In recent years, Egypt has faced economic deterioration casting a shadow over its present and future. Since the outbreak of the 25 January 2011 revolution, the Egyptian economy has suffered successive declines, which intensified with the spread of the COVID-19 pandemic in 2020 and the Russia-Ukraine conflict in 2022, then peaked with the war on the Gaza Strip since 7 October.
The challenges facing the Egyptian economy are many, from high inflation rates to a shortage of foreign currency, declining investment and rising unemployment, in addition to Cairo suffering a budget deficit and huge external debts that almost exploded with the successive decisions to float the local currency against the US dollar.
The effects of the economic turmoil were not limited to the financial side but extended to various aspects of life in Egypt: prices of basic goods rose noticeably, living standards fell, and anxiety and tension among citizens increased. To deal with these challenges, the Egyptian government took many decisions, including liberalising the pound’s exchange rate, raising interest rates, rationalising government spending and increasing social support, the latest being the surprise decisions taken by the Central Bank of Egypt today, Wednesday, to liberalise the pound’s exchange rate according to market mechanisms and raise interest rates to their highest level in its history by 600 basis points, affecting the overnight deposit and lending rates as well as the main operation rate, which reached 27.25%, 28.25% and 27.75% respectively. It also raised the credit and discount rate by the same amount to 27.75%.
At the end of February 2024, Egypt’s foreign currency reserves rose slightly to USD 35,310.8 million, compared with USD 35.22 billion at the end of December 2023, according to an official statement from the Central Bank of Egypt.
Egypt’s foreign reserves had risen in January 2021 to USD 40,062.5 million, a large increase of USD 4 billion, after standing at only USD 36 billion in May 2020. They continued to rise until May 2022, when they reached USD 37,123.5 million, and then kept declining until they finally reached just over USD 35 billion, also according to the Central Bank of Egypt.
The Ras El-Hekma Deal
Bankers told Zawia3 that the aim of these steps is to reduce monthly inflation rates and confront the parallel exchange market, while some of them believe the matter depends on what the state can achieve after these decisions, and that the repercussions of the decision on the market, production and prices will appear in three stages.
These decisions came after Egypt received significant international cash inflows, including a USD 10 billion instalment as part of the Ras El-Hekma development deal, in addition to USD 520 million from the sale of historic hotels to a company affiliated with Talaat Moustafa Group Holding, with the aim of confronting the parallel dollar market.
A Direct Impact on the Market
Commenting on the decisions, Dr Fayyad Abdel Moneim, former Egyptian finance minister and banking expert, told Zawia3 that their impact will be swift and direct but temporary at the same time, saying: “The effect will be temporary and will calm the market until things settle”. He stressed that there will be another effect appearing in the medium term and a final effect appearing over a period of up to three years, but after a short period the market will begin to absorb these decisions, provided they are sufficient and effective and able to provide the foreign currency needed for the imports we need and reduce the goods held at customs awaiting release once hard currency is provided to bring them in; only in this case will the exchange rate be balanced.
Abdel Moneim believes there is no fixed exchange rate, as this is the nature of currency in the modern economy, because it is subject to a range of pressures and different transactions, including to cover several sectors, most notably imports, manufacturing, consumption, holding and other transactions that affect the market and make it volatile at times. But the market is the strongest factor expressing prices: if the market is stable and its needs are met, prices will stabilise; but if there is a gap, prices will not fully stabilise, and the government will then not succeed in achieving its aims.
Asked about the repercussions of the central bank’s recent decisions on production and projects, he said they will inevitably have an impact: imports will be regular, the production cycle will work as it should and raw materials will be available in the markets, pointing out that the regularity of the production cycle and of investors’ and producers’ economic calculations is very important, and its effect is expected to appear in a short time.
The former finance minister believes the expected change and the state’s short-term goals stem from the state’s decisions, namely raising interest rates by 6% at once, after successive rate rises in the past period, as well as the successive expected payments from the Ras El-Hekma deal and the IMF deal, which has come very close, and that these events combined will have a direct impact on prices in the market.
Genuine Structural Reform
Continuing his remarks on the repercussions of the central bank’s decisions, Fayyad said these measures must ultimately aim at genuine structural change and reform in the Egyptian economy, namely strengthening exports, narrowing the trade balance gap and achieving balance of payments surpluses, so that citizens and traders feel stability in the exchange rate. He focused on how the state can achieve balance of payments surpluses and increase real revenues in the trade balance, which come directly from tourism revenues and Egyptians’ remittances, as well as closing the gap between exports and imports, through a long-term strategic plan set by the government.
| Since the decision was taken this morning, the dollar exchange rate at Egyptian and foreign banks has seen a turbulent rise, exceeding EGP 50 at the National Bank of Egypt after standing at only EGP 30.8 early in the morning, an increase of more than 66% in the official market. |
According to data from the Central Agency for Public Mobilisation and Statistics in Egypt, urban headline consumer price inflation declined in January 2024, with the monthly rate at 1.6% compared with 4.7% in the same month of the previous year and 1.4% in December 2023. Annual inflation also declined, reaching 29.8% in January 2024 compared with 33.7% in December 2023.
Inflation and the Egyptian Economy
“Creating a direct balance in supply and demand mechanisms in the Egyptian market, while we will feel a strong push towards eliminating the accumulated demand for foreign currency.” This is how economist Dr Bilal Shoaib described the quick effects of the central bank’s decisions, stressing that the bank’s intervention on interest rates mainly aims to control liquidity, to prevent currency traders from manipulating the dollar rate again.
Shoaib stressed to Zawia3 that this economic measure is very important for achieving balance in the exchange rate, noting that inflation is one of the most prominent challenges facing the Egyptian economy and is directly linked to the phenomenon of “dollarisation”, meaning traders’ attempts to convert Egyptian pounds into dollars, and accordingly pricing goods, cars and food in dollars and selling them in Egyptian pounds, which leads to a crazy, random rise in prices.
On the other effect of the central bank’s decisions, the economist said they will bring more foreign investment, helping to provide the dollar liquidity that is needed in the first place, stressing that this will allow banks to raise interest rates for further monetary tightening.
Shoaib revealed that up to one trillion pounds of local currency is outside the banking system, noting that there are more savings vehicles in Egyptian state banks, and the state seeks from time to time to collect this liquidity by issuing high-interest savings certificates.
This comes as Egypt’s two state banks issued new investment certificates with a high return of up to 30% over three years, with the return reduced to 25% and 20% in the second and third years respectively, and the return paid periodically during the investment period. The National Bank of Egypt decided to launch a three-year declining-return investment certificate, with an annual return of 30% in the first year, 25% in the second year and 20% in the third year, with the return paid annually.
The National Bank of Egypt also amended the return on its three-year declining Platinum certificate, with the annual return now 26% in the first year, 22% in the second year and 18% in the third year, for new issues from today, 6 March 2024, with the return paid monthly. In addition, the return on the three-year fixed-return Platinum certificate was amended to an annual 21.5% for new issues from today, 6 March 2024, instead of 19%, with the return paid monthly.
The one-year Platinum certificates were also kept, with an annual return of 27% paid at the end of the term and a monthly return of 23.5%, along with a new payment frequency with an annual return of 23% paid daily.
In the same vein, Banque Misr is reissuing its three-year declining “Ibn Misr” savings certificate with different return payment frequencies to meet customers’ needs, approving three issues with annual, quarterly and monthly payment. According to the bank, annual returns reach 30% for the first year, 25% for the second and 20% for the third, while quarterly-paid returns reach 27% for the first year, 23% for the second and 19% for the third, and monthly-paid returns reach 26% for the first year, 22.5% for the second and 19% for the third, for new issues from today, 6 March 2024.
Commenting on the new decisions, economist Ehab Samra told Zawia3 that what is happening was expected, arguing that citizens allowing the constitutional amendments in 2019 was the starting point for where the Egyptian economic scene has reached now, after they renewed their trust in the current authorities, which have compounded the crisis.
He added: According to a previous statement by Finance Minister Mohamed Maait, 54% of Egypt’s economy lies outside the government budget (meaning special and investment funds), apart from the army’s economy, which means we are facing a fragile economic system that lacks the tools to protect citizens. He continued: “Cairo received unprecedented foreign cash inflows, such as Egypt had never received in its history, which were completely squandered on unproductive assets that generate no revenue entering the state budget, while important productive assets were sold or production was halted with a view to future sale”. He said the central bank’s decision today to raise interest rates by 6% is the largest rate hike in history, and is the only decision the bank can take, while liberalising the exchange rate is not in the hands of the government or the central bank but in the hands of market forces now, according to what the World Bank and other creditors have imposed on us, which is why we find the dollar rose from EGP 30.9 to EGP 51 in some banks within a few hours.
On the impact of liberalising the exchange rate on local markets, he said prices will rise again, because the regime has lost the mechanisms for dealing with the market and wasted its production lines, and what is happening is just painkillers. The official rate has now become the same as the black market rate, and the state lost the mechanisms for dealing with the crisis when it withdrew from the productive public sector, which always represented a means of rescue for Egyptians in times of crisis, and it also weakened the productive capacities of the private sector (idle factories). As he describes it, the state’s announcement of the customs release of goods tomorrow is merely a means of collecting foreign currency inflows. “The government cannot force producers to sell goods and products at prices below the rate of local banks, which has already reached the black market rate, which adds to Egyptians’ burden”. He concluded that eliminating the black market is useless, because it is not a cause but a result of weak productive resources, exports, tourism and Suez Canal revenues and lower remittances from Egyptians abroad, and that if the government follows the same economic policy, nothing will change in the scene; rather, we are heading for worse, as he describes it.
