On 4 January the Central Bank of Egypt let the pound float for the third time in less than 12 months. It had been floated twice in 2022, in March and in October, but external account pressures meant that another floatation was in order, especially to close the gap between the official rate and the black market. The CBE’s resistance to letting go of the pound is understandable; it is aware of how much a weak pound will drive inflation, which is already at unprecedented highs.
The annual urban inflation rate in Egypt accelerated to 21.3 per cent in December 2022, from 18.7 per cent the month before, the highest reading since December of 2017. And these are the figures even before the latest spike in prices. This overshoots the CBE’s inflation target of a maximum of nine per cent because of the depreciation of the pound and subsequent supply shortages. Hopefully the decision by the CBE to revoke the requirement that importers must issue letters of credit will gradually ease those shortages by expediting the release of goods stranded at ports, but the problem of high prices will persist. The price of food has increased everywhere, reaching historic levels in 2022, as stated by the United Nations Global Crisis Response Group, a recent report by the UN Conference on Trade and Development (UNCTAD) said.
The report, titled “A Double Burden: The effects of food price increases and currency depreciations on food import bills”, said the global hike in prices is a challenge for food security globally, but particularly for net food-importing developing countries. Unlike in previous food crises, developing countries, including Egypt, now face a double burden, the report showed. “They not only pay higher prices for the food they import, but the price increase is exacerbated by the depreciation of their currency vis-à-vis the US dollar. This erodes the fiscal space that many developing countries need to face the concomitant challenges of recovering from the Covid-19 pandemic, the cost-of-living crisis, and the climate emergency.”
In its quest to encourage Egyptians to hold onto their pounds and to possibly encourage dollar hoarders to exchange them at banks, the National Bank of Egypt and Banque Misr have both offered savings certificates at as much as 25 per cent interest rate. The logic behind issuing such high yielding notes is to encourage those hoarding dollars to de dollarise and shift their savings to the local currency. Moreover, the expected high demand on the new certificates - they attracted LE100 billion in the first two days - will help to reduce liquidity in the market and thus rein in inflation. The head of Banque Misr told a prime-time talk show on Friday that half the money invested in the certificates is fresh money coming out the banking system and not through depositors liquidating other deposits or savings certificates which would mean draining the system of liquidity.
While these certificates may help they remain a short-term solution. The more sustainable solution is for Egypt to boost its exports, reaching the target of $100 billion annual target set by the president for 2025.
Egypt’s natural gas exports increased by 140 per cent in 2022 to reach $8.4 billion compared to the 2021 level thanks to the hike in global prices amid increased European demand. Egypt last year embarked on a plan to cut imports and increase exports by localising manufacturing in nine investment sectors, including wood and furniture, chemicals and textiles. There are 141 product categories under these nine investment areas, together accounting for almost a quarter of Egypt’s 2019 import bill, according to a cabinet statement.
That is the only way to increase hard currency income, create jobs and grow the economy. The government can help achieve that target by addressing the challenges it faces.
* A version of this article appears in print in the 12 January, 2023 edition of Al-Ahram Weekly