Time Runs Out: Egypt’s Options to Halt Pound Collapse Diminished

The Egyptian pound’s exchange rate against the dollar continues to dominate daily headlines, following an accelerated free fall and widening gap between the parallel and official market rates to unprecedented levels. Experts, economists, and business leaders stress the urgent need for government decisions and measures to address the crisis, warning against further delays in announcing and implementing them.

Traders in the parallel market report the dollar’s surge to exceed 71 pounds, compared to around 30.85 pounds in local banks, creating a 130% gap. This significant increase occurred after the war on Gaza last October and amidst the absence of clear government plans to resolve the crisis.

Egypt’s economic crisis worsens over time, exacerbated by the deepening shortage of foreign currency, as highlighted in a report by the research institution Capital Economics. The report also underscores Egypt’s increased need to secure an agreement with the International Monetary Fund (IMF).

Egyptians on Edge

Egyptians await anxiously as the IMF team visits Cairo to finalize the resumption of discussions on a $3 billion rescue package and increase in loan to offset the impacts of the Gaza war on the Egyptian economy. The lack of clear government solutions further exacerbates the crisis.

The government appears incapable of taking immediate action to bridge the gap between exchange rates and restore confidence among citizens and investors. This mounting concern adds greater pressure on the economic situation and social stability. The absence of an IMF agreement signifies Egypt’s dwindling options to address the crisis.

Egypt and the IMF

Despite reaching an agreement with the IMF on a new rescue package in December 2022, Egypt only received the first installment of the $3 billion loan, amounting to $347 million, due to the IMF’s conditions related to the liberalization of the pound’s exchange rate and expediting state asset sales.

In diagnosing and treating the economic crisis, President Abdel Fattah al-Sisi points to the “dollar gap” as the main reason for the current situation. He emphasizes the need to reduce it by decreasing dollar-denominated imports, increasing dollar exports, and promoting the industry.

Al-Sisi emphasized that resolving the dollar crisis would solve all other issues. He stated, “If we solve the dollar crisis, everything else becomes insignificant for Egypt.”

To achieve this, al-Sisi stated, “We are required, in a short period of time, to elevate Egypt’s export and manufacturing rates to make the dollar available for spending on imports,” indicating the necessity of increasing them to $100 billion.

Egypt’s average annual imports reach around $90 billion, compared to total exports (commodities and petroleum) of approximately $52 billion, resulting in a trade deficit of $38 billion, excluding debt installments and their interests.

As Egypt’s foreign currency reserves significantly decline due to the ongoing war in Gaza and its negative effects on the economy, as well as the decline in revenues from the Suez Canal and tourism, the nation witnesses a decline of about 30% in remittances from Egyptians abroad, a crucial source of foreign currency.

The United Nations Conference on Trade and Development (UNCTAD) reported a 42% decrease in commercial navigation between Europe and Asia, passing through the Egyptian Suez Canal in the past two months.

Egypt’s Options to Overcome the Crisis

Tarek Metwally, a banking expert and former Chairman of Bloom Bank, expressed his belief that Egypt’s options have become limited since the crisis began in early 2022. He emphasized the high economic and social costs of any delay, indicating that the problem lies not in the devaluation of the pound but in the availability of the dollar in the markets.

Metwally stressed that the crisis is not new and has been ongoing for decades due to structural problems in Egypt’s economy, characterized by its reliance on rent rather than productivity. The sources of Egypt’s dollars, including expatriate remittances, Suez Canal revenues, and tourism, are all affected by external factors, leading to a recurring dollar shortage with every political upheaval in the region.

Metwally highlighted that the solution lies in transitioning to a productive economy based on production and exports to avoid or minimize external influences. He noted that previous economic reform programs, including the 2016 program, succeeded in achieving monetary and financial reform but failed in structural reform.

He outlined three steps to overcome the current crisis: optimizing state assets by selling or leasing them to maximize their size and increase revenues, relying on investment instead of borrowing as a sustainable means of development, transitioning to a productive instead of a rent-based economy, and replacing current economic managers with those capable of creating solutions and restoring confidence among citizens and investors.

Sawiris’ Formula to Solve the Crisis

The Egyptian billionaire, Naguib Sawiris, warned of the repercussions of delayed government decisions, describing it as a “disaster.” He stressed that attempting to solve the dual exchange rate problem by offering the dollar at a lower rate than the black market will not succeed. Instead, he highlighted the necessity of commencing from the black market rate, gradually leading to a decrease after the availability of supply, as those who possess it will agree to sell it through channels.

Amid the ongoing search for a solution to Egypt’s economic crisis, Diaa Rashwan, the General Coordinator of the National Dialogue, announced that the current economic conditions would be a focal point in the second phase of the national dialogue.

Prime Minister Mustafa Madbouly previously mentioned that the solution to overcome the current economic crisis and restore the country’s growth trajectory within six years.

Immediate Solutions

Hany El-Husseini, an economic expert and member of the economic committee of the Al-Mo’tammar Party, described Egypt’s dollar crisis as a result of years of mismanagement. He emphasized the need for effective transparency, both in presenting and solving the economic problems. Despite the government attributing the deteriorating economic conditions to external factors, El-Husseini stated that other reasons, including government responsibility, should not be overlooked.

El-Husseini concluded that the solutions lie not in devaluing the pound but in adopting new and different economic policies focused on generating dollar returns. He stressed that the current situation calls for immediate solutions, leaving the government with no room for choice. He emphasized that reducing the pound sharply or gradually would harm the economy and citizens alike, but he acknowledged it as an unavoidable, necessary step rather than a curative one. Before undertaking such measures, the country must remember that previous devaluations were followed by additional reductions due to their economic inefficacy.

Amid Egypt’s critical economic situation, the search for viable solutions continues to be a prolonged journey. El-Husseini maintains that the most effective practical solutions are medium- to long-term, while the current situation necessitates immediate solutions. He underscored the urgency of implementing transparent and comprehensive policies, suggesting the need to change current economic leaders to individuals with greater acumen and realism.

In conclusion, the challenges faced by Egypt’s economy are immense, requiring swift and strategic actions to navigate through the crisis and channel the country towards sustainable growth.