The journey of the Egyptian pound’s decline began in the wake of the military coup that was staged in mid-2013. This is a natural and logical result of the army taking to the street, its entrance into the political world and its forced imposition of control over the country and the people. The only development that occurred lately is that the pound reached a record low when the US dollar was exchanged for over 8 Egyptian pounds for the first time in history last week.
Since 2013, the decline had been gradual rather than rapid, meaning that the new government in Egypt was successful in delaying the decline, not overcoming or avoiding it. This is because Egypt, the second largest Arab economy, received financial aid between mid-2013 and the end of 2014 in foreign currency from the Gulf states. The value of this aid is over $20 billion, which helped the government avoid the crash of the Egyptian currency and protect the country from the economic collapse that almost occurred as a result of the military coup.
On 28 June 2013, the day that the army was deployed to the streets of Cairo in preparation for the 3 July coup, the USD was equivalent to only 6.9 Egyptian pounds. At that time, the Egyptian pound had already declined due to the political crisis in the country and the failure of the agreement between the Muslim Brotherhood and the national Salvation Front. The currency was also affected by the Tamarod movement’s calls to take to the streets once again.
In the three months following the military coup, specifically between September and December 2013, the value of the Egyptian pound increased slightly, and it settled its exchange rate against the foreign currencies as a result of the billions of dollars Egypt received in aid. This included the deposits made by Kuwait in hard currency, which helped the economy’s stability and covered the cost of the army deployment in the street. In 2014, the Egyptian pound started to gradually decline once again, but the financial aid prevented it from collapsing, and it began 2015 relatively stable. On 1 January 2015, $1 was equivalent to 7.1 Egyptian pounds, but the absence of aid from the Gulf since the beginning of the year led to the fastest decline of the Egyptian pound since the reign of King Farouk, with the Egyptian pound losing about 14 per cent of its value in just ten months.
There are several reasons behind the decline or fall of the Egyptian pound, the first of which is the deployment of the army in the streets and the disruption of the state institutions. This costs millions of dollars a day and the economy is burdened with additional expenses. It also increases the budget deficit, as the Armed Forces were forced to withdraw more funds from the cash reserves during 2015 due to the lack of Gulf aid. The army’s revenues were limited to American aid, which are purely military aid and do not include financial aid.
The second reason for the Egyptian pound’s decline is the collapse of the tourism sector, which accounts for 7-11 per cent of Egyptian GDP. More importantly, the tourism sector in Egypt generates about 20 per cent of its foreign exchange earnings, according to data from the State Information Service (SIS), which means that its collapse directly affects the hard currency and its availability in the local market. The collapse of the tourism sector is due to the fact that over 70 per cent of the tourists who flock to Egypt come from the European continent, while Arabs, despite their importance, only make up 8 per cent of tourism in Egypt. Everyone knows that a European tourist would not visit a politically unstable country or a country that is witnessing acts of violence and oppression, and Egypt’s image has been tarnished over the last two years due to the arrest of journalists, mass death sentences, and human rights violations. These are matters that the West takes seriously, and this makes many people fearful or hesitant to travel there.
The third reason for the decline of the Egyptian pound, which may be the most important, is the increase of corruption in Egypt during the past two years, as there is no parliament, meaningful political opposition or accountability. The country is under the rule of one individual who leads the army at a time when the army dominates over 40 per cent of the country’s economy. This means that politics, the economy, security, defence, laws, the constitution and the judiciary have remained under the control of one individual. This atmosphere undoubtedly reinforces corruption and allows the corrupt to steal whatever they want from the country’s resources.
All of these factors combined lead to an almost empty treasury in Egypt and have caused a severe decline in the country’s foreign currency reserves, which have been continuously falling over the past three months. In September alone, they suffered a 10 per cent decline, reaching dangerous levels, after losing over $3 billion in three months. The foreign currency stored in the Central Bank of Egypt is currently dropping by $1 billion a month, which may lead to further decline and a collapse in the future if the situation continues in this manner.
The economic and monetary crisis witnessed by Egypt at the moment is both stifling and dangerous, and escaping this is only possible by means of an emergency plan that calls for the recovery and revival of the tourism sector and the attraction of more foreign investments. These two sectors can only be revived if a climate of freedom, openness, stability, democracy and human rights preservation is provided.
Translated from Al Quds Al Arabi, 25 October, 2015.