Egypt’s Economic Turmoil – What’s Happening and Why?
Fish market, Alexandria, Egypt. (Picture credit: Ahmed Fareed, Unsplash)
The Egyptian pound has lost almost 50% of its value since March. Inflation is at 20%. What are the reasons for Egypt’s economic slump and how is it affecting Egypt’s citizens? We provide here an overview of what’s happening and why.
WHAT ARE THE CAUSES OF EGYPT’S ECONOMIC PROBLEMS?
Egypt’s debts have more than tripled in the last decade, while its foreign currency reserves (needed to service the debt) have dropped sharply. This has led Egypt to seek a $3 billion bailout from the International Monetary Fund*. It’s Egypt’s fourth loan from the IMF in six years. So, what’s causing Egypt’s financial problems?
External pressures on Egypt’s Economy
In the last few years Egypt’s economy has been badly hit, first by the effects of the travel restrictions of the Covid-19 pandemic (tourism is a key part of Egypt’s economy) and then by the impact of the war in Ukraine. Uncertainty in the global financial markets in the first few months after the invasion led to investors pulling billions of dollars out of emerging markets such as Egypt - moving their money to what they viewed as safer investment opportunities. Egypt’s tourism sector once again took a hit as some 10% of its visitors had come from Russia and Ukraine.
Egypt relies heavily on foreign imports - it is one of the world’s biggest importers of wheat. Global rises in fuel and food prices, and particularly the wheat crisis caused by the war in Ukraine, have pushed up inflation and increased pressure on Egypt’s foreign currency reserves.
Internal factors affecting Egypt’s economy
Much of Egypt’s economy is dominated by state- and military-owned enterprises. This has depressed the private sector, which remains under-developed, as well as discouraging foreign investment. In recent years, the government has spent billions on huge infrastructure projects – including building an as-yet unfinished New Administrative Capital city east of Cairo at an estimated $59 billion.
Another reason Egypt has struggled to attract foreign investment is the exchange rate. Like many Middle Eastern countries, Egypt’s pound was pegged to the US dollar, meaning the exchange rate was fixed and had become artificially high so investors were not getting as much for their money.
WHAT’S HAPPENING NOW?
The Devaluation of the Egyptian Pound
To secure the latest loan from the IMF, Egypt had to agree to various conditions intended to improve their financial situation in the long term, including moving from a pegged exchange rate to a flexible one (one determined by market forces). This led to a sudden and major 15% devaluation in Egypt’s currency at the end of October 2022. Since then the value of the currency has continued to decline, as it adjusts to market rates. Overall, it has devalued more than 50% against the dollar in the last 10 months.
Inflation worries and bank restrictions
In the long term the devaluation of the Egyptian pound should lead to Egyptian exports becoming more competitively priced (and more attractive). Investing in, and travelling to Egypt, should also become more attractive due to lower prices, increasing the amount of foreign currency coming into the country. These factors will help to drive economic recovery.
However, in the meantime things will become very difficult for the Egyptian population as the cost of imported goods increases, exacerbating already rising inflation levels in Egypt. Inflation is now at around 20%, with food prices increasing by over 37% in the past year.
In an effort to curb inflation, Egypt’s Central Bank has raised interest rates to 16.25%. The national bank is offering interest rates of 25% on fixed term bonds, to try and encourage people to save rather than spend. Many banks have also put restrictions on withdrawals of foreign currency and increased credit card charges.
Increasing poverty levels
As the cost-of-living soars, salaries have not kept up with inflation. Unemployment rates are also on the rise, meaning that many in Egypt are struggling to make ends meet. It is estimated that 60%, and rising, of Egypt’s population are currently in, or at risk of going into, poverty. Prices change on a day-to-day basis, making it hard for families to budget. The government’s National Institution of Nutrition recently recommended on Facebook that people who can no longer afford to buy chicken meat should try eating chicken feet instead.
WHAT MEASURES ARE BEING PUT IN PLACE?
Social support
Recognising the impact of economic measures the Egyptian government has committed to using part of the IMF bailout to fund increased payments through Egypt’s existing social support schemes. Karama (meaning ‘Dignity’), includes disability and old age payments, and Takaful (meaning ‘Solidarity’) provides family income support. Together they reach 5 million of the most vulnerable. However, with a population of over 105 million this will leave many struggling without support.
The poorest can already buy bread at subsidised prices using food cards. The government recently announced the introduction of new prepaid cards which will give everyone the opportunity to purchase this important commodity at cost price. Special state-run outlets have also opened to sell cut-price groceries.
Economic reforms are promised
In the longer term, large-scale reforms are needed. The Egyptian government has pledged to slow down spending on mega projects and to work to rebalance the economy – including reducing the state and military role and boosting the private sector. You can find more details of the government’s plans here.
Rebalancing an economy is highly complex and difficult to achieve. Even if Egypt’s government sticks to its promised reforms, any economic recovery is likely to be slow. If reforms are not successfully implemented, the devaluation of the currency could continue unchecked. This has happened in Lebanon, with devastating consequences. While its different size and structure means Egypt’s economy is unlikely to unravel in the same way as Lebanon’s, the consequences could be just as devastating for ordinary citizens.
* The IMF is an international organization established to promote global economic growth and financial stability. One of its key functions is to offer loans to countries in economic distress, to mitigate financial collapse.
