FEBRUARY 14, 2017
Egypt’s economy is being overhauled. It has floated the pound, raised interest rates and cut subsidies, securing a US$12 billion IMF loan in November. Foreign inflows to Egypt’s stock market have reached the most since the 2011 uprising, with investors betting on an earnings recovery and taking advantage of cheaper dollar-based valuations. The benchmark EGX 30 Index has surged 55 per cent since the currency float in local terms.
Egypt is taking the necessary steps to improve its economy, and slowly signs are emerging that this effort is paying off.
Consider, for example, that remittances from Egyptians abroad – a crucial source of hard currency – fell by more than US$2 billion to $17bn last fiscal year as confidence in the pound plummeted and trading on the black market soared. But lately the central bank has said levels are starting to recover, with inflows growing by 12 per cent in the fourth quarter to $4.6bn. The Central Bank of Egypt (CBE) said the country’s foreign reserves hit $26.3bn by the end of January, rising from $24.2bn a month earlier.
The announcement comes a few days after Tarek Amer, the central bank’s governor, said that Egypt received a total of $4bn in yields from Eurobonds issued on the global bond market last week. Tourists seem to be returning as well. British travel group Thomas Cook said that demand for holidays in Egypt is picking up again, after unrest in the North African nation had pushed holidaymakers into choosing rival sun spots.
On the negative side, the central bank raised interest rates by 300 basis points on the day it floated the pound. Even so, annual core inflation – a gauge that strips out volatile items – surged to 25.86 per cent in December, the highest level in almost 12 years. That puts pressure on households in a country where about half the people live around or below the poverty line. And for the second time in three months, the government has increased the prices of subsidised sugar and cooking oil. The decision, which took effect on February 1, increased the price of subsidised sugar by 14.3 per cent – from 7 Egyptian pounds (Dh1.44) to 8 pounds a kilogram, and increased the price of subsidised oil by 20 per cent, from 10 to 12 Egyptian pounds.
In November, Egypt suffered a sugar crisis. Egypt imports about 1 million tonnes of sugar annually but an acute shortage of dollars cut the imports by private traders, leaving the market in short supply. Major food companies such as Pepsi halted production in Egypt after the government seized weeks of sugar supplies, amid nationwide shortages of the staple. According to Egypt’s ministry of supply and internal trade, the government supports about 70 million of its 90 million people through more than 20 million ration cards that give recipients access to subsidised goods.
The latest price increases narrows the gap between subsidised sugar and oil and those on the free market. Subsidised sugar is now only 3 pounds cheaper than that on the market, and for cooking oil the gap is now 6 pounds.
What is expected to be carried out by the government in the next few months? The loan instalments, as per the IMF agreement, are conditional on the government acting to tighten Egypt’s fiscal position, improve the business environment and liberalise the economy. To this end the government has vowed to ease capital controls by June, scrapping a $50,000 limit on non-priority imports and a $100,000 cap on the transfer of money abroad by individuals. A ceiling was originally implemented to halt a parallel exchange system that had arisen following the political turbulence of 2011. With dollar demand eventually exceeding supply by the end of 2013, businesses depended on the black market to source dollars. The IMF loan was also contingent on Egypt enacting a more flexible exchange rate.
The CBE responded by floating its currency in early November to bring foreign capital back to the country and return foreign currency trading to the formal banking sector. It held Egypt’s currency steady at 8.80 pounds to the dollar from March last year. But the local currency quickly lost half its value against the dollar after the devaluation, reaching a low of 19.64 pounds to the dollar on December 20. This month the pound is trading at a “genuine equilibrium exchange rate, in the sense that as many people want to sell foreign exchange as buy foreign exchange”, said Chris Jarvis, the IMF’s mission chief to Egypt, after the fund released details of the $12bn loan approved last year – its largest in the region. While the pound is weaker than the fund predicted, it may recover after the initial period of post-float trading, Mr Jarvis said. “That’s our current expectation,” he added.
Non-oil business activity, which the IMF regards as crucial to the nation’s long-term recovery, has yet to show significant improvement. The Emirates NBD Egypt Purchasing Managers’ Index has posted a contraction in each of the past 16 months. Higher interest rates meant to keep inflation in check are likely to limit growth to just a bit more than 1 per cent this year.
The reforms being executed are projected to result in Egypt’s fiscal and monetary policy tightening significantly in 2017. This will no doubt put pressure on growth, although this will be more than offset by an increase in foreign investment, exports and tourism. The hefty depreciation in the pound, following its floatation, should lift the competitiveness of Egypt’s exports and tourism sector. The cheaper pound will also boost foreign investors to return, supported by the government’s capacity to implement much-needed reforms and by large multilateral investors’ pledges to increase FDI to the country.
