Egypt’s economic reforms offer hope and pain

A surge in commodity prices has been an immediate result of the free flotation of the Egyptian pound.
Sunday 11/11/2018
A man walks past an advertisement for a currency exchange bureau in Cairo. (Reuters)
Money worries. A man walks past an advertisement for a currency exchange bureau in Cairo. (Reuters)

CAIRO - It is two years since life became unmanageable for Ibrahim Dessouki, a salesman in his early 30s.

With a salary of 3,000 Egyptian pounds — approximately $168 — Dessouki had been able to put enough food on the table for his wife and son. Now, however, his salary is far from enough to do so, even after it increased to 4,200 pounds ($235).

“Commodity prices are becoming far higher than my financial abilities,” Dessouki said. “My income is always dwarfed by what I need to buy for my family.”

A surge in commodity prices has been an immediate result of the free flotation of the Egyptian pound, a Central Bank of Egypt decision that went into effect two years ago.

The Central Bank ended a decades-old controlled foreign exchange rate regime, as part of an economic reform package that aimed to rescue the national economy. The reforms were begun when the foreign exchange parallel market thrived, foreign currency reserves were at record lows and investors refused to inject money into a chaotic local market.

The reform package included slashing almost 80% of fuel, electricity and water subsidies, the introduction of new taxes and a loan of $12 billion from the International Monetary Fund (IMF).

“The measures have paid off at the level of economic indicators,” said Fakhry el-Fiky, a former assistant to the IMF executive director. “Exports are rising, investments are coming back and Egypt is turning into an affordable destination for tourists.”

The rise in exports, especially construction materials and agricultural crops, is backed by a weaker pound that gives Egyptian products a competitive edge in foreign markets.

The eradication of the foreign exchange parallel market also brought stability to the market, which encourages investments. In the first half of 2018, foreign investment inflows increased by 24%, compared with the first half of the previous year, the Ministry of Investment said. The economic growth rate was 5.3% this year, up from 4.2% last year and less than 3% in 2016.

The reforms rescued foreign currency reserves at the central bank, raising them to $44.5 billion from $19 billion in October 2016. Egypt hopes to raise the reserves to $50 billion within three years.

Monetary reforms are encouraging Egyptians working abroad to send earnings home. In 2017, remittances from Egyptians working in other countries rose to $26 billion, the highest in history. Before the flotation, Egyptian nationals usually exchanged the dollars they had for Egyptian pounds before sending them to their families in Egypt to benefit from the rate difference.

The exchange rate of the pound against the US dollar has also been stable for several months, at around 17.80 pounds a dollar. Before the flotation, the exchange rate was 8 pounds a US dollar.

The drop in the value of the national currency has been disastrous for many people. Those like Dessouki have especially felt the heat.

He said he is incapable of meeting daily financial obligations: bills, food for the family and medicine. “My wife and I spend most of the time at our parents’ homes in order to save some money,” Dessouki said.

He said he works hard to stay afloat while commodity prices keep rising. However, many other Egyptians have fewer options. The national poverty rate has risen to 27.8% of the population.

This is happening because of the sharp increase in the inflation rate after the pound flotation. In March, the annual inflation was 11.4% after more than 14% a year earlier.

The government works to shield the poor from the harmful effects of the reforms by increasing some food subsidies, distributing financial aid to tens of thousands of poor families and constructing flats for slum dwellers and those with limited incomes.

Economists call for offering more support to the poor so that they can keep going.

“The social protection programmes launched by the government are far from enough,” said Rashad Abdo, an economics professor at Helwan University. “There is a huge demand for support, given the very large number of people who have been negatively affected by the reforms.”

Dessouki said he will enroll his son in a nursery school soon. His wife wants to find a job at the school because she heard that the school administration offers a 50% discount for children whose parents work there.

“We are trying to get by but this is very difficult,” Dessouki said. “It is the poor who are footing the bill of the reforms.”

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