Either investment and reform or we wait for the next floatation

Ziad Bahaa-Eldin
Wednesday 2 Nov 2022

If we only float and are satisfied with that, we will certainly pay the price twice, first in inflation and secondly in not enjoying the returns on greater investment, tourism and export.


I have no hesitation in describing floating the Egyptian pound last week as a sound and necessary decision. It simply re-priced the value of our national currency in a realistic way based on market forces and thus revealed an existing reality rather than creating a new one. It also put an end to the depletion of our reserves in desperate attempts to defend an unrealistic value, as well as bringing us out of the paralysis that hit the markets in the past months due to the scarcity of hard currency and restrictions on importation.

But if the floatation is necessary, it is not without adverse inflationary consequences due to the increase in the cost of imports of raw materials, equipment, goods, consumer products and services, although it should also be noted that many traders and importers had already been pricing their products on the basis of the black market value of the pound, and therefore some of the inflation associated with the floatation had already occurred.

On the other hand, flotation is not all evil. The depreciation of the Egyptian pound is supposed to increase exports, tourism revenues, and foreign investment. It is also supposed to limit the imports of unnecessary goods and services, reduce the travel and spending by Egyptians abroad, push people to buy local products and create more job opportunities.

The problem, however, is that these gains are not achieved alone. In fact they will not be achieved at all if there is no Egyptian production capable of export and global competition, if the investment climate is not conducive to attracting investors from abroad, and if the conditions are not suitable to luring tourists to visit Egypt.

In other words, floatation brings about certain inevitable costs, but it may also bring about benefits and advantages. However, these benefits are neither certain nor inevitable if they are not supported by government policies and programmes aimed at increasing private investment, exports and tourism. If we only float and are satisfied with that, we will certainly pay the price twice, first in inflation and secondly in not enjoying the returns on greater investment, tourism and export.

To avoid being theoretical, let us remember what happened in the aftermath of the “great floatation” at the end of 2016, when the markets were in severe turmoil due to an unrealistic official exchange rate, prompting the Central Bank to finally float the pound, which then declined in value from eight pounds to the US dollar, briefly touching twenty, and finally settling down at sixteen. We welcomed this decision at the time, describing it as difficult but sound and necessary - despite the accompanying inflation - in the belief that the forthcoming gains from investment, export and tourism will compensate for the hardship. But what happened was the opposite.

The state carried out sound monetary reform, relied on the loan from the International Monetary Fund and the support of Arab countries, but did not carry out structural or deep reform in the investment climate, did not support exports, or improve tourism offers. Rather investors found themselves dealing with a more difficult investment climate, more complex bureaucracy, and more competition from the state. The result was that Egyptians paid the price of inflation on the one hand and failed to take advantage of any new opportunities on the other.

This is exactly what we should avoid repeating. Last week’s float was necessary, and the price hikes it will bring about is inevitable. But we can benefit from the advantages of floating if we seize the opportunity to achieve a boom in investment, employment, export and tourism.

In July 2017 in Al-Shorouk newspaper, I wrote an article entitled “Fiscal Reform Is Not the Problem... Rather, Delayed Economic Reform Is”. In it, I stated that “the worst that could happen is for people to pay the full price of financial reform and not benefit from its returns.”

I reiterate my call not to be satisfied with the loans obtained from the IMF and other institutions, not to assume that we have passed the bottleneck, and not to be satisfied with overcoming the floatation hurdle, but to work to unleash the energies of investment and production in order to take advantage of the relative advantages that come with floatation, so that we do not - once more - pay the price twice, then wait for the next big floatation a few years down the road.

*The writer is an economist. This article also appears in today’s edition of the daily Al-Masry Al-Youm.

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