A déjà-vu financial crisis

Magda Shaheen , Friday 21 Oct 2022

Al-Ahram Weekly compares Egypt’s current dollar crunch to that in 2016-17.

Dollar

 

It is said that what Egypt is experiencing today in terms of a foreign exchange crunch is déjà-vu, repeating the main lines of a similar crisis five years ago. Although it is also said that the crisis was precipitated by the unfavourable global situation, the Covid-19 pandemic followed by the war in Ukraine and the rise in prices of Egypt’s main grain imports, this does not justify such a short cycle for a hard-currency shortage to recur.

In order to sign the $12 billion 2016 loan deal with the International Monetary Fund (IMF), Egypt had to float its currency, among other measures, to address its macroeconomic vulnerabilities as part of an agreed reform programme and to restore competitiveness. This led to the devaluation of the Egyptian pound from an official rate of around LE9 to the dollar to around LE15 to allow for increased Egyptian exports. Floating the pound was a necessary step at the time to qualify for the IMF loan.

Today, fewer than five years later, Egypt is once again being blamed for its overvalued exchange rate and is calling for the full floatation of the pound, risking a further major devaluation. While it is difficult to speculate on the level at which the pound will stabilise against the dollar, it is widely expected to hit LE25. To speak of a range of LE23 to LE25 to the dollar after full floatation means a devaluation of over 90 per cent of the pound’s value in less than five years.

Where are we going in today’s crisis, which is much larger in scale and impact at a time when the global situation is also more acute and critical? It is clear that Egypt is going through a difficult period and needs to define clear and stable strategies to engage all actors in the economy to move ahead in harmony and concert. One must caution, however, about the rapid resurgence of Egypt’s financial crisis and the dollar tightening in less than a five-year cycle.

Such crises are expected to occur at an accelerated pace in Egypt as long as they are treated with palliatives without addressing the root causes that necessitate a transition to a more productive economy. The transition from a rentier economy to a productive economy capable of balancing its macroeconomic indicators, reducing its trade deficit, and attracting foreign direct investment, rather than mobilising speculative money that flees overnight to seek quick and speculative gains elsewhere, is required.

Egypt can no longer content itself with makeshift measures such as the bridge of Gulf financing to face the gravity of the situation.

Although the devaluation of the Egyptian pound is a necessary condition for this transition to happen, it is by no means a sufficient one. This is for the simple reason that the devaluation of the pound clearly serves to mark the Egyptian economy out as more competitive in the global market, reducing Egypt’s export prices to make its products more attractive in the marketplace. That is on the one hand. On the other hand, devaluation makes imports more expensive, so that consumers fall back on domestic goods. All of this is well and good if Egypt has the necessary demand for its exports and can satisfy consumer needs for goods domestically —neither of which is the case.

In addition, the expected $3 to $5 billion loan deal with the IMF is a far cry from the $12 billion agreed in November 2016. However, it is also said that Egypt’s problem today, unlike in 2016, is not the lack of hard currency insofar as this is a pricing of the dollar issue, as people are now refraining from selling in anticipation of the price of their dollars rising with the upcoming floatation. This is also why the banks have hiked interest rates on the dollar to over five per cent to allow the use of available dollar liquidity as bridge funds until the situation eases.

There is a need to build confidence in the economy through more stable and transparent policies and effective implementation to reassure foreign investors as well as the domestic private sector. It is true that the IMF agreements do not relate to the size of any loan, but rather to what an IMF agreement gives to Egypt in terms of credibility and trust. This should make Egypt more attractive to foreign direct investment through the greater involvement of the domestic private sector. But was that not also the goal in 2016-17, which did not materialise as expected?

At this point, it is to be hoped that the upcoming economic conference on 23-25 October, which will bring together government officials, academia, NGOs, and private-sector representatives, will openly and honestly address today’s vulnerabilities and set a timeline for dealing with them with a whole new way of thinking.

The conference should indulge in a tour d’horizon of what has gone wrong and how the situation can be rectified, with no inhibitions or conditions imposed on any panelist or discussant, be they from the government or private sector. An open and honest dialogue is necessary. The pound’s devaluation is not a panacea for all the ills of Egypt’s economy, and it will certainly not lead to increased competitiveness unless accompanied by trade-facilitation measures and streamlining export and import procedures.

The writer is former assistant foreign minister for international economic affairs.


*A version of this article appears in print in the 20 October, 2022 edition of Al-Ahram Weekly.

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