Egypt’s economic reform paying off but at cost for the poor

Sunday 04/12/2016
An Egyptian doorman washes a car in Cairo, Egypt. (AFP)

Cairo - Economic reform measures taken by Egypt in early November are paying off, although at a heavy social cost, economists said.

The foreign currency parallel market is disappearing with cur­rency exchanges going back to the official banking system, leading to predictions that foreign currency revenues would grow, they added.

“The new measures, which were indispensable for the reform of our economy, will significantly improve our economic conditions,” said As­sistant Finance Minister for Treas­ury Affairs Mohamed Mo’eit. “This will even be noticed by the general public some time from now.”

Having strenuously tried, but in vain, to rein in the parallel curren­cy market, Egypt decided to float its national currency, the pound, against foreign currencies. The country’s decades-long controlled foreign currency exchange rate re­gime caused a situation in which foreign currencies were valued by the Central Bank at a rate far lower than their real market prices.

This opened the door for much of the foreign currency dealings to be conducted outside the official banking system. The presence of a parallel currency market and two exchange rates for the same curren­cies scared off investors and caused problems for importers.

Nonetheless, the pound float, initially derided by monetary plan­ners, is achieving positive results, the government says. The US dol­lar exchange rate at the country’s banks, for example, jumped from 8.88 pounds before flotation to 18 pounds, the same rate as on the parallel market.

This is sending thousands of US dollar hoarders to banks to ex­change their greenbacks. The banks had collected $3 billion in the first three weeks after the flotation, the Central Bank said.

“The foreign currency parallel market will totally disappear day after day,” said economist Nashaat Ibrahim. “Those who have dollars do not need to exchange them at the black market now because they can get the same rate at the banks.”

In an effort to try to ease Egypt’s budget deficit, fuel subsidies were slashed 47%, a move decried by the general public but lauded by econo­mists as a way to reduce the coun­try’s deficit of almost 20%.

Egypt spent $6.8 billion to subsi­dise energy in the 2015-16 budget. The recent subsidy reduction is ex­pected to lower total energy subsi­dies to $3.9 billion.

The new economic measures came in the wake of an agreement between Egypt and the Internation­al Monetary Fund (IMF) for a $12 billion loan. The IMF has disbursed $2.75 billion to Egypt and the re­mainder of the loan is to be released over three years.

Egypt said the loan is important to prop up its foreign currency re­serves, now at $23.5 billion, move ahead with an economic develop­ment programme and gain inves­tors’ confidence.

The new measures, however, are coming at a huge cost for the gen­eral public and the Egyptian Treas­ury, economists said.

Egypt, heavily dependent on im­ports, has to pay more pounds for commodities it buys from other countries, which means higher prices in local markets. Commod­ity prices are shooting up, dwarfing the earnings of tens of millions of Egyptians, almost 27% of whom are poor.

“The government should have expected the inflationary wave re­sultant from the pound flotation from the very beginning,” said Ab­del Nabi Abdel Mutaleb, an econo­mist and a former deputy Trade minister. “There is an urgent need for action now to control the mar­ket and prevent commodity prices from becoming out of control.”

“The aim of the reform pro­gramme is to attract direct invest­ments and raise living standards,” Egyptian Prime Minister Sherif Is­mail said in a recent interview with a local newspaper.

To prevent more Egyptians from descending into poverty, the gov­ernment is set to increase food subsidies and work to keep those who do not deserve to be in the programme out. About 20 million Egyptians benefit from their coun­try’s food ration system but the government says many food stamp holders do not deserve them.

The government says it will take the public three years to fully feel the effects of the new economic measures.

“All this will take time to happen, but the public must be patient for the reform to bear its aspired fruit,” Mo’eit said. “We cannot move ahead without the reform. Every­body must understand this.”