The last two weeks in July saw Egyptians stunned at the havoc in the money markets owing to unprecedented swings in the Egyptian Pound/US Dollar exchange rate. Even though the Central Bank of Egypt (CBE) placed the exchange rate at EGP8.89 for the dollar, the shortage in hard currency drove the dollar up to EGP13.25 during the third week in July. This was a full EGP2 higher than the week preceding it, and it drove a panic-stricken demand for more dollars as many Egyptians feared their national currency was close to crashing. The following week, however, the pound gained in value, rising one pound against the dollar. No one seemed to understand the reason for the sharp swings in EGP/USD values, nor offer any prediction for the future.
Cause for optimism
It was not as though the Egyptian economy was crashing. Egypt is already on the path of economic reform, even though this constitutes a very bitter medicine. Last week, the government announced a partial lift of the subsidy for electricity, raising prices for power consumption 40 per cent higher. The rise is bound to hurt all Egyptians, but must ultimately serve to put the economy on the right track.
Egypt’s stock market index had been rising steadily during July, and closed at a 13-month high on Thursday 28 July amid optimism over Cairo’s talks with the International Monetary Fund (IMF).
Last May, according to a report by the Central Agency for Public Mobilisation and Statistics, Egypt’s trade deficit shrunk 24.6 per cent than a year earlier, with exports increasing by 9.1 per cent to 18.3 billion pounds, and imports decreasing by 13.3 per cent to 43.5 billion pounds. This was the outcome of the government policy to promote exports and reduce imports in order to manage the shortage in hard currency from which Egypt has increasingly suffered since the Arab Spring uprising in January 2011. The consequent political and economic turmoil drove away tourists and foreign investors; the foreign currency reserves dropped from a pre-Arab Spring USD36 billion to USD17.5 billion till July 2016 when it took another plunge to USD15.5 billion on account of recent payment of some of Egypt’s debts. This drove the CBE to ration dollars, giving priority to imports of essential goods and to exporters who need to import raw material for manufacturing.
The fact that Egypt is currently holding talks with the IMF for a USD12 billion, three-year lending programme has given rise to hope that the country is on its way out of the economic doldrums. Premier Sherif Ismail pointed to the importance of cooperating with the IMF in order to promote international confidence in the economy, thus attracting foreign investments and reaching fiscal stability. The Egyptian public, however, still fears other rounds of EGP/USD exchange rate swings, and wonders whether or not the success of the IMF talks will ultimately stabilise that rate. More importantly, will it stabilise the spiralling prices that are now the scourge of Egyptians?
According to the Egyptian Centre for Economic Studies (ECES), the IMF loan will reduce Egypt’s demand on external funding, estimated at USD25 billion for the coming year.
The ECES stresses that the IMF loan, or any foreign loan for that matter, should be used for investment projects that yield revenue in order for Egypt to be able to service the debts these loans bring; foreign loans must never be used merely to ameliorate the national budget. Moreover, the conditions set by international bodies giving Egypt loans, including the IMF, must in no way affect the economic reform programme that Egypt is currently implementing and must not increase the economic burdens on mainstream Egyptians.
The current exchange rate crisis, the ECES points out, is the outcome of a number of factors on the fiscal and economic levels, all of which ultimately lead to an inability of the economy to provide foreign currency resources. Since 2011 there has been a decline in tourism, foreign direct investments and exports. Local production plunged, forcing the State to increase its imports to compensate for the lack of locally-produced goods.
Speculation and jihadi-sponsored activity
Economy expert Mukhtar al-Sharif told Watani that once Egypt signs the agreement with the IMF, USD2 billion will enter the Egyptian treasury, thus increasing the supply of US dollars. He says that another loan of USD500 million by the African Development Bank (ADB) is expected before yearend, also a Saudi USD1.5 billion-grant that will go into development of the Sinai Peninsula. Egypt also plans, Mr Sharif says, to issue USD3 billion worth of eurobonds by September or October. All these measures are bound to increase the US dollar balance in the Egyptian treasury. He explains that once this happens, those who amass US dollars in fear of unexpected decline in the value of the Egyptian pound will inevitably attempt to get rid of the huge amounts of dollars in their possession, in order to avoid large losses. This would in turn force the US dollar back against the Egyptian pound, he says.
However, according to Mr Sharif there is another dimension to the crisis of the USD/EGP exchange rate. The huge swings it has undergone over a short span of time point at speculation by traders who profit from these swings. It was thus a good move by the government, he says, to combat the foreign exchange companies [mostly owned by Islamists] which fuel the black market, now aptly labelled the parallel market. It does not help, he explains, that Islamist jihadi terrorism in Sinai is promoting arms and drugs trafficking, increasing demand on the dollar and placing further pressure upon the Egyptian pound.
Shrinking dollar resources
Banking expert Amir Alphonse explains that the huge recent drop in the value of the Egyptian pound versus the USD is due to several reasons. Most prominent among them, he said, was the shrinkage of the US dollar resources in Egypt, which are the Suez Canal revenue, remittances from Egyptians working abroad, and income from tourism and exports. “We thus need to create new US dollar resources in order to solve this crisis,” Mr Alphonse says.
“The question now is how can we direct the funds that will come from the IMF loan towards creating new investment projects in order for these to generate new US dollar resources?” Mr Alphonse asks. “It will be difficult to pay back the loan,” he pointed out, “if we use the IMF loan in any other direction.” He points to a series of very important meetings recently held between the government, the CBE and representatives of the industrial sector with the objective of getting the production wheel to roll again to provide the needs of the local market and thus save on imports, and to promote exports.
The huge fluctuation in the value of the Egyptian pound took place in the wake of talk by CBE Governor Tarek Amer that was taken by the media to hint at a possible devaluation of the EGP. It cannot be said for certain whether or not Mr Amer’s remark led to the unprecedented fluctuation, but it did raise questions about the possibility and potential benefit of future devaluation or of floating the pound.
Ahmed Shiha, head of the Importers Division of the Cairo Chamber of Commerce, says that devaluation of the pound will not be as beneficial as some claim. It will not boost Egyptian exports, since more than 50 per cent of the inputs needed for manufacture are themselves imported. Devaluation would thus only serve to increase prices and raise inflation rates. “Devaluing the Egyptian pound will lead to more Egyptian pounds being required to pay for imports, which would automatically raise prices and cause a rise in the USD/EGP exchange rate.”
According to Mr Sharif, the CBE Governor’s statement was taken out of context; Mr Amer, he explains, was talking about flexibility in dealing with the Egyptian pound, which was taken instead to indicate intention of floating the pound. “In Egypt,” Mr Sharif says, “we cannot afford to leave the Egyptian pound to supply and demand; this would create fluctuations that we cannot sustain, and would lead to uncontrollable price rises. Egypt’s economy is not as sturdy as the economies of developed countries,” he says, “and its problems have been building up for many decades. They cannot be wiped out overnight.”
10 August 2016