Patrick Werr: Egypt has woes but pessimism has gone too far

On the surface at least, many of Venezuela’s problems seem to have parallels in Egypt, but when you dig deeper you'll find a gulf between them.

There has been a lot of speculation on social media that the Egyptian economy might be headed in the direction of Venezuela’s, where the currency has plummeted against the dollar and prices are soaring to near hyperinflation levels.

The short answer – highly unlikely.

On the surface at least, many of Venezuela’s problems seem to have parallels in Egypt.

Both countries peg their currencies to the dollar at unrealistic rates. Both have suffered from a huge decrease in foreign revenue – in Venezuela’s case from the collapse in oil prices in mid-2014, and in Egypt’s case with the collapse of tourism, first in 2011, then again a year ago when a Russian airplane was blown out of the sky over Sinai.

Both countries have expensive subsidy programmes for consumer goods and a complex regime of government-controlled prices that make their economies inflexible and unable to absorb shocks easily.

Venezuela’s mess was triggered by the collapse of oil prices from about US$110 per barrel in mid-2014 to under $50 now. At the time, oil accounted for more than 95 per cent of the country’s exports and half of government revenue. The revenue of Venezuela’s state oil company fell to $72.2 billion last year from $121.9bn in 2014, a drop of 41 per cent.

Rather than allow the cur­rency, the bolivar, to weaken to reflect the new reality, the government kept it fixed at 10 bolivars to the dollar for vital imports such as food, medicine, factory inputs and pensions for Venezuelans living abroad, but added a second rate of 658 for everything else. Neither rate matches supply and demand, so people increasingly turned to the black market.

At same time, the government began printing money to finance the enormous deficit that the collapse in oil revenue caused in its budget. M2 money supply grew by more than 100 per cent in the year to August, and the pace has been speeding up rapidly.

This, of course, has led to inflation as more and more bolivars chase after the same goods and services. Inflation this year could reach about 500 per cent and as much as 2,200 per cent next year, as the government prints money to pay its debts, the IMF forecasts. Inflation in 2014 was only about 68 per cent.

The printing of money has debased the exchange rate as well. The black market rate had been relatively stable at about 1,000 bolivars to the dollar over the past few months, but last weekend, it surged to well over 1,500, partly because of an upsurge in political instability.

With the currency collapsing, people have been reduced to carrying piles of cash in gym bags to make their purchases. Stores can no longer be bothered to count the notes out, so they weigh them on scales. The lack of foreign currency in the banks has led to acute short­ages of imported food and medicine. The IMF expects the Venezuelan economy to contract by 10 per cent this year.

While Egypt has its problems, the chance of it replicating Venezuela’s decline is very doubtful.

The key difference is ­money supply. Although Egypt has been printing money to help fin­ance its budget deficit for several years, the amount of money creation has been subdued compared with Vene­zuela’s. Although Egypt’s M2 money supply grew by a worrisomely high 18.1 per cent in the year to September, there are few signs that the rate of increase is growing. As a matter of fact, it has been at around this level since early 2013.

Egypt’s government is aware of the danger of an expanding money supply – the finance minister mentioned the subject a couple of times when addressing visiting American businesspeople last week.

Similarly, inflation, although running at the fast pace of 14 per cent, is far below anything that Venezuela’s economy has recorded in years.

At the same time, the Egyptian government has been making reforms to get its budget deficit under control. It implemented a value-added tax last month and raised electricity and tob­acco prices. Unlike Venezuela, Egypt has long been in close contact with the IMF and has committed itself to conditions that would pave the way in the coming weeks for $12bn in IMF loans.

These include devaluing the currency and decreasing the subsidies it pays to keep petrol and diesel prices low. These reforms would go a long way towards keeping inflation and the exchange rate under control.

Patrick Werr has worked as a financial writer in Egypt for 26 years

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