This morning’s key headlines from GenerationalDynamics.com
- Egypt, in economic crisis, sharply devalues currency in order to get an IMF loan
- Egypt’s government says that ‘the luxury of delay is not available’
Egypt, in economic crisis, sharply devalues currency in order to get an IMF loan
People jostle with each other to get to the fuel nozzle on Friday in the hours before a scheduled 47% increase in the price of petrol (al-Ahram)
In a step unprecedented for Egypt, in order to meet conditions for a $16 billion loan from the International Monetary Fund (IMF), the Central Bank of Egypt announced on Thursday that its pound currency would be allowed to float in value against other currencies. Previously, the government pegged the currency at a fixed rate of 8.8 pounds per US dollar, but international foreign exchange (forex) traders were increasingly unwilling to pay a dollar for just 8.8 Egyptian pounds.
The “grey market” price was already at around 15-16 pounds per US dollar, so it is not surprising that when the currency was allowed to float, it quickly plummeted in a single day from 8.8 pounds per US dollar to a value of about 14.65 pounds per dollar. This meant that prices of imported goods will cost about 45% more than before the currency was floated.
The government also announced a 30-47% increase in subsidized fuel prices, as part of a plan to slash its total subsidy bill by 14%. The announcement was made about two hours before the price increase would take effect, resulting in long lines of cars hoping to fill up during those two hours.
Egypt’s economy had been increasingly in crisis at the fixed exchange rate. US dollars were becoming increasingly scarce, and all imports had be purchased in Egyptian pounds, which exporters increasingly refused to accept. The result was that basic commodities like sugar and flour were almost completely unavailable. Egyptian citizens were becoming increasingly vocal in blaming the government for the shortages.
However, the shortages have now been replaced by prices that are 40-60% higher than before, so social unrest is only likely to increase. Al-Ahram (Cairo) and Reuters and NPR and Guardian (London, 25-Oct)
Egypt’s government says that ‘the luxury of delay is not available’
Ever since the Arab Spring and the fall of Egypt’s dictator Hosni Mubarak in 2011, Egypt’s economy has been plagued by a series of disasters. There have been riots and jihadist terrorist attacks that have sharply cut Egypt’s income from tourism.
When Mohamed Morsi became the first democratically elected leader of Egypt in its history, there was hope that things would settle down. However, Morsi turned out to be one of the stupidest leaders in Egypt’s history, and proceeded to destroy one of Egypt’s institutions after another in order to gain more power for himself and his Muslim Brotherhood government. This led to the army coup on July 3, 2013, led by then General Abdel al-Fattah al-Sisi, who is now president of Egypt.
All this chaos once again resulted in harm to the tourist industry, but there was a more significant result. Qatar was a big supporter of the Muslim Brotherhood, and provided a great deal of aid to Egypt when Morsi was in power. That aid ended with the coup, and the slack was taken up by Saudi Arabia, United Arab Emirates (UAE) and Kuwait. However, the collapse in the price of oil since then has meant reduced aid from these countries to Egypt.
During the last five years, Egypt’s economy has continued to worsen, and the Egyptian currency was under attack by forex investors. Even so, Egypt’s central bank continued to peg the pound at a fixed rate versus the US dollar. Finally, in July of this year, Tarek Amer, the governor of the Central Bank of Egypt, announced that Egypt’s longstanding policy of defending the Egyptian pound against devaluation had been a “grave error,” because it had not helped the economy, but instead had caused numerous problems, including shortages of dollars.
This announcement exacerbated the crisis, since it became clear that some kind of currency devaluation was coming, especially when the International Monetary Fund (IMF) appeared to demand it if the IMF were going to approve a loan to Egypt.
On Friday, Egypt’s prime minster Sherif Ismail held a press conference and said:
Yesterday was an important day in the history of the Egyptian economy, with the moves in foreign currency and petroleum prices. … We’re taking important decisions, decisions that will revive the economy and take it forward. …
The luxury of delay is not available. It may have been available in previous decades but today we cannot afford such painkillers.
There has been massive social unrest in Egypt in the last five years, since the beginning of the Arab Spring. The government has good reason to fear that there will be substantially more social unrest, as the currency devaluation causes higher prices to bite further into people’s incomes. Al Ahram (Cairo) and Bloomberg and Tahrir Institute for Middle East Policy (Cairo, 3-Oct)
- Generational Dynamics analysis of the crisis in Egypt (28-Jul-2013)
- Downed EgyptAir flight an economic disaster for Egypt (21-May-2016)
- Egypt-Saudi deal for Red Sea bridge triggers massive protests in Cairo (16-Apr-2016)
- Ousting Morsi may have saved Egypt from austerity, for a while (27-Jul-2013)
KEYS: Generational Dynamics, Egypt, International Monetary Fund, IMF, Hosni Mubarak, Mohammed Morsi, Muslim Brotherhood, Abdel al-Fattah al-Sisi, Qatar, Saudi Arabia, Tarek Amer, Central Bank of Egypt, Sherif Ismail
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