Egyptians woke up Thursday 3 November to news that the Central Bank of Egypt (CBE) had floated the Egyptian pound. The CBE placed a tentative exchange rate of 13EGP against a dollar, give or take 10 per cent. This meant the CBE had devalued the EGP by as much as 38 per cent. At 1pm the same day the EGP was priced freely. Throughout the week, the pound continued to weaken, losing some 50 per cent of its pre-float value which had stood at EGP8.8 to the dollar.
In its 3 November statement, the CBE said that it aimed at regaining confidence in the Egyptian economy, achieving fiscal stability, and bringing down inflation. Besides floating the pound, the CBE raised interest rates by 300 basic points, and announced the banks would remain open till 9pm daily throughout the week.
Fuel prices raised
On the evening of 3 November, the government again surprised Egyptians by raising fuel prices by some 30 per cent. The decision had the effect of a bombshell; the first response was dumbstruck disbelief. Once the public realised it was indeed true, there followed on the street a sad collective resignation to the news. Operators of microbuses and tuk-tuks directly raised their fares; passengers paid without argument. The government said it would adjust taxi fares to meet the new rise in gasoline prices. It also pledged it would offer reasonably priced food and basic commodities on the markets to cushion the rise in prices.
For the public, floating the EGP was not something that was easily understood; many realised it ushers “black days ahead”, but beyond that there was no real grasp of the hard move. Raising fuel prices, on the other hand, made the painful truth of the dire economic situation seep in. To the rampant question of “why?” officials replied that floating the pound and phasing out subsidies were among the real economic reform measures Egypt now had no option but to implement.
In their time-honoured manner of cushioning painful realities, Egyptians quickly inundated the social media with jokes about the new fuel prices. Pictures of donkeys with “Taxi” sprayed across their bodies held captions of “the new, modern, affordable method of transport.”
There were fears that the call for protest on 11/11 which had so far found little public support [http://en.wataninet.com/uncategorized/were-suffocating-but-would-we-risk-our-country/17813/] would now swell in ranks. But this appeared not to be the case. On the street, the prevalent mood was: “No more demonstrations; all our ills stem from the turmoil and demonstrations of the 2011 Arab Spring.” Many ventured opinion nostalgic of the pre-Arab Spring Mubarak days of peace and prosperity.
No black market anymore
The CBE’s decision of floating the pound was widely seen by economists as a bid to revive the economy which is still reeling from the aftermath of the 2011 Arab Spring. The political turbulence and upsurge in terrorism that ensued worked to bring tourism to grinding halt and to drive away foreign investors, thereby drying up the main sources of hard currency in Egypt. With foreign reserves falling, Egypt was compelled to ration its dollars to pay for essentials such as wheat and medicines. This drove local businesses to the black market to secure the foreign currency needed for imports and industry inputs.
Now that the EGP has been devalued, the competitiveness of Egyptian goods is expected to rise in world markets, and the country can better secure the loans it needs to kick-start the economy. The flexible exchange rate is said to have been one of the conditions placed by the International Monetary Fund to provide Egypt with a USD12 billion three-year loan that was approved last August. The IMF mission chief for Egypt, Chris Jarvis, said the CBE’s move would make more foreign exchange available; and would foster growth, job creation, and a stronger external position for the country.
Floating the pound will work to bring its official rate in line with its black market price, narrowing thus the gap between them; this gap had lately widened to bring the ratio of the dollar/pound value to 18, whereas it was officially only 8.8. No question, this deterred investors, discouraged imports from Egypt, and raised prices to unprecedented levels.
Only two days before the CBE floated the pound, the Union of Chambers of Commerce had taken a decision to refrain from buying dollars; this instantly worked to bring down the EGP/USD rate from 18 to 13.
Markets in euphoria
Even though the majority of the public did not know what to make of the news, apart from fearing a new wave of price rises [http://en.wataninet.com/features/economy/floating-the-pound-what-egyptians-have-to-say/17744/], all connected to the business or industrial world highly applauded the “long overdue” move. Muhammad Radwan, head of equities at the Cairo-based Pharos Holdings, told Bloomberg: “The markets went into complete euphoria.” Bloomberg reported that on the day the EGP was floated Egyptian stocks over the world soared in value. The EGX 30 Index gained 3.4 per cent, the highest gains since 2008.
The markets continued to show positive results; Sunday 6 November , the first day of trading following the decision to float the pound, saw the stock exchange gain some EGP19 billion half an hour after trading started in the first session of the new week. The EGX 30 gained 2.43 per cent. The strong upward trend persisted throughout the week.
MP Ayman Abul-Ela praised the CBE’s decision to float the pound. He said it was expected that the dollar pound exchange rate would see sharp fluctuations but would stabilise within the week.
Egyptian exporters were elated with the CBE’s decision to float the pound. “I expect we’ll see a surge in exports very soon,” said Hussam Elwan, board member of the Exports Division of the General Union of the Chambers of Commerce. Alaa’ Ezz, Secretary-General of the Union, said that the double exchange rate in Egypt had deterred many foreign investors from venturing into the market. Now, Mr Ezz said, that impediment to investment has been removed.
According to Mukhtar al-Sharif, Professor of Economy at Mansoura University, the decision to float the pound will result in a single exchange rate that would deter the hoarding of dollars and put an end to black market manipulation.
Not first float
Economics expert and head of the Egyptian Forum for Economic Studies, Rashad Abdu pointed out that the CBE’s move should allow local banks to hold sufficient foreign currency to cater for the needs of importers and foreign currency seekers, thus put the currency black market out of business. He warned, however, that the black market could see a comeback if the CBE fails to fulfil the market needs for hard currency.
Dr Abdu expected the pound devaluation to bear fruit. He recalled the move taken in the 1990s when the official exchange rate was 0.83EGP/USD against 5EGP/USD in the black market. Atef Ebeid, the then Premier decided to free the pound and raised the EGP/USD rate to 3.33EGP/USD. The move worked well then, and has since been in force. Today, however, Egypt’s economy called for a free float of the pound.
Dr Abdu explained that there are two types of floating exchange rates, the “free float” which the CBE has just applied, and the “managed float”. Under free float, the exchange rate is freely determined by the market; the only intervention by monetary authorities would be to ease the speed of exchange rate fluctuations, but not to limit this fluctuation. Under the managed float, the exchange rate is determined according to supply and demand but the Central Bank intervenes from time to time to manage the fluctuations in exchange rates according to a set of indices which include the magnitude of the gap between supply and demand and developments in the exchange rates of parallel markets. The managed float is usually adopted by developing countries which tie their currencies to the US dollar, the Pound Sterling, or to a basket of currencies.
Dr Sharif said that it is expected that prices would initially rise in the wake of floating the pound, then reach stable levels. “Ultimately,” he said, “this is the bitter medicine that would cure the ills of the Egyptian economy.”
The decision to increase interest rates, Dr Abdu said, is a double-edged sword. It will encourage Egyptians to deposit their money in the banks instead of risking it on investment. Investors thus stand to lose, since the banks would be offering risk-free high interest for money.
According to Osman Muhammad Osman, former Planning Minister, Egypt’s government should implement sound economic measures during the upcoming four months in order for prices to stabilise and inflation to go down. Dr Osman expected inflation to rise to 20 per cent in December, after which it would steadily decrease. “Egypt should stick to its full reform programme,” he said during the talk show BiSaraha (Candidly) on Nogoum FM radio channel, “otherwise there is risk the country would go bankrupt and be unable to pay salaries and pensions.”
Now that Egyptian banks are for the first time freely trading foreign exchange on the interbank market, Egypt will shortly ask the International Monetary Fund’s executive board to finalise its USD12 billion loan request, Finance Minister Amr al-Garhy said.
9 November 2016