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Recent reforms have put the economy on the right path, or so the government hopes. Niveen Wahish and Sherine Abdel-Razek on whether official optimism is well founded
By Niveen Wahish and Sherine Abdel-Razek
A double whammy of floatation of the Egyptian pound and reduced fuel subsidies has resulted in what many commentators describe as a rollercoaster economic ride.
Both measures had been trailed for a month after the International Monetary Fund (IMF) made it clear no loan would be forthcoming unless they were implemented. Now an IMF deal could be finalised almost immediately.
“The IMF Executive Board will meet on Friday, 11 November, to discuss Egypt’s request for financial assistance under an Extended Fund Facility for the amount of $12 billion,” said Christine Lagarde, managing director of the IMF, in a statement on Tuesday.
Egypt has requested a $12 billion loan over a three-year period from the IMF. If approved, Cairo could soon be in receipt of the first tranche of $2.5 billion in funding.
Free marketeers have hailed the government’s move to liberalise the exchange rate and cut subsidies. International credit rating agency Moody’s said this week that devaluation of the pound was credit positive for Egyptian banks because it will increase the availability of US dollars and so support economic activity.
The stock market reacted positively to the reforms. The market’s main EGX30 index gained 18.4 per cent in the four sessions following floatation. On Tuesday the market closed at 10,097 points, its highest level since June 2008.
Though investment banks say a reasonable exchange rate for the pound is between LE12 and LE13 to the dollar since floatation, the pound has been trading at close to LE18 per dollar and LE20 per euro.
“Before the floatation we were told that speculation was inflating the value of the dollar but this seems not to be the case,” says Alia Ahmed, a young graphic designer.
“Now prices have all but doubled,” she says.
People with hard currency commitments have been dealt a particularly heavy blow.
“I have to pay for my daughter’s university abroad,” says Soha Shehab, “and now it is double what I budgeted for. It’s not as if it’s something I can just stop buying. She must finish her schooling.”
Students at the American University in Cairo, who have to pay part of their tuition fees in dollars, have also been hit by the falling value of the pound.
Meanwhile, reduced fuel subsidies have triggered a domino effect as increased costs are passed on to consumers. From taxis to vegetables, prices are rocketing.
While there has been no official increase in the tariffs for white taxis, drivers are demanding higher fares with many refusing to switch on their meters.
Microbus fares have jumped by a third on average, though operators say the increase does not factor in higher costs of maintenance and spare parts.
Even the most conservative estimates see inflation increasing to 18 per cent. Beltone Financial suspects the real figure will be much higher and could reach 25 to 30 per cent during the first quarter of 2017.
Prime Holding expects food, beverages and medical care to be hit most severely by the pound’s devaluation. Before the floatation the sectors were securing their dollar needs at the official rate.
But is such bitter medicine really needed?
Experts warn that there is no quick solution to Egypt’s economic problems: The dollar shortage will not ease overnight, the budget deficit will take time to bring under control and investments are unlikely to pour back into Egypt immediately.
A banker, speaking on condition of anonymity, says people who bought dollars on the black market for LE18 will wait until the rates offered by banks reach that figure before off-loading the currency.
Nor is the new exchange rate system without teething problems.
“We are opening letters of credit for importers, albeit with a lesser value,” says one banking source. He adds that his bank, as yet, is not selling dollars except in the case of customers travelling abroad and it will not do so until it has accrued enough to begin selling them.
“Transactions remain subdued. The banks simply do not have enough dollars to satisfy clients’ needs. Customers are holding on to their green backs in anticipation that prices will increase,” says Sherif Othman, head of treasury at a private sector bank.
“We can only say the new system has succeeded when banks have enough liquidity to cover the demand for dollars and transactions are conducted at a lower exchange rate than we are seeing now.”
Othman expects it will take at least a year. “When the pound was devalued in January 2003 it took a year and half for things to settle down and the dollar to trade at a fair price.”
The floatation of the Egyptian pound ends a major constraint on economic activity, insists Deputy Minister of Finance Yasser Sobhi.
“Egypt has a lot of potential and there is huge interest on the part of investors. This is our chance to unleash that potential and boost economic activity,” argues Sobhi. He adds that resolving macro-economic imbalances will have a positive impact on growth and job creation.
The economy grew at 4.3 per cent in 2015-16. The targeted growth rate for 2016-17 is 4.2 per cent, according to the World Bank.
Prime Holding does not expect to see significant increases in FDIs for at least a year. Investors have been avoiding Egypt, it says, because of the existence of two exchange rates, official and black market, and the obstacles they face in repatriating profits.
Prime Holding does, however, expect private investments to pick up. It anticipates a fall in interest rates by the fourth quarter of 2016-17, as soon as the shock of floatation is absorbed.
In the meantime, banks are acting to reassure the market. Restrictions on hard currency spending with credit and debit cards have been eased. They are also adopting measures to attract dollars. Remittances can now be transferred without commission and interest rates on deposits are going up. State-owned banks are offering 20 per cent and 16 per cent interest on three-year and 18-month deposits respectively and many private banks are following suit.
By Monday over LE20 billion worth of deposit certificates had been bought as customers cashed in older, lower yielding bonds. To discourage holders of Suez Canal certificates from cashing them, the government has raised interest rates from 12 to 15.5 per cent.
The devaluation and subsidy cuts have been hailed at textbook reforms though critics of the moves say they should have been preceded by better protection for the poorest members of society. A study by the Egyptian Centre for Economic and Social Rights, published under the title Black Thursday’s Policies: Liberalisation without Protection, accuses the government of dragging its feet over developing an effective safety net, funding social security programmes and restructuring pension schemes. The study claims the reforms could increase poverty rates to unprecedented levels. According to the Central Agency for Public Mobilisation and Statistics (CAPMAS), 27 per cent of the Egyptian population is currently living in poverty.
Sobhi counters such arguments by stressing that reduced subsidies not only help fiscal consolidation but free up money to be spent on health and education programmes and on selected social subsidies and infrastructure projects.
© Al Ahram Weekly 2016
