Egypt’s currency crisis continues to stifle growth, as the IMF estimates that GDP growth will slow to 3.3% for 2016, down from 4.2% during 2015. The well-publicized ‘dollar shortage’ is partially to blame, yet is an imprecise summary of the problem.
The country does not suffer from a ‘shortage’ of dollars so much as a restriction of supply through official channels. The Central Bank is only gradually changing the exchange rate to a more realistic level, while dollar income from traditional sources such as the Suez Canal, hydrocarbons, foreign aid and tourism is either stagnant or in decline. Priority access to dollars is awarded to key businesses such as importers of fuel, food and medicine. Other firms have to wait in line and sometimes only obtain part of their requirement. This often forces companies to go to private currency exchanges to make up the shortfall.
These bureaux are largely fed from a more reliable source: the remittances sent home by the nearly four million Egyptians abroad. This is by far the country’s largest single source of hard currency, growing from $5 billion a decade ago to over $20 billion today – nearly four times the revenue of the Suez Canal. Of course, these revenues do not accrue directly to the government, yet tend to be exchanged through the private sector. These bureaux are a lifeline to the economy, but – predictably – they charge far higher rates than banks.
While this situation will continue to hurt import-oriented businesses and the wider economy in the coming months, the long term outlook is somewhat more optimistic. After a decade-long decline in output, Italian oil and gas giant Eni discovered the Mediterranean’s largest gas field in 2015 off the Egyptian coast, doubling the country’s gas reserves. When it comes online in 2017, it will cut Cairo’s fuel import bill (paid in dollars) and bring much-needed investment to the energy sector, with other firms such as BP, Shell and Apache already joining the exploration bonanza. It would however be unwise for the government to anticipate a similar reversal of fortunes for the country’s tourism sector, which is far more sensitive to political unrest, a less predictable factor than gas output.
Another key source of foreign currency – aid from the country’s Gulf allies – has long been expected to dry up due to falling oil prices. This however, has not materialized, as Egypt’s influence in the region as the largest Arab nation has turned out to be a better guarantee of continuing support. Indeed the recent rebound in oil price may ensure further assistance, restoring confidence among investors. By comparison, income from the Suez Canal has largely been stagnant, despite a recent expansion in the canal itself. This is largely due to sluggish global trade. This could change for the better or the worse.
In the short term, resolving the currency issue is crucial. In March this year, the Central Bank made a long-awaited decision to devalue the Egyptian pound, leading to stock market gains. This has demonstrated an appetite for change among policy makers. This must translate into further reforms as uncertainty over exchange rates and other regulatory issues continues to harm productivity and spur inflation. Further weakening of the currency may lay the foundation for a sustained economic recovery. However, this will be dependent on improved stability at home – somewhat elusive at present. The country’s surest source of hard currency, the diaspora, may be attracted to invest more back home as the pound weakens, reaping the fruits of Egypt’s greatest asset – its people.