How Will the Egyptian System Deal With the 5th Pound Flotation?
Egypt is facing a major economic crisis as the International Monetary Fund (IMF) is about to conduct its first review of the country’s economic reforms. Egyptian experts say that Cairo is in a dilemma between implementing the IMF’s demands to devalue the pound for the fifth time since 2016 during Ramadan, which would mean doubling prices and reviving popular anger, or waiting until after Eid al-Fitr.
A political economist explained to Al-Estiklal that Abdel Fattah el-Sisi’s regime is in a dilemma because of this fifth flotation, which may raise the dollar’s price to 40 pounds and make it “wait for more devaluation,” according to Mada Masr.
He explained that Sisi’s regime has two solutions: The first is to initiate the IMF’s requests and devalue the Egyptian currency from about 30 to 40 pounds per dollar, which means increasing the anger of Egyptians during Ramadan.
The second solution is to negotiate with the IMF to postpone the implementation of the new devaluation of the pound value until after Eid al-Fitr, and to disburse the grants that the regime promised and increase pensions to ease the shock of the new flotation. This is what the “political and security apparatus” see as a fear of an explosion of popular anger.
But the Egyptian expert, who preferred not to mention his name, explained that both options are difficult because if the flotation takes place at the end of March after the IMF mission leaves and finishes reviewing, Egyptians will spend the rest of Ramadan and Eid in a state of tension and anger.
Financial analysts told Reuters on March 28, 2023, that there is a wide gap between the dollar exchange rate in the black market and bank prices. This means that the pound needs a new flotation against the dollar.
The People Have No Importance
Regarding which of the two options the Egyptian authorities may resort to, economic expert Abdul Hafez al-Sawi said that Cairo now relies heavily on bold decision-making. He explained to Al-Estiklal that the government relies on security guarantees to control any reaction against any economic decision that affects citizens’ lives, which means that the pound may be devalued at any time before or after Ramadan and Eid. He clarified that the Egyptian government has “overcome the issue of timing and its challenges to impose specific economic orientations.”
He gave an example that the devaluation of the pound is largely linked to presenting the general budget to Parliament on April 1, 2023, according to the constitution.
However, the government may decide to devalue the pound without caring about its economic or social impacts on Egyptians.
Al-Sawi noted that the devaluation of the currency from about 16 pounds per U.S. dollar to more than 30 pounds now did not take long, which means that the psychological barrier and boldness in decision-making allow the authorities to make a new bold decision in devaluation during the coming period.
The street’s acceptance of the idea of reducing the pound without any reaction, and the sale of Egypt’s assets without any popular or labor union, party, or other reaction, gives the government the justification to make many similar decisions without taking into account the reaction of the street, according to al-Sawi.
He pointed out that the issue of a popular explosion may come soon because the government is taking dangerous steps that help to explode the street and anger public opinion, especially in light of the spread of corruption, high prices, and the absence of accountability.
However, determining the timing of this explosion is difficult due to the absence of opinion polls and freedoms and any roles for civil society to monitor government decisions or object to them.
Egyptian economic analyst Mostafa Abdelsalam also confirmed that the Egyptian authorities “will not care much about public opinion, but are primarily concerned with obtaining the approval of the fund for the new tranche, which paves the way for negotiations with Gulf countries to obtain $14 billion in the form of investment and asset purchases.
He expected, in an interview with Al-Estiklal, that the Central Bank of Egypt would take steps, with the arrival of the International Monetary Fund mission to Cairo to review its commitment to what was agreed upon in exchange for a $3 billion loan, to persuade the mission of Egypt’s seriousness and pass the second tranche of the loan.
Among these steps, as Abdelsalam confirms, is allowing greater flexibility in the exchange rate in order to reduce the gap with the black market for currency, which means allowing the pound to fall against the dollar, also raising interest rates between 2 and 33% to combat inflation, which exceeded 40% in February 2023.
He explained that “there may not be a complete flotation, especially since the difference between the official and the non-official price is about 5 pounds per dollar.
“But any increase in the dollar price will translate into higher commodity prices, which will increase the suffering of Egyptians and weaken their purchasing power.”
Float and Deferral
The International Monetary Fund (IMF) has not yet set a date for the first review of Egypt’s economic reform program, following its $3 billion loan, according to Bloomberg agency on March 23, 2023.
The IMF spokesperson, Julie Kozack, said that preparations for the first review have begun, and mission dates will be announced when agreed with the Egyptian government.
The mission was supposed to be in Egypt currently, as the IMF had set March 15, 2023, for the first review of the program in the staff report published in January 2023, but did not explain the reasons for the delay. This led to speculation that Egypt requested the delay until after Eid al-Fitr, opting for “security and political vision” rather than economic measures to deal with the crisis of the pound’s collapse.
The IMF is scheduled to conduct eight reviews over the program’s 46-month duration, which ends in June 2026. The second review, after the current one, will be on September 15, 2023.
Egypt’s Central Bank has allowed the pound to float four times since November 2016, in agreement with the IMF, the first of which was in November 2016, followed by two times in 2022, in March and October, and once at the beginning of 2023.
The floats that have taken place since March 2022 resulted in an increase in the dollar’s price against the pound by more than 90%.
The year 2022 was tough on the Egyptian pound, as it began to collapse from 15.75 pounds to the dollar at the beginning of the year to 18 pounds after the central bank’s decision to float it in March, losing 15% of its value.
It underwent a second float in October 2022, losing 57% of its value and registering 24.7 pounds.
Then, the pound underwent a fourth float in January 2023 as part of the government’s negotiations with the IMF for a new $3 billion loan, to reach the lowest level at 32 pounds to the dollar before improving to 30.7 pounds.
The near fifth flotation is expected to be in late March 2023 or in April, according to the Egyptian government, in order to coincide with a new collapse of the pound due to the lack of dollar liquidity in Egypt, putting pressure on the currency.
Egyptians on social media are discussing the fifth flotation with bitter sarcasm, given the government’s suppression of any objections to its policies.
A recent report by HSBC Bank on March 22, 2023, predicts that the dollar will reach 35–40 pounds per dollar in the coming months in the medium term.
According to Bloomberg data on March 6, 2023, the non-deliverable forward contracts for the Egyptian pound continued to decline, reaching unprecedented levels of over 40 pounds per dollar for a period of 12 months.
On March 7, 2023, five international banks predicted further declines in the value of the Egyptian pound in the near future, given the government’s failure to attract new inflows of dollars, raising the possibility of a new reduction in the value of the Egyptian currency.
The five banks agreed that the decline in the pound’s value was certain, but their estimates varied, ranging from 35 pounds in the short term, which means a 16% decline in the currency’s value since the beginning of March 2023.
In the long term, the price of the pound in non-deliverable forward contracts for a period of 12 months is expected to decline to between 37.9 and 38 pounds per dollar, according to Bloomberg data on March 8, 2023.
Painkillers Don’t Work
Despite Egypt’s anticipation of the upcoming evaluation by the International Monetary Fund for its economy in hopes of selling bonds and assets to Gulf countries, the American bank “Morgan Stanley” confirmed that currency exchange rate liberalization is not a magical solution to alleviate the Egyptian economic crisis.
On March 27, 2023, the bank explained in a report that the financial scope for Egypt is limited, and to put an end to the liquidity crisis caused by the ongoing foreign currency shortage and fill the financing gap, a “broad-based” program for government offerings must be implemented.
Egypt is expected to attract up to $7 billion through asset sales in 2024 (one billion dollars by the end of the current fiscal year in June and another five billion in the fiscal year 2024/2023), according to estimates by the American investment bank.
This may help increase foreign currency liquidity, enhance the state’s financial position, as well as narrow the financing gap, which Morgan Stanley estimates to be around $23–24 billion by the end of the fiscal year 2024/2023.
This would help ease expectations for further depreciation of the pound against foreign currencies and ensure a smooth transition to a permanent flexible exchange rate system.
Morgan Stanley asserts that Egypt’s delay in conducting a “large-scale” sale of its assets “may prove costly,” as the cessation of offerings from now until the end of the current fiscal year in June 2023 could lead to investor sentiment deterioration and liquidity problems with foreign currencies for extended periods.
This would increase expectations for further depreciation of the pound and inflation, increasing pressure on the current interest rate.
The analysts emphasized that allowing Cairo to further devalue the pound against the dollar “is not enough,” and allowing the currency to further depreciate until the start of attracting foreign flows is not a panacea given the already high levels of inflation and associated social costs, according to the analysts.
Morgan Stanley said that government debt burdens, in addition to debt service, are putting pressure on the Egyptian budget, accounting for about 92% of GDP in the fiscal year 2021–2022.
The report also expects government debt to rise to 96.2% of GDP in the current fiscal year, then to fall again to 91.5% in the next fiscal year.
Egypt needs external financing to cover the budget deficit in the fiscal year 2023–2024, amounting to about $24 billion, according to the report’s data.
The International Monetary Fund “estimates Egypt’s external financing gap at around $17 billion and expects its program will help unlock about $14 billion more from international and regional partners,” according to Bloomberg.
As part of efforts to resolve the dollar crisis to ensure the stability and non-collapse of the pound, the World Bank announced on March 22, 2023, that it had agreed to a new agreement with Egypt, under which it would receive $7 billion in financing for fiscal years 2023–2027.
Egypt is facing a severe economic crisis and a decline in its foreign currency reserves following the Russian invasion of Ukraine. This has led Cairo to seek a loan from the IMF and the World Bank and take measures to address the foreign exchange crisis.
