic through the canal, it has not come close to fulfilling the grand promises Egyptian officials made at its inception.

Nonetheless, the expansion has provided several benefits, although more tempered than the government would suggest. The Suez Canal Authority has estimated that the project has reduced the waiting time for ships from 8-11 hours to 3 hours. For southbound ships, the authority’s data suggests that the expansion shortened transit time from 18 hours to 11 hours. The improvements are not insignificant, as much of the value of international shipping it tied to transit time.

It was also a needed expansion in the long-term to keep up with the growth of international trade and increased traffic through the canal.

However, critics have noted that the expedited construction to quickly open the expansion pushed the project’s expenditure significantly higher than was necessary.

Foreign companies were brought in to complete the dredging of the existing 37-kilometer stretch, as there were not enough dredgers in Egypt to finish the project in accordance with the government’s schedule. The foreign contracts were drawn up with payment to be issued in US dollars, exacerbating the erosion of Egypt’s foreign currency reserves, a fact that has not been helped by Egypt’s balance of payments deficit widening to US$3.6 billion during the first three quarters of the 2015/16 fiscal year.

To fund the ballooning cost, the Egyptian government sold LE54 billion in public bonds and took out at least an additional US$850 million in loans. The celebration of the extension’s opening is estimated to have cost $30 million.

From the beginning, industry experts have disputed Egyptian officials’ claims that the project would generate significant revenue, as any increase would be contingent on global trade fluctuations.

Capital Economics calculated that global trade would be required to grow by 9 percent annually for the Suez Canal’s revenue to reach the promises made by the Egyptian government, while Moody’s Investors Service put the figure at 10 percent.

Actual trade projections fall significantly short of this benchmark. The World Trade Organization predicts global trade will grow 3.3 percent in 2015 and four percent in 2016. The 25-year average estimated growth rate is only five percent.

Despite this discrepancy, Moody’s predicted that the expansion would have a positive but small impact on trade through canal, stating that it would generate greater revenue from transit fees, tax and the Suez Canal Authority’s dividend payments. However, the credit rating agency added that these improvements would come at a much slower pace than the government predicted.

Recent data shows the Suez Canal’s dollar revenues from tolls to be around US$290 million less in 2015 than they were in 2014, with figures for 2016 still unavailable.

However, this decline has been misrepresented by Egyptian officials. In April the state-owned MENA news ran an article with the headline “Suez Canal revenues up 6.5% in 1st quarter of 2016.” The report quoted Mamish as saying that revenue from the canal increased by 3 percent year-over-year in 2015.

Mamish’s revenue figures, however, were presented in Egyptian pounds rather than SDRs or US dollars and were not adjusted for the Egyptian currency’s devaluation in 2015. At the end of the first quarter of 2015, the pound’s official exchange rate was LE7.53 per US dollar, compared to LE8.78 in 2016 — a 16.6 percent decrease in value, suggesting a more tempered growth in revenue.

SDRs complicate things further, as the unit of account functions as a claim to currency held by IMF member countries, which they can cash out. The IMF publishes a daily exchange rate for the key international currencies included in its currency basket. The shipping companies can then pay in their choice of accepted currency based on the IMF’s exchange rate.

While the SDR is meant to mitigate risk of currency fluctuations, the dollar has been out-performing the unit of account since 2014, meaning that Egypt suffers an overall loss in toll dollar revenue as it converts to the stronger currency.

Ushered in with fanfare as a monument to Egypt’s economic recovery and as a “gift to the world,” the extension in truth was a significant investment that has featured a relative paucity in returns, linked as it is to contracting global economy.

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