Meed | New shock treatment for Egypt’s economy

New shock treatment for Egypt’s economy

20 March 2024

Commentary
Edmund O'Sullivan
Former editor of MEED

June this year will mark the 50th anniversary of Law 43 of 1974, Egypt’s first attempt to set its economy on a path to private sector-led growth.

In March, the Washington-based IMF announced that an agreement had been reached for new lending to Cairo as part of a plan “to unleash private sector growth” and contain inflation and growing government indebtedness.

We have heard that hope expressed many times in the past half century. Egypt is often described as having the world’s oldest economic restructuring programme. Cynics say it is one of the least effective.

On 6 March, the central bank announced that the Egyptian pound would be allowed to float. The currency almost immediately fell 60%.

Economists have long advocated floating exchange rates to stimulate growth and correct balance of payments problems. It will raise the price of imports and encourage the Egyptian people to buy locally produced goods. Demand for Egyptian exports will be boosted.

But a floating exchange rate on its own will not cut inflation, which was more than 30% in the year ending February 2024. Money supply growth has to be squeezed, too. That is why the central bank’s key interest rate was increased by six percentage points to more than 27% the same day as the float began.

Investors are loving it. Egyptian shares closed at a record high on 10 March and are set to go higher. Those holding dollar-denominated government bonds, which have soared since the deal, will also be pleased.

Egyptian shares closed at a record high on 10 March and will go higher

But the overwhelming majority will not be. The dollar value of deposits in Egyptian pounds has been cut by more than half.

About 20% of Egypt’s food is imported and it will immediately become much more expensive. It will take time to switch to import-substitution industries and build factories that can take advantage of the pound’s international competitiveness.

There is going to be prolonged economic pain and political ramifications.

The IMF agreement says that the government must provide “adequate levels of social spending to protect vulnerable groups”. Those groups are unlikely to represent more than a small minority.

It will be 11 years this summer since the military coup that displaced Egypt’s first democratically elected government. But it is only now that the full implications are being felt.

Re-elected in a landslide victory in December, President El Sisi is imposing a programme that none of his predecessors dared contemplate on a country where political opposition has been quashed.

In 1977, the “bread riots” ended Egypt’s original experiment with shock economics. Perhaps this time it will work.