Egypt: Free float relief

Egypt’s currency has nosedived since its central bank free floated the pound this month. It lost more than 50% of its value, adding to the burden already felt by Egyptian consumers.

The pound was trading at around LE15.50 against the US dollar earlier this week, down from an official rate of LE8.88 earlier this month. The devaluation paves the way for a US$12bn loan from the International Monetary Fund ($2.75m is already on its way).

Early in 2016, Central Bank governor Tarek Amer implemented the biggest devaluation in years, cutting the pound rate by 13%. Even at this level, however, it was far from resembling an accurate market rate, leading the parallel market to thrive.

Last week’s decision to devalue the currency was not a standalone measure. It was accompanied by a sudden cut in fuel subsidies that raised the price of petrol and diesel by more than 45% overnight.

Egypt’s population has been forced to pick up the strain. “We as a society faced a major shock [last week] even though we have been expecting this,” Samer Attallah, assistant professor of economics at the American University in Cairo, says. “If I were the government I would have phased it out.”

At a discussion about the implications of the devaluation, Attallah said: “What was surprising was everything happening on the same day. We expected a devaluation, not a complete flotation.”

Pointing to the coinciding cut in fuel subsidies, he added, “This is a real economic shock. People lost 48% of the value of their savings and this has a severe impact on purchasing power.”

Though harsh in its effects on consumers, the decision to finally devalue the pound came as a relief to markets.

Simultaneously, the Central Bank unexpectedly raised its two main interest rates by three percentage points and announced investment certificates with high interest rates in a bid to lure dollars from the market.

The Egyptian stock exchange reacted to the devaluation with historic gains, with the main benchmark index breaking the 10,000 barrier, up from 8,800 points two weeks ago. Still, the delay to the implementation of the devaluation had compounded an already difficult decision.

After months of staggered negotiations, Egypt reached an initial agreement with the International Monetary Fund in late July for a three-year loan. The conditions attached to the loan require the Egyptian government to introduce reforms that affect subsidies, taxes and investment laws.

It is unclear why a devaluation or flotation had been delayed. As a result, business and trade activity has become erratic as supplies of both luxury and basic goods have become unreliable. The currency crisis resulted in severe shortages of goods, and it recently began to affect sugar supplies.

The disappearance of sugar from shelves made it clear that Egypt’s worsening economic conditions had become difficult to ignore, and that the government was inadvertently wading into a battle it can little afford to enter. Egypt’s annual consumption of sugar is 3Mt , only 2Mt of which is produced locally, according to the US department of agriculture. The supply gap is filled by imports mainly from Brazil and the EU and particularly between the months of July and October.

The sugar shortage is a stark reminder of Egypt’s heavy reliance on dollars to import not only luxury goods, but also basic commodities whose absence is socially sensitive enough to spur political turmoil.

How the changes to Egypt’s currency will affect the supply of goods remains to be seen. Banks will be left to decide the rate of the pound.

Either way, families will have to reduce their standard of living, as Attallah explains.