Economic test for Egypt

Tourists are reluctant to travel following the 11 September US attacks

The Egyptian government is facing the first serious test of the new currency regime it introduced in August.

Egypt earns most of its dollars from foreign visitors, many of whom are reluctant to travel following the 11 September attacks in the US.

There are no figures as yet as to how much tourism has fallen in the past month, but officials forecast a 30% to 50% drop in the next year.

If the currency weakens as a result - as many analysts think is likely - the government may be tempted to discard its new policy and try and control the currency market.

Sound pound

Egypt devalued its currency by 6% in August, under pressure from the financial markets. It also broadened the band within which the Egyptian pound traded against the US dollar.

By making it easier for Egyptians to buy dollars, the previously flourishing local black market all but vanished.

However a weakening Egyptian pound may tempt the government to re-introduce restrictions.

The currency fell close to the lower limit of its trading band, at about 4.26 to the dollar in the immediate aftermath of the US attacks. It has recovered, though some analysts forecast it could fall further.

Egyptian government officials now warn that tourism receipts - about $3.24bn last year - could fall between 30% and 50% in the next year.

Egypt does get foreign exchange from other sources, such as exports and remittances from Egyptian workers in Arab Gulf states.

Under pressure

Tourism fell 20% in the year following the attack on tourists at Luxor in 1997, but soon recovered, Navaid Farooq, Egypt analyst at US ratings agency Standard &Poor's told BBC News Online.

"If it is a one year shortage, they can withstand it," he said, pointing to the $12bn of currency reserves Egypt has in the bank.

"This is another external shock for Egypt, of which it has suffered several. [The question is] how will the government and economy cope with it?" he said.

"The Egyptian government has finally taken positive steps on the exchange rate mechanism. These are the beginning of the moves towards a more flexible exchange rate, the process is not over and this is one of its first tests," he added.