Four years after the currency floating: The poor still pay the price

The decision to float the Egyptian pound four years ago consumed more than half of the Egyptians’ savings on the one hand and led to a massive and unprecedented wave in price increases, making the second half of their wealth and savings at the mercy of prices. The country also sank into a deep well of debt, from which it is not expected to exit within decades to come, due to its reaching historical levels and its payment periods spanning about half a century. This critical situation was due to the repercussions of the Central Bank of Egypt’s decision, in November 2016, to liberalise the exchange rate of the Egyptian pound, whereby the currency rate is determined according to the mechanisms of supply and demand, which is also known as “floating currency.”

A few weeks after the float, the Egyptian pound fell against the dollar, frighteningly, and lost 100 per cent of its value in less than two months. On that day, the dollar reached about EGP 20, within less than two months, compared to less than EGP 9 before the float. However, the EGP was not able to stand on its feet again during the past three years only, without also gradually increasing against the dollar, so that the dollar’s price fell below EGP 16.

Experts expect the Egyptian pound to strengthen its position more and more this year, in light of the Egyptian economy’s growth expectations. This progression of the Egyptian pound has many factors and happened for multiple reasons, most notably the International Monetary Fund loan to Egypt worth $12 billion and the Saudi and Emirati financial support to Egypt. But in the face of this progress, the Egyptian citizen found himself mired in prices that he could not afford, with the removal of subsidies on basic commodities.

One of the consequences of these reforms was to reduce subsidies on fuel, water, electricity, transportation, and other services. The flotation decision also caused a decrease in the value of Egyptian workers’ wages, which could not keep pace with the rise in prices after inflation reached 34 per cent. Thus, the overwhelming majority of the living standards decreased, and a large proportion of the middle class fell below the poverty line. In addition to the loss of a large part of the value of their savings and investments in the Egyptian pound (as happened with EGP 64 billion, the value of the Suez Canal investment certificates, and doubled from certificates and deposits in all Egyptian banks).

Here, it can be said with a high degree of confidence that the decision failed to achieve the most important part of its objectives. Faced with this, the majority of Egyptians still suffer from weak purchasing power and high prices, in addition to an increase in the poverty rate from 28 to 32.5 per cent during the years 2017 and 2018. Here, people ask, why do prices remain high despite the decline in inflation rates and the improvement of the pound’s exchange rate?

At the country level, it found itself mired in unprecedented record-breaking debt. At the end of last June, Egypt’s external debt rose by 14.8 per cent annually, registering $123.5 billion, compared to $108.7 billion at the end of June last year. Investors’ holdings of Egyptian treasury bills and bonds doubled, in five months, to record $21.2 billion in October, compared to $10.4 billion at the end of May.

The monetary reserves, mostly debts, rose, for the first time, to $45.246 billion in October 2019, before falling to $39.22 billion last October due to the repercussions of the coronavirus pandemic. Four years after the decision to float the pound, the trade balance deficit has not decreased due to the increase in imports more than the increase in exports.

Egypt’s imports in 2019 amounted to about $76.4 billion, compared to $68.1 billion in 2016, according to the Central Agency for Public Mobilisation and Statistics. While Egypt’s exports in 2019 amounted to only about $29.8 billion, compared to $21.7 billion in 2016; that is, imports increased by about $8 billion, as did exports.

Many do not disagree on the inevitability of the floatation decision that was taken, as previous policies caused the pound’s exchange rate to be fixed, partially or completely, despite the changes in the balance of payments over the years, due to the unreality of its price, which resulted in the continued deterioration in the Egyptian balance of payments. In reality, however, the method in which this float was managed was wrong, to the degree that greatly affected its effectiveness.

One of the main reasons for what happened was that the government did not realise the fact that foreign direct investment does not enter the country based on the value of its currency against the dollar only. Rather, it is looking for a legislative and human rights infrastructure that guarantees it, at the very least, a clear legal path in the event of a dispute, and the investor seeks to avoid very high levels of corruption, as it deducts a large percentage of the return on his investments.

Economist Mohamed Rizk says, “Floating the Egyptian pound did not solve the problem from its roots, so there was no urgent need for this decision.” He continues, “I do not want to exaggerate by saying that it will be the main reason for the collapse of the Egyptian economy if Egypt’s access to foreign debts stops or its sources dry up for one reason or another.” Rezk points out that “the float is the beginning of the real problems of the economy, and without any doubt, the people have only reaped the evaporation of 60 per cent of their savings and the explosion of prices.”