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By Yasmine Hassan 

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   After weeks of turmoil, where Egypt’s five year economic predicament had come to a stalemate, the Egyptian Central Bank floated the pound currency on Nov. 3, introducing yet a more intense period of economic instability and unpredictable but inevitable price hikes.  

 

The Central Bank originally devalued the Egyptian pound by 32.3 percent, and set a primary guidance level of 13 pounds to the U.S. dollar. However, it has been sliding even further since then.

 

This step aggravated a national crisis of price hikes that had already touched

upon almost all goods and services, as the Egyptian pound has lost 40

percent of its value this year alone and over 70 percent since the 25th of

January 2011 Revolution.

 

Ayman Samir, the owner of a grocery store in Downtown Cairo, is complaining

about an extreme stagnation. “When a customer comes and learns about the

new prices, he just leaves the product and goes on his way,” Samir says.

“You would have never found a grocer sitting like this without work before…

People are now struggling to afford the products of utmost necessity,”

he states, pointing to his empty store.

 

The decision to float the pound came in response of a key demand by the International Monetary Fund (IMF), as a precondition to secure a $12 billion loan to Egypt over three years. According to The Guardian newspaper, the loan deal has also imposed other conditions on the Egyptian government, such as lifting subsidies on fuel, over and above other state subsidies that had already been reduced in early 2016.

 

In the wake of the floatation decision and the subsequent subsidy cuts, the average Egyptian breadwinner is struggling today to provide his or her family with the most basic living needs.

 

How did we arrive to this and where are we today?

 

Professor Ahmed El Safty, visiting associate professor of practice in the Department of Economics at the American University in Cairo (AUC) and former senior economist at the Central Bank of Egypt, explains that the situation can be traced back to the aftermath of the 25th of January Revolution, when “the international reserves of the Central Bank dropped from about $36 billion in early 2011 to $15 billion around mid 2012.”

 

The crisis further escalated, “when the injection of foreign exchange by the GCC countries [Gulf Cooperation Council] stopped and at the same time the market was losing confidence in the system,” El Safty states, referring to the floatation decision as a necessary collective measure to face “the increasingly scarce supply and high demand of foreign exchange.”

 

As for the gravity of the financial deficit that followed the floatation, according to Professor Adel Beshai, economics professor at AUC and former assistant secretary general of The U.N. World Food Conference, it falls back on “the hesitance” of the Egyptian administration.

 

“Had they floated in August, after the agreement with the IMF, the equilibrium exchange rate of the pound vis-a-vis the dollar would have settled by now and would have been equal to 9.50 or 10 pounds to the U.S. dollar,” Beshai says, explaining that the floatation decision was unjustifiably delayed, thus empowering the black market and intensifying the crisis.

 

The black market value of the Egyptian pound had reached a historical record of 18 EGP to the U.S. dollar, days before the floatation decision.

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The aftermath of the floatation: The struggle of an average citizen

 

Surveying several grocery stores in Cairo and Giza - southwest central Cairo- , it has become clear that the prices of basic goods largely vary today from one store to the other. However, as a general trend, all prices have gone up.

 

Talking to a 44 year-old housewife in Faisal neighbourhood, one of the most crowded and noisy neighborhoods in Giza with lots of shops, she said, “The biggest problem is food. Concerning clothes for example, we can put on more than one thing over the other and keep warm … but what can we do without food?” “Even a small ‘foul’ [beans] sandwich has jumped from 1.25 pounds to 2 pounds,” she complains.

 

In an attempt to explain the price hikes, El Safty says, “It is a matter of increasing the cost for the retailers or the producers, and they have to transfer it to the customers.”

 

Nevertheless, vendors have also been accused of being “greedy.”

 

Beshai argues that retailers are exaggerating, “as they already had stocks” before the floatation. “It is time now that if you were making a 60% profit, be content with 30%,” he adds.

 

Producers, importers and vendors in the variant economic sects have been dealing with different kinds of “challenges,” following the floatation decision. However, the fall victim in all cases is the Egyptian consumer whose income remains the same, while prices are drastically increasing and some of his basic necessities mysteriously disappear.

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Strategic commodities: A retroactive tab

 

In addition to facing a huge budget crisis to supply new stocks at the higher dollar price, importers of essential commodities, such as wheat, are currently in deep trouble with the banks because of dollar deals that they had made months before the float.

 

In light of the dollars scarcity, importers of essential goods had been put on a priority list since November 2015, allowing them to open credit lines in the banks in Egyptian pounds. And supposedly, the bank was responsible for making the equivalent in dollars available for them at EGP 8.8 to the dollar, explains Mustapha Abd El Rahman, financial manager at “El Wehda for Import & Export & Trading of Wheat.”

 

At first, that privilege made the importer’s life much easier; however, following the floatation decision, importers were surprisingly demanded to cover the new exchange difference after the floatation; or else, the bank would not release their imported goods.  

 

“I had deposited, for example, the equivalent of $42 million. Now, I am bearing a loss of an extra EGP 7 or 8 for each dollar, which means a total of EGP 280 million,” Abd El Rahman explains, adding that this is a huge loss for the company and it would inevitably translate into an increase in prices.

 

It is also worth noting that custom duties have been sharply raised by the government earlier this month, jumping up to 60% on everything from wheat to luxury cars; thus inducing, even further, motivation to increase prices.

 

 

Pharmaceuticals, an inevitable sacrifice: raise prices or drugs won’t be available anymore

 

The prices of all medicine below EGP 30 had already increased by 20% before the floatation; and there have not been any further hikes since then.

 

However, even though the Ministry of Health is, till now, banning any price increases, there is actually an imminent threat that possibly millions of Egyptians will no longer find some of their essential medication at all, whether at a low or high price.

 

Doctor Safwat Moussa, a pharmacist in a middle class neighbourhood in Giza confirms that “the pharmaceutical companies have started refraining from supplying the [imported] drugs, leading to an extreme shortage.” He explains, “The (Health) Minister’s rejection to increase prices is inconsistent with the market economy; and they [the pharmaceutical companies] will not accept to lose.”

 

Moussa further refers to a stagnation in the market despite the fixed price. “People come and calculate the value of the prescription and leave […] or they cannot afford the whole box and they end up buying a stripe or only one pill,” he states.  

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Concerning the argument of the medicine firms, Mohamed Y., a sales and marketing employer in a multinational pharmaceutical company says, “The head company [abroad] refuses the current profit margin and does not want to send drugs anymore.”

 

He explains, “We are bound to a “dollars” target to deliver to the headquarter by the end of the year. However, since drugs are sold locally in Egyptian pounds, they do not even meet half of the target agreed upon when exchanged into dollars,” noting that the Egyptian branch, in this case, would be considered a losing one by the head company, and subsequently, “some companies are already closing down.”

 

 

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Clothes, laptops, cars… You name it

 

Apart from the basic life necessities, most, if not all, less essential products have equally become much more expensive, such as clothes, shoes and cigarettes. It has become the norm for shops to remove or tear up old price tags and cover them up with double or even triple the old price.

 

Two of the sectors that have witnessed the most increase in prices are electronics, such as computers, phones, machines and of course, cars.

 

Essam El Hennawy, general sales manager at Al-Mansour Automotive,

one of Egypt's largest importers, distributors and retailers of motor

vehicles, says that car prices have increased by 100 percent between

January and November 2016, and another 100 percent since the

floatation decision. “Prices went crazy,” El Hennawy states.

 

Not only has a new car become worth a fortune, even fixing or

maintaining your old one is a challenge.

 

The price of spare parts has also increased, following the exchange

crisis, El-Hennawy confirms, explaining that “spare parts are mainly

imported, and even the locally assembled ones are partly so.”

 

El-Hennawy adds, “We expect 20 to 30 percent shrinkage in the market in 2017 compared to this year,” pointing out that the industry is already witnessing very slow markets, due to a “question of affordability.”

 

 

Short-term pain for a long-term gain?

 

Despite this gloomy cloud covering the Egyptian societies, as a result of the inconsistency in Egypt's economy, bankers and experts are actually arguing that the floatation decision has been the right call, and that long-term benefits will follow.

 

“The devaluation decision was very well-managed; and the results so far have been very good,” says Amgad Doma, head of strategy and planning at Emirates National Bank of Dubai (NBD) in Cairo.

 

“The (foreign currency) flows into banks have exceeded the

expectations. Everything is slowly and surely going back on

track,” Doma says, adding that according to the recent reports,

“the years 2018 and 2019 will be first stable and healthy, and

will witness very positive economic indicators.”

 

El Safty further predicts that “the Egyptian pound worth should

get higher in the future, but after the system becomes stable,”

adding that we are expecting a surge in foreign exchange flows

due to foreign investments and the IMF deal that was approved

ten days after the floatation.

 

As for the price hikes and the subsidy cuts, El Safty reassures

that “one part of the government’s program with the IMF is to

increase the social safety net for the people,” clarifying that

some subsidies might “increase” during the three years period of the IMF agreement.

 

 

The best way to utilise the situation

 

There is optimism for Egypt and its future. Economist Beshai says the country is “in the most wonderful position, potentially, to increase exports,” providing that productivity is raised, with further help and facilitation by the government.

 

In an interview with Hani Cassis, CEO of Misr For Industry & Trade (MINTRA), an Egyptian paper company which exports 88 percent of its production, he acknowledges, “This [the devaluation] was very cash-positive for exporters … because there is incoming funds in dollars and because part of our debts is in pounds,” confirming that the devaluation resulted in “good financial results.”

 

According to Cassis, “the only way to achieve balance and richness for Egypt is that manufacturing capacity and exports get higher,” proclaiming that “a thousand factories can solve the problem if they export for $50 million only each.”

 

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Regardless of the availability or effectiveness of a “long term plan,” and how the big players, i.e. importers, exporters and bankers, deal with the challenges, it remains undeniable that the average Egyptian citizen is the one who is suffering, and will continue to suffer, the most in the middle of this dilemma. The average citizen will probably be the last to feel or see the alleged positive aspects of this devaluation.

 

“People used to suffer to pay even one pound for a product; now, you are asking them to pay one and a half pounds for the same thing. How can they do it?” says Samir, who deals with distressed consumers and  struggling breadwinners on a daily basis in his grocery store.

 

“Food, water, housing, electricity, rent … how can we afford all of that with these price hikes,” Samir wonders.

 

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