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