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Devaluating the Egyptian pound, big difference between theoretical and practical results

The foreign exchange market witnessed severe disturbances following the central bank's devaluation of exchange rate raising the dollar against the pound by about 14.3% in one shot

Ahmed El-Sayed Al-Naggar , Monday 4 Apr 2016
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The latest devaluation happened after a wave of speculation against the Egyptian pound and the foreign exchange market’s lack of resources of foreign currencies. This lack of foreign currencies is the result of a large deficit in external balances.

The current account balance’s deficit during the last twelve months ending last September was about 14.7 billion dollars. This balance includes the balance of trade and balance of trade in services and transfers. As for the deficit in the balance of trade alone, it has reached, according to official statements, about 38.8 billion dollars in the fiscal year 2014 – 2015.

If we examine some indicators of the current fiscal year 2015–2016, we will find that the trade deficit in its first quarter reached around 10 billion dollars and the current account balance’s deficit was 4 billion dollars in the first quarter of the aforementioned year in comparison with 1.6 billion dollars only in the first quarter of the year 2014–2015.

If we combine the balance of trade in services and transfers, which is the more indicative balance regarding the capability of the local economy, the deficit reaches 8.3 billion dollars in the first quarter of the fiscal year 2015–2016 in comparison with 7.8 billion dollars in the first quarter of the previous year.

It is quite evident from these official statements that the root of the problem in the exchange rate and the successive erosion of the foreign currency reserve lies in the external balances.

The devaluation policy of the Egyptian pound exchange rate against the dollar and the main free currencies was done with the aim of raising the cost of importing from abroad so as to curb imports. Moreover, if the Egyptian exports fix its prices to the Egyptian pound, it will be cheaper on evaluating it against foreign currencies. Thus, the demand on it abroad will increase.

This policy is a repetition of the calcified ideological recipe of the World Bank and the International Monetary Fund’s school and those who follow them. It has been proved many times that it doesn’t work in Egypt and it creates successive spiral cycles of decline in the Egyptian currency in the black market to be pursued by the monetary authorities with more devaluation of the local currency every now and then without any of this affecting the economy positively.

The best thing is to take measures to ensure the direct treatment of external balances’ deficit, which caused the erosion of the foreign currencies reserve and constituted a pressure on the exchange rate of the Egyptian pound.

However, since the devaluation of the exchange rate has taken place already, we should set our sights on the anticipated consequences so as to be ready to address them; utilising the positive ones and confronting the negative ones.

Prices rise is the confirmed result along with its negative effects

It goes without saying that the devaluation of the Egyptian pound against foreign currencies will lead to the rise in prices of goods and services which Egypt imports from any foreign market with the same amount of rise in the currency of the country which we import from against the Egyptian pound. For example, the foreign commodity, which its price is one dollar and its importing cost was 7.83 Egyptian pounds before devaluation, will be after devaluation around 8.90 Egyptian pounds.

Since the imported goods and services constitute around 28% of the total consumption of goods and services in Egypt, hence its cost and the sale prices to consumers will rise with the same amount of increase in the currencies with which the imports were financed against the Egyptian pound.

Historical experience indicates that the only confirmed result for the devaluation of exchange rate of the Egyptian pound every time since the mid-seventies of the last century and until now is represented in a wave of prices rise or a kind of inflation.

This inflation wave caused by devaluating the local currency affects the poor and the middle class, especially all those working for wages where they move in rates lower than the quick increases in prices while the wealth of the property rights owners will increase simply because the price of their properties rose.

This consequence is totally different from all the efforts aimed at achieving political and security stability based on consensus that is to be realised through development, creating jobs, social justice in distributing incomes and price controls.  

As for the businessmen who got loans in dollars or in free currencies to finance the purchasing of machinery, equipment, raw materials and necessary supplies for their work, the loans’ values estimated in the Egyptian pounds will be raised to add emergency and unexpected burdens over their shoulders. The options available before them will be hard; either to raise the price of their products and risk the loss of a part of their consumers, or that the conditions of their facilities will be in turmoil and stall.

Of course, the easier way is to raise the prices on consumers, especially if the goods are essential and indispensible or even luxurious and those who consume them are ready to pay its price even after its rise.

According to official statements, Egypt’s imports of goods and services reached 78.1 billion dollars in the fiscal year 2014–2015. Its bill, which was estimated in Egyptian pounds, will rise around 85 billion Egyptian pounds. This sum is equivalent to about 9.6 billion dollars in the light of new rate of exchange.

This wave of prices rise of goods imported totally from abroad is to be followed by a rise in all the goods which are produced by using imported inputs, equipment, machinery and spare parts. This is to be followed by a price rise in local goods that are equivalent to the imported goods then a rise in all goods afterwards.

In contrast, foreign exchange companies will achieve emergency and huge fortunes according to the volume of what they accumulated of foreign currencies before the rise against the Egyptian pound.

It is a well known fact that whenever any citizen goes to change local money to foreign currency from many foreign currency exchange companies, he doesn’t get an invoice of what he has exchanged if he wanted to have a higher price for the foreign currencies. The sweeping majority of citizens who exchange local money to foreign currency prefer this way due to the direct interest logic.

Consequently, the earnings of those companies of the foreign currency were increasing in reality more than what they inform the central bank about or what they are committed to transfer. 

It is noteworthy to mention that the majority of the foreign exchange companies are owned by those who worked previously in the black market of foreign currency, i.e. those who were like outlaws until their status was legalised in the early nineties.

There is a significant chunk of these companies that are owned by religious extremists where some of their symbols were among the biggest and most important currency traders in the black market when it was criminalised and who then became owners of foreign currency companies afterwards.

The truth is that everything that the foreign currency companies do, banks can do, including allocating a window for foreign exchange after the official working hours.

It can be said that revitalising exports, investments and tourism need many measures concerning founding businesses, divestment and improving the foreign image of Egypt regarding security and freedoms. This is not to be done through propaganda, but by achieving good levels in the security and freedoms spheres that can earn respect and acceptance internationally on both official and popular levels. The popular level is important because it determines the touristic flow to Egypt and it is vital source of foreign currency.

Tourism revenues were heading towards recovery and reached around 7.4 billion dollars in the year 2014-2015 in comparison with 5.1 billion dollars only 2013–2014. However, the Russian passenger plane crash and afterwards the incident of the Italian youth Regini cast their shadow over Egyptian tourism.

Treating this situation has nothing to do with devaluating the exchange rate of the Egyptian pound against free currencies in order to lower the tourism cost in Egypt because it is already low. What should be done is to treat the negative effects of the aforementioned incidents, enhancing safety in Egypt and improving Egypt’s international image concerning security and freedoms.

Increasing exports and attracting investors and tourists, theoretically and practically

When the IMF justifies its demand to devaluate the local currency foreign exchange rate or float it, it usually points out that the decline in the exchange rate will lead to increasing the attractiveness of the local market in the eyes of foreign investors and tourists where the power of free currencies they have is raised so as to buy goods, services and assets.

This justification is worthless in the current situation in Egypt because what is obstructing developing foreign investments are the bureaucratic complexities and misapplication of the single-window system. For it was confined to Cairo instead of establishing branches of it in all governorates and making fundamental changes in the mandate of executive authority in granting permissions and licenses in order to restricting to one agency.

Moreover, the flow of foreign investments and tourism to Egypt is affected by the political and security situations and the actual status of political and individual freedoms or with the international image whatever its credibility is. Consequently, devaluating the foreign exchange rate of the Egyptian pound against the dollar and the main free currencies may not lead to any development in attracting investment and tourism currently.

In its fixed recipe or “prescription,” the IMF points out that devaluating the local currency leads to competitiveness of exports. This recommendation of the “fund’s” recommendations is based on a theoretical justification that is valueless in Egypt’s case. Because the production stagnation and weakness in growth currently in Egypt means that there is no surplus of goods for export in a country where the trade deficit reached 38.8 billion dollars in the fiscal year 2014–2015. The best thing to be done is to move this growth to achieve an effective increase in production in order to have what we can export.

Official and international statements mention that the real growth rate of the Egyptian Gross Domestic Product was 1.8%, 2.2%, 2.1%, 2.2% and 4.2% in the years 2011, 2012, 2013, 2014, 2015 respectively. All of these are low rates of growth or closer to the edge of stagnation except in the year of 2015, which can be considered at best average growth, but it is far better than its predecessors. It is necessary to mention that this growth was achieved through high levels of internal and external borrowing.

By the way, the burdens of the fiscal policy and the huge deficit that is increasing year after year and the consequent borrowing exerts pressure on the Egyptian pound and on both the stability of prices and inflation rate.

The Egyptian monetary policy is like that of any other country suffering from enduring the results of the economic and fiscal performance, but it also bears a major share of what’s going on in Egypt due to the approach of devaluating the Egyptian pound according to IMF and the WB recipe.

This was implemented instead of placing the society and the government in front of the necessity of rationalising expenditure and imports and seeking ways to treat the crisis causes.

This is to be done through organised and planned work in order to regain the balance of the current account balance and preserve a stable exchange rate for the Egyptian pound that suits achieving the economic policy objectives.

The writer is the Chairman of the Board of Al-Ahram Establishment.

 

 

 

 

 

 

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