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Floating the pound in Egypt between alleviation and exacerbating crises

March 15, 2024 at 12:09 pm

People walk past a currency exchange shop displaying a giant US dollars banknote on November 3, 2016 in Cairo, Egypt [KHALED DESOUKI/AFP via Getty Images]

In an extraordinary meeting of the Central Bank of Egypt’s Monetary Policy Committee last week, the bank issued a statement highlighting the decision it made to raise interest rates by 600 base points and allow the exchange rate to move according to market mechanisms. It justified this decision by eliminating the accumulation of demand for foreign currency following the closing of the gap between the official exchange rate and the parallel exchange rate. It also announced that, as part of its interest in the role assigned to it to protect the requirements of sustainable development, the bank stressed its commitment to maintaining price stability in the medium term, as it targets inflation as a main basis for monetary policy, with the exchange rate moving according to market mechanisms.

Immediately after the announcement, the exchange rate of the Egyptian pound in the official market fell by more than 60 per cent, as its trading price against the dollar was 30.9 pounds before the float. The trading price went over 54 pounds on the day of the float, then at the end of the day it reached 50.54 pounds.

The decision of the Central Bank to float the Egyptian pound was expected and was not surprising, as the floatation was not only linked to the local will but was imposed by the external will represented by the International Monetary Fund and its dominating order which suspended the second tranche of its last loan – estimated at $3 billion – until its dictates were adhered to, beginning with the flotation. Therefore, it was not surprising that the floatation decision was issued while the IMF’s delegation was in Egypt and a few hours later the government reached an agreement worth $8 billion with IMF, in addition to another loan from the IMF of $1-$1.2 billion for climate financing, according to Prime Minister Mostafa Madbouly’s remarks during a press conference on the afternoon of the floatation day. This conference was held with the Governor of the Central Bank, Hassan Abdullah, and the head of the IMF mission to Egypt.

Moreover, the justifications for the Central Bank’s decision to float the currency – although it conceals its real motive – are justifications that the Central Bank must punish itself for. What is the reason that led to the build-up of demand for hard currency and created a parallel market for the exchange rate? Isn’t the reason for this the policies of the Central Bank itself, its silence and its bearing of the selfish consequences of establishing projects that destroyed the hard currency, most notably the Suez Canal expansion project and the Administrative Capital, which brought both status and devastation at the same time?

Raising interest rates will not achieve stability and will not address inflation, which the Central Bank announced as a goal in its statement, including the term sustainable development in its statement, as Egypt is the furthest country away from it under this policy. While increasing the interest rate will withdraw an amount of liquidity from the market, especially after the issuance of bank investment certificates on the same day with a 30 per cent interest rate, this liquidity will not achieve a significant reduction in inflation, especially with the high cost of credit and its restrictions. This will disrupt the production movement that is suffering for years as a result of the shrinkage of the private sector and the expansion of militarisation throughout the economy.

Where are those who praised the billions from the Ras Al-Hikma project, even though it will evaporate as those did before it, with the division of the Egyptian state and its national security being fatally undermined? If the government was boasting about those billions, why did it decide to float the pound?

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The flotation in Egypt has fatal consequences, including the exhaustion of savings, the rise in prices, the increase in the poverty rate with the dissolution of what remains of the middle class, the increase in the import costs and the doubling of the value of external debt when calculated in the local currency. There is no hope for increasing exports in light of their inflexibility and the shrinkage of the private sector.

The floating of the currency in Egypt is just a link in the chain of the flotation spiral, through which Egypt will move from one crisis to a greater crisis with a new flotation, with the flotation cycle becoming known: debts, selling assets, patching up debts, then floating the currency. Then this starts all over again with an even bigger crisis after handing over to the IMF, destroying the country and burdening the people with high prices and poverty, generation after generation. The consequences of this destructive policy in terms of the country’s capabilities and resources are so severe that the Egyptian Finance Minister is boasting about the IMF to pave the way for receiving external financing worth $20 billion.

The greatest affliction is the government that looks at the supply and neglects the disease by relying on monetary policy based on floating the currency that restricts the sale of hard currencies and neglects social protection. In the end it will create a new parallel market after not-so-long. How miserable is that policy that has no goal other than patching up debts and selling assets.

If the government is serious about solving its problems, it must first adopt a policy of justice by removing injustices, clearing prisons of the oppressed and compensating those incorrectly detained. Injustice is darkness, and the Egyptian economy lives in this darkness. Ibn Khaldun was right when he said: “Injustice heralds the destruction of civilisation.” The policy of justice also includes providing social protection to those in need, so that they do not have to ask.

We must also focus on the structural policy that ends the militarisation of the economy, opens the door to the private sector, enhances production, provides employment and job opportunities, meets the needs of the local market for goods and services and guides imports and enhances exports, while exiting the tunnel of dealing with the IMF by scheduling existing debts. This is because whoever entered the IMF tunnel only leaves on the ruins of a state whose resources have been enslaved. What is the situation like now when it reaches selling the country’s assets to countries that have their hands on the Egyptian economy and national security, and transforming Egypt from the treasuries of a rich land to the treasuries of an indebted and begging nation?

This article first appeared in Arabic in Arabi21 on 13 March 2024

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