Egypt pounded by steep currency decline

Egypt has sworn in ten new cabinet members to address the country’s mounting economic problems, but some analysts say the government has not acted fast enough as the Egyptian pound continues to lose value.

Shortly after a 63 percent majority of Egyptians approved a new constitution in December 2012, Egypt’s central bank announced that its foreign reserves had reached critically low levels, and that it could no longer afford doing business as usual.

Egypt’s economy spluttering

Since the January 2011 uprising, the bank has spent 60 percent of its US dollar reserves on paying debt and defending the value of the pound, and now has to resort to new measures to defend its remaining reserves.

These include selling dollars to local banks through auctions, imposing a cap on daily withdrawals by corporations and individuals, imposing a one-two percent fee on individuals buying dollars, and reducing local banks’ dollar reserves.

Since the central bank’s announcement, the pound has shed about three percent of its value, and now trades at 6.43 pounds to 1 US dollar, a record low.

This has sent shockwaves through the economy. “Pressure on the pound is normal,” Hazem el-Beblawi, a former Egyptian finance minister, told Al Jazeera. “But at this moment there is fear and concern, which complicates the problem.” He warned that “the big fear is that the pound could lose more than needed because a state of pessimism is dominant”.

Root causes

Egypt’s longstanding economic problems are seen by many as a major cause of the country’s January 2011 uprising.

According to the government’s latest economic plan published in November, in the last fiscal year (ending in June 2012) 80 percent of Egypt’s spending went to fixed items, such as interest on loans (22 percent), public salaries (26 percent), and food and fuel subsidies (32 percent). The remaining 20 percent hardly covers the country’s needs to spend on new programmes and investment projects.

Only seven percent of last year’s budget went to new investment projects. The same budget suffered a deficit of 167.7bn Egyptian pounds ($26bn).

Egypt’s current cabinet, led by Prime Minister Hisham Kandeel, ambitiously planned to cut the budget deficit by 15bn Egyptian pounds ($2.3bn), achieve a growth rate of 3.5 percent, while boosting spending on public salaries, food subsidies, and investments.

“Everyone agrees we have an economic problem, and the solution is a political one. It requires sacrifice and consensus. But people are divided.“ – Hazem el-Beblawi, former finance minister

These increases were a direct response to growing public demand for spending on projects that help the poor.

To achieve these goals, the government wanted to cut fuel subsidies, some of which go to rich corporations and individuals, by 25bn Egyptian pounds ($3.9bn). It also wanted to raise an additional 44bn Egyptian pounds ($6.9bn) in revenue by hiking taxes and projecting higher revenue from oil exports, the Suez Canal, and government-owned companies.

Finally, the government aimed to double foreign direct investment to $4bn, increase exports by 18 percent, create 700,000 new jobs, and attract 12.5 million tourists.

But things have not been going according to plan. Political tension spoiled the end-of-the-year tourism season. And in December, Egyptian President Mohamed Morsi rescinded a decree he had issued earlier that same day that would have raised taxes. The Muslim Brotherhood and its political wing, the Freedom and Justice Party, objected to the planned tax hikes, fearing it would anger voters before the constitutional referendum.

The failure to raise taxes meant delaying agreement over a much-needed $4.8bn International Monetary Fund loan to Egypt, which suffers from staggering budget deficits.

On New Year’s Eve, Egypt’s planning minister, Ashraf el-Arabi, warned that the “budget deficit is expected to rise to £200bn ($31.3bn) in the current fiscal year unless strict economic policies are put in place to confront it”.

What went wrong?

Economic growth has slowed significantly since the revolution: an anaemic 1.8 percent from June 2010 to June 2011, compared with 5.1 percent the previous fiscal year. Spending on salaries and government programmes has risen, and foreign investment has fled. In this context, some analysts believe that post-revolution Egyptian cabinets, including the current one appointed by Morsi and led by Kandeel, have not acted fast enough to implement needed reforms.

The How Foundation, an independent think tank based in Cairo, criticised the cabinet in a new study for not acting fast enough to devalue the Egyptian pound. If the cabinet had acted sooner, the study argued, Egypt’s foreign reserves would not be in such a dire condition, and the currency’s devaluation would have been more gradual.

The study blames Morsi’s decisions for hurting the economy, such as his November 22 declaration that prevented his decrees from being reviewed by the judiciary, a decision that sparked huge protests.

Socialist economists, such as a Abdel Khalek Farouk, the author of several books exposing economic corruption under the Mubarak regime and a senior member of the socialist-leaning Popular Current coalition led by former presidential candidate Hamdeen Sabahi, told Al Jazeera that crucial reforms could be implemented in a “month or two” if officials were to appoint a “national coalition government capable of saving the country”.

Farouk believes government should increase income tax rates on the rich to 40 percent, impose across-the-board caps on public salaries, work in co-operation with the private sector to create jobs, and expand the role of government-owned companies.

Meanwhile, liberal economists such as el-Beblawi believe that reforms such as lifting fuel subsidies and increasing taxes should be implemented “gradually through a well-known and agreed-upon plan”.

According to el-Beblawi, the government has not taken any serious steps to control the budget deficit because it fears the political effects this would have. “Everyone agrees we have an economic problem, and the solution is a political one. It requires sacrifice and consensus. But people are divided.”

Brotherhood hopeful

Abdullah Shehatah, the head of the Freedom and Justice Party’s economic committee, told Al Jazeera he remained hopeful that a 3.5 percent growth rate was “still possible” in 2013.

“Things have become more stable after the referendum … I believe the cycle of stability has started.“ – Mohamed el-Feky

If the political situation stabilises, he said, and an agreement is reached with the IMF, the economy will improve. He also blamed the central bank for not devaluating the Egyptian pound earlier “gradually and quietly”. Likewise, he believed subsidies and taxes should be reformed gradually. According to Shehatah, businesspeople have told his party they would “accept” increasing income taxes to 35 percent from the current 25 percent, but they worry that raising taxes during current slowdown will hurt business and growth.

Egypt’s current economic trouble is “temporary”, and will be remedied by more political stability, Shehatah said, following expected parliamentary elections in about three months.

Mohamed el-Feky, a Freedom and Justice Party member and the head of the financial committee within Egypt’s upper house of parliament, shared Shehatah’s view that political tension is a major cause of Egypt’s economic woes today.

“I expect the signing of the IMF loan this month. Things have become more stable after the referendum. After a new house of representative elections law is issued in a month, all parties will get busy with elections. I believe the cycle of stability has started.”

The How Foundation suggested that, to escape from the current crisis, banks should control the rush to buy foreign currency, part of the government’s local debt should be shifted to foreign currency to free more local currency for domestic lending, and fuel subsidies should be removed only gradually in order to avoid public anger.

In the meantime, Egyptians have not lost their sense of humour, and activists are circulating pictures online showing Egypt’s central bank putting up a banner reading: “Money is not everything in this life.”

Follow Alaa Bayoumi on Twitter; @Alaabayoumi