Daily Times

The pound’s devaluation makes sense in the long term but there will be consequences for the poor and middle class.

The Egyptian government appears to be on the verge of further devaluing the pound. President Abdel Fattah el-Sisi met the governor of the country’s central bank, Tarek Amer, last week to give political cover to the move.

Beltone Financial, an Egyptian investment bank, advised that the move is imminent. The devaluation and partial flotation would be part of a wider deal with the International Monetary Fund (IMF) to implement economic reforms in return for a much-needed $12bn loan to jump-start the economy.

For Egyptians who are likely to see their savings devalued by up to 30 percent, there is a sense of impending doom. The people know the move is happening, but not exactly when or what to expect. While the devaluation makes good economic sense in the long term, there will be immediate consequences for the poor and the struggling middle class.

Meanwhile, the opaqueness of the decision-making process reflects badly on the economy and continues the Egyptian government’s rich tradition of keeping its population in the dark on major economic policy shifts.

The ‘Intifada of Thieves’: Egypt’s current crisis evokes 1976-1977, when a worsening fiscal situation forced the government of President Anwar Sadat to negotiate with the World Bank for loans.

In October 1976, the Cairo representative of the World Bank, Paul Dickey, sent a secret memorandum to the minister of economy, Zaki el-Shafie, arguing that Egypt needed to take bold decisions, such as devaluing the pound and reducing and eventually eliminating subsidies.

“The opaqueness of the decision-making process reflects badly on the economy and continues the Egyptian government’s rich tradition of keeping its population in the dark on major economic policy shifts.”

Shafie and his team tried to explain that Egypt was a net importer and devaluation would exponentially increase the price of imports. Moreover, they feared the political impact of reducing or removing subsidies. It soon became clear, however, that the “suggestions” outlined in the memo were effectively the conditions for obtaining a loan.

On January 17, 1977, the deputy prime minister announced that subsidies on major commodities and foodstuffs would be cut. The next day’s papers announced price increases for goods, including bread, rice, pasta, gas, oil, sugar, and even cigarettes.

News spread quickly, and protests started the same morning. Factory workers in the Helwan district of Cairo were the first to demonstrate against the government. Workers from the nearby military factories were quick to join, and the protests spread to factories and universities in Cairo and eventually across Egypt.

Left with few options, on the evening of January 19, the government announced it was cancelling the subsidy reductions and ordered the army to maintain order and crush the protests, which Sadat labelled the “Intifada of Thieves”.

Managed devaluation: Fast forward to the early 2000s and Egypt’s economy was facing another crisis.

In 2001, the stock market had almost crashed and gross domestic product growth had slowed to 3.3 percent. Part of the problem was that the pound was pegged to the dollar, making Egyptian exports less competitive in international markets.

The government had “maintained the peg in order to maximise hard currency revenues from tourism … But the result was simply to delay the political turbulence that would follow the inevitable devaluation”.

Devaluation was always a goal of the government and was necessary for long-term economic growth as the pound was unnaturally overvalued.

However, when the government devalued the pound in January 2003, it did so in a haphazard way with minimal societal consultation or deliberation. The devaluation increased consumer prices, especially on food, which disproportionately harmed the poorest segments of society. The government responded by increasing subsidies on basic food items as a stopgap measure, but this failed to prevent substantial short-term inflationary pressure.

Back to the future: Today, Egypt faces fraught economic conditions. Sisi was elected in 2014 on a platform of improving security, stability, and jump-starting the economy, but he has yet to deliver on all fronts.

There has been a focus on grandiose projects that in the short term are unlikely to deal with the festering problem of youth unemployment. Economic policymaking has entered the realm of the absurd recently when Sisi suggested funding development projects via collecting spare change.

In terms of monetary policy since 2011, the government has attempted to support the Egyptian pound against the dollar, a policy the central bank governor who was appointed in November 2015 labelled a “grave mistake”.

Already, Egyptians face capital controls, including limits on transferring currency abroad and the amount they can withdraw to travel overseas.

Companies that import foreign components are severely affected as well, as they struggle to amass the dollars needed to continue operating their businesses. The capital controls have even adversely affected Egyptians studying abroad, putting limits on the amount of money they can withdraw from ATMs overseas to fund their study and living expenses.

By not clarifying when or how the devaluation will occur, and if it will be followed by a free float or not, the Egyptian government continues its tradition of not being forthcoming with its people. Whenever it does occur, prices are likely jump considerably, considering inflation is already at 15.5 percent – the highest level it has been at for seven years.