Shoppers in Egypt, Lebanon and Iraq left at the mercy of currency markets

Foreign exchange crunches and rising global inflation has drastically increased the three countries' import bills, leading to record increases in food prices

A currency trader counts US banknotes at an exchange shop in Beirut. EPA
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The recent economic woes of Egypt, Iraq and Lebanon, though quite different in nature and magnitude, all have one thing in common: instability of the local currency against the dollar.

The three countries, whose currencies are either pegged to the dollar or deeply affected by changes in its value, are facing their sharpest rises in food prices in years.

The problem, caused largely by the knock-on effects of Russia's war on Ukraine and the Covid-19 pandemic, has also been exacerbated by the Arab world’s susceptibility to US foreign and fiscal policies and its often tumultuous domestic politics.

Iraq blocked from full access to its dollars in foreign reserves

Iraq’s foreign reserves reached an all-time high of US$100 billion this year following increases in the global price of oil that have been a boon for the petroleum-rich nation’s revenue.

However, since the US-led invasion of Iraq in 2003, the country's Central Bank has had dollars in the US Federal Reserve and makes monthly requests for money. The Iraqi bank then sells off the transfers in dollar auctions to local banks and exchange houses.

In recent months, however, the Fed has reduced cash inflows to the Central Bank of Iraq by about 80 per cent in a bid to combat money-laundering, which Iraqi officials say benefits neighbouring Iran and Syria, both of which are under strict US sanctions.

Iraq's reduced access to its own money amid rising local demand has increased the country’s import bill (which it foots in dollars) and invigorated its black markets on which $1 is trading for around 1,500 dinars today.

The official exchange rate had been fixed at 1,460 dinars to the dollar since 2020 until this year, when a government revaluation reset it at 1,300.

As the value of the dinar has continued to fall, the prices of the majority of goods have increased by at least 50 per cent since December 2020, which has subsequently increased the burden on a nation where the national poverty rate is 31.7 per cent in a population of 40 million.

Hundreds of protesters took to the streets of Baghdad in January to decry the recent drop in the value of the dinar and the resultant rise in food prices.

Lebanese pound continues to plummet, exacerbating socio-economic divide

Similarly, in late March, dozens of Beirut residents took to the streets to protest against the sharpest fall to date of the Lebanese pound, which, though officially pegged at 15,000 liras to the dollar this year, is trading at an all-time low of more than 100,000 liras on the black market, the exchange rate used for most transactions in Lebanon.

Since 2019, many Lebanese supermarkets have removed price tags, listed in lira, off their goods due to the almost daily fluctuations in the value of the local currency. Price tags returned to shelves again this year but not in the national currency, which has lost 98 per cent of its value on the parallel market since 2019, but in the more stable dollar.

While pricing in dollars may be more convenient for assessing the value of goods, many Lebanese are concerned by the unfettered dollarisation of their economy as it does not address the issue of the collapsed local currency, which is still used to pay public servants and many private sector employees.

Salaries in lira have not kept pace with inflation, reaching approximately 124 per cent in January, one of the highest inflation rates in the world.

The collapse of the local currency has also created a divide between those paid in dollars and those in Lebanese pounds. Some of the latter have become impoverished to the point of needing to eat out of rubbish bins while the former, fortunate dollar-earners can afford to eat at gourmet restaurants and drive luxury cars.

Years of financial corruption, political instability and mounting public debt have dried up much of the country's once stable sources of foreign currency, which included remittances from a large diaspora and tourism revenue.

Furthermore, a prolific financial sector made attractive by discreet banking practices and competitive interest rates has all but disappeared amid continuing probes into the financial practices of the country’s political elite.

Lebanon's economic woes were laid bare by the Covid-19 pandemic, when inflows of foreign cash reached critically low levels. The 2020 port blast, that killed more than 200 people and injured at least 6,000, resulted in billions of dollars in damage and rendered hundreds of thousands of people homeless.

Siham Rizkallah, professor of economics at Saint Joseph University in Beirut, previously told The National that the so-called dollar addiction was having a disastrous effect on both the economy and people of Lebanon.

“It is creating a Lebanon for US dollar holders that we see in restaurants, shopping malls, big hospitals and touristic venues versus workers whose incomes are in lira who have become excluded from the socio-economic tissue,” she said.

“Lebanon needs a new exchange-rate regime to put an end to the current chaos."

After a visit to Beirut late last year, the International Monetary Fund announced it would approve financial aid to Lebanon until a series of agreed-upon reforms were introduced.

Egypt devalues currency as import ban raises prices of food staples

In the same vein, reforms requested by the IMF were the main reason behind the recent drop in the value of the Egyptian pound against the dollar — more than 50 per cent since early last year.

Following the departure of more than $20 billion of foreign investments from Egypt’s debt market, in the wake of the war in Ukraine, the Egyptian government, faced with dwindling foreign reserves, turned to the IMF for its fourth loan in six years. Egypt is the IMF’s second biggest borrower after Argentina.

The IMF asked for a series of reforms that included a free-floating local currency and increased social welfare for the country’s poorest. Three consecutive devaluations of the pound followed, bringing down its value from about 15 Egyptian pounds to the dollar early last year to slightly more than 30 this year.

The drop in Egypt’s foreign reserves prompted the government to tighten controls on imports to prevent the departure of scarce dollars from its economy, which had taken significant hits during the Covid-19 pandemic and hadn’t recovered.

Like Iraq and Lebanon, Egypt relies heavily on imports to feed its 104 million people and to keep its many industries running.

The import ban led to billions of dollars of goods (including essentials such as chicken feed, medicine and raw materials) being held up at the country’s ports for months. The goods are yet to be wholly cleared.

Consequently, the prices of many essential food items such as chicken, meat, grains and cooking oil have either doubled or tripled since last year, with analysts anticipating more rises in the coming months.

This has caused significant changes in the lives of millions of Egyptians. While some cut out more expensive food items such as meat from their diets, others started to purchase cheaper food of lower quality.

According to Monica Malik, chief economist at Abu Dhabi Commercial Bank, the worst is not yet over for Egyptians in terms of rising cost of living.

"We expect the Consumer Price Index to accelerate further in coming months, with the EGP devaluation still continuing to filter into prices," she said.

"Meanwhile, we see the EGP settling in the 36.0-38.0 range against the US dollar by end-2023," said Ms Malik. As of April 4, the Egyptian pound was trading at almost 31 EGP per $1.

To help mitigate the effects of rising prices, the governments of Egypt and Iraq have launched programmes to provide essential food items like sugar, bread or flour and cooking oil at subsidised prices. However, both countries’ policies are a far cry from what they need to be to mitigate rising levels of food insecurity in the region, a recent UN report stated.

Egypt also raised the minimum wage for state workers by about 15 per cent last month. However, with its populace contending with a decrease of more than 50 per cent in the value of the currency and therefore their purchasing power, the increase will do little to alleviate mounting financial pressures.

As Arab currencies decreased in value, the US dollar strengthened significantly over the course of last year, due largely to repeated interest rate rises by the Federal Reserve to reduce inflation.

As a result, analysts predict the pressure on Arab citizens will most likely not be alleviated for some time.

A World Bank forecast in January warned that the global economy was "perilously close to falling into recession" and analysts anticipate that the Ukraine war will continue throughout the year and keep food and energy prices high.

Updated: April 05, 2023, 8:41 AM