Egypt’s government appears headed towards a dramatic moment of truth in the coming few weeks, as it seeks to assert control over its rapidly disintegrating currency regime and finances. Even though the inevitable austerity measures could trigger a groundswell of discontent, the government must move quickly and decisively, since delays will make the financial mess even harder to resolve down the road.
Over the past two weeks, the Egyptian pound tumbled from 12.87 to the US dollar to about 15 on the black market as Egyptians, well aware that a devaluation was on its way, rushed to abandon the currency. The black market price now carries a premium of about 70 per cent to the central bank’s official peg of 8.88 to the dollar, a peg which no longer has any basis in reality.
This run on the pound began ahead of the annual IMF meetings in Washington, held from October 7 to 9. Egypt’s finance minister and central bank governor were flying to Washington, and it was widely believed in Egypt’s financial community that they would use the occasion to submit Egypt’s request for a desperately needed $12 billion finance package to the IMF’s executive board. A devaluation, it was thought, was a key condition in any IMF loan accord.
But two days before the meeting, the finance ministry, perhaps belatedly noticing the run on the currency, told Reuters the loan would be not be submitted at the meetings, but at an executive board meeting scheduled for later on. Then on October 8, IMF managing director Christine Lagarde explained what the Egyptian government had not yet explained – Egypt would have to devalue its currency and cut subsidies before it could even submit any loan accord to the board.
On top of that, officials said, Egypt had not yet been able to meet a third condition for the loan, that it line up $5 billion to $6bn in additional financing from other donors.
This pushes any possible approval of the IMF loan to mid-next month, assuming Egypt can come up with the additional financing. Some of the money was to be provided by Saudi Arabia, but Cairo’s relations with Riyadh were recently muddied by a disagreement over Syria, reportedly prompting Riyadh to suspend previously promised oil product shipments to Egypt.
Egypt had long postponed cutting fuel subsidies for fear of enraging a public already suffering from years of economic stagnation. When he came to power two years ago, president Abdel Fattah El Sisi raised petrol and diesel prices by 40 to 78 per cent, but inflation, now running at 14 per cent a year, has already eaten up part of that increase.
The country’s fuel subsidies have helped to create a huge budget deficit, which the government has been financing essentially by printing money, a policy that is unsustainable.
The need for these economic reforms is bad news for the government. Egyptians are already furious over a host of recent austerity measures – in August the government raised electricity prices by 25 to 40 per cent, and last month it imposed a 13 per cent valued-added tax to replace a 10 per cent sales tax. It also recently increased water bills and the tax on tobacco and alcohol.
The anger in the street has become palpable, and the government risks protests if it goes ahead with fuel price increases. Activists have already called for a mass demonstration on November 11 to protest against the rising cost of living. In a speech on September 26, Mr El Sisi said the military could deploy across the entire country in six hours if needed, a remark Egyptians in the street interpreted as a warning to would-be protesters.
The government has little choice but to press ahead with the IMF accord. People making foreign exchange transactions have increasingly abandoned the banking system in favour of the black market, and fewer dollars are making it into central bank coffers. Facebook pages have sprouted up to help black-market buyers and sellers find each other. One has about a quarter of a million members.
The central bank is having to scrape to find dollars for essential commodities such as wheat and fuel. KLM has said it will stop flying to Egypt in January because it cannot get its dollars out of the country. Factories have stalled for lack of spare parts. Meanwhile, the pound has only continued to weaken since the IMF accord was postponed.
When the central bank does move to devalue, halfway measures will not be enough. It must weaken the pound aggressively – the Dubai-based investment bank Arqaam Capital suggests to 14 to the dollar – to convince the market that the price in banks matches reality, thus restoring confidence. And it must do it quickly. The longer it waits, the further the pound will fall on the black market, and the steeper any devaluation will have to be.
Patrick Werr has worked as a financial writer in Egypt for 26 years.
business@thenational.ae
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