Egypt's currency at risk

Egypt's currency at risk
Comment: The lack of pragmatic economic vision in Egypt will see the pound drop and inflation rise under the pursuit of foreign investment, writes Mohamed el-Meshad.
5 min read
28 Sep, 2015
The Egyptian Central Bank is under pressure to devalue the pound, stirring inflation fears [AFP]

Just five years ago, ten Egyptian pounds could have bought you ten falafel sandwiches, five bowls of rice pudding or $1.85.

Today, it can get you four falafel sandwiches, three bowls of rice pudding - the cheaper kind - or $1.25.

The value of the Egyptian pound has been continuously decreasing, as reflected in purchasing power of both goods and foreign currency. According to Minister of Investment Ashraf Salman, the pound's value must continue to decrease in order to reach its "real" market value.

Salman's statement, made at a Euromoney conference earlier this month, however, did not deter the Central Bank, which decided to maintain the rate of the Egyptian pound relative to the dollar just a few weeks later. 

     Egypt's main incomes are tourism and the Suez Canal revenues


What's clear is that there is a valuation problem of the Egyptian currency.

The Central Bank fears that it would fail to maintain a sense of calm and stability in the economy if it allows the pound to reach its "true" level - as reflected in its reluctance to succumb to calls of investors and Salman himself to do just that. 

The seemingly mixed messages from the governor of the Egyptian Central Bank and minister of investment is a clear indication that the country's lack of an economic vision can not possibly last if the government has any hope of achieving sustained economic growth or cohesive development.

The function of an economic plan is to avoid conflicting messages from government bodies that play vital regulatory roles for the economy. This way, the coordination between government teams could be aimed towards the same long-term goals.

From his perspective, the minister of investment is looking to the positive effects of allowing the pound to reach its actual market rate. In theory, foreign investors would have more confidence to invest in the economy, because they believe they are dealing with a fair exchange rate that also allows them to purchase more with their foreign currency.

It also may increase Egypt's export competitiveness, as it would cheapen locally produced products for purchase in foreign currencies. To be fair, however, Egypt's main incomes are tourism and the Suez Canal revenues, both of which are much less sensitive to exchange rates than, say, agricultural products or consumer goods.

From the Central Bank's perspective, further depreciating the pound may lead to higher prices in ways that may lead to uncontrollable ripple effects in the domestic economy.

Egypt imports significant portions of the country's food and energy. At a time of political instability, these are two items for which the government would hate to lose pricing control - especially since estimates on how much the pound would depreciate in an open market range from a further 15 percent to 50 percent.

Salman's statement effectively depreciates the currency, almost at the moment of utterance. It is an indication to foreign investors that if they buy Egyptian pounds at the current price of roughly 7.73 EGP/ $1, that they are getting duped.

The situation is now that investors will not feel inclined to buy at the current level - at least not in official markets - and the official Central Bank rates are in a "managed float", causing a shortage of dollars in the market, allowing the black currency market to thrive.

It is difficult to say whether he was acting responsibly or not as a cabinet minister - that would depend on the government’s economic strategy, if such existed.

In China, for example, currency strategy clearly aims to support the country's ever expanding export base. For years the Yuan was valued based on this strategy. Changes in currency were in accordance to changes in the country's growth strategy.

     The government tried to portray a sense of direction in its March Economic Conference... [but] never gave a clear indication of its plans


Most GCC countries have pegged their currency to the dollar.

However, despite being net-exporters, their exports (and economic performance) will not be affected by foreign exchange rates as much as they would be by changes in the oil and gas markets.

The Egyptian government tried to portray a sense of direction in its March Economic Conference. However, in reality, the government never gave a clear indication of its plans. On one hand it is attempting to pander to foreign investors, but on the other it is still clinging to the old strategy of large national grand projects that are supposed to allow for an economy that grows from within.

Each of these strategies would entail different monetary policy and currency perspectives. However, the reality is that, due to the economic policies of the past 15 years, Egypt is exposed to the international markets - and the current president is continuing this trend, albeit in a seemingly more haphazard way than before. 

Since the Euromoney conference, Egypt's investor class has been pressing the absolute need for the pound to depreciate. If economic policies succumb to their desires without due consideration for the wider picture, the Egyptian general public can look forward to further inflation - while foreign and local investors find more opportunities to thrive.

Mohamed ElMeshad is a journalist and a PhD candidate at SOAS, focused on the political economy of the media. He extensively worked in Egypt, Bahrain, West Africa, the UK and US. Recently, he contributed to the Committee to Protect Journalists’ book,
Attacks on the Press (2015).

Opinions expressed in this article remain those of the author and do not necessarily represent those of al-Araby al-Jadeed, its editorial board or staff.