Seeking to meet the International Monetary Fund demands, Egypt took unprecedented step of floating of its currency to trade freely as it announced a series of sweeping measures to stabilize an economy badly affected by a dollar shortage that has raised fears of social unrest, according to Bloomberg.
The Central Bank of Egypt (CBE) also raised interest rates by 3 %points. It raised the overnight interest rate, overnight lending rate and the rate of the central bank’s operation to 14.75%, 15.75% and 15.25%, respectively. The discount rate was also raised by 3 % points to 15.25%, according to the CBE statement.
In this context, the National Bank of Egypt, one of the country’s biggest banks, said on its website that the dollar could be bought for 13 pounds and sold for 13.50 pounds each, compared to the previous rate of 8.88 Egyptian pounds to the dollar that the bank had maintained since last March.
The measures move Egypt closer to securing a $12 billion loan from the International Monetary Fund.
Egypt’s economy has been suffering since the military coup in 2013. Tourism and foreign investments which were among the major resources of foreign currency have withdrawn as a result of political unrest and security instability in Sinai Peninsula which led to shortage in hard currency.
“Foreign-currency reserves have stabilized this year, they are still more than 40 % below their Mubarak-era levels,” according to Bloomberg.
As a result, the government of Abdel-Fattah El-Sisi seeks to secure a loan from the IMF, whose managing director, Christine Lagarde, said
authorities needed to act on the exchange-rate and lower energy subsidies before the board can consider the country’s loan request.
The central bank said its decision to immediately liberalize the exchange rate is part of Egypt’s “home-grown reform program, backed by the support of the international community.”
It said, “This move will allow market demand and supply dynamics to work effectively,” it said.
But despite the decision to float the Egyptian currency, the Egyptian government still faces many economic as well as social challenges as the loan program comes with strict austerity measures that would make Egyptians’ lives even more difficult in the months and years ahead.
“Moreover, managing the fallout on average Egyptians struggling with surging prices will be a key test for al-Sisi, whose government is also trying to revive a tourism industry battered by terrorist attacks in Sinai. The inflation rate is at the highest in at least seven years, “according to Bloomberg.
In addition, reviving foreign investment will also be one of al-Sisi government’s challenges especially with the presence of the military in business that will definitely have negative repercussions on the investment environment.
The Egyptian military has widened its economic activity, including producing cement, supplying medical items to hospitals, running the government’s smart-card system for the distribution of subsidized goods, establishing fish farms and manufacturing water meters. Moreover, last year al-Sisi issued a law that allows the army to set up companies with the participation of domestic or foreign capital.
Analysts repeatedly warned from the military expansion in business saying that its economic activities will probably shrink both national and foreign investments as no one will rescue competing the army in business.
Earlier this month, Financial Times wrote in an article titled: “General Al-Sisi deploys the army to tackle Egypt’s economic woes” that to many Egyptians suffering from high inflation, the army — which has used its own farms and factories to pump cheap food into the market — has been performing a public service. However, “some businessmen fear it will be impossible to compete with an institution that has unrivaled political clout and is protected by law from revealing its accounts,” said the FT.
The editor of the daily Shorouk, an Egyptian independent newspaper, Emad al-Din Hussein, wrote that the military deserved “thanks” for stepping in to “solve problems”. But he also called on civilian and army leaders to “re-evaluate the participation of the armed forces in economic activity,” as cited by FT.
He added, “We should also discuss whether the participation of the army has impacted the size of local and foreign investment or not.”
Omar al-Shenety, managing director of Multiples Group, a regional investment bank said the army had “stepped in to inject momentum in the economy at a time of great need”. But he added that it would create unfair competition in some sectors.
Shenety said, “If a company is importing a product and the army comes in as an importer, the company can’t compete.”
“Despite having some justifications, we now have a new reality; there is direct competition between the army and some companies across various sectors.”