The pound is wrestling with the global crisis.. How do we understand the dilemma of the Egyptian economy?

In November 2016, Egypt witnessed a liberalization of the local currency exchange rate, and the Egyptian pound lost about half of its value against the dollar, as part of an economic reform program initiated by the government under which it obtained a loan from the International Monetary Fund worth $12 billion.

Barely six years passed, the Egyptian currency entered again into a downward spiral, and the Egyptians woke up last March to a new decline in the exchange rate, which the Egyptian authorities said was caused by the severe consequences of inflation that has continued to hit the whole world, especially after the Federal Bank raised The US interest rate to attract foreign investment to the United States, along with the economic repercussions of the Ukraine war and the Corona pandemic.

According to the expectations of international institutions, the wave of inflation accompanying the decline in the price of the Egyptian pound will not be the last.

While Egypt is currently seeking the support of the International Monetary Fund through a new loan, and justifies the current economic crisis by factors beyond its control, most notably Russia's war on Ukraine, some experts attribute the Egyptian economic crisis to long-term factors, many of which are not the result of the Ukrainian war.

There are fundamental reasons for the weakness of Egypt’s economy for decades that quickly revealed themselves in recent years, most notably the excessive reliance on imports against the weakness of domestic production, a scourge that has hit the country’s economy since the opening up in the 1970s, in addition to the skyrocketing rate of external borrowing over the past eight years.

In this report, we discuss these problems and their role in the current crisis.

Import..the curse of openness

Like many other countries in the third world, Egypt is a fragile economy linked to a strong global economy, as its economy is linked to the US dollar as it has been in practice since 1945, and therefore the success of the ruling regime in managing the economy depends on its ability to manage sources of hard currency, and expand the range of available opportunities To work millions of manpower in various sectors.

Throughout the eighties and nineties and the beginning of the new century, the Egyptian population did not exceed 80 million people, and as a result of good education and proficiency in Arabic, millions of Egyptians worked in the first Gulf boom after the oil price jump during the October 1973 war. We know it today.

On the one hand, they eased the burden of employment on the state, and made hard currency for it with their annual transfers.

Years passed, then, and imports grew rapidly, and the Egyptian economy succeeded in getting out of several pitfalls, using political maneuvers sometimes, as happened in the Gulf War in the early nineties, when Egypt's participation in the war prompted Western countries to write off half of the country's debts.

However, various variables, most notably the transformation of the political system and society in the wake of the Egyptian revolution in 2011, and the previous major demographic shifts, with the diminishing ability of the canal’s revenue, tourism and oil fields to cover the Egyptian economy’s deficit, and the shrinking of employment opportunities abroad, although the absolute value of Egyptian remittances continues in increase;

It prompted the Egyptian regime to search for a new approach to absorb these millions and launch a real industrial economy more integrated into the international labor market, so that Egypt would be more able to export and achieve sustainable development, as the government pledged.

But the country's new economic policies soon revealed their shortcomings.

The Egyptian government recently announced that it had achieved a leap described as historic, after the country’s exports rose for the year 2021 to 45.2 billion dollars, compared to 32.6 billion dollars in 2020, but the problem lies in the import numbers that reveal the difficult side of the current crisis and its pressure on the Egyptian pound.

According to the economic bulletin issued by the Ministry of Trade and Industry, Egyptian non-oil imports during 2021 amounted to about 76.7 billion dollars, in addition to about 12 billion dollars of oil, which means that the deficit in the trade balance amounted to 50%.

And because Egypt has been suffering from a trade deficit since 2004, which makes its foreign currency expenditures greater than its income, the solution from the Egyptian government’s point of view was to stop importing more than 800 brands, in a temporary attempt to stop the depletion of its dollar reserves, especially after the flight of about 15 A billion dollars in foreign investment outside the country, within just three weeks of the Russian attack on Ukraine, as investors flee emerging markets for safer investments in the United States that have raised interest.

What increases the horror of the crisis is the rise in global prices, as a direct result of the war, which means that the government and the central bank must implement an urgent plan to save the local currency and protect the local economy from a fierce inflation wave.

Loans..a cycle that never stops

With the increase in demand for the US dollar due to import, the value of the Egyptian pound is constantly threatened, and here the Central Bank has intervened in several decisions to protect and stabilize the national currency.

Banking expert Hisham Aref explained in an interview with Meydan that the Central Bank is now addressing this problem through a fixed scenario represented by loans, whether from countries or international institutions or even through bonds, in order to obtain foreign exchange and manage the need for investors to import goods The strategy.

And whenever there is an abundance in the US dollar, the price of the Egyptian pound becomes fixed, but if this equation is disturbed, the national currency begins to fall again, forcing the government to move the exchange rate, which is what the Egyptian administration is trying to avoid as much as possible after the exchange rate exceeded 18 pounds For one dollar, there was speculation that it might break the twenty-pound threshold.

What happens then if Egypt stops borrowing?

The absence of the dollar and the sharp depreciation of the national currency will raise import costs, increase inflation and reduce the purchasing power of consumers, leading to the government’s inability to pay its debts in hard currency, a scenario that previously led to the collapse of the economic situation in Venezuela, Lebanon and Argentina.

The problem here is that loans that solve the crisis in the short term, increase the burdens of the economy in the long run.

Since mid-2014, the external debt has tripled, until it recorded in April 2022 about 145.5 billion dollars, and there are estimates to increase the debts by about 100 billion dollars over the next five years if the government continues to borrow 15-20 billion dollars each year.

Economists describe the consequences of these monetary policies, which are based on fixing the national currency with loans, by saying that a large movement of the currency exchange rate usually occurs every seven or ten years.

The results appear to be similar by projecting them on what happened in Egypt in 2003 when former President Mubarak moved the price of the pound, and when the economic conditions worsened seven years later, the Egyptian revolution erupted in 2011, without the Transitional Military Council, and after it the short rule of President Morsi, was able to take the decision to float Sisi took it in 2016, and less than seven years later, the last move occurred in March 2022, as a result of the rise in global commodity prices, the flight of foreign investment, the decline in the number of tourists, and the continued excessive dependence of the Egyptian economy on these resources.

Egypt is scheduled to obtain, for the fourth time in six years, a new loan from the International Monetary Fund in order to provide its needs of foreign currency needed to purchase foodstuffs and pay its foreign debts, without revealing the amount of financial support requested by Cairo.

Although the Egyptian government announced an austerity policy that it had previously announced in 2016, some experts indicated that the IMF only helps in facing urgent economic difficulties, without addressing the underlying causes.

Production..the only difficult solution

The conclusion, then, is that Egypt depends on the outside to meet 50% of its food and drink needs, which made all government reforms contingent on the stability of the dollar and with it the global economy.

Although Sisi actually adopted an economic reform policy in 2016, the inflation rate fell to 11% after it reached 30% in 2017, (it has now risen to 14.9%), and foreign exchange reserves rose from less than $15 billion in late 2016 to About $37 billion currently, all government plans quickly dissipated during the current international crisis, which revealed the absence of any sustainable solutions away from borrowing and austerity policies, while the problem of chronic weak production remains without a real solution.

According to the statements of the Egyptian Finance Minister, taxes represent 70% of state revenues, and while the government relies on purchasing all its needs from abroad, it also obtains about three quarters of its resources from taxation, which reflects the fact that it has been hidden for many years that Egypt is not a productive country for its needs. interior.

The government, then, needs to build factories and encourage foreign investment in the manufacturing sectors, and then increase production to reach the break-even point or self-sufficiency in which the local market demand is equal to production, and then the state begins to export the surplus and reverse the trade balance in its favour, which ultimately reduces The extent of pressure on the dollar, without the government being forced every time to borrow to pay its debts and meet its needs.

The dilemma here is that the government has given top priority to large-scale infrastructure projects, without injecting equivalent funds into developing a heavy industrial sector.

The American economic magazine "Bloomberg" expects that the development of an industrial sector in Egypt will take several years, and that it will need huge funds to avoid a repetition of the expected old scenario.

Without this step, any president who heads the country will be forced to resort to the IMF again in the coming years in light of the production deficit at home and the pressured population increase, which will be followed by another float of the Egyptian pound as we are used to.

In the end, no regime that wants to solve a dilemma that lasted nearly half a century of the life of the Egyptian political economy;

Without adopting a comprehensive national project to invest in human resources and industrial capabilities in a way that meets the needs of the interior, reduces dependence on imports, gives millions of real diverse jobs, and moves the country to the boom that it has long been searching for since its industrial project faltered in the mid-seventies, and finally, saves the Egyptian pound from The curse of the renewed flotation, and gives it new, logical and necessary reasons for steadfastness in the face of foreign currencies and global crises.