Floating the Egyptian pound or submerging it

Al Ahram Weekly 13/10/2016 by Hany Ghoraba

The economic aftermath of two consecutive revolutions in Egypt in January 2011 and June 2013 is still lurking on the horizon despite serious efforts by consecutive Egyptian cabinets to place the economy back on the recovery track. The international trade recession and lower tourism income as a result of the ongoing war on terrorism in Egypt and the Middle East are among factors that haven’t helped in attaining the tangible results aimed at by cabinets since 2011.

Nevertheless, one cannot discount the multiple blunders caused by conflicting government policies during the fiscal year 2015-2016, all of which have negatively impacted the Egyptian economy. Many of these blunders are due to financial policies that consecutive cabinets have adopted to resolve post-revolution economic issues. Unfortunately, most of these measures were counterproductive and on top of them was the continuous devaluation of the Egyptian pound.

Overspending on mega-projects and massive infrastructure programmes, which are not only costly but also slow in terms of projected revenues, added to the economic blues. With the exception of the recent expansion of the Suez Canal, most of the infrastructure projects are considered long-term investments that cannot have any significant yield before many years to come.

New IMF loan not an assured means to recovery: A new IMF loan at around $12 billion doesn’t guarantee economic stability let alone reform under the current economic team led by Finance Minister Amr Al-Garhi and Central Bank Governor Tarek Amer. The latter has been a source of instability himself thanks to his calculated press statements about devaluing the Egyptian currency, which signaled to black market traders to stock incredible amounts of US dollars, thus creating a bubble and deeper crisis.

Ironically, the government has received over $23 billion in grants and loans from Arabian Gulf States following the 30 June 2013 Revolution, along with other international loans and grants. These massive funds have not been utilized efficiently towards balancing or reforming the Egyptian economy in the years between 2014-2016, As a result, many economic experts, such as Rashad Abdou, are skeptical of the current devaluation procedures and the lackluster performance of the current economic team.

The IMF is pressuring the Egyptian government to take drastic measures to reduce the national deficit. Usually the first target would be economic subsidies for the impoverished classes, especially on fuel and foodstuffs. With every currency devaluation, every Egyptian citizen loses a significant portion of his/her life savings, pays higher prices for the same products and is likely to refrain from any extra spending that could improve the cycle of the economy, thus causing a recession in the market. The current projected devaluation doesn’t really have any prospects of a tangible positive effect in the short term in the economy, and is not guaranteed to deliver these results in the long term.

Presumed benefits of devaluing the currency:

Advocates of floating and devaluing the Egyptian currency argue that the procedure will insure an influx of foreign tourists who will be attracted to lower priced hotels and trips. A quick glance at the top 20 world touristic destinations, which are led by France, the US, Spain and China, reveals countries whose currencies are not weak by any means. On the contrary, the American dollar, Euro and Chinese Yuan are hard currencies. However, the fact remains that problems within the Egyptian tourism industry were never about the prices of hotels. Most tourists in Egypt enjoy cheap 5-star hotels that they can hardly afford in their own countries.

One of the argued benefits of devaluing the currency is providing a boost to Egyptian exports of a variety of products. But Egyptian exports are mostly comprised of products that are not of a household nature (such as electronic devices, household equipment or mechanical products, or cars) which may benefit from a weaker currency to increase competitiveness. Egyptian-made exported products such as cement, steel, metals, and other raw materials are priced mainly by international market prices that provides little margin for competitiveness. Thus, Egyptian exports enjoyed few benefits in the past two decades of devaluation policies. On the other hand, the bill for imports — especially for foodstuffs for more than 50 per cent of Egypt’s requirements — has been multiplying and consequently multiplying the prices of these essential foodstuffs.

The Sharm El-Sheikh Economic Development Conference in March 2015 represented a historic chance for Egypt to move on the right track for quick recovery. Alas, the government has taken counterproductive measures after the conference that ended up placing more restrictions on hard currency cash flows, and hence opportunities for investment.

For reasons believed to be of a security nature, on the one hand, and miscalculations on the other, the Egyptian government has placed the flow of foreign currency under stricter control, which resulted in crippling the cash flow influx — hence the lack of it in the Egyptian economy.

The restrictions included bank transfer caps and stricter regulations on smaller non-bank wire transfers via services like MoneyGram and Western Union. On paper these restrictions were aiming to prevent the transfer of illegal funds that may be used to bankroll terrorist attacks in Egypt. However, the sad reality indicated that these restrictions halted the healthy cash flow of hard currency in the economy.

In March 2016, the governor of the Egyptian Central Bank assured the Egyptian public that devaluation would help increase investment, stabilise the market, and increase exports and tourism. None of that happened and market stagnation continued along with a widened gap between the black market value of the US dollar and the Egyptian pound. The Egyptian pound was devalued in the black market from around LE8.88 against the dollar, as the official rate, to a black market price reaching as high as LE14 against the dollar in October 2016. It is quite unfathomable that the Central Bank keeps attempting to utilise futile methods in order to appease the IMF and ends up hurting an already battered economy.

High inflation rates (that reached 12.37 per cent in June 2016, according to Central Bank figures) caused by such measures will be catastrophic. The Egyptian market is already suffering a near recession in many of its sectors, along with social instability amid price hikes that are not met by tangible increases in wages to balance them.

Once again the government finds itself in a quagmire of its own making due to the lack of long term planning or prioritising the necessities of the current economic situation. Accordingly, should Prime Minister Sherif Ismail’s government continue on this path of treating the Egyptian economy according to simple textbook formulas, without considering the consequences of its decisions on the populace, the situation will only exacerbate even further.

The current cabinet is making President Abdel-Fattah Al-Sisi’s sincere efforts and vows to revive the Egyptian economy in two years even harder.

Hope is not lost as the nation has already faced its demons fighting terrorism and is on the brink of attaining a victory over the Muslim Brotherhood and its affiliates. The fight for a stable economy is equally hard and it requires a different type of stance, qualified fighters and out of the box solutions, rather than applying IMF rules.

Since the late 1990s, average Egyptians have been continuously hearing about alleged “economic reform”, usually followed by more taxes, tariffs and fees that only add to their daily burdens. They still remain hopeful and wish to believe that their government is aware of their problems and is vehemently working on resolving them. That belief is diminishing lately and this needs to be addressed urgently.

Original post in Al Ahram Weekly

http://weekly.ahram.org.eg/News/17520/21/Floating-the-Egyptian-pound-or-submerging-it.aspx

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