The traditional monetary policy is insufficient to achieve the goal of the central bank due to the poor performance of the economy in its dealings with the outside world. This led to a significant rise in inflation rates, and here imposing more challenges on all sectors, and weakening their competitiveness locally and internationally. It is also expected that the decision will increase the flotation. of poverty rates in the country.
The citizen will not bear the liberalization of the exchange rate in light of the increase in inflation, and the decision to liberalize the exchange rate will lead to a high cost for the citizen, and then an increase in the prices of domestic and foreign products, whether they were manufactured for the local market or for export in global markets, as well as food products and consumer goods that are imported, their prices will increase. In a way that the citizen may not bear.
The question here is, are we witnessing a complete flotation and that the central bank does not interfere at all in determining the exchange rate in order to be subject to market rules, or is the flotation partial, provided that the central bank intervenes periodically as a maker of the exchange market, provided that the central bank determines the buying and selling prices of the local currency?
Egyptian banks have started offering various investment tools to attract deposits in dollars, to be new investment certificates in dollars that are characterized by a stable return on them during their retention period, besides that they are not affected by fluctuations in the Egyptian market prices.
There may be severe restrictions on the withdrawal of bank deposits in Egypt from local and foreign currency after the upcoming flotation decision due to a failure achieved by the fiscal and monetary policy. Financial crises We have many financial and economic models and plans.
Of course, the Ukrainian war also affected foreign reserves, which were just under $41 billion at the end of last February, as they fell by about $4 billion in March to $37.082 billion.
Egypt did not reduce imports, increase exports, create new tourism markets to compensate for the losses caused by the war in Ukraine, and encourage Egyptian workers in other countries to keep the remittances they send home.
It is possible for citizens to lose confidence in the Egyptian financial system if the floating decision is implemented. The decision to liberalize the exchange rate leads to a loss of confidence that erodes liquidity in the banking sector, which increases fears that banks in Egypt will not be able to help the government to finance the high deficit in the budget and in the balance of transactions. The Egyptians’ confidence abroad may decline, and financial flows may not continue normally due to fears of an economic collapse.
Financial transactions will be in dollars instead of Egyptian pounds. After the exchange rate is liberated, companies will start asking citizens and customers to pay dues in dollars. This is a lack of confidence in the national currency and the beginning of the collapse of the Egyptian economy.
After the implementation of the decision to liberalize the exchange rate, the resort becomes the black market for a complete arrangement, whether for work or treatment abroad, or to send money to children studying abroad, or to travel for tourism or for imports, which exceeds the demand for dollars on the black market, which is sold at a higher price than prices. official.
The black market is the alternative to money in Egypt, in which there is regular supply and demand for foreign currency, including transfers of Egyptians residing abroad, transferring their savings illegally.
Debt constitutes a crisis, and the per capita share of it is within the limits of a thousand dollars, and most of the domestic revenues go to repaying loans and their interest, which is unprecedented. The state’s general budget suffers from the burdens of public debt (external and domestic), as debt burdens amount to about 54 percent of the total uses of the general budget.
In the event that the liberalization of the exchange rate is implemented, all companies and factories in Egypt will stop selling and importing orders, and some of them may give exceptional leave until the exchange rate market stabilizes, the dollar against the pound, and the re-pricing of products in all sectors of agriculture, industry and trade.
Excessive external debt is a dangerous indicator that leads to terrifying inflation, and we must remember what happened to Egypt during the reign of Khedive Ismail, when the major Western countries, especially France and Britain, took advantage of the debts with which Egypt built major projects, in order to interfere in internal affairs and even manage the Egyptian economy. Which ended with the British occupation of Egypt in 1882.
Due to the large number of debts, data from the Central Agency for Public Mobilization and Statistics in Egypt showed that the annual inflation of consumer prices in Egyptian cities recorded its highest level in about 5 years.
We hope that those in charge of fiscal policy will reconsider the policy followed for borrowing, regardless of the justifications that prompted us to borrow, even if they are logical. We suggest that the Minister of Finance stop excessive borrowing until we study the situation calmly and assess its results and consequences, and I hope that Parliament will not agree to any A loan, unless it is for “the very strong.”
The increase in the long-term debt and the decrease in the short-term debt is a very good indicator, given that it confirms that there is no risk currently for foreign debts, because most of them come due for repayment after a long period, compared to short-term debts.
Why do inflation rates rise in Egypt despite the many resources and capabilities? Inflation has multiple and natural causes, including the epidemic and war, and sometimes some reasons may be sudden and beyond the control of people. Egypt also without a planned liquidity pumping plan in the production chains, which leads to creating a gap in the markets resulting in higher prices Effects and causes of inflation in Egypt The increase in the rate of economic inflation means a decrease in the purchasing power of the local currency and this affects the cost of living in Egypt, when inflation is high The cost of living increases, which ultimately slows down economic growth.
It is therefore required to constantly maintain a certain level of inflation in the economy to ensure that spending is boosted and to prevent people from saving too much money.
This may require the intervention of the monetary authority (the central bank) by changing the interest rate or adopting a policy that reduces or increases the money supply (as needed).
For individuals, everyone looks at inflation differently depending on the type of assets they own. For example, a person who owns real estate investments or stored commodities, inflation means to him that the prices of his assets are rising. As for those who have money, they may be negatively affected by inflation as the value of their money erodes.
Inflation has multiple and natural causes, and sometimes some of the causes may be sudden and beyond the control of humans, but the most prominent factors causing it are:
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High demand or low production, which leads to the creation of a gap in the markets resulting in higher prices.
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An increase in the money supply or the volume of money circulating among people, as this pushes them to spend more.
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An increase in the cost of producing some commodities also leads to a rise in the price of the final product.
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Producers may raise prices to cover the expected increase in the wages of workers who are willing to face the increasing cost of living, and this exacerbates the rate of inflation.
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Natural disasters that reduce the production supply can cause inflation.
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The rise in global product prices, such as oil or food, may be reflected in inflation within importing countries.
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Expectations play a major role in determining inflation. If people or companies expect higher prices, they build on these expectations during wage and lease negotiations, and this causes inflation.
There is an increase in accumulated consumption, and the authorities respond to this by increasing the money supply, and this will result in a rise in commodity prices…
1- The money supply in Egypt
Inflation is mainly due to an excess of the money supply over economic growth.
The more the money supply increases and the government decides to print more money, the lower the value of the currency, because that means more money with the same amount of goods.
This leads to an increase in the demand for commodities, and thus an increase in prices.
2- Religion in Egypt
Public debt leads to inflation, due to the fact that governments have no choice but to pay the national debt by increasing taxes or printing more money.
– When taxes are increased, companies will have to raise their prices to compensate for the tax rate imposed on them, and thus inflation will occur.
– In the second case related to money printing, the money supply will increase, and thus inflation will occur.
3- Inflation resulting from the rise in wages.
– The higher the wages of workers, the more people are able to spend money on buying consumer goods, which leads to an increase in demand.
In this case, companies will raise commodity prices to the level that the consumer can bear, to achieve a balance between supply and demand.
– There are other reasons for the increase in demand, including lower taxes on income, which provides more income to consumers and encourages them to spend more.
Monetary stimulus policies such as lowering interest rates may also increase demand, as this may encourage people to take out more loans, or lead to higher housing prices.
4- Cost inflation
– When Egyptian and foreign companies in Egypt face an increase in the prices of raw materials that they use in manufacturing, they will increase the price of the commodity to the consumer, in order to maintain their profits.
5- The exchange rate in Egypt
– The currency exchange rate affects inflation greatly, so whenever the value of the local currency is less than the value of foreign currencies, the prices of imported goods and commodities will be very high, and costly to consumers in the country.
6- Inflation resulting from the pursuit of profits
This type of inflation occurs when companies raise their prices in order to obtain more profits.
7- Low productivity
When firms are less productive, the supply of goods decreases and prices increase.
8- Increase taxes
– When the government imposes more taxes such as value-added tax or customs duties, it will lead to higher prices.
Addressing inflation:
It depends on the cause of inflation. Basically, if the economy is overheating, central banks can implement what is known as deflationary policies that would rein in aggregate demand, usually by raising interest rates.
In some countries, central banks link their local currencies to another and thus link their monetary policies (such as the Gulf countries that peg their currencies to the US dollar and whose monetary policies are affected by the policies of the Federal Reserve).
In some cases, the government may set prices directly, when things seem to be getting out of control beyond what the citizen can afford, and these price-setting procedures usually lead to the accumulation of financial obligations on the government.
Central bankers are increasingly relying on their ability to influence inflation expectations as a tool to reduce inflation.
The more credible central banks are, the more impact their statements will have on inflation expectations.
We know that the reasons for this increase are the rise in the prices of imported goods affected by the rise in inflation globally, as well as the increase in commodity prices locally as a result of the increase in demand, noting that the impact of the Russian war on Ukraine and before it the Corona epidemic.
Also, increasing competition in the economy, and among the proposals also is that increasing Egyptian industrial production be a priority.
1- Increasing production in the industrial cities
Since the beginning of the Corona epidemic crisis and the Russian-Ukrainian war, the Ministry of Finance has not focused on solving the demand-side problem, by injecting liquidity into the economy and direct cash assistance to Egyptians. Demand has increased without being matched by an increase in supply, such as electric cars, solar panels, and others.
Increasing industrial production, which can balance the opposition of supply and demand, thus reducing price hikes and the rate of inflation. Egypt has the resources and tools.
2- Stop spending
The skyrocketing price increase in Egypt is the rise in inflation rates. It is considered that the increase in government spending is the main reason for the rise in inflation rates.
3- Improve supply chains
That the Ministry of Finance seize this opportunity, with rising inflation rates and other effects of the Corona pandemic crisis and the war, to improve its supply chains to be able to meet any increase in demand.
4- Reducing the profits of major companies
To combat monopoly and others to confront the concentration of profitability of large companies, the influence of a group of giant companies needs to be confronted in a way that reduces the rise in inflation, and links between corporate monopoly and high prices to concentrate major profits.
5- Setting prices
To rein in inflation and limit the rise in prices as we are currently witnessing, imposing price controls.
Inflation can be treated through policies that affect the aggregate demand side, the most important of which are monetary and fiscal policies.
Monetary policy: First, monetary policy tools are used to control inflation rates by influencing the levels of money supply. The greater the money supply than the supply of goods and services in the economy, the higher the inflation rates, and vice versa.
The central bank may also resort to dealing with inflation to open market operations through which it sells and buys securities, which leads to the withdrawal of excess liquidity from the market, and then a decline in aggregate demand and inflation.
Fiscal policy: Secondly, the inflation rate can also be reduced through the use of fiscal policy tools, which are government spending and taxes to treat inflation. Demand and then the rate of inflation decline.
Reducing inflation rates: Third, by adopting supply-side policies that include a set of policies designed to reduce costs, improve efficiency, productivity, and competitiveness so that production levels can be increased and high inflation rates contained through a number of policies, the most important of which are: – Reducing tax rates. Labor market reforms. – Improving education, skills and training. Liberalization of goods and services markets. – Incentives to enable start-up companies. Infrastructure improvements.