Egypt is closer than ever - according to Egyptian officials at the International Monetary Fund - to signing a long-awaited agreement after arduous negotiations with the Fund to obtain a new loan, during which economic reform measures were examined, foremost of which is the pound exchange rate.
Over the course of 2020 and 2021, the Central Bank of Egypt, headed by its former governor, Tarek Amer, restored the policy of stabilizing the exchange rate of the pound, and raising its value by 15% against the dollar;
To become around 15.7 pounds instead of about 18 pounds.
But he returned and partially abandoned his policy (managed flotation) last March, and devalued the pound by 15% at once, under the weight of the flight of hot money, which Egyptian Finance Minister Mohamed Maait estimated at about $22 billion later, against the backdrop of the Russian-Ukrainian war. But it wasn't enough.
Since that time, the Egyptian pound has continued its gradual decline journey until it exceeded the level of 19.62 pounds to the dollar, losing about 25% of its value compared to its level before last March 20, pending the results of negotiations with the International Monetary Fund, which is a certificate of confidence for the Egyptian economy, and opens the door In front of the return of apprehensive and anticipating foreign investors.
Despite the decline in the exchange rate of the pound against the dollar to a historical level, the worst is yet to come, as Bloomberg Agency believes that the Egyptian pound needs to fall by about 14%, or the equivalent of 24.6 pounds against the dollar.
The demands of the International Monetary Fund during the difficult negotiations - which began since last March - to allow greater flexibility in the price of the pound, as one of the main conditions for reaching an agreement on the approval of a new financial support package for Egypt;
It made Egyptian officials assure that the Egyptian government with the flexibility of the Egyptian pound exchange rate.
The Egyptian Minister of Planning, Hala Al-Saeed, is the first government official to publicly support allowing more flexibility in the exchange rate of the pound against the dollar, last September, according to the specialized economic website "Enterprise", which added that Hala Al-Saeed's statements come after weeks of speculation about the establishment of a governor. The new central bank, Hassan Abdullah, further depreciated the pound to address the imbalance in the country's external situation, and gave a strong impetus to the country's efforts to obtain a new loan from the IMF.
Reasons for pressure on the pound
There are several reasons that pressure the Egyptian pound to decline sharply and continuously, and experts and analysts pointed to a number of them:
The foreign exchange reserve decreased from 45.5 billion dollars in March 2020, to 33.19 billion dollars last August.
Stabilizing the value of the pound and adopting a managed float policy instead of supply and demand.
Public debt worsened to 409 billion dollars;
As the largest city in the Arab world.
The exit of more than 20 billion dollars (hot money) from government debt instruments.
The high cost of importing basic commodities and fuel due to the war in Ukraine.
Increasing the gap between exports and imports by more than 40 billion dollars.
The size of the financing gap widened this year to about $32 billion.
weakness after strength
Professor of economics at Egyptian universities, Alia Al-Mahdi, believes that "the issue of the exchange rate of the pound is not the only one in Egypt's discussions with the International Monetary Fund, but it tops the economic headlines. There is talk of strengthening the role of the private sector, providing social protection for the neediest, and reducing the debt ratio."
As for the continued offering of the pound exchange rate in all of Egypt’s discussions with the International Monetary Fund, I explained to Al Jazeera Net that the government is devaluing the pound and then later fixing the exchange rate, and therefore a complete liberalization of the pound exchange rate does not occur.
Regarding the repercussions of liberalizing the exchange rate, Al-Mahdi stressed that this step is important;
Because it will not impose economic restrictions on the state, and leaving it to supply and demand will reflect the real economic situation of the pound, and will help increase Egyptian exports, and reduce the import bill instead of imposing restrictions on it.
Thus the issue of exchange rate liberalization is a core idea for the IMF and the World Bank.
If the liberalization of the exchange rate is a positive step, why does the state not implement it and abide by it?
The professor of economics answers that governments have a perception that the value of the pound is part of the value of the economy, while there are countries that struggle to keep the price of their currency low. As for the concerns raised about high inflation, they are not accurate.
Because the bulk of inflation has internal and not external causes, emphasizing that the citizen will be harmed by the devaluation of the pound because the value of his savings will decrease and the purchasing power of the pound will decline, but it will protect the citizen from continuing exposure to shocks later.
But Al-Mahdi stressed that liberalizing the exchange rate of the pound will not be a solution to all the problems of the economy, and it cannot be imagined, noting that the value of the pound is part of the state’s monetary policy, and it alone is not sufficient to address the country’s economic problems, which can be treated by adopting an integrated policy with regard to politics. Financial, monetary, commercial, productive, and services related to education, health and social protection.
Another loan
In the event that an agreement is officially announced, this will be the fourth time for Egypt in 6 years that it obtains a loan from the International Monetary Fund to protect the economy from the specter of collapse in light of the scarcity of dollar resources and the increase in external obligations.
In late 2016, Egypt began implementing a 3-year program with the IMF, which included a $12 billion loan, coinciding with a sharp devaluation of the currency and a reduction in subsidies.
In 2020, Egypt obtained from the fund - under a credit standby agreement - $5.2 billion, in addition to $2.8 billion under the rapid financing instrument to address the effects of the repercussions of the Corona pandemic.
The pound’s decline more than expected may stimulate inflation and increase the burden on domestic consumption, which could lead to a slowdown in growth between 3.3 and 3.8% in 2022-2023, compared to 6.2% in 2021-2022, according to Fitch Solutions, a research company affiliated with Fitch Ratings. credit standing.
According to data from the Central Agency for Public Mobilization and Statistics (official) in Egypt, the annual consumer price inflation in Egyptian cities recorded its highest level in nearly 4 years, reaching 15% last September.
pound victim
On the other hand, economic expert Ibrahim Nawar saw that “the Egyptian pound is a victim of economic deficit and government policy failure, and an attempt to save it will not work, not by a gradual reduction or a sudden reduction; the central bank has tried to intervene in the foreign exchange market using various mechanisms, including dollar auctions in 2012, then devaluing the pound and raising the interest rate by a large percentage once in November 2016, then reducing it again by a large percentage last March, and now we are talking about the need to reduce its value again by an administrative decision, with the Central Bank continuing to resort to paying Deficit in the trade balance and debt service from its book accounts.
And he warned - in statements to Al-Jazeera Net - that with the collapse of the net foreign assets of the banking system to below zero, the central bank is actually facing what can now be described as a "cash disaster" that cannot be treated by reducing the pound and raising interest rates together, although this is necessary as a measure A precautionary measure to prevent the monetary situation from deteriorating further and further."
treatment
According to Nawar, the treatment should include an integrated package of the following procedures:
Reducing the price of the pound once to 22 pounds to the dollar.
Raise the base interest rate to at least 18-19%.
Immediately reduce government spending by at least 20% to prevent an exacerbation of public debt.
Reduce the value-added tax by at least 5%.
Increasing taxes on energy companies operating in the local market.
Immediately start returning the assets of the Sovereign Fund to the people, and selling state-owned companies and their various bodies at preferential prices to Egyptians.
Reducing all government offices’ budgets, including ministries and governorates, by 50%.
Cancellation of all administrative decisions that led to the current commodity bottlenecks in the markets.
Entering into serious negotiations with creditors to reschedule the domestic and foreign debt, the service of which consumes approximately 20% of GDP.
Re-evaluating all major projects that drain a large proportion of the national income, and have no return in the foreseeable future.