Egypt turns to Suez Canal to boost revenues

ISMAILIA, Egypt — As Russia’s war in Ukraine continues to put pressure on Egypt’s economic and financial health, Cairo has turned to the Suez Canal to help it deal with the crisis. The strategic waterway, one of the most important maritime arteries in the world, represents an important source of foreign exchange for Egypt.

During the economic setback of the coronavirus pandemic, the Suez Canal turned out to be bad one of the few bright spots for Egypt, and thanks to him flexible marketing policy, which included measures such as rebates for some ships, brought the channel $6.3 billion in revenue in 2021, the highest in its history. Now Egypt’s external financial vulnerabilities have gone under increasing pressure of the impact of the Russia-Ukraine conflict on tourism, food, oil prices and even the bond market. Against this background, the Suez Canal Authority (SCA) has announced a significant increase in its transit fees in order to increase its revenues.

“Suez Canal receipts accounted for around 7.4% of total current account receipts in the first three quarters of 2021. Given that the war between Russia and Ukraine has significantly weakened tourism revenue prospects and helped reverse capital inflows, the Egyptian government is likely trying to expand sources of other foreign currencies,” said Callee Davis, an economist at Oxford Economics Africa, to Al-Monitor.

“However, it is unlikely that a tariff hike will fully offset lower revenues from these sources of foreign exchange given the importance of tourism revenue and portfolio inflows,” he added.

Even before the outbreak of war in Ukraine, Egypt had announced a one-off increase in tolls across the canal. Early last November, the SCA issue a decision a 6% increase in transit vessel tariffs from February compared to those of 2021. The company excluded from this increase both cruise ships and liquefied natural gas (LNG) carriers, for which tolls would remain unchanged.

But since the outbreak of war, the SCA has announced three toll increases. the first of these walks came at the end of February, when the previous increase had already taken effect. This time the biggest increase – 10% – was reserved Tankers for chemical and other liquid bulk cargo and for LPG tanker. carry ships LNG, vehicles and general cargoamong others, recorded an increase of 7%. Dry bulk carriers, crude oil carrier and Tanker for petroleum products had increased their tolls by 5%.

However, on March 15, the canal administration decided to scrap the 15% rebate granted since November for LNG tankers, who then had to pay full transit fees. The passage of this type of ship through the canal increased by more than 90% in the last three years.

Finally, on March 22, the SCA announced Change in toll surcharge imposed from March 1st for ships transiting the canal from May 1st. For the vessels for which it had imposed a 10% toll increase, the SCA increased this to 20%. For those considering a 7% increase, it doubled it, except for LNG tankers, for which it kept the rate. Finally, new increases of between 5% and 15% were announced for ships that had been scheduled for an increase of 5%.

“The decision to increase Suez Canal fees comes against the backdrop of rising commodity prices around the world. This was probably factored into the decision as I imagine the channel has certain operational costs that it needs to take into account. But even as the profit margins of commodity exporters — like fuel exporters — soared, Egyptian authorities likely saw an opportunity to increase their share of the pie. This would also explain the rationale behind the recent elimination of the LNG carrier rebate,” Davis said.

In his circular, the SCA has stated that the toll increases are “consistent with the significant growth in world trade, the improvement in ship economy, the development of the Suez Canal waterways and the improvement in transit service”. But during a press conference in Ismailia on March 29, attended by Al-Monitor, Admiral Osama Rabie, head of the SCA, said the decision was also in response to the fallout from the war in Ukraine.

The conflict in Eastern Europe has dealt a severe blow to Egypt’s tourism sector, another important source of foreign revenue, hastened a worrying outflow of capital and pushed prices of staples such as wheat further higher. Egypt’s budget deficit will also remain high, and the early maturity of a significant portion of its debt has recently contributed to its funding needs Fitch Ratings Report called.

All of this is happening at a time when the SCA is also pursuing its own ambitious projects. The first of these is the expansion of the New Suez Canal, announced in the middle of last year, and the widening and deepening of the southern section of the historic waterway. The second is to set up its own sovereign wealth fund, which is expected to reach 100 billion Egyptian pounds ($5.48 billion) in capital. In late 2021, the SCA announced that it had already begun allocating part of the channel’s revenues for this purpose, instead of directing all revenues to the Treasury as it has done up until now.

“We expect the Suez Canal to generate about $7 billion in dollar revenues [1.5% of the gross domestic product (GDP)] for Egypt in fiscal year June 2022 [fiscal 2022]’ Krisjanis Krustins, director of Fitch Ratings’ sovereign team, told Al-Monitor.

“Even before the increase in transit fees, revenue had increased. They increased 16% year over year from July 2021 to February 2022, totaling approximately $6 billion in fiscal 2021. Suez Canal revenues are one of Egypt’s most important sources of external revenue and of significant importance in the context of its current account deficit, which we expect to be around 4% of GDP in FY2022,” he added.

The shipping industry is still grappling with the effects of the coronavirus pandemic and the Russian invasion of Ukraine has added to the pressure. Against this background, the Increase in transit fee The costs announced by the SCA are considered significant for some types of vessels crossing the waterway, Xeneta chief analyst Peter Sand told FreightWaves.

But otherwise, according to analysts and the SCA, no significant adverse impact on the industry or negative impact on the number of ships crossing the Channel is expected. In addition, Rabie has insisted the agency will closely monitor the sector and adapt as it evolves. “Most sectors of the shipping industry are doing well right now, so they can afford to pay more – something the SCA will be very aware of,” James Baker, editor for container shipping at Lloyd’s List, told Al-Monitor.

“The canal is a natural bottleneck for shipping and the alternative to using it is much longer trips. This – and the associated additional fuel costs – means the SCA tends to have the upper hand when prices rise,” noted Baker.

“In times of rising oil prices and bunker costs, it will still be cheaper to pay the canal fees than to take the detour. I doubt that this will affect the number of transits as the cost is still reasonable as an element of the total travel cost,” he concluded.

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