2024-03-18 05:02:47
On Wednesday March 6, Egypt took the plunge for the greatest immediate benefit of businessmen and the stock market. The military regime has in fact made two historic decisions which, if applied over time, will profoundly disrupt the functioning of the national economy. The reform of the foreign exchange market is the most visible. Until now, the Egyptian central bank (ECB), entirely subject to the State, controlled the value of the Egyptian pound (£E) against the dollar or the euro. But it will now be determined by the confrontation between supply and demand for foreign currencies. Since the latter have been lacking for more than two years due to the war between Russia and Ukraine, the price of exchange rises in Egyptian pounds and the shortage sets in. Since 2022, the rate of the national currency has been lowered four times by the ECB in considerable proportions, from 17 to more than 30 £E per dollar. On the black market, the greenback reached more than £E70. And in the future, the ratio between the national currency and foreign currencies will be established daily.
State waivers
The second reform concerns financial markets. Until now, national savings were remunerated at interest rates lower than the rise in prices. However, this “financial repression”, denounced by the wealthy minority who are the only savings, should end. Hence the wave of speculation that immediately arose. At an undefined term, interest rates should be higher than inflation and revised every day by comparing credit offers and requests. On March 6, the gap between the two curves was reduced thanks to a spectacular rise in interest rates from +6% to between 24% and 30%.
In a major political event, the Egyptian authorities have effectively abandoned historic control established by President Gamal Abdel Nasser in the 1950s over two key economic instruments: foreign exchange and the price of money. This revolution was not made “at home” as Prime Minister Mostafa Madbouly claimed on Thursday March 7 in Alexandria, but under sustained pressure from the International Monetary Fund (IMF). Its general director, Kristalina Georgieva, a Bulgarian economist trained during the Soviet era, has made numerous stopovers in Cairo, stubbornly refusing in the absence of an agreement on foreign exchange to increase her aid: three billion dollars over three years. , a misery for the most populous Arab country by far.
Following the reforms of March 6, IMF aid increased to more than nine billion, with the World Bank and the European Union pledging to provide fifteen more. Added to this would be an obscure real estate operation set up by capital from the United Arab Emirates, which would bring in more than 35 billion dollars, five of which are available immediately. In Cairo, we are also counting on the money of emigrants, which is massively spent on the black currency market (around thirty billion dollars in a full year), and which should return through legal channels.
The poor, the first victims
Is this windfall capable of stabilizing the economy exposed to an unprecedented shock? A dollar at £E50 and interest rates of 30% are disrupting the daily lives of more than 106 million Egyptians. With annual inflation of more than 35%, prices and activity are the first victims. For the poor, estimated at at least 60% of the population, feeding themselves becomes a challenge. For businesses, large or small, the price of inputs, which are largely imported and payable in foreign currency, makes these commodities almost inaccessible. The satisfaction awarded by Moody’s, one of the two main American rating agencies, which now gives a positive view of investing in Egypt, does not change much immediately.
The expectations of the different economic players will play a key role. If they foresee a resumption of the infernal cycle of domestic prices and currency rates, the dollar at £E50 will soon be nothing more than a memory, especially since it already reached £E72 at the start of the year . If promised aid, often associated with industrial or infrastructure projects, does not arrive or is delayed, stabilization could be compromised or delayed.
Another pitfall, the desperate situation of public finances. The debt burden, that is to say the payment of interest due on the State debt, absorbs two-thirds of budgetary revenue. A small third remains to help the most disadvantaged not to die of hunger, to pay (poorly) several million civil servants, to train a large number of young people, and to provide for the needs of an expensive army. Debt restructuring, as was done in the 1990s, following the first Gulf War, is not on the agenda. International diplomacy is incapable of agreeing on a solution to this crisis which affects almost all non-oil emerging countries.
Failing this, will Egypt find its way back to international financial markets as it did between 2013 and 2021? Unlikely. It will therefore be necessary to resort to printing money and relaunch the hunt for the dollar, before returning to the reforms of March 6.
Impossible “demilitarization”
Finally, the hardest part remains: adjusting the rest of the economy to the now liberal functioning of exchange and money. This would require “demilitarize” the economy in the hands of the generals for more than 10 years. Subsidies, unrepaid loans, privileges in all directions, non-existent taxation, investment directions, have led the economy down a sterile path. The country’s massive debt (between 160 and 300 billion dollars according to estimates) has mainly been used to pour concrete. The new administrative capital1 alone, which is still not active, cost more than 60 billion dollars. Five other new towns are lost in the desert and dozens are planned. These colossal investments yield nothing except for the khaki-clad businessmen who got their hands in it.
Productive investments in the rest of the economy have been sacrificed. Only foreigners have dared to carry out some operations in hydrocarbons or tourism. The very active bourgeoisie of the time of President Hosni Mubarak has become absent, further unbalancing an economy under influence.
President Abdel Fattah Al-Sissi and his prime minister have promised the return of dollars and lower prices thanks to their measures. However, skepticism remains in order, as these measures could prove to be good neither for the economy nor for the Egyptians.
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