Sunday,24 February, 2019
Current issue | Issue 1148, 16 - 22 may 2013
Sunday,24 February, 2019
Issue 1148, 16 - 22 may 2013

Ahram Weekly

Almost too late?

Despite improvements in tourism and remittances from workers abroad, Wael Ziyada, head of research at EFG-Hermes, believes the value of the Egyptian pound will continue to fall

Al-Ahram Weekly

A post-revolution drop in tourism and foreign direct investment has deeply harmed the economy as well as the Egyptian pound. Hayat Yehia
examines how the dollar’s rise against the pound has affected all aspects of life and interviews head of resear

What are the main reasons for the depreciation of the Egyptian pound?
The sharp drop in Egypt’s foreign currency reserves and the transfer of large amounts of foreign currency overseas after the 25 January Revolution are among the main reasons why the value of the pound has been falling. About $9.5 billion had left the country by the end of the first year of the revolution, while direct foreign investment had plummeted to almost zero after having peaked at $13.5 billion in fiscal year 2007-2008. One year before the revolution, these investments amounted to $6 billion.
Meanwhile, remittances from Egyptian workers abroad also dropped by about $1.5 billion after the revolution in Libya and the return of Egyptian labour. Tourism retreated by 25 per cent according to official statistics, but I believe the actual drop has been much higher. Hotel occupancy is now no more than 40 per cent.
At the same time, the trade deficit has mushroomed because of problems with importing energy resources. If the slowdown in economic growth had not partially reduced imports of some materials and commodities, this deficit would have been much worse. All this has put pressure on the exchange rate and led to the free fall of the Egyptian pound against the US dollar, the emergence of a black currency market, and rising inflation that is expected to continue, possibly reaching 12 per cent by the end of 2013.

Despite improvements in these indicators, the value of the dollar continues to climb against the pound. Why?
The government has announced that tourism figures are rising and remittances from abroad have risen by 70 per cent. Meanwhile, bank transactions on dollar deposits have also decreased the dollarisation process over the past two months. The price of the dollar has dropped on the black market to about LE7.5 to the dollar after it had touched a record LE8.25 two months ago. But these indicators will not be sustained if the economy continues to be managed without vision. It would be naïve to think that remittances will continue at these high levels or that the dollar will continue at this price under these conditions.
The budget deficit at the end of the current fiscal year in June is predicted to be 12 per cent of GDP, or LE200 billion. Personally, I believe it will be higher at 14 per cent in the coming fiscal year, or LE300 billion, which means greater problems in the exchange rate of the pound to the dollar, which could reach LE10 in 2014.
The problems at the beginning of the revolution had fewer repercussions and were related to the political transition, but today these repercussions have become more widespread. This has increased the economic threats and blocked the so-called transitional justice, meaning the restoration of the country’s institutions, organisations and people to compensate for the period of imbalance caused by the shock of change. This balance happens when all parties work together to realise the interests of the country.
Looking at the revolutions in other countries, in my opinion Egypt has the worst record of achieving transitional justice in comparison to almost all the other revolutions. Egypt has a destructive political opposition that is more interested in proving the validity of its ideologies over serving the interests of the nation and being flexible in terms of its thought. The biggest threat comes from the leftists who criticise the economic conditions but offer no alternative solutions.
Meanwhile, the Muslim Brotherhood wants to monopolise power, and since there is widespread disagreement in society it has politicised economic decision-making for its own political ends at the expense of genuine reform. For example, the government does not dare to take any decisions to reform the subsidies system, especially energy subsidies and raising taxes, which are two of the critical factors in resolving the country’s huge budget deficit, out of fears of losing the forthcoming elections.

But officials have often talked about reforming the subsidies system, especially for energy-intensive factories and imposing new taxes?
The government will not carry out any of these reforms before the parliamentary elections because the Brotherhood does not want to lose its popularity and in turn its parliamentary seats. The government had an opportunity more than one year ago to implement these reforms, and the butane gas coupons were announced 15 months ago. This procrastination has negatively impacted the IMF negotiations, which have become very difficult because the IMF feels Cairo is not serious about carrying out the needed reforms. Egypt does not have much more time to reform the subsidies and taxes, not only to obtain the IMF loan, but also to avoid economic collapse.
The chances of lifting the subsidies gradually have become slim, even though usually subsidies are lifted gradually over several years to avoid impacting the poor too much. The government will thus be forced to speed up the rate of lifting the subsidies and reforming taxes, even if these social strata are negatively affected.

Does borrowing from countries such as Qatar and Libya help solve the problem?
On the contrary, it compounds it. It is a moral catastrophe. Not only will we obtain these loans in exchange for high rates of interest, such as the Qatari deposit that has an interest rate of four per cent and could even become 4.5 per cent for the later bonds, they also hinder the country’s ability to take much-needed decisions on genuine economic reform.

What are your expectations for the exchange rate?
In the past, the bank only forecast the price of the dollar on the official market, but after the emergence of the black or parallel market, now the real exchange market in Egypt, Hermes has decided to add a new price in its forecasting called the “transaction rate”, which is the average price of the official and parallel market.
The bank forecasts the price of the dollar to reach LE7.6 and its price on the black market to touch LE8.25 by the end of 2013, especially amidst expectations that Egypt will not obtain the IMF loan before the last quarter of 2013.

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