Cairo: Dizzying price rises have added strain to Egyptian lives across the country following a move to let internal financial markets set the value of the Egyptian pound without limits.
The full floatation of the currency was agreed as part of reforms required under the terms of a multi-billion-dollar loan from the International Monetary Fund (IMF). It came at a difficult time, alongside increasing economic turmoil in the global economy at the beginning of the new year.
Many Egyptians are struggling to swallow the hard pill of wider economic reforms mandated by IMF. The topic seems to be the only thing Egyptians talk about lately.
The drowning currency’s gasp for air is all that can be heard.
The slump in the country’s currency took the price of a dollar as high as 32 Egyptian pounds on 11 January. The next day, the pound rebounded to about 30 pounds to the dollar. Economic pressure and tension were palpable in the markets as prices increased from one hour and the next.
Dwindling purchasing power
The vast majority of Egyptians have lost more than one third of their purchasing power in the past few months. The pound continues to weaken, prices continue to rise, both at home and worldwide, Russia's war on Ukraine is still raging, and foreign investors are still reluctant to enter the Egyptian market.
Meanwhile, it remains unclear if the private sector can rescue the economy at all, and if it can, to what extent it can be saved.
“How long will we have to submit to the IMF’s whims?” asks Hassan Gomaa, owner of a small bakery.
“Whenever the government strikes a deal with the IMF, citizens bear the brunt. Our pockets are emptied, and our peaceful lives are disturbed.”
Since Cairo resorted to the IMF in November 2016, Egyptians have felt the impact of government mandated economic reforms which include: fuel and natural gas price jumps, subsidy cutbacks, pricier tags for goods and services, and higher fees and taxes.
Along with support from friendly Arab countries, Cairo relied heavily on the three-year $12 billion loan it took out from the IMF in several instalments under an agreement concluded in November 2016.
However, the government failed to carry out the required reforms that would have improved the investment case for the country. Instead, investors complain of difficult procedures, increased fees, and competition from the state.
As markets grappled with an unworkable official exchange rate, the Central Bank of Egypt (CBE) began floating the pound as of 2016. The Egyptian currency’s value weakened sharply.
Where once 8 pounds were required to buy a dollar, soon it was 20. The pound stabalised at around 16 to the dollar in November 2016. This exchange rate impact was one of the prices paid by the country to fill the deficit in the state budget with the IMF loan.
Economy faces headwinds
In addition to staggering public expenditures, Egypt has also been affected by several developments that transcend its borders: the repercussions of the Covid-19 pandemic, rising geopolitical tensions around the world, especially as the Russia-Ukraine war continues to rage, and moves by central banks across the world to increase interest rates, led by the US Federal Reserve.
So, when the dollar peg to Egypt’s pound was altered on the official market, the parallel currency market was immediately shaken — particularly as the gap between the official and unofficial market rates tightened.
Since March 2022, the CBE has gone to great lengths to control the exchange rate. Its long list of measures included a significant three-phased devaluation of the Egyptian currency relative to the dollar. Thus, the price of a dollar surged from 15.75 pounds in March to 30.60 pounds following the third floating in December 2022.
The price hike was felt clearly in the food market. It struck oils, fats, vegetables, and fruits. But it had an even bigger impact on the prices of fish, meat, poultry, and cheese. What were once basic items suddenly became luxuries to many citizens as the pound fell to its lowest ever level against the dollar.
How big are Egypt’s debts?
According to a report released by the CBE last September, Egypt’s external public debt stands at about $157.8 billion, compared to $34.4 billion at the end of 2012 — a near fivefold increase in a decade.