Monday,25 March, 2019
Current issue | Issue 1357, (17 - 23 August 2017)
Monday,25 March, 2019
Issue 1357, (17 - 23 August 2017)

Ahram Weekly

The fruits of floatation

Last year’s floatation of the Egyptian pound was a critical step towards the economic development of the country over the long run, writes Aisha Ghoneimy

The government has embarked on a critical economic reform programme that has encompassed the floating of the Egyptian pound, the implementation of fiscal consolidation measures and the reform of the investment climate.

In November 2016, the Central Bank of Egypt (CBE) allowed the pound to float freely against other currencies in a decisive decision at a critical period that was taken in order to rescue the economy from the dark tunnel it was in and no end of economic losses.

The liberalisation of the exchange rate was an essential step towards retrieving the competitiveness of the economy and supporting private-sector activity and investment opportunities hindered by shortages of hard currency. Moreover, the earlier dominance of speculation in the black/informal market and in tourism revenues had caused major shortages in the supply of hard currency, reflected in Egypt’s lower net international reserves (NIR) of $19.06 billion at the end of October 2016.

Speculators had grasped the opportunity of high demand for foreign currencies in order to raise their prices by more than what was quoted on the official market. As a result, the CBE had to undermine the black/informal market by allowing the market forces of supply and demand to determine the price of foreign and domestic currencies.

At the same time, the government took key decisions to boost the purchasing power of the pound and stabilise the foreign exchange market. One of these related to its strategy of developing exports and rationalising imports in order to increase the competitiveness of Egyptian exports in foreign markets, expand industrial investment, and deepen domestic industry such that it was able to match the quality of imported products. This in time will result in decreasing the quantity of imports and increasing exports.

Besides the floatation of the currency, the government’s introduction of new regulations and a new investment law have helped lure back foreign investors to Egypt and thus increase net inflows from foreign direct investment (FDI) and foreign investment in Egyptian treasury bills accompanied by further increases in the country’s foreign reserves.

However, social pressures have been exacerbated. This has been due to the high rate of inflation that has stemmed from the higher prices of imported commodities because of the floating of the pound, in addition to the removal of subsidies and the imposition of a new Value-Added Tax (VAT), all part of the government’s economic reform programme.

In order to combat this inflation, the CBE has raised interest rates as a short-term tool to lower it. The government has also introduced social programmes to help poorer households overcome the short-term negative implications of economic reform.

In spite of such negative consequences of floating the pound in the short run, in the long run it will lead to positive returns for the economy as a whole. There has already been a decrease in the trade deficit by 46 per cent year-on-year and significant increases in the NIR to reach $36.04 billion in July 2017, boosting confidence in the Egyptian economy and leading to positive impacts on credit ratings.

The significant increases in the NIR are due particularly to improvements in the balance of trade, increases in remittances from abroad, increased revenues from tourism, as well as net investment inflows. It is noteworthy that Egypt’s balance of payments saw an overall surplus immediately following the decision to liberalise the exchange rate, due to increases in net inflows of capital and decreases in the current account deficit supported by gradual improvements in the trade balance and tourism revenues, which jumped by 128.3 per cent to reach $1.3 billion in the year to March.

In addition, the floatation of the pound has contributed to a 10 per cent increase in total remittances from abroad, reaching $8 billion in the period from November 2016 to March 2017.

Egypt’s trade deficit has been steadily improving since the floatation of the pound, with exports spiking to $11.13 billion during the first six months of 2017 compared to the corresponding period last year by an increase of eight per cent. By contrast, imports declined by 30 per cent. As a result, the country’s trade deficit dropped by 46 per cent on an annual basis during the first half of 2017 to reach $13 billion.

The country’s capital and financial accounts have also been improved by increases in foreign investment in Egyptian government securities due to the recent $4 billion Eurobond sale. Net inflows of FDI amounted to $8.7 billion by the end of fiscal year 2016-2017, and they are expected to exceed $10 billion in the current fiscal year. 

This meant that the value of the pound then started to appreciate, reaching around LE17.8 to the US dollar in July 2017 for the first time after its earlier depreciation to LE18.8. The pound is gradually regaining its strength on the back of steady increases in the foreign reserves.

The Ministry of Planning’s economic indicators for fiscal year 2017-2018 forecast that the pound will appreciate more, accompanied by increases in the GDP growth rate, which should reach around 4.8 per cent in 2017-2018, compared to 4.1 per cent in 2016-2017. Inflation should decline to around 18 per cent, and there should be a rise in the employment rate due to job opportunities that are projected to be created by both public and private investment.

Further gains are expected to be accomplished in the long run, and GDP growth is expected to increase as a result of increased investment and net exports. Net inflows of foreign direct and indirect investment are expected to be supported by the enhanced competitiveness of the economy. Tourism revenues are also expected to grow, as the depreciation of the currency will attract more tourists to Egypt when accompanied by political and economic stability. More job opportunities are expected to be created as a result of improved domestic exporting industries and increases in investment.

The government and the CBE are taking major steps towards achieving the targets of the country’s economic reform programme, fulfilling these through the consistent coordination of three main policies: fiscal policy, monetary policy and trade policy.

Society will see the fruit of such economic reform on the long run, even if this may take time to materialise as a result of the challenges that have faced the Egyptian economy since 2011. The government should therefore continue to provide the lower and middle classes with subsidised food and public services like education, healthcare and transportation. There is also a need for further cash transfers in order to bridge the widening income gaps in society that have been seen as a result of pressures on the middle classes.

The author is a researcher and coordinator of international relations at the Faculty of Economics and Political Science, Cairo University.

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