The reasons behind the decline of the Egyptian pound

The recent decline of the Egyptian pound comes as no surprise; in fact, it was expected. Moreover, it is not surprising to learn that all of the economic indicators and data coming out of Cairo suggest that the future of the Egyptian currency is bleak, and that the Egyptians need a national economic rescue programme. This must consist of reforms to remove the grip that the army has over economic life.

In previous articles I predicted the decline of the Egyptian pound within 2016, making $1 equivalent to 10 Egyptian pounds. These predictions still stand, because the economy is not like politics and the language of numbers does not lie; there is no room for deception or misguidance.

The Egyptians are continuing to pay the price of the army taking to the streets in the aftermath of the 25 January Revolution in 2011. Before this, they paid the price of the army’s domination of political, economic and public life. However, the biggest price they have had to pay came after 3 July 2013, when the army turned into an alternative security agency to the police, an alternative investment company to the private sector and a parallel government alongside the normal state institutions.

During the period between 3 July 2013 and mid-February 2016, almost a quarter of Egyptians’ money evaporated with the pound losing a quarter of its value. On the day before the overthrow of the Muslim Brotherhood — 2 July 2013 — the US dollar was equivalent to 6.9 Egyptian pounds; last week, the dollar exceeded 9 Egyptian pounds for the first time in history. The currency has lost about 23 per cent of its value since Al-Sisi came to power and the army took control of public life.

The economic data received from Egypt is mostly negative, with little apparent optimism therein. We should have witnessed the recent sharp decline in the exchange rate of the Egyptian pound during the second half of 2013, during the first few months following the military coup. However, the billions in financial aid received by the army from the Gulf States postponed the fall. The Gulf money did not save the country from the decline, as it barely covered part of the military budget and was not utilised for economic growth and normal production activity.

There is much information and data that drives me to believe that the Egyptian pound will continue to decline, the most important of which is that foreign currency reserves in the Egyptian Central Bank were worth $36 billion on 25 January 2011, but today are down to $16.4 billion, despite the billions pumped in by the Gulf States over the past few years. This means that an astronomical amount of money has evaporated from the Egyptian reserves, and only God knows where it went and when it was looted from the vaults of the Central Bank.

In addition to the decline of the foreign currency reserves, the tourism sector is suffering from a recession; so much so, that it is on the verge of collapse. Last month, tourism in Egypt fell by 46 per cent compared to last year, according to the Tourism Promotion Authority. This means that the revenue from this sector was cut by nearly half, and it usually generates 9-11 per cent of the foreign currency in the country.

In addition, the Suez Canal, upon which the Egyptian government has spent billions to expand the waterway, is suffering from a decline in revenue because shipping has reduced rather than increased. Revenue in 2015 declined for the first time in years, generating just $5.2 billion compared to $5.5 billion in 2014. The canal was expanded with money that could have been used for many other productive and profitable projects.

The flow of foreign investment has also declined, and they are normally an important source of foreign currency. Despite a slight improvement, investment is still below what it should be, at around 40 per cent less than the level in 2007 and 2008, when investment amounted to over $13.1 billion. Even after the international financial crisis, foreign investment fell to $6.7 billion, which was still higher than it is today.

These three sectors — tourism, the Suez Canal and foreign investments — are the main sources of foreign currency in Egypt. This further escalates the exchange rate crisis and makes it unlikely that a solution will be reached in the near future.

The conclusion is that Egypt is suffering from a deep economic crisis and government officials must acknowledge this. The crisis has brought the foreign currency exchange rate down to the current low levels, and pushed unemployment up to 13 per cent.

The negative data still suggests that the crisis will only get worse, and that the Egyptian pound will continue to fall unless an economic plan is put in place in order to save the country and people from the current situation. The plan must ensure that control over Egypt’s political, economic and public life is handed over to civilians.

Translated from Al Quds Al Arabi, 22 February, 2016.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.