On 3 November last year the Central Bank of Egypt floated the Egyptian pound. Almost overnight the pound fell from its official rate of LE9 per dollar to LE18. A year later and the public has yet to fully adapt. When considering the price of an item the habit to compare it to the pre-floatation price is for many irresistible. “I call it the pre-floatation syndrome,” says Noha Adel, an information technology specialist. Before the floatation the pound had in fact been trading at double its official rate on the black market. Some observers had expected the pound to appreciate after the floatation to around LE13 per dollar but that did not happen. Today it is selling for LE17.7. Mention floatation and people will complain at length how their purchasing power has been slashed by half. It has affected all income brackets, with only the very rich escaping. To compound the problem the floatation was accompanied by cuts to fuel subsidies. The decisions were a prerequisite for the International Monetary Fund's (IMF) approval of a $12 billion three-year Extended Fund Facility (EFF) which Egypt desperately needed to bridge an annual financing gap of around $10 billion. The decisions were aimed at streamlining government finances and ending the foreign currency black market. Egypt's budget deficit stood at 12.5 per cent of GDP in fiscal year 2015-16. It dropped to 10.9 per cent in 2016-17. The government is targeting 9.5 per cent in the current fiscal year. Egypt has already received two tranches — $4 billion — of the EFF. And an IMF delegation is currently in Cairo for a second review of the government's reform programme before the third tranche is disbursed. The sharp fall in the value of the pound, fuel subsidies which were cut again this summer and the imposition of a value-added tax formed the perfect recipe for skyrocketing inflation which hit a 30-year high of 33 per cent in July. It has since cooled slightly — falling to 32 per cent in September — which many hope is the beginning of an extended downward trend. With the fallout hitting Egyptians hard in their pockets were these decisions the right? “Absolutely”, says Khaled Hamza, head of investment banking at Sigma Capital. The reforms were long overdue, he argues, and impact of the decisions will be felt beyond the limited scope of rectifying the balance of payments and government finances. “It was a complete overhaul of the system, of the way of thinking about the economy, its dynamics and processes.” Among the benefits of floatation he cites the rationalisation of consumption patterns and the substitution of local products for imports where alternatives are available. The high rate at which banks are now buying dollars coupled with a decision to raise interest rates immediately by three per cent and a further four per cent across the year encouraged flows of hard currency into the country. This increased availability of hard currency meant banks could meet producers' demand, says Hamza, and helped Egypt pay its arrears to international oil companies and repatriate the growing backlog of foreign companies' accumulated profits. But all this came at too heavy a price for Egyptians, argues a banker who prefers to remain anonymous. “Egyptians were crushed in the process,” he says, especially middle-class wage earners whose incomes did not increase but whose obligations doubled. The new policies were implemented when the economy was at its weakest. Foreign currency reserves were at a low of $19 billion in October 2016 which gave the CBE no space for manoeuvre. The policies, says the banker, treated symptoms rather than the root problem, which is that Egypt produces too little for domestic consumption, let alone for export. Structural reforms to support manufacturing are among the topics scheduled for discussion with the IMF delegation currently in Cairo, according to the minister of finance. Hamza believes there should have been preparations to attract foreign direct investments before rather than after the floatation. “It took a very long time to issue the investment law and its executive regulations,” he says. Indeed, the investment law's executive regulations were only approved last week. Dependency in attracting hard currency on carry trades and the interest rate differential together with foreign investment in treasury bills and bonds is more vulnerable and less sustainable than attracting FDI inflows, says Hamza. Egypt has received $18 billion of investments in domestic debt instruments. The danger of these inflows is that capital flight of foreigners' investments in equity and debt instruments could cause the pound to depreciate further, he explains. Meanwhile FDI reached $7.9 billion in 2016-17, up just $1 billion on the year before. Hamza would also like to see a more active privatisation programme with a state-owned bank or insurance company — something that would attract foreign interest — being put on the block. He also wants to see a more aggressive tackling of bureaucracy. “Egypt has many investment opportunities but lacks the kind of environment that attracts investors,” he says. Investors want a speedy and fair justice system. They need to be offered the kind of incentives that make Egypt more attractive than other destinations in the region. Hamza agrees. One of the most important targets of the floatation that has not yet been achieved, he says, is to transform the country into a more competitive place to do business and hence attract the FDI that will create jobs and ease unemployment. Building an industrial infrastructure orientated to export markets is another target that has so far been missed. According to the World Bank, Egypt's economy is forecast to grow by 4.5 per cent of GDP in the current fiscal year, slightly higher than last year's 3.8 per cent. “The growth that we should target needs to be far more equitable. The man in the street needs to feel the benefits of floatation since he has paid the cost,” stresses Hamza. The stamp of approval from international financial institutions that followed the economic reforms has allowed Egypt to issue $7 billion worth of Eurobonds on international markets. And the government is expected to revert to international markets before the end of the year for another $3-4 billion. The Eurobond issues, along with funds from the IMF and other international financial institutions, have been crucial in boosting Egypt's foreign currency reserves to $36.5 billion, a notch higher than the pre-2011 Revolution level. But it has brought with it ballooning foreign debt, reaching $79 billion in the 2016-17 fiscal year, up 42 per cent from 2015-16 according to CBE figures. With public debt now exceeding 90 per cent of national income a former minister of finance recently cautioned that Egypt must think long and hard before taking on any more debt. In the end, though, Hamza believes things could not have been done much differently. “What would have happened had the reforms not been implemented?” he asks. “How long could the state budget support the excesses and waste?”
