Ending dollar discrepancies

Niveen Wahish and Sherine Abdel-Razek, Tuesday 6 Feb 2024

Hopes are high for an end to Egypt’s foreign currency crunch, write Niveen Wahish and Sherine Abdel-Razek

Economy

 

The pound strengthened remarkably against the dollar in the parallel market earlier this week gaining more than 20 per cent to change hands at LE55-60 after hitting LE72 over the weekend.

The gain was fed by news that Egypt is close to signing a new agreement with the IMF and unconfirmed reports of a pending $22 billion of Gulf investment in Egypt’s North Coast. Both developments would translate into the inflow of billions in dollars much needed to prepare the scene for a new devaluation, a definite outcome of the current negotiations with the IMF.

During a media roundtable on Thursday in Washington, Managing Director of the IMF Kristalina Georgieva announced the fund was “very close” to reaching an agreement with Egypt.

“We are not talking about a long, protracted period at all,” she said.

Georgieva’s comments followed a two-week IMF mission to Egypt to discuss the completion of the first and second reviews of Egypt’s reform programme supported by the Extended Fund Facility (EFF) that Egypt agreed with the IMF in December 2022.

“The mission and the authorities will continue discussions virtually over the coming days to finalise the memorandum of economic and financial policies and identify the magnitude of additional support from the IMF and other bilateral and multilateral development partners needed to help close Egypt’s increased financing gaps in the context of recent shocks,” mission lead Ivanna Vladkova Hollar was quoted as saying in a press release.

Speculation is rife that Egypt’s new agreement with the IMF will be somewhere between $6 and $12 billion, far higher than the $3 billion agreed in 2022.

The EFF had previously stalled because of Egypt’s failure to free the currency exchange market and delays in privatising state-owned companies.

“With the resumption of the programme and the additional funding, devaluation is only a matter of time. It is not clear when it will happen but most likely sometime this month,” says Mohamed Seddiek, managing director of Synergy Capital, a Cairo-based financial advisory firm.

While Seddiek expects a managed float that allows the pound to depreciate slowly, Capital Economics, the UK-based research group, predicts any increase in the facility will be contingent on an initial devaluation and, more crucially, credible moves to a fully flexible exchange rate. This, says Capital Economics, means the currency would initially fall to around its current level in the parallel market and then appreciate in line with improvements in Egypt’s current account deficit. Egypt has been keeping the official exchange rate at LE30.9 since March.

The IMF is increasing its package to Egypt, said Georgieva, in recognition that it has been “one of the worst affected” countries by Covid-19, the war in Ukraine as a result of its high dependency on grain imports, and the proximity of the conflict in Gaza.

Houthi attacks on ships in the Red Sea resulted in Suez Canal receipts, one of Egypt’s main sources of foreign currency, falling 47 per cent year-on-year, dropping to $428 million in January as the number of ships passing through the waterway fell by a third.

The outlines of the new deal with the IMF started to unfold this week as the government announced it would ration its spending. On Sunday the cabinet said state investment plans would be reduced by 15 per cent in the current fiscal year. No new projects will be started this fiscal year, and priority will be given to projects that are 70 per cent or more complete.

The cabinet announcement was preceded by the Central Bank of Egypt’s (CBE) decision to raise interest rates by two per cent on 1 February. The overnight deposit rate, the overnight lending rate, and the main operation rate were raised to 21.25 per cent, 22.25 per cent, and 21.75 per cent respectively.

“Geopolitical uncertainty and ongoing maritime trade disruptions continue to raise domestic and global inflationary pressures,” read a CBE press statement.

Capital Economics viewed the move as a precursor to completing the IMF deal. “While inflation has been well above target for some time, the CBE has held off from hiking interest rates since August,” it said in a research note.

An expert who asked to remain anonymous agreed, noting that reductions in spending and the tightening of monetary policy are austerity measures the IMF invariably prescribes for countries facing high budget deficits and escalating inflation.

While January’s inflation rate has yet to be published, price increases have long dominated TV talk shows and family gatherings. “Crazy prices” is the most trending hashtag on social media platforms.

“The price of everything jumps daily,” complained Maha, a house help working in 6 October city. “Cooking oil, meat, milk, and even bread is becoming unaffordable,” she says.

Fear of future price hikes following a devaluation pushes people to act irrationally and buy more than they need, says Seddiek, a problem that is then compounded by traders, acting out of greed or the need to preserve their capital, increasing prices randomly.

Although inflation fell to 33.7 per cent in December, down from 38 per cent in September, it is expected to take an upward trend on the back of increases in electricity prices and services such as trains and subway train tickets and increased consumer spending ahead of the holy month of Ramadan, Dina Samir El-Wakkad, Dina Samir ElWakkad, a Master's researcher in international Economics, told Al-Ahram Weekly.

El-Wakkad also attributes price increases to monopolistic practices, something which “requires strong market oversight”.

On Monday, cabinet spokesperson Mohamed Al-Homosani announced that “measures are being taken that will contribute to injecting cash liquidity into the foreign exchange market and contribute to solving many of the problems that have emerged as a result of this challenge, the most important of which are the shortage and high prices of some goods and products.”

“The facilities extended through the deal should help restore confidence in the system and stem the parallel market by meeting the needs of importers,” says Seddiek.

Seddiek notes that news of a deal to sell land in Ras Al-Hikma, a prime beachside location on the northwest coast of Egypt, had helped cool the parallel market. According to Seddiek, proper development of the area could help double Egypt’s tourism inflows as long as the terms and conditions stipulate niche hotels and hotel chains, such as those operating in Southeast Asia, capable of attracting a new segment of tourists.

Moving forward, the state should prioritise spending on investment projects that have a positive impact on the economy and promote production, according to El-Wakkad.

She added that to realise the benefits of funds spent on supporting infrastructure to stimulate investments the state must allow the private sector a far more active role and formulate a stimulus package within a regulatory framework that creates an attractive and supportive investment climate.

* A version of this article appears in print in the 8 February, 2024 edition of Al-Ahram Weekly

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