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Egypt needs an urgent rescue plan

March 23, 2022 at 11:15 am

Egyptian men work in a bakery at a market in Cairo, on March 17, 2022 [KHALED DESOUKI/AFP via Getty Images]

All over the world, when interest rates go up, the exchange rate of the local currency rises against other currencies. This is a rule of thumb, but what happened in Egypt was the complete opposite; the exchange rate of the Egyptian pound collapsed quickly, and prices rose, adding to inflation.

The decline in the value of the pound after raising the interest rate is a very dangerous economic indicator. It means that confidence in three main pillars is shaky or perhaps non-existent: the local currency; macroeconomic performance; and the decisions of monetary policy makers in the country. This situation is, of course, related closely to the current war in Ukraine, as well as the distrust in economic decisions, especially the decision to float the pound in November 2016, which at that time led to a sudden collapse in its exchange rate.

READ: Egypt in new round of talks with the IMF for support

There is only one explanation for the collapse of the exchange rate of the pound after raising the interest rate, which is that people are convinced that monetary policy makers in Egypt no longer have the tools to address the economic crisis, provide the necessary hard currency or restrain inflation. For this reason, investors, both local and foreign, rushed to get rid of the local currency and resorted to the safe haven of the US dollar.

Russia's invasion of Ukraine could lead to bread shortages across parts of the Arab world - Cartoon [Sabaaneh/Middle East Monitor]

Russia’s invasion of Ukraine could lead to bread shortages across parts of the Arab world – Cartoon [Sabaaneh/Middle East Monitor]

What happened to the pound, then, is one of the manifestations of a larger and deeper economic crisis. Egypt is facing additional costs amounting to billions as it is the largest importer of wheat in the world and wheat prices have already risen by more than 60 per cent since the beginning of the Russian invasion of Ukraine. This, inevitably, has led to an increase in the price of bread, but that is not the only crisis. A similar situation relates to oil, which is being sold today at prices not seen for fifteen years. Moreover, the Egyptian tourism sector, which is the country’s main source of hard currency, is also facing a crisis because more than half of the tourists who visit Egypt every year come from Russia and Ukraine.

These three crises — wheat, oil and tourism — are related directly to the US dollar and hard currency. The high costs of wheat and oil mean an increase in the need for the dollar, and consequently more deficit in the trade balance. As for the tourism sector crisis, it warns of a decline in the country’s hard currency revenues, which causes further weakness of the local currency.

READ: Egyptian Prime Minister sets fixed price for unsubsidised bread

Not only that, but in the latest report issued by the Stockholm Institute for Peace, it was found that Egypt is the third largest importer of arms in the world, with purchases constituting 5.7 per cent of total sales. Indeed, Egypt’s imports of arms increased during the past four years by 73 per cent. This means that billions of dollars, precious hard currency, are used to buy weapons instead of buying wheat and oil and providing the necessary support for the local currency.

In conclusion, the current economic crisis in Egypt is very dangerous, and the recent decline in the exchange rate of the pound is only one of the outcomes of this crisis. To get out of it, a comprehensive and urgent rescue plan is needed. Until that is in place, the pound will lose more of its value and prices will go up, which means more poverty, hunger, disease and unemployment for the people of Egypt.

Translated from Arabi 21, 22 March 2022

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