Egyptians pin hopes on new measures to reverse economic slump

Sunday 08/01/2017
Egyptian delivery worker carrying food at popular market in Cairo

Cairo - Fewer foreign tourists, a slowdown in exports and lack of investment incen­tives negatively affected Egypt’s economy in 2016 but measures have been insti­tuted that are designed to reverse Egypt’s economic fortunes in 2017.
“Egyptians will feel the positive effects of these measures in the new year,” said Samir Morqos, a former economics professor from the American University in Cairo. “The measures were well-calculat­ed and based on thorough studies of Egypt’s economic needs in the future.”
The measures included a free flotation of the Egyptian pound against foreign currencies, a deci­sion made long after Egypt had lost the battle against the black market.
The presence of an official for­eign exchange system and a black market created two prices for for­eign currencies, a situation that scared investors and caused untold losses to importers and manufac­turers. Banks bought the US dollar, for example, for 8.88 pounds while it was traded for 14-15 pounds on the black market.
The flotation decision on No­vember 3rd was aimed at unifying foreign currency exchange rates and moving foreign currency deal­ings back to the banking system.
The banks collected $4 billion the month after the move was made, which eased pressure on foreign currency reserves at the Central Bank and helped meet im­porters’ and manufacturers’ de­mand for greenbacks.
Rashad Abdo, president of the Egyptian Forum for Economic Studies, said the big challenge in 2017 will be for Cairo to rein in commodity prices, which have shot up because of the rise in the official US dollar exchange rate.
“The pound flotation drove the US dollar exchange rate up from 8.88 pounds to 18 pounds,” Abdo said. “This has automatically pushed commodity prices up.”
Commodity prices have risen almost 80% since the pound flo­tation and there are fears that the resulting public resentment could lead to political unrest.
Before the flotation, the govern­ment struck a deal with the Inter­national Monetary Fund for a $12 billion loan, the first tranche ($2.75 billion) of which Egypt received in mid-November. The government said the loan was necessary to sup­port foreign currency reserves, finance Egypt’s economic reform programme and gain investor con­fidence.
Economists said the loan was needed to help increase foreign currency reserves, especially after main Gulf financiers Saudi Arabia and the United Arab Emirates re­duced their financial support.
“The reserves were on the way down while revenues from tour­ism and exports almost totally stopped,” Morqos said. “A continu­ity of the decline in the reserves would have been catastrophic for the economy.”
A challenge in 2017, economists said, will be for Egypt to use the loan money it gets in reforming its economy as it promised.
Apart from the pound flotation, the government slashed fuel sub­sidies 48%, prepared to restruc­ture the food subsidy system and raised import duties on hundreds of goods.
The customs duty increases were aimed at encouraging consumers to opt for locally made products and scrap imported ones.
The decision can have other ef­fects, economists said.
“True, the decision will make imported products too costly for most consumers to buy but it can backfire, especially if there is not enough national output,” said Mukhtar al-Sherif, an economics professor at Mansoura University.
One of the challenges Egypt faces in increasing production is to help reopening thousands of fac­tories that closed in the past five years because of political unrest, competition with imported prod­ucts and lack of necessary fuel.
The reopening of the estimated 4,000 factories will contribute to reducing unemployment, placed at 28% of the workforce of 26 mil­lion, Sherif said.
“More production will also con­tribute to reducing the poverty rate, which reached 27.8% in 2016,” he added.