Postivity galore

Niveen Wahish , Tuesday 5 Mar 2024

Niveen Wahish reviews the positive economic impacts of the Ras Al-Hekma deal signed last week

Postivity galore

 

Mais, a Syrian citizen, comes to Egypt every few months to check on her son who goes to one of the universities in the New Administrative Capital (NAC). She exchanges dollars in the parallel market whenever she runs out of money to cover her expenses.

When she arrived in Cairo almost two weeks ago, she exchanged dollars at around LE52, down from LE60 when she was last here in November. The reason was the announcement of a $35 billion deal under which ADQ, the Abu Dhabi-based development and holding company, will develop Ras Al-Hekma, 170 million square metres of prime coastal land on the North Coast.

This Monday, she was told the rate was around LE43 per dollar. The latest drop followed announcements that $10 billion in fresh money from the deal has been delivered to the Central Bank of Egypt (CBE). The new rate is a marked drop from the around LE70 reached on the parallel market in January.  

With the influx of money from the deal and the drop in the dollar rate on the parallel market, people are expecting a devaluation to be announced soon.

The supply of foreign currency “should make officials more comfortable with pushing ahead with a devaluation of the pound and move to a flexible exchange-rate regime,” UK-based research house Capital Economics said in a note last week.

The drop in the value of the dollar on the parallel market clarifies the real value of the pound and makes a devaluation easier, said one banker who preferred to remain anonymous. “Going from LE31, the current official rate for the dollar to around LE40, the going rate in the parallel market, is manageable,” she added.

Moreover, “such a move is unlikely to be inflationary in the near term given the sharp appreciation of the pound in the parallel market over the past couple of weeks,” US investment bank Goldman Sachs said in a note issued on 27 February.

Egypt’s annual headline inflation rate recorded 29.8 per cent in January.

A devaluation is likely to be followed by the inking of a deal with the International Monetary Fund (IMF), which would signal the flow of more dollars into the system. Letting go of control of the currency has been one of the sticking points in discussions of an agreement, but these discussions seem now to be resolved.

“On the key issues we have full agreement,” IMF Managing Director Kristalina Georgieva told Reuters on the sidelines of a G20 finance ministers meeting in Sao Paolo in Brazil recently. She said she expected that the agreement with Egypt could be ready in weeks.

“There was the hope to complete the reviews by the time the fasting month of Ramadan begins… Let’s see where we land,” Georgieva said, adding that there is also the “likelihood” of augmenting the programme to help Egypt’s economy more generally, which has been severely impacted by the war in Gaza.

She would not specify the exact amount, but experts estimate it could be anywhere from $6 to $12 billion. Egypt’s original deal with the IMF, signed in December 2022, was for $3 billion. Only one installment of around $370 million had been disbursed before the agreement stalled because of differences over policy implementation with the government.  

As a foreigner exchanging dollars in Egypt, Mais is disappointed that her dollars now give her fewer pounds. But for Egyptians news that the dollar rate on the parallel market has fallen has given them renewed hope that at least the price hikes that have hit the country might finally slow down.

Experts have explained that consumers should not expect an immediate drop in prices, however, because traders have to first sell the goods they bought at the higher dollar rate. In the meantime, Prime Minister Mustafa Madbouli is following up on the release of goods from the ports.

In a cabinet meeting on Monday, Madbouli said that given the increases in dollar resources in recent days, whether from the Ras Al-Hekma deal or from others, presidential directives have been issued to quickly release goods, especially food commodities, medicines, fodder, and production requirements.

This will stabilise prices and lead to their eventual decline, he said.

While the dollars from the deal have entered the CBE coffers, they have not yet made their way into the wider banking system, said the anonymous banker. The banks are not yet able to open letters of credit, unless for basic food items, she said, adding that before opening new letters of credit there is a need to pay for goods held up in customs and enable foreign companies to repatriate their profits.

Nonetheless, the fact that the funds have arrived has spurred positive sentiment about the Egyptian economy, she said. Improved confidence and the restoration of liquidity in the official foreign-exchange market should see hard currency inflows pick up, Goldman Sachs said.

“Portfolio inflows, the restoration of two-way foreign exchange liquidity, the devaluation of the pound, and high nominal rates should precipitate the return of inflows into the local debt market,” it noted.

It also listed remittances as another potential source of hard currency. The latter had been not coming through the official rates and were instead traded on the parallel market.

Goldman Sachs expects other real-estate investments similar to that in Ras Al-Hekma in the near term. In addition, they expect a reversal in the dollarisation trend witnessed over the past couple of years as a function of increased confidence.

The deal has also reduced fears of a sovereign default, according to Capital Economics.

However, the new developments, fears banking expert Gamal Wagdy, could encourage further borrowing from the international markets and a return to a reliance on hot money. The latter was the cause of Egypt’s problems in the first place, he stressed.

Egypt’s debt-to-GDP ratio has been consistently increasing over the past decade. The ratio of debt to GDP surged to over 110 per cent in 2016 after the structural reforms to the economy and currency devaluation, said a note by N Gage Consulting.

The government aims to reduce this ratio to 80 per cent by 2025 and to 77 per cent by 2033, N Gage added.

Wagdy is against selling stakes in state-owned companies for the sake of cash. The sales are a way of attracting immediate money, but they mean losing a sustainable source of income for the future, especially since the companies involved are all successful enterprises and otherwise no one would have thought of buying them.

He would prefer foreign investment to set up new projects that create new jobs and boost manufacturing rather than cherry pick already existing entities.

The government has said it targets revenues of $6.5 billion from the sale of stakes in state-owned companies in the current fiscal year. Among the candidates up for grabs is Wataniya Fuelling Stations. Press reports say the cabinet is reviewing final offers for 30 per cent of the company.

Also waiting to be picked up is United Bank, which is being looked at by the Qatar Islamic Bank (QIB) and the Kuwait Finance House.


* A version of this article appears in print in the 7 March, 2024 edition of Al-Ahram Weekly

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