The Central Bank of Egypt decided, in an extraordinary meeting held on Monday, to raise the interest rate by 1 per cent to 9.25 per cent on deposits and 10.25 per cent on lending. It also allowed – indirectly – to depreciate the pound’s value against the dollar, to drop its value in banks by 16 per cent at once, as one dollar became equivalent to 18.2 pounds, after it was stable at 15.65 years ago.
The Central Bank’s decisions raised panic in the markets, as the buying and selling movement stopped until the dollar price stabilises, until the increases imposed on goods and products, mainly imported ones, are determined.
Egypt depends mainly on importing goods and products from abroad, as its agricultural production (especially grains) is insufficient. Most of its industries are light or medium and depend on production inputs from abroad. Therefore, any pound depreciation against the dollar directly means an increase in prices. All imported goods and products and locally manufactured with imported raw materials have the same rate of devaluation of the pound (16 per cent, so far).
Grains, such as wheat and corn, automobiles and electrical appliances, chemicals and fertilisers, medicines and medical devices, etc., are all goods and products whose prices will increase in the next few days, if they have not already increased.
This will be added to the already high inflation by the Central Bank’s recent decisions. The total governorates of the republic recorded a 10 per cent increase in prices last February, which exceeds the Central Bank’s targets (5 to 9 per cent).
Of course, this will affect the purchasing power of citizens and will lead to an increase in the burdens on them, which means a decrease in the level of welfare and an increase in poverty rates in a country where about 30 per cent of the population lives below the poverty line. According to figures before the Corona pandemic, another 30 per cent is close to the edge of poverty.Following the Central Bank’s decision, the government announced the allocation of a financial package of 130 billion pounds ($7.1 billion) to mitigate the expected violent impact of the devaluation of the pound and the high level of inflation on citizens, especially those with low incomes.
The government’s decisions included improving wages and pensions starting next April, instead of the beginning of the new fiscal year next July, as well as a slight increase in social protection programs, and raising the tax exemption limit from 24,000 pounds to 30,000 pounds (1,650 dollars) annually, an increase of 25 per cent.
The wage package, which will be implemented early next month, included the payment of a regular allowance to those who are addressed by the civil service law at 8 per cent of the job wage, instead of 7 per cent as stipulated in the new budget draft, and a special allowance for those who are not addressed by the civil service at 15 per cent of the basic wage, instead of 13 per cent, with a minimum bonus of 100 pounds per month.
The additional monthly incentives for employees who are addressed by the provisions of the Civil Service Law and workers not addressed by it are settled in cut-off financial categories ranging between EGP 175 and EGP 400 depending on job grades, and they are the same incentives in the new draft budget without any increase, which was approved last January.
For social protection networks, the Ministry of Finance announced a measure of 2.7 billion pounds to include about 450,000 families in the lists of beneficiaries of the “Solidarity and Karama” program to help the poor and increase the number of beneficiaries by 12 per cent. In contrast, each family’s share of financial allocations will increase by only 1.5 per cent, the value of 80 pounds.
The allocations for the “Solidarity and Karama” programs did not witness any increase during the current fiscal year’s budget, compared to the previous fiscal year, as the allocations remained at the level of 20 billion pounds annually for a total of 3.8 million beneficiary families, whose “annual” share was 5260 pounds ($289) for the family.
This assistance remains limited, as much of it is cosmetic aid, through bringing financial incentives imposed by law several months early, in return for the adverse economic effects that citizens will suffer from the decisions of the state represented by the Central Bank.
These deteriorating economic conditions portend dire social repercussions on citizens, especially the poor, which may lead to a wave of unrest and violent protests whose motives will not be political, but mainly for bread.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.