Egypt: Binding Ties

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Egypt and Libya are looking to enhance their economic ties and taking advantage of their geographical proximity, with the announcement of two major cross-border investment projects in the energy sector. After a summer of officials from both countries shuttling between Cairo and Tripoli, President Hosni Mubarak sat down with Libyan leader Muammar Al Qadhafi last weekend to discuss how to take the relationship to the next level. Energy deals and increased trade are set to boost cooperation between the North African neighbours.

According to the Central Bank of Egypt, trade between the two countries grew 39% last year to $267m. Egyptian exports to Libya reached $141m in the financial year 2006/2007, while Libyan exports to Egypt jumped 75%, reaching $126m. Egypt buys poly-ethylene, propylene, butane and propane gas and steel products from Libya, and sells mainly rice, dairy products, copper wiring and cables, steel products, paper, pharmaceuticals, chemicals, ceramics, white goods and cement.

Trade between the two countries is set to accelerate further, with plans to establish an Egyptian-Libyan border free trade zone that would include industrial, warehousing, trade and tourism projects. However, a timeframe has yet to be announced.

Libya expects to generate at least $36.9bn from its oil industry, and has begun to invest some of its earnings in overseas ventures, including buying stakes in energy projects in Kenya, Sudan and Ethiopia. Egypt is keen to attract some of Tripoli's surplus cash for its own economy.

Hussein Sabbour, head of the Egyptian Businessmen's Association, believes Libya's proximity and increasing oil earnings make it a land of opportunity. "Libya has a lot of money and needs modernisation," he told OBG. "It needs to build hotels, infrastructure, hospitals, water supply systems and housing. These are projects in which Egyptian companies can be involved," he added.

Egypt's refining capacity could also play an important role in the Libyan economy in years to come. Indeed, Libya may have vast reserves of oil and gas, but its refining capacity, at 378,000 barrels per day (bpd), is half that of Egypt's, which has the highest refining capacity in the Middle East outside the Gulf, according to figures released by the Organisation of Arab Petroleum Exporting Countries.

In this context, the two countries have announced plans for a new oil refinery, which will be built west of the Egyptian city of Alexandria with Libyan funding. The plant will have an estimated capacity of 250,000 bpd, and it will be used to process Libyan crude, according to reports by local media.

Gas will also serve as a bridge between the two countries, as they are planning to build a natural gas pipeline between Alexandria and Tobruk. The pipeline is expected to supply the eastern side of Libya with Egyptian gas.

Economic cooperation is set to become increasingly strategic for both countries. For Egypt, Libya might represent more than an emerging market next door, with the Libyan government announcing its intention to take its investment in the Egyptian economy up to $10bn within the next two years. According to the Egyptian Ministry of Investment, Libya is already among the top 10 investors in Egypt.

This could mean fresh and diversified foreign direct investment for Egypt at a time when traditional investment from countries like the US and the Europe is facing a slowdown.

For Libya, having Egypt as a close partner could yield long-term results. Since re-entering the international community after improved relations with the US and Europe, Tripoli has been trying to bolster its image abroad. Securing support from Egypt, a regional heavyweight, might facilitate those efforts.

© Oxford Business Group 2008