During less than a year, and from March 2022 until now, the exchange rate of the dollar has doubled against the Egyptian pound, so that the latter lost almost half of its value, and after it reached the barrier of 32 pounds in the last cut in early January, then decreased to just below thirty, the price gradually returned to skipping this barrier, in banks, it reached between 30.13 pounds for buying and 30.23 pounds for selling, and 30.28 pounds for purchase and 30.33 pounds for selling.
The temporary stability for a few weeks in the pound’s exchange rate is linked to hot money pumped by Gulf countries into Egyptian banks, through which they bought bonds of about a quarter of a billion US dollars. At the same time, the exchange rate fell on the black market to 32 pounds, with the government expanding its use of the security fist against merchants. With the US Federal Reserve raising the interest rate again by 0.25 per cent and the decision of the Central Bank of Egypt to fix the interest rate, the exchange rate is not linked to this issue, or it can be said that the case has deeper dimensions. The question is: Where is the exchange rate of the dollar heading against the pound?
A clear picture appears now
The beginning of the new floating of the pound in January is linked to the agreement with the International Monetary Fund on new conditions implemented by the government in exchange for a new loan, scheduled over 46 months, at a value of $ 3 billion, in addition, to support from the Gulf partners. It has already started, as we mentioned, with the implementation of the first conditions of the fund. The fund announced its conditions under pressure from the UAE, which is considered the largest beneficiary of the sale of Egyptian assets and the first competitor for Saudi Arabia to expand in the Egyptian market, especially with the existence of a partnership between the Emiratis and the fund to develop economic policies.
This Saudi-Emirati expansion in the Egyptian market is facing the distinction of the army’s economy, which has sufficient influence to control the Egyptian economic sectors, which harms the investments of those countries, in addition to the exchange rate that faces this expansion, as the stability of the Egyptian currency is at a price higher than its actual price. It makes purchases at high estimations for the Gulf investor. Therefore, the essential condition of the fund was a flexible exchange rate, which reduces the value of the pound by half, which reduces the value of Gulf payments to the Egyptian government by half accordingly, in addition to that an attempt to exit, even partial, the army companies from the economy, which allows for fair competition not with the private sector in general, as mentioned by the IMF, but clearly with Gulf investments.
Pound! Where to?
Over the past few days, Egyptians have noticed a gradual and slight decline in the pound price against the dollar, which raises the question: for how long? This reduction is based on a direct move from the Central Bank of Egypt, and the track is completely managed. The Gulf hot money protects the pound from actual collapse. Still, more than this money is needed to stabilize the exchange rate, and the government is trying to attract more money by borrowing from the international debt market. This, in addition to the new debt instalments from the International Monetary Fund, means that things will be under control.
But why has the pound been turning into pennies over the past few days? Although this decline was slow compared to previous sudden shocks, however, the price is based on the information mentioned, linked to the agreement reached between the Gulf creditors and the government, in terms of a deal on the exchange rate that puts the pound in the value that the Gulf investor wants, as this investor pays more money to expand buying assets and bonds in Egyptian banks, especially with the restlessness in countries such as Saudi Arabia and Kuwait because of complimentary support.
The government’s purpose
The current economic crisis in Egypt has caused widespread popular discontent and unprecedented criticism of the government’s experience in managing the financial path from the start, prompting the president to defend his way more than once, and went so far as to assert that he is continuing in it even if many believe that what he is doing as a primary reason for the crisis. This restlessness is all that matters to the government, which is trying to justify, through its officials and ministers to its media channels, using the Russian-Ukrainian war, which it sees as the cause of the crisis.
Despite the International Monetary Fund’s assertion that this crisis showed structural imbalances in the Egyptian economy, starting with spending on non-return projects or lack of interest in a genuinely competitive investment environment, in addition to the failure to find a dollar resource that is not mainly dependent on tourism and remittances from Egyptians abroad. However, the role of the fund here is purely profitable. It does not need to put in place an accurate reform prescription that addresses those imbalances that they referred to and puts in place what achieves what satisfies both parties (the government and the fund). Therefore they are all comforting solutions. The government will retreat from its direction. It relies on the hot money passing through the fund with its conditions. In contrast, the government sees it as a solution to buy time until the end of the war (it can be clarified by using the famous proverb: better to be blind in one eye than blind in both) and until the government can re-hide those imbalances in the imaginary numbers.