Excessive loaning and unwise investment led to the all-time decline of the Egyptian pound

Along with declaring a new deal with the International Monetary Fund to get USD 3 billion in loans, the Central Bank of Egypt started a recent devaluation of the Egyptian pound, letting it record an all-time decline against the US dollar. The US dollar exchange rate in Egypt increased in the morning of Thursday from 19.7 pounds up to 22.50 pounds and continued rising until the closure of banks in the afternoon to hit 23.16. From March, the Egyptian pound lost 47.5% of its value before the war when the US dollar exchange rate stabilized at 15.7 pounds.

While the Egyptian government attributed the financial crisis to the inflationary pressures created by the pandemic and the war in Ukraine, the government was heavily criticized over excessive loaning and succumbing to hot money appeals over the past few years. Infrastructure and urban megaprojects were also cited as a cause of exhausting financial reserves in low-profit long-term investments. Egypt’s foreign debt hiked under Sisi’s administration from USD 46 billion in 2014 up to USD 155.7 billion in 2022, growing by about 238%. The obligation to GDP ratio amounted to 46% against 15% in 2010. Such a ratio is alarming in a developing economy with minimal value creation ability, as the trade balance has USD 43 billion deficit.

Since 2016, after Egypt floated the currency for the first time, the government has depended on the so-called “hot money”, which is funds targeting short-term treasury bills with high-interest rates, so that it can keep the exchange rate at a nearly fixed figure, 15.7 pounds for US dollar. Then, Bloomberg reported Egypt keeps the world’s highest real interest rate, which is the difference between the inflation rate and the nominal interest rate. But after the pandemic and the war, the hot money was said to singe Egypt when funds exited the emerging markets, including Egypt. At the same time, the US Federal Bank raised the federal interest rate repeatedly. According to Egypt’s treasurer Mohamed Mait, USD 22 billion departed Egypt after the war. But if hot money departed, the foreign debt instalments and interests stayed. Egypt’s public budget for 2022/2023 was completely depleted with debt payoffs. In time the country lost its greenback sources, such as tourism, while the cost of energy and food doubled. All of that emptied the country’s treasury from greenback reserves so that the government could no longer keep the exchange rate at fixed, relatively low figures to decrease the cost of living and keep prices affordable.

The new deal with the IMF is expected to relieve the crisis and provide the government with a chance to restore fiscal prudence provided that it stopped wasting reserves in megaprojects aiming at propaganda of feats used politically by Egypt’s General, Abdel Fattah al-Sisi, to establish legitimacy he failed to get through genuine democratic elections. This political-economic overlap complicates the Egyptian situation and makes Egypt stable fire under the ashes.