Some had been wondering why it was taking so long, with hard currency shortages and a rampant parallel market throughout 2023 making the devaluation of the currency, a corrective move, unavoidable.
The CBE had been delaying the latest devaluation until it had enough dollar buffer to prevent the value of the dollar against the pound from overshooting. The investment from the Ras Al-Hikma deal gave the CBE that opportunity, pumping in an initial $10 billion in fresh money with a similar amount expected in about two months. And yet letting go of the currency was still a painful decision, with Egyptians wondering how much further their income will be impacted. Record levels of inflation throughout last year have cut into their purchasing power.
What was even more unexpected is the six per cent interest rate hike. This measure was taken to “accelerate the monetary tightening process in order to fast-track the disinflation path and ensure a decline in underlying inflation,” as the statement by the CBE’s Monetary Policy Committee (MPC) said. “The MPC emphasises that anchoring inflation expectations is critical and warrants this policy response to bring the real interest rate into positive territory,” it added.
The eventful day, what is more, wrapped up with the announcement of an $8 billion deal with the International Monetary Fund (IMF). The latter was no surprise. For months the IMF had said adopting a flexible exchange rate and tightening monetary policy were a prerequisite to reaching an agreement. Recognising the troubles faced by the Egyptian economy, especially following the war in Gaza and the subsequent fallout on tourism and Suez Canal revenues, the IMF granted Egypt an augmented $8 billion agreement. The original, signed in December 2022, had been for $3 billion, but it had stalled because of Egypt’s failure to meet the prerequisites of the IMF.
In addition to Egypt committing to a flexible exchange rate system, the new deal calls for reducing inflation, tightening fiscal policy, decreasing debt-to-GDP ratio, and rationalising state spending as well as structural reforms. There is no doubt that for the past three years Egypt’s economy, like that of many developing countries, had fallen victim to Covid-19, the war in Ukraine, and unprecedented global inflation.
More recently it has been affected further by regional unrest on its borders in Gaza and Sudan. But none of this should obscure structural faults in the economy starting with overreliance on borrowing, weak balance of payments due to limited FDIs and a still-humble exports figure as well as the recent decline in remittance inflows due to the presence of a buoyant parallel market. There is a definite need for revisiting economic policies, removing bureaucratic barriers, and implementing inviting policies for the private sector.
It is certain that recent National Dialogue discussions about the economy summed up what needs to be done, but quick implementation is crucial to instilling confidence in the Egyptian economy once again. A set of moves during the last few days magnified hopes that the situation is improving. The government has started to clear the import backlog and the pace is expected to speed up with the increased availability of dollars. Besides the $1.3 billion in strategic goods including food and medicine, experts put the backlog of other imports anywhere between $5 and $14 billion. This will help to contain the inflationary pressure of devaluation as more commodities become available.
Most Egyptian banks have removed foreign spending limits on credit cards, a restriction that weighed down on the profits of many small businesses which pay online for services needed to proceed with their activities. There are prospects for more dollar inflows with talk of a number of international partners, including the World Bank, providing Egypt with up to $5 billion as well as expectations of increased portfolio investments in sovereign bonds in light of the current high interest rate and stable currency.
* A version of this article appears in print in the 14 March, 2024 edition of Al-Ahram Weekly
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