By Mohamed Bably
What does The Devaluation of Egyptian Pound Mean
The devaluation of the Egyptian pound has been a crisis the country has been facing for a couple of years now. Back in 2010, the US dollar was trading for 5.5 EGP. Today, the US Dollar is going for 12 and even 13 EGP in the Black Market (depending on where you trade it).
The devaluation of a currency means to lower the value of the country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.
Basically, it means to lower the value of the Egyptian Pound based on Egypt’s ever declining foreign currency reserve of the US Dollar.
In this case, we’re going to be discussing the devaluation of the Egyptian pound with respect to the United States dollar currency.
The EGP VS the US Dollar
The US dollar continues to reinforce its value and position in front of the Egyptian pound, with the latter’s value weakening. As the dollar continues to increase in value, Egyptians are getting more and more worried about their bank savings, that consequently decreases in value and affect the day-to-day standard of living.
The vast majority of Egyptian citizens rely on making ends meet and obtaining money from certificates of deposits in banks. These certificates offer very appealing return rates that could reach up to 15% interest a year.
As a result the devaluation of the Egyptian pound against the dollar directly affects Egyptian living standards because the purchasing power that citizens have decreased amidst growing prices of goods and necessities. This has lead to Egyptians seeking alternatives to bank certificates.
Towards the end of the 1970’s, this alternative was to invest money with investment companies that started appearing during the time of late president, Anwar Sadat.
Sadat had thought to increase economic investment and allow for a free market. However, Egyptians later faced a catastrophe, when the government realized that these investment companies used their money to influence politics and make their way into parliament and other political branches.
The government chose to close these companies. Egyptians then once again returned to their sanctuary of investing their money in bank certificates and depend on the banks rate of return, by the end of the 90’s these rates of returns had reached 18% and so they served as a safe haven for families to invest their money.
The Present Alternative for Investment
In recent years, the Egyptian pound has begun to devaluate greatly in front of the dollar, which has lead to a decrease in disposable income to most families, this has lead them to pursue new measures of investing money, that measure being real estate development.
Real estate development allowed for high lump sum gains from buying and reselling properties. This came as a result of a high demand from Egyptians that lived abroad who chose to transfer their money to Egypt instead of placing the money in banks, to invest it in real estate.
The demand and supply curve for the past ten years has become a major role in ways to overcome the devaluation of the pound to Egyptian families as the profits somewhat surpass the devaluation of the pound. Consequently, many new sub-urban communities have been formed such as New Cairo, Shorouk City, 6 October and others.
These cities have made their owners a large fortune out of buying the land at a time when prices were low, developing them and then selling them at an extremely expensive market price. The demand for these properties lead to many construction and development companies in Egypt to offer various payment facilities that allowed for almost anyone to purchase housing, with payment packages reaching to ten years of installments without interest, this lead to a sudden rush in purchasing and an overall increase in demand. This demand had to be saturated and so more and more of these development companies emerged.
As a result of the sudden surge in development and the wide variety of choices a consumer now has, a noticeable drop has appeared in the real estate market, with economists stating it to be a state of saturation, the markets have begun to slow down and Egyptians abroad have regressed in their transfers of money back home. Many have come to believe that for them to save their dollars as opposed to transferring them to Egyptian pounds would be more profitable than investing the money, this also comes with the fact that so many different sub-urban communities exist now so Egyptians abroad feel that they will be able to purchase whenever they see suits them as opposed to leaping at new opportunities to invest.
This inevitable saturation has lead many to believe that ultimately, the real estate market will crash in Egypt and the high priced communities will see a noticeable drop as the supply simply surpasses the demand.
How can the Egyptian pound stabilize?
This ultimately brings us to the question of how did we get ourselves here, and who is to blame for where we are. The reality is that the current economic situation of the country is a natural state given the events that have taken place within the past five years. Countless countries have gone through much worse experiences and have found ways to overcome them, such as France and Germany; both being countries left in ruins after the second and first world wars. Arguably those were different times and different world economic states, but they recovered nevertheless and currently both have high GDP per capita.
In order to help stabilize the Egyptian pound, the country needs to focus on the measures in which foreign currency was acquired in the past. The current balance of payment deficit that pulls down the Egyptian pound is largely due to the fact that imports far exceed exports. Import & export companies have been struggling with business, the country as a whole imports many of its basic necessities and far less goods and products are exported now, this leaves us with a huge deficit in the country’s balance of payments. As a result, incentives have to be made for more use of domestic product. The country needs to industrialize itself more and become more dependent on its own products, as well as focus on high levels of quality control in order to allow for these products to be exported and sold to other countries.
Also foreign investors have to be attracted back into the country, incentives and motives should be made for investors to start returning to Egypt and bringing with them countless new job opportunities as well as help with the economy in the process. Emphasis should not only be on bringing foreign investors to the country but also to attract tourists back. The tourism sector has always been a very profitable sector in Egypt and the current lack of tourism is slowly decaying Egypt’s touristic areas, these areas once flourished and were often described as the most beautiful places in Egypt, they are now deserted cities that are only occupied during annual holidays by Egyptian tourists for much lower rates than before.
The Black Market
The black market has played a vital role in the devaluation of the Egyptian pound, due to the decrease in supply of US dollar, the black market managed to fill the gap in the market by offering to buy or sell foreign currency for extremely high rates. These rates a considered high due to the fact that the Central Bank of Egypt has the price of the dollar to EGP fixed in banks, therefore when the black market offers to buy the dollars for a more expensive price, people choose to sell to them as opposed to banks.
This leads to a higher decrease in supply of dollars because the money then is not recirculated but instead stored and kept by black marketers for when the price might increase later on in time. As a result, strong measures have to and have begun to be taken place in order to eliminate the emergence of a strong black market, because these markets exist above the rule of law and therefore cannot be controlled by government.
They consequently have a direct impact of the devaluation of the Egyptian pound because it leaves the Egyptian pound price to be determined by the owners of foreign currency exchange shops. The Egyptian pound was devaluated by the Central Bank by almost 15% last march in an effort to defeat the black market and consequently bridge the gap between the bank price and black market price, however that gap continues to grow, and with that grows the Egyptian people’s fear of another devaluation of the Egyptian pound.
Tourism was a main source for foreign currency in Egypt. Foreigners and tourists visiting Egypt’s beloved Hurghada or Sharm El Sheikh came with their currencies. However, after the 2011 revolution, tourism has fallen. International tourism has halted and with it the flow of foreign currencies. Local authorities have tried to promote Egypt’s tourism internationally with a campaign of billboards with a slogan “This Is Egypt.” However, international tourism has not risen at all. Local tourism has helped keep the tourism industry alive, but a lot of tourism companies have closed. Without tourism, the foreign currency flow has significantly decreased,
Imports and Exports
A major part of the problem is our imports vs. our exports rate. Today, Egypt is importing a majority of its products. Manufacturing has slowed down since the revolution, and our exporting has decreased tremendously.
The main problem with the devaluation of the Egyptian pound is that it causes traders to stop selling their products. This occurs because many Egyptian traders believe that a second devaluation of the Egyptian pound is inevitable and that the exchange rates will sky rocket even more than their record level. This subsequently drives them to store away their already purchased products in the hope that they would later sell them for a higher price and thus a higher profit. This has been reflected on many various products such as the price of electronics and the vehicles, with may vehicles now being on hold or on a waiting list for at least a year.
A team from the IMF is currently back in Egypt arranging another bundle of credits thought to be worth $12 billion for more than three years. The country desperately needs the money. The administration confronts vast spending plan and current-account shortages (just about 12% and 7% of GDP, separately), as Egypt’s remote stores run unsafely low. Exaggerated money, twofold digit expansion and a jobless rate of 12% complete the troubling picture. Potential financial specialists are saying endlessly
In any event, policymakers are considering courses around Egypt’s administrative framework. President Sisi utilizes the armed force for a significant number of activities, expanding its effectively substantial part in the economy. Conventional firms, however, are choked by formality. Nothing moves without an influence. Egypt comes at an unfortunate 131st in the World Bank’s simplicity of-working together positioning. A financial specialist must get licenses from 78 distinctive authority bodies to begin another business venture, as indicated by the legislature. Its guarantee of a “one-stop shop” to supply all of them, made year and a half ago, has so far come to nothing.
However, casual undertakings think that its difficult to obtain cash, and in this manner difficult to develop. This year, the administration ordered that 20% of bank credits go to little and medium-sized firms, however it is not clear how casual ones will be dealt with (or whether there are sufficient promising little ventures to assimilate that much money at any rate). Banks may battle to back this arrangement and still continue loaning to the legislature.
Egypt is likewise neglecting to supply its youth with job opportunities. More than 40% of them are unemployed. A college instruction is in reality free, however the quality is poor and colleges attempt to instruct abilities that nearby managers really require. Egypt produces numerous specialists—however a greater amount of them wind up in Saudi Arabia than in Egypt. Different graduates depend on the general population area to give work, yet employment opportunities are progressively rare.
In any case, Egypt’s future is uncertain. The Egyptian pound will continue to suffer unless we start exporting goods. The Egyptian population has been optimistic, and it remains to be seen what will happen next.