What are Egypt's options to prevent the collapse of the pound against the dollar?

The Egyptian government expects the pound to continue to decline against the dollar (Al Jazeera)

Cairo -

The exchange rate of the Egyptian pound against the dollar tops the research headlines on a daily basis after the increase in the pace of free fall and the widening of the gap between the price in the parallel and official markets to an unprecedented level amid anticipation of government decisions and measures that should not be delayed any longer in announcing and implementing them, according to experts, economic analysts and businessmen. .

Traders in the parallel market said that the dollar exceeded 71 pounds, compared to about 30.85 pounds in local banks, with a gap of up to 130%. Most of this increase occurred after the war on the Gaza Strip on the seventh of last October and the absence of clear government plans to resolve the crisis.

The economic crisis in Egypt is getting worse over time, according to a report issued by the Capital Economics research institution, indicating the worsening foreign exchange shortage and Egypt’s increased need for an agreement with the International Monetary Fund.

Egyptians bite their fingers

The Egyptians are looking with concern at the results of the International Monetary Fund team's visit to Cairo to put the final touches to resume discussions on the $3 billion bailout program and increase the loan to confront the repercussions of the war in the Gaza Strip on the Egyptian economy.

The price of the pound in the parallel market exceeded 71 pounds per dollar, compared to about 30.85 pounds in local banks (Al Jazeera)

The government also seems unable to take any clear step towards bridging the gap between the two exchange rates and achieving some balance to restore the confidence of citizens and investors and contain the growing concern about further increasing pressures on the economic situation and societal stability, without reaching the IMF agreement, which is considered a lifeline. This indicates Egypt's limited options for dealing with the crisis.

Egypt and the “hair” of the IMF

Although Cairo reached an agreement with the International Monetary Fund on a new rescue package in December 2022; It only received the first installment of the initial $3 billion loan, amounting to $347 million; Because of the Fund’s conditions related to liberalizing the exchange rate of the pound and accelerating the pace of selling state assets.

In his diagnosis of the economic crisis and its treatment, President Abdel Fattah El-Sisi believes that the “dollar gap” is the main reason for this crisis, and therefore it must be reduced by reducing the import bill in dollars, increasing exports in dollars, and encouraging industry.

During his meeting with a number of media professionals last week, Al-Sisi reduced his country’s crisis to “the scarcity of the dollar,” and considered that its solution would be the solution to all problems, saying: “If the dollar crisis is resolved, it will be up to you, Egypt, and I will not care about anything else.”

In order to achieve this, Al-Sisi said: “What is required is that, in a short period of time, we reach the rates of export and manufacturing within Egypt, in a way that makes the size of the dollar available for spending on imports,” that is, increasing it to 100 billion dollars.

Al-Sisi: What is required is that, in a short period of time, we reach the rates of export and manufacturing within Egypt, in a way that makes the size of the dollar available to spend on imports” (social media)

Egypt's average import bill from abroad is estimated at about $90 billion, compared to total exports (commodity and petroleum) of about $52 billion, including $35 billion in merchandise exports, with an average deficit of $38 billion in the trade balance, without taking into account debt installments and interest.

The Egyptian debt service, including debt installments and interest, will amount to about $42.3 billion during the year 2024, which is the highest bill ever required to be paid in one year, after the external debt jumped to about $165 billion and a cash reserve that does not exceed $35.2 billion.

At a time when the Egyptian state’s foreign exchange resources are witnessing a noticeable decline as a result of the continuation of the war in the Gaza Strip and its negative effects on the economy, such as the decline in revenues from the Suez Canal and tourism after they achieved the highest level last year, in addition to the decline in remittances from Egyptians abroad by about 30%, which are the most important sources. The country's foreign exchange.

The United Nations Conference on Trade and Development (UNCTAD) said on Friday that commercial shipping traffic between Europe and Asia, passing through the Egyptian Suez Canal, has declined in the past two months by 42%.

The Suez Canal recorded the highest revenues in its history during the last fiscal year, which began in June 2022 until the end of July 2023, amounting to $9.4 billion.

Egypt's tourism revenues increased to about $13.2 billion last year, and the number of tourist arrivals increased to 14.91 million tourists.

Egypt's options for exiting the crisis

Regarding Egypt’s options to address the economic problem, the banking expert and former Chairman of the Board of Directors of Blom Bank, Tarek Metwally, expressed his belief that “Egypt’s options have become limited since the outbreak of the crisis at the beginning of 2022, and that any delay will have a large economic and social cost,” stressing that the problem is not Floating the exchange rate of the pound, but rather by making the dollar available in the markets.

Egypt's foreign exchange resources are witnessing a noticeable decline as a result of the continuation of the war in the Gaza Strip and its negative effects on the economy, such as the decline in Suez Canal revenues (Getty)

Metwally explained in his speech to Al Jazeera Net that the dollar crisis in Egypt is not new, but rather it is old and is being renewed due to problems in the structure of the Egyptian economy for decades, which are that it is a rentier economy and not a productive one, and Egypt’s well-known dollar sources, which are remittances from Egyptians abroad, Suez Canal revenues, and tourism, all of which are affected. Due to external factors, we are witnessing a renewed dollar shortage crisis with every political turmoil in the region.

Accordingly, Metwally believes that the solution is to shift to a productive economy based on production and export to avoid any external influences or reduce their impact. “Unfortunately, all economic reform programs, including the 2016 program, succeeded in achieving financial and monetary reform and failed in structural reform.”

The banking expert added that the other problem is that those in charge of managing the economy replace investment with borrowing on the grounds that it is the cheapest and easiest, because real investment is sustainable development, but borrowing is debt and a burden on the economy.

Expert Metwally identified 3 steps to get out of the current problem: It is taking advantage of the state’s huge assets, whether by selling them or leasing them to its administrations, in a way that increases their size and increases their revenues, relying on investment instead of borrowing, shifting to a productive economy rather than a rentier economy, and finally changing the current officials responsible for managing the economic file with others capable of creating solutions and restoring the confidence of citizens and investors.

Sawiris' recipe for resolving the crisis

In turn, Egyptian billionaire Naguib Sawiris warned in a post on the “X” website of the delay in the government’s announcement of urgent decisions, describing it as a “disaster,” and said, “The delay in the required decisions... is a disaster that will increase the extent of the critical situation we are in.”

The delay in the required decisions...a disaster that will increase the extent of the critical situation we are in...and any attempt to remedy the duality of the exchange rate by offering the dollar at a lower price than the black market will not be successful. The correct thing is to start from the black market price and it will decrease gradually after there is an offer. Everyone who has it will agree to it. Selling via channels…

— Naguib Sawiris (@NaguibSawiris) January 29, 2024

The path to finding a solution to the economic crisis that Egypt is going through is still long, as the General Coordinator of the National Dialogue, Diaa Rashwan, announced that the current conditions of the economy will be at the forefront of the second phase of the National Dialogue, which has resumed its work and activities.

In his perception of the time period to solve the economic problem, Egyptian Prime Minister Mostafa Madbouly said earlier that he is not talking about 50 years or 20 years, but only 6 years to overcome the economic crisis and restore the growth path that the country was on a few years ago before the global crisis. .

Time is running out... and urgent solutions are ineffective

The economic expert and member of the Economic Committee of the Tagammu Party, Hani Al-Husseini, described the dollar crisis in Egypt “as a symptom and not a disease, and it is the result of years of mismanagement and diagnosing the disease and treating it with tools that exacerbated the economic problem instead of alleviating or solving it, and those responsible for the economic file were very late in setting a prescription.” An effective recipe for treating these problems.

Al-Husseini, in statements to Al-Jazeera Net, called for sufficient transparency, whether in presenting problems or solving them, but so far the government holds external factors responsible for the deterioration of economic conditions, which is an unacceptable justification. There are other reasons, and the government is a major part of them, but it seems that going with the IMF is the quickest, most painful and difficult solution to ensure rapid, but unsustainable, cash flows.

Al-Husseini believed that most of the effective practical solutions are medium and long-term solutions, while the current situation requires urgent solutions, and therefore the government did not leave itself room for choice, indicating that reducing the pound sharply or gradually would both harm the economy and the citizen more, but it is inevitable, It is an urgent step and not a therapeutic step because before taking such a step we must remember that all previous reduction decisions were followed by other reductions due to their economic infeasibility.

According to Al-Husseini, the solutions do not lie in reducing the value of the pound, but rather in adopting new and different economic policies based on creating a development renaissance that generates dollar revenues, stopping spending on any projects that do not generate financial revenues, increasing the cash reserve, and reducing borrowing. Thus, the step to reduce the pound comes gradually with a sufficient balance. It is hard currency, and before that, to exclude those in charge of the economic file with others who are more sophisticated and realistic.

Source: Al Jazeera