What are the benefits of reducing the pound and raising interest on Egyptians?

Egypt devalued the pound, so it touched the level of 50 pounds to the dollar, and also raised the interest rate, reaching 27.25% (Reuters)

The economy is people's livelihood. They fear poverty and hope for protection and wealth. The rise and fall of macroeconomic indicators, such as the interest rate, the value of the currency, the inflation rate, etc., people face with the hope that they will happen at the lowest cost.

For two years, people in Egypt have been living in a situation that has a severe negative impact on their lives, especially the rise in prices, while the level of their salaries and wages is moving very slowly, not commensurate with the rise in prices.

The price of the dollar on the black market was the talk of the people in Egypt. Everything was mortgaged to the price of the dollar. Savers feared wasting their savings, so they went to buy gold and foreign currencies, while merchants and importers were greatly affected, due to the lack of foreign exchange on the one hand, and the risks of dealing with the black market on the other hand. .

The government’s situation was not in the best of individuals and institutions, as foreign debt obligations haunted it, and many of its projects that needed operating requirements from abroad were almost halted, while its foreign exchange resources were negatively affected by the decline in revenues from the Suez Canal and the tourism sector, due to... The Israeli aggression against the Gaza Strip and the tension in the Red Sea.

On the sixth of this month, the Egyptian government took action in late 2016, as well as in 2021, to reduce the value of the pound. The dollar jumped in the official market, reaching a ceiling of 50 pounds to the dollar. It also raised the interest rate by 6% once.

Egypt raises its hand from the pound (Al Jazeera)

Will prices be reduced?

Before March 6, 2024, the pound rose on the black market, from 70 pounds to the dollar to around 40 pounds, which made the Egyptian street urgently asking for an answer to the question: Will prices decrease?

But after the official price of the dollar became around 50 pounds, and interest rates were raised, the question still remains: Will prices fall?

Merchants have an excuse not to lower prices, under the pretext that the goods they have were purchased with currency on the black market at prices between 60 and 70 pounds to the dollar, and therefore they cannot sell at a loss, which makes the recent measures useless.

But after the merchants run out of these stocks, will the prices fall, after the merchants deal with the dollar prices according to the official market?

This will depend on the extent to which the banking system responds to meeting the needs of merchants for foreign exchange. If they obtain their needs, there may undoubtedly be a relative state of price reduction and a decline in inflation rates, but if merchants are deprived of meeting their needs, they will immediately resort to the black market, and Egypt is witnessing it. More waves of inflation.

Will institutions benefit from the new procedures?

There are two things regarding institutions. The first is regarding raising the interest rate by 6%. This decision will have a negative impact on institutions and merchants who rely on bank financing, because this will lead to an increase in production costs and a decline in their ability to compete in the local and international markets.

As for the devaluation of the pound, merchants and institutions hope that the relief that has occurred from the flow of some dollar resources - from the Ras Al-Hikma deal and the funds expected to flow from the International Monetary Fund loan - will lead to a solution in releasing goods piled up in the ports. They also hope that the meeting will be met. Their foreign exchange needs and to emerge from the recession they recently suffered from.

But the question remains, will current foreign exchange resources suffice for all this?

Will the normal state of dealing in foreign exchange through the official market return?

This is what reality will answer in the coming days.

What is the expected impact on low-income people?

Several weeks ago, the government announced that the minimum wage would be raised to 6,000 Egyptian pounds, which is now equivalent to $120 per month.

This is an income that may be suitable for a single person to meet the minimum requirements for living, but it is not suitable for supporting a family, which means an increase in poverty rates during the coming period.

It is worth noting that the Central Agency for Public Mobilization and Statistics delayed for nearly two years in issuing the Egyptian Household Income and Expenditure Survey, which includes poverty rates in society.

There is another segment of poor families, whether beneficiaries of solidarity and dignity programs, or non-beneficiaries, as these families will suffer from poverty to a greater extent, and these economic and social conditions will reflect negatively on the conditions of those families, as they are deprived of education, health and other basic services under the measures. Expected conditions of the IMF.

Will the black market be eliminated?

Speculators do not know how to leave the markets, but they make themselves ready to seize opportunities, and it becomes clear to them the reality of Egypt’s cash flows and their adequacy for the official market. If there is a gap that the banking system is unable to meet, the speculators will return again, to work mainly on remittances from workers abroad. , whether from inside or outside Egypt.

It is worth noting that the black market continues even with very small margins between it and the official market, but it thrives in the presence of a large difference.

Will raising the interest rate attract savings from the market?

Public business sector banks have offered savings certificates at about 30%, while the interest rate in banks for deposits has become 27.25%, and the inflation rate announced at the end of January 2024 is 29.8%, which makes the interest rate in the official system lower than the inflation rate, and thus individuals will look into... For a more profitable alternative, this may be directed to speculation in stock exchanges or real estate, and speculation on the dollar may decline relatively until the market stabilizes.

Here, those with savings must recall their previous experiences with the government during the past ten years, where they rushed to buy certificates, or deposit their money in banks in light of the rise in interest rates, and then find themselves after about a year facing a reduction in interest rates and rising inflation rates at rates exceeding the interest rate. Much.

Who are the winners and losers from the March 6 measures?

At the top of the losers are individual speculators, not speculative traders, who bought the dollar at higher prices than it is now in the official market, but their loss is linked to how they dispose of their foreign currencies.

If they sell the foreign currencies they have now, for fear that the market will witness lower prices than they are now, they will undoubtedly suffer huge losses, while if they keep the foreign currencies they have for long periods, their losses will be limited to disrupting the capital cycle.

As for speculative traders, they are usually not satisfied with one market, especially since the Egyptian experiences since the 1970s have enjoyed the availability of several markets for speculation, foreign currencies, stock and bond exchanges, real estate, as well as cryptocurrencies.

There are also industries and services that depend on an external component of production, and the cost of the import bill will increase significantly, which will ultimately be at the expense of the consumer of the good or service, but this matter may deepen the state of recession, especially since this is accompanied by the government targeting inflation and restricting the movement of money.

As for the winners from what happened, they are the debtors, and among them, or at their head, is the government, as the real value of the debts owed to them has decreased. The government owes about 7 trillion pounds, as a local debt, as well as individuals, those who have debts to banks or individuals, especially if they have a supply of foreign exchange. It makes them get better rates and pay off their debts.

The Egyptian pound against the US dollar (Al Jazeera)

Will the government improve crisis management?

The breakthrough announced in Egypt regarding foreign exchange, after the March 6 measures, is not new, and it is feared that it will be followed by crises that will confuse the performance of the Egyptian economy as a whole.

The government usually pins all problems on external causes, such as regional and international crises, or internal causes related to population growth or extravagant behavior among individuals.

The truth is that crises are essentially related to mismanagement, delayed decision-making in a timely manner, and high rates of corruption.

The real challenge before the government, during the next stage, is to have a program to truly address the economic and financial problems, and to take the necessary measures to ensure that they do not reoccur.

Source: Al Jazeera