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Egypt’s Dollar Dilemma: High Inflation, Soaring Debt, and the Battle for Economic Stability

by Rahil M
0 comment

The US dollar, a crucial currency for international transactions, has become increasingly scarce.

Egypt, the Arab world’s most populous nation, finds itself in the midst of a severe economic crisis, dollar crunch, and the repercussions are rippling through both local and international businesses. High-street brands such as Starbucks and The Body Shop are grappling with the consequences of a soaring debt crisis that has raised significant concerns about Egypt’s ability to navigate its economic challenges.

At the heart of Egypt’s economic woes is a severe foreign currency crunch. The US dollar, a crucial currency for international transactions, has become increasingly scarce. The Egyptian pound is plummeting, and inflation is surging at an alarming rate, reaching 35 per cent. This perfect storm is creating a challenging environment for businesses operating in Egypt.

Egypt’s economy, heavily reliant on imports, has been hit hard by a series of recent shocks. The COVID-19 pandemic dealt a significant blow to the country’s vital tourism sector. The war in Ukraine raised the cost of essential imports, including wheat. Additionally, recent attacks by Yemen’s Houthi rebels on Red Sea shipping have disrupted crucial Suez Canal fees, further impacting the nation’s revenue.

Remittances from overseas Egyptian workers, a primary source of foreign currency, saw a drastic decline of up to 30 per cent in the third quarter of 2023 alone, according to data from the Central Bank of Egypt. This decline has intensified the pressure on Egypt’s already highly indebted state, which has struggled to service its ballooning debt.

In response to these economic challenges, the International Monetary Fund has intervened with a $3 billion loan facility. However, this financial aid comes with a significant condition – Egypt must implement painful austerity measures. These measures, intended to address the economic challenges faced by the country’s 106 million people, two-thirds of whom live on or below the poverty line, have sparked concerns about the potential social impact.

President Abdel-Fattah al-Sisi recently shed light on the gravity of the situation, noting that the state spends $3 billion a month on essential commodities such as food and energy. The challenge lies in the fact that these services are provided to the Egyptian people in Egyptian pounds, but the payments for these services must be made in dollars.

One of the immediate consequences of this crisis is the overwhelming demand for US dollars. The dollar, on the black market, is trading at 70 Egyptian pounds, more than double the official exchange rate of 31. Banks, facing their own challenges, often refuse to provide dollars to their customers. Bank clients travelling abroad are subject to strict limitations, allowing them to withdraw or transfer a maximum of $100 from their Egyptian accounts.

This scarcity of dollars has far-reaching effects. Everyday activities, such as online payments for services like Netflix, become challenging for individuals with only a debit card, as they cannot pay to overseas accounts. Larger purchases, like new cars, become unaffordable for most middle-class families.

International businesses are also feeling the impact. Kuwaiti retailer Alshaya, holding Egypt franchise rights for prominent brands such as Starbucks, The Body Shop, and Debenhams, has been forced to close retail outlets due to the economic rundown.

Egypt’s external debt has surged to $164.7 billion, and the cost of servicing this debt in 2023 will be a staggering $42 billion. Global financial institutions are taking note of these challenges. JP Morgan recently announced the exclusion of Egypt from its index of government bonds of emerging economies due to concerns about reported difficulties in essential foreign currency convertibility.

Ratings agency Moody’s has downgraded the outlook on Egyptian government bonds to “negative” from “stable.” This shift reflects concerns about foreign currency shortages, weak consumer confidence, and borrowers increasingly unable to repay their loans.

Economists suggest that Egypt is approaching a critical juncture. There are two potential paths forward. One involves a shift toward economic orthodoxy, including adopting a fully flexible exchange rate and maintaining a tight grip on fiscal policy. The alternative, less favourable path involves policy indecision, particularly concerning the floating of the pound, which could lead to a messier economic situation.

Analysts anticipate a two-step solution in the short term, involving an initial devaluation of the pound to 40 per dollar and the adoption of a flexible exchange rate regime, a commitment Cairo has made to the IMF for years but has yet to implement.

The immediate challenge for Egypt is to reach an agreement with the IMF for its enhanced Extended Fund Facility. This agreement is seen as increasingly likely and would provide crucial financing while assuring investors that Egypt is on a more stable economic path. Such assurance could attract investments into Egypt’s bond market and help reduce interest rates on the country’s debt.

In the midst of this economic turmoil, Egypt stands at a crossroads, with critical decisions ahead that will shape its economic future. Reassuring investors, implementing effective policies, and addressing the root causes of the crisis are paramount for Egypt to navigate these challenging times successfully.

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