Basking in the glow of Egypt’s devaluation

In the end, the central bank far exceeded expectations on its currency flotation. I am absolutely overjoyed, and I think this will lead to a surge in the country's growth.

Normally I don’t like to predict, but this time I’m going to go out on a limb. After the government’s courageous reforms last week, Egypt’s economy will quickly begin roaring ahead at speeds we haven’t seen in a decade.

After nearly six years of increasingly restrictive currency controls that had been strangling the economy, the central bank on November 3 took the bold and difficult decision to float the Egyptian pound – entirely. There were fears in the business community the government would do the bare minimum devaluation necessary to get the US$12 billion loan it has been seeking from the IMF. But in the end the central bank far exceeded expectations. I am absolutely overjoyed.

This should quickly translate into exceptionally fast economic growth, and here is why:

Immediately after Egypt’s 2011 uprising, many people had expected to see a J curve, where the economy collapses briefly because of the flight of tourists and foreign investors (the first part of the J), but then they rush back to make up for lost time once a stable government is in place (the second part of the J).

It never happened – partly because of security concerns but mostly because the central bank, in the middle of the 2011 uprising, once again began pegging the currency at unrealistic levels. Investors knew the currency would eventually have to come down, wiping out part of their investments, and they also had a well-grounded fear that they would not be able to repatriate their profits as the country ran out of foreign currency.

As a result, private business contracted in last month by its fastest pace since 2013, according to the Purchasing Managers’ Index compiled by Emirates NBD. The PMI collapsed to 36.4 from the previous month’s 42 – where anything under 50 represents economic shrinkage.

This should be the last month we hear such painful news. Over the past week, the central bank has allowed the pound to weaken from its peg of 8.88 pounds to the US dollar.

The central bank as of Thursday morning was offering to sell dollars to commercial banks for 17.5967 pounds. So far it has resisted the temptation to draw down reserves to slow the currency’s fall.

We can get some idea of the economic growth we can now expect by looking at what happened the last time the central bank liberated its currency, more than a decade ago. It devalued the pound in 2003, then floated it entirely in December 2004.

Egypt’s economic landscape then was similar to what it now is in a number of ways. Tourism was just beginning to recover from a series of disasters – the massacre of dozens of tourists at Hatshepsut’s Temple in Luxor in 1997, the outbreak of the second Palestinian uprising in late 2000 and the US-led invasion of Iraq in 2003. Egypt had just discovered world-class natural gasfields in the waters of the Mediterranean and began delivering gas from its two new liquefaction plants in December 2004 and May 2005.

Tourism now is similarly recovering from new disasters – the political instability in the wake of the 2011 uprising and the bombing over Sinai of a Russian aircraft a year ago. Tourism revenue collapsed in the year to the end of June to its lowest level in well over a decade.

And as in 2004, Egypt has vast newly discovered gasfields offshore that will come into production soon.

So how fast was economic growth the last time around?

Before the January 2003 devaluation, the economy had been growing at tepid rate of about only 3 per cent. After the devaluation, it sped up to 4 per cent and again to 5 per cent the following year.

After the pound was floated entirely in December 2004, the currency actually strengthened against the dollar – growth soared to 6.9 per cent in 2005-06 and to 7.1 per cent and 7.2 per cent in the subsequent two years.

Egypt has some higher hurdles now than it did in 2004. Then, the world economy was also growing at a much faster clip and international energy prices were much higher.

But the country now has some important advantages it didn’t have then. As of 2002, Egypt only had 65,000 hotel rooms, whereas in early 2015 it had 225,000, with another 150,000 being built.

The country’s natural gas infrastructure is far more advanced than in 2004, with two giant liquefaction plants all but idle and ready to accept gas for export if Egypt can produce a surplus or persuade Cyprus or Israel to send their own newly discovered gas for processing.

But perhaps the most important advantages are the huge growth and greater sophistication of Egypt’s private business community and the expansion of the country’s infrastructure. Businesspeople who have waited on the sidelines for six years have built up an enormous backlog of investments.

We should soon see some amazing growth.

Patrick Werr has worked as a financial writer in Egypt for 26 years

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