A recent report by US financial and business expert Bloomberg revealed that the Egyptian Pound had shown the second best performance against the US dollar in 2019.
The Egyptian Cabinet’s media centre released an infographic depicting how the performance of the Egyptian Pound compared to other currencies over the first six months of 2019. It showed that the EGP exchange rate had risen by 6.5 per cent against the dollar during the first half of 2019, a performance second only to the Russian ruble worldwide, which had risen by 9.5 per cent against the dollar.
In 2016, Egypt had embarked on an ambitious economic reform programme supported by a 12-billion-dollar loan over three years from the International Monetary Fund. A major move in that programme was floating the Egyptian Pound. The economy had been in tatters following the Arab Spring uprising in January 2011.
After floatation, the exchange rate of the Egyptian Pound took a dive from around 8 to 18 pounds per dollar. This year, 2019, came with gradual improvement, however, with the Pound reaching some 16.6 pounds per dollar last June. It has currently risen further, standing at some 16.54 per dollar.
To grasp the significance of these figures, it might do well to remember that in 2015 the Egyptian Pound was the second worst in performance among currencies of the Middle East.
Investment up .. and foreign reserves
Not surprisingly, the good news regarding the Egyptian Pound have been enthusiastically touted by economists and the government in Egypt. Experts and politicians have been insisting that it reflects a positive upturn in the Egyptian economy.
Two questions, however, beg answers. First: was the positive upturn to be expected, and what has brought it on? Second: why do Egyptians feel it has not eased matters for them on the personal front?
The Cairo Centre for Economic and Strategic Studies (CCESS) published a recent research paper that offered 10 reasons for the EGP gaining in value versus the USD. The paper said that the rise in value of the EGP was to be expected since all economic indices have been confirming escalating improvement in Egypt’s economy.
First: growing foreign investment in the Egyptian government debt instruments has led to a rise in the foreign currency influx. Investment in government debt instruments amounted to USD16.8 billion in April 2019, and reached USD17.8 billion in the month of May 2019 which also saw a 40 per cent increase in foreigners’ acquisition of domestic debt. The CCESS paper expects Egypt to maintain its position as ‘attractive’ for investment in debt instruments, since investors tend to borrow in currencies offering low interest rates, then reinvest in countries which offer high interest like Egypt. Moreover, the risk level in Egypt is low compared to other developing countries. The paper also divulged that investment in security funds and domestic debt instruments reached USD4 billion last May.
Second: Egypt’s foreign currency reserves rose to USD44.275 billion in May 2019 from some USD14 billion in 2013.
Tourism and gas
Third: the revenue from tourism increased by 16.5 per cent in 2018, making a turnover of USD11.3 billion. According to the CCESS paper, the tourist sector’s contribution to Egypt’s GDP amounted to 11.9 per cent of the GDP.
Fourth: following recent natural gas findings which made Egypt reach self-sufficiency in natural gas, the country’s spending on petroleum product imports dropped, saving Egypt a USD3 billion a year.
Fifth: remittances from Egyptians working abroad reached USD25.5 billion in May 2019. From February 2019 to March 2019, the inflow of these remittances saw a 23.5 per cent leap, rising from USD1.8 billion in February 2019 to USD2.3 billion in March.
Sixth: the Central Bank of Egypt’s decision to cancel the fixed foreign exchange rate led to an abundance in foreign currency in the banks, allowing for funds to be directed to investment in the market. This in turn contributed to regaining the confidence of international financial institutions in the Egyptian market.
Exports up, imports down
Seventh: the rise in Egypt’s credit rating has contributed to increasing the confidence of foreign investors in the Egyptian economy, and has encouraged them to aggressively enter the Egyptian market, whether through investing in Egyptian stocks or in government debt instruments. Foreign investments in these fields reached USD26 billion, the CCESS paper said.
Eighth: At USD25.5 billion worth of exported goods, Egyptian exports leaped by 11.6 per cent during 2018. The CCESS paper said the increase was mainly in oil and agricultural exports.
Ninth: Imports were down from a yearly figure ranging between USD75 billion and USD80 billion to a figure ranging between USD55 billion and USD60 billion a year. The CCESS paper explained that this was due to the rationalisation policies adopted by the Egyptian government with the objective of reducing the import bill and resorting to local alternatives whenever possible.
Tenth: Foreign currency inflows have been on the rise ever since Egypt adopted the economic reform programme and the Central Bank took the decision to float the Egyptian Pound. The influx of foreign currency increased the supply of the US dollars, up to USD160 billion since 2016, according to the CCESS paper.
Despite the rise in value of the Egyptian Pound, and the overall improvement of economic indicators, the prices of goods and commodities on the Egyptian market did not decline.
The CCESS paper explained this, in part, by trader distrust that the upturn may not be sustainable; the sharp decline in the dollar versus the Pound may be no more than a short lived instance. They have thus refrained from reducing prices, preferring a ‘wait and see’ attitude.
Additionally, according to the CCESS paper, a typical trade cycle takes from three to four months, so the prices of commodities would not go down before that.