Egypt’s foreign exchange market and the need for a different economic policy
Calm seems to have prevailed in the currency market in the past few days following the Central Bank of Egypt's (CBE) recent decision to devalue the Egyptian Pound against the U.S. Dollar by around 15%.
But the dominant media discourse continues to mix up the cause of the problem with its effect, conflating the disease and its symptoms. As long as the fundamental economic problem is not addressed, the consequences will continue to be felt, regardless of the CBE's interventions.
The root cause is that Egypt imports more goods and services than it exports and the state does not have the financial resources to cover the gap. The result is growing demand for foreign currency and, with a fixed pound, higher prices in the black market.
The government must identify the principal causes of the current crisis and address them in a radical way; all other measures are palliative and will only postpone the inevitable return of the symptoms.
More specifically, as the government prepares its economic programme for submission to parliament later this month, it should seize the opportunity to look closely at four issues.
First, it must offer a clearer economic vision than what we have seen over the past two years. The floundering and inconsistencies in government policies have had disastrous effects.
An economic vision is different from an annual budget where the government announces expected revenues and spending proposals. It also differs from the 2030 document prepared by the Ministry of Planning, which set development targets for the next 15 years.
What is missing is a lucid description of how the state will steer the economic ship in the coming years.
Does it intend to adopt expansionary policies that rely on increased taxes and spending or will it rationalise spending to reduce the deficit, domestic debt, and inflation? Does it want to enhance the social security system to include education and health and create jobs, or will it suffice with better bread distribution and the Karama and Takaful cash transfer programmes? Does it want to spur economic growth by encouraging small and medium industries and offering finance, training, and marketing assistance or will it continue to rely on large industries, giving them every available exemption, benefit, and subsidy? Does it have a plan for promoting certain economic sectors, or will it continue to battle on all fronts?
Answers to these questions are needed so that people can understand where the state is headed and investors can prepare for market conditions.
Second, the state should admit that the investment policies of the last two years have not had the desired effects, especially following the economic Sharm el-Sheikh conference a year ago.
It should recognise that valuable time was lost - and with it chances for external finance and foreign investments - due to its attachment to an investment law that achieved none of its promised objectives.
It only further complicated and destabilised the investment climate, leading to turf wars between government bodies and utter paralysis at a time when we most needed more investment and growth.
Unfortunately, all the voices over the past year that cautioned against the futile legislation and putting off serious reforms of the investment legal framework were ignored, all so the state would not need to admit its error.
Third is the issue of national megaprojects. No one is against a new capital or the addition of another one or even four million feddans of agricultural land.
But projects of this size cannot continue without assessing their impact on the budget and weighing them against our needs for social spending; urban redevelopment; the renovation of existing irrigation, sanitation, and transportation networks; and the development of informal areas inhabited by millions of Egyptians.
Economic management is not solely about implementing megaprojects, no matter how swiftly and competently. It also involves choosing spending priorities and balancing them against various economic and social benefits.
The fourth and final issue is tax policy. The biggest share of income tax is paid by civil servants and major corporations and their workforce.
Outside of these three groups, there is much room to expand the tax base and increase tax revenue without overburdening taxpayers. I know very well that this is easier said than done, but if we do not take serious steps in this direction, the social balance will remain skewed.
CBE policies are vital to determine monetary and credit approaches to the crisis, but dealing with the root of the economic crisis is the responsibility of the government and executive.
The idea that our problem is just the price of the dollar and that the CBE can produce the magic cure-all is irrational, troubling, and untenable.
(Ziad Bahaa-Eldin holds a Ph.D. in financial law from the London School of Economics. He is former deputy prime minister, former chairman of the Egyptian Financial Supervisory Authority and former chairman of the General Authority for Investment.)
*This article was originally published in Arabic in al-Shorouq newspaper on Mar. 14. The English version first appeared on Ahram Online on Mar. 17, 2016.