Adopting an open exchange rate is one of the main IMF conditions for the $3 billion loan it agreed to extend to Egypt, the first tranche of which, $347 million, we received in December.
Further devaluation is needed in order for Egypt to demonstrate that it is honouring its commitment enough to receive the second tranche in October. The loan will help shore up an economy still struggling with the repercussions of the Russian-Ukrainian war.
Egypt has devalued the pound three times since March 2022, stripping it of 50 per cent of its value making a US dollar worth LE31. This pushed inflation up to 32.7 per cent in May, a level that has put the breadwinners in Egyptian households in a daily struggle to make ends meet. The core inflation rate, which measures the change in prices after excluding volatile items, namely food and fuel, were at an all-time high of 40 per cent during the same month.
Meanwhile the lack of foreign currency has revived a black market for the dollar where it is being traded for LE38-40. The gap between this and the official means that any devaluation would see a drop of at least seven more pounds for the dollar and thus raising dollar denominated expenses, namely imports, and pushing inflation to unprecedented levels.
The dilemma is that in order to limit the losses of devaluing the pound, Egypt needs to have a buffer of unencumbered foreign currency assets that it can use to protect the pound. However foreign investors and potential buyers of assets are reluctant to pump the foreign currency needed into the economy due to worries around the instability of the exchange rate.
The government is working on different fronts in order to avoid or at least postpone a new devaluation. Al-Sisi ruled out turning to international debt markets and instead said that the country needs to work to increase exports and limit imports. The government is also trying to accelerate the pace of the privatisation programme. Prime Minister Mustafa Madbouli said $2 billion worth of assets would be sold by the end of June.
On Sunday, the government struck a deal with the International Finance Corporation, the private sector arm of the World Bank, according to which the latter will develop a strategy for selling state assets, preparing and restructuring the companies to be divested before sale as well as implementing approved transactions. This is taking place amid a myriad of news about companies being prepared to be offered to investors. The list includes Bank of Alexandria, Ezz Al-Dekhila and Kima for Fertilisers. The planned sale of other companies, like the seven historic hotels that have been merged under one company, are said to be in the final stages of negotiations.
Limiting its dependence on the dollar as the main currency it uses to meet its foreign obligations is another plan that Egypt is working on. It is said that we have officially applied to join the BRICS alliance (which includes Brazil, Russia, India, China and South Africa), and BRICS is considering introducing a common currency that will allow member countries to drop the greenback altogether. Meanwhile Egypt and Russia are working on plan to reduce the use of the dollar in bilateral trade in favour of the Russian rouble.
There are also negotiations with India to barter Egyptian fertilisers and natural gas for Indian exports as part of a wider deal that could see New Delhi extending a credit line worth several billion dollars to Cairo, Reuters said, citing anonymous sources. The deal would also allow Egypt to pay for exports in the Indian rupee rather than the dollar.
The details of the deals will be finalised during the visit of the Indian prime minister to Egypt after the Eid vacation. It is worth noting that the Minister of Supply Ali Mosselhi told reporters last week that Egypt has been delaying payments for its wheat imports for some time due to lack of dollars.
To what extent all those steps might help to postpone further devaluation of the pound remains to be seen.
* A version of this article appears in print in the 22 June, 2023 edition of Al-Ahram Weekly