The IMF has expressed concern that if Egypt continues to control the exchange rate of the pound, bottlenecks in the economy that have been building up due to a scarcity of foreign currencies will only increase and scare away much-needed investment to help revive growth.
“The Egyptians have been saying that they want to move to a [monetary policy] model that is determined by supply and demand,” said Masood Ahmed, the regional head of the IMF, as the fund released its latest assessment of the region yesterday.
“We are basically keen to support moving to that objective and most observers agree that staying with the current model would create an increasing bottleneck in the economy.”
The Arab world’s most populous country has been in the process this year of negotiating a US$12 billion bailout package from the IMF, but tapping those funds will only be possible if Egypt moves to a more flexible exchange rate, reduces subsidies and gets an additional $6bn in financing.
So far the country has not met any of the conditions despite frequent signals from the central bank, government and other officials that they plan to move to a more flexible exchange rate and further reduce subsidies that have weighed down government finances for decades.
Egypt’s government relies heavily on inflows of hard currency to import energy and food that it sells at subsidised rates.
Businesses are also in need of foreign currency to import raw materials and machinery. Both have been suffering for years from decreasing receipts from key sources including foreign direct investment, the Suez Canal, remittances from Egyptians abroad and tourism – especially since the downing of a Russian jet in October last year over Sinai.
The value of the Egyptian pound has been tightly controlled by the central bank over the past five years as the government intensifies efforts over the past year to curtail imports while using its foreign currency reserves to defend the Egyptian pound. As a result of these measures, hard currency has become even harder to find, pushing up the value of the US dollar in the black market.
The Egyptian central bank devalued the pound by 13 per cent in March, but that failed to kill the trade of the black market.
The dollar currently trades at a premium of 75 per cent at 15.5 pounds on the black market from the official rate of 8.85.
Egypt’s economy grew by 4.2 per cent last year, according to the IMF, a rate that is expected to slow to 3.8 per cent this year and 4 per cent next year.
Since the protests that ousted Hosni Mubarak as president in 2011, average annual growth rates have stalled.
Analysts have said that investors shying away from the country has been one of the most serious consequences of Egypt’s dysfunctional monetary policy.
“People need to feel that they can bring money in and out of the country and they should not be worried,” said Mr Ahmed.
“At the moment, given the difference between the official rate and the parallel rate and given the difficulty of transferring Egyptian pounds into dollars at the official rate, anyone bringing money in is worried about getting it out without a loss.”
mkassem@thenational.ae
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