Egypt floats currency amid social, political tensions

Sunday 06/11/2016
Egyptians gather to buy subsidised sugar from a government truck after a sugar shortage in retail stores across the country in Cairo, last October.

Cairo - The Egyptian Central Bank’s decision to float the country’s currency aims to alleviate eco­nomic crises that have in­creased political pressure on Presi­dent Abdel Fattah al-Sisi with calls for nationwide protests on Novem­ber 11th.

There has been increasing dissat­isfaction among Egyptians towards the government and its economic policies, particularly following a sugar crisis that is seen as a case study of the country’s financial woes.

In a country where an estimated 20% of the population has diabetes and in which sugar, along with oth­er staples, is subsidised by the gov­ernment, the commodity is viewed as a necessity, not a luxury.

Egypt imports approximately 1 million tonnes of sugar a year — about one-third of its total con­sumption but a worsening currency crisis and the imposition of a 20% import tariff in April 2015 to protect local producers cut sugar imports, leaving the market short and driv­ing up prices.

Cairo announced that the price of subsidised sugar would increase 40% — from 36 to 50 US cents per kilogram — on November 1st and warned against hoarding sugar. Authorities seized 9,000 tonnes of sugar in raids on factories and warehouses across the country. Local media reported that police arrested a man in Cairo who was carrying 10 kg of sugar, saying this exceeded the “reasonable amount for personal use”.

Egypt’s Central Bank announced November 3rd that it would allow the pound to float in value, which immediately devalued the currency by approximately 48%.

Cairo had been trying to maintain an artificially strong pound at 8.8 pounds per US dollar when the rate was closer to 18 pounds per dollar on black market.

“This aims to eliminate trading of the currency on the black market, boost the economy and achieve higher growth rates,” a Central Bank statement said. “This will help end fluctuation in currency markets in a manner that reflects the real power of supply and demand.”

The move meets one of the re­quirements demanded to qualify for a 3-year, $12 billion Internation­al Monetary Fund (IMF) loan that Cairo desperately needs. Another requirement is cutting Egypt’s subsidies programmes, including sugar.

While the reforms and the IMF loan are expected to strengthen Egypt’s economy in the long term, they are likely to cause a sharp rise in imported goods prices in the short run at a time when costs are already skyrocketing and Egyptians expressed discontent with the in­creases.

“We welcome the Central Bank of Egypt’s decision to liberalise the foreign exchange system and adopt a flexible exchange rate re­gime. This will make more foreign exchange available,” IMF Mission Chief for Egypt Chris Jarvis said in a statement.

“The flexible exchange rate re­gime, where the exchange rate is determined by market forces, will improve Egypt’s external com­petitiveness, support exports and tourism and attract foreign invest­ment.”

Questions over subsidies and shortages of basic foods are particu­larly sensitive in a country that has had two revolutions since 2011 and in which the 1977 food riots haunt the popular imagination.

Speaking before the decision to liberalise Egypt’s foreign exchange system, Egyptian Prime Minister Sherif Ismail told parliament: “We appreciate the country’s situation. We are going through a very tough situation.”

The government also announced fuel hikes of 30.5-46.8%. Ismail said the economic measures were in compliance with IMF require­ments and sought to improve living conditions for Egyptians in the long term.