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The Economic Benefits of the New Suez Canal

inauguration of the new suez canal
The inauguration ceremony of the new Suez Canal, in Ismailia, Egypt, 6 August 2015. Photo Zuma Press

Following the July 2013 ouster of Egyptian President Mohamed Morsi and the landslide election victory of Abdel Fattah el-Sisi in May 2014, the newly elected leader vowed to prioritize the country’s economy, which has been ailing since the 2011 revolution.

The centrepiece of his economic plan was announced with much fanfare a few months later: a mega project to expand the Suez Canal, allowing two-way traffic along most of the strategic waterway, which is the shortest shipping route between Europe and Asia. The logic was that the extra lane would reduce waiting times and increase the number of ships able to transit the canal, thereby almost doubling its income.

The cost of the project was estimated at $8.2 billion, the majority of which was raised in the form of bonds issued exclusively to Egyptian citizens. Construction included digging a 35km parallel waterway and deepening another 37km of the existing canal to allow the passage of larger vessels.

The project was initially supposed to take three years to complete, but el-Sisi ordered it to be ready in one year. According to some accounts, 75% of the world’s dredgers were employed to help meet the ambitious deadline.

“This was a completely political decision, and it increased the cost of digging and dredging from the allocated $2.49 billion to $3.83 billion. It also meant that billions of dollars were paid to foreign countries when we badly needed it,” says Hisham Khalil, an economics analyst and a senior member of Egypt’s Social Democratic Party.

The new waterway was opened in an elaborate ceremony on 6 August 2015, with events taking place around the country including Cairo’s iconic Tahrir Square.

Mohab Mamish, chairman of the Suez Canal Authority, said in a press conference on 29 July that the new waterway would increase annual profits from the Suez Canal from $5.3 billion in 2014 to $13.23 billion by 2023.

Experts are sceptical, however. “Before the expansion, the Suez Canal could already accommodate 78 ships daily. In order to increase income from the new waterway, the number of ships passing through it must surpass that. The expected increase in world trade over the next ten years is 3.8 per cent annually, which means it will take 11 years to reach 78 ships daily,” explains Khalil.

Taking into account the $3.83 billion spent on digging and dredging as well as around $2.81 billion – a total of $6.64 billion – and comparing this to the expected increase of around $400 million after 11 years, the return may barely outweigh the cost, adds Khalil.

Maersk Line, the world’s largest container shipping company, has welcomed the expansion, saying it would reduce transit times and benefit world trade as a whole. However, it told Reuters that it will not send more ships through the canal next year.

Credit-rating agency Moody’s also released a statement following the opening of the new lane saying it will likely boost income from the Suez Canal through increased transit fees and taxes in the long run, but at a much slower rate than the government projects. The new canal will likely have “limited credit-positive effects” in the current fiscal year, says the report.

The best economic effect of the project, says Khalil, is that it encouraged ordinary Egyptians to invest, bringing billions of dollars of private money into the official market. The digging and construction work also invigorated the market because most of the contractors were from Egypt’s private sector, although the impact was largely temporary.

“If the project had instead focused on the development of the Suez Canal area to form an industrial hub – by creating industries and offering logistical services and storage facilities – it would have produced long-term sustainable benefits and growth by increasing foreign investments, foreign currency income and technology transfer,” says Khalil. The government has stated that this will be the next phase of the project now that the new waterway is complete.

The project also included digging six tunnels underneath the canal to connect mainland Egypt to the Sinai Peninsula. “If these tunnels are realised, they will be a lifeline for the development and growth of Sinai. This will be the most important part of the project and will really improve national security,” adds Khalil.

Since coming to power, el-Sisi’s government has taken bold steps to solve the country’s economic woes. The most controversial of these was cutting fuel subsidies by about a third, a move that his predecessor Morsi had been reluctant to take out of fear of the expected backlash. By introducing new taxes, especially on cigarettes and alcohol, el-Sisi’s government has also been able to decrease the budget deficit from 12 per cent to slightly less than 10 per cent of GDP.

The subsidy cuts have sent the price of fuel, food, public transportation and other services skyrocketing. El-Sisi defended the cuts in a televised speech in July 2014, calling them a “bitter pill” to start reforming an ineffective system and urging Egyptians to bear austerity measures that were necessary to revive the country’s economy. Many economic experts have hailed these measures as a welcome first step to curbing the growing budget deficit and improving investor trust.

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