Egyptians pin hopes on new measures to reverse economic slump
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.