After the exchange rate of the Egyptian pound stabilized for a long time at 15.65 pounds to the dollar, it fell again against the dollar since March 2022 until now.
Through gradual reductions, the exchange rate reached 27.9 pounds to the dollar on Tuesday, January 10, 2023, but the decline that occurred on Wednesday, January 11, 2023 raised many concerns, as the dollar exchange rate reached 32 pounds, but with The end of trading today, Monday, improved its exchange rate, to settle near 29.7 pounds to the dollar.
This made experts provide more than one explanation for this sudden and emergency improvement. Some of them saw that this improvement is a result of the central bank exercising its role, according to the International Monetary Fund agreement that provides for the adoption of a flexible exchange rate, with the right of the central bank to intervene when there is a sharp rise in the exchange rate. .
However, Egyptian and foreign media outlets published reports stating that foreign investment funds have returned to work in treasury bills, and that some of them have already pumped about $250 million through an Egyptian bank, to buy these bills, whose interest rate exceeded the ceiling of 21%.
Here, some sensed the danger of the government resorting again to employing hot money in addressing the financing crisis in general, and achieving stability in the exchange rate in particular.
Hot money is the money of foreign investors and institutions looking for very high financial returns through short-term investments in bonds of all kinds, bank deposits, and others.
Regarding the Egyptian government's position on hot money, Egyptian Finance Minister Mohamed Maait said in late June that "the lesson we learned is that you cannot rely on this type of investment, it only comes to obtain high returns, and as soon as a shock occurs until he leaves the country."
It is worth noting that Egypt relied on this money greatly after it reached an agreement with the IMF in November 2016, and its value fluctuated between $14 billion and $30 billion. However, after the Russian war on Ukraine, these funds left Egypt in a large way, as it was estimated Its value is about $ 22 billion, which created a large gap in the Egyptian balance of payments for the fiscal year 2021-2022.
These funds had a major role in stabilizing the exchange rate of the pound against foreign currencies for a long time, but this was not without a price, as the interest burdens on these funds were paid at the highest interest rate in the world at the time, which contributed to inflating the bill for foreign investment profits in Egypt.
After this narration, we find that the question that these lines must answer is: Where do the risks of these funds lie for the Egyptian economy?
Hot money risk
The funding crisis that Egypt has been experiencing for a while makes the economic policy maker work during the coming period to find radical solutions that seek to bridge the dollar gap for Egypt's economic dealings with the outside world.
There is no doubt that the Egyptian government's return to hot money will result in the following risks:
The continued situation of the Egyptian economy, especially the exchange rate and foreign exchange reserves, under the pressure of the movement of these funds, which are looking for any increase in the interest rate in the world and heading towards it. for these countries.
According to the statements of the Minister of Finance, Egypt has suffered from the exit of hot money from Egypt 3 times.
The government's continued use of these funds to maintain the stability of the exchange rate or to secure the foreign exchange reserves makes these indicators not reflective of the true performance of the Egyptian economy, because the principle is that the stability of the exchange rate or the securing of foreign exchange reserves come from own resources, and not from debts, especially from debts. Hot money debt.
These funds increase the burdens of public indebtedness for Egypt for long periods, and confuse the situation of the state’s general budget, as the debt interest bill constitutes the components of public spending, and its value in the fiscal year 2022-2023 budget amounted to about 690 billion pounds (23.24 billion dollars), and there is no doubt that This value will increase in light of the Egyptian government's expansion of indebtedness during the year.
The government resorts to using hot money, as well as the rest of the debts, without presenting a vision or program about getting rid of these funds and these debts, so that there is room in the state’s general budget to spend on education, health and infrastructure, and thus the government has transformed exceptional tools into permanent tools that cannot be abandoned about it, despite the exorbitant benefits incurred by the debt to the budget.
These funds force the financial policy maker to adopt high interest rates on the bills, and thus the interest rate prevailing in the market as well, which is not commensurate with the situation of the Egyptian economy, which desperately needs to reduce the interest rate, to secure less expensive financing for investment and production.
The persistence of the high interest rate on treasury bills that absorb hot money encourages local investors to leave productive and service activities, and go to put their money in this type of investment, which guarantees them high and guaranteed returns without risk.
Hence, the dependence of the Egyptian economy on the outside increases.
Hot money represents one of the tributaries of the exit of foreign exchange from Egypt. At the end of each period - quarterly or every year - the owners of these funds work to exit their profits from Egypt to their original sources, and that is in foreign currencies.
The Egyptian balance of payments for the year 2021-2022 monitored investment payments abroad at about $16.8, and they include two items: profits accrued on foreign direct investment in Egypt, and interest and distributions paid on non-resident investments in bonds and securities.
What's the alternative?
If the state of extreme necessity represents the Egyptian government resorting to hot money, then let it be during the short term, and not more than a year, then the alternative is to narrow the demand gap for the dollar, according to a studied economic mechanism, according to the following tracks:
Providing local ingredients and raw materials for the national industry, and not importing similar ones from abroad.
Stopping the path of privatization of public companies, and working to reform them so that they become an important tributary for the production of goods for the Egyptian market.
Adopting a group of projects to absorb the unofficial savings that are wasted in speculations on real estate, the exchange rate, or the stock market, or illegal money investment operations, provided that these projects are in the form of joint stock companies, and public institutions such as banks, insurance companies, and others have a share of up to 30%, To ensure the proper implementation of these projects, and to reassure individuals to buy the shares of these projects.