Was the flotation a panacea for Egypt's economic problems?

CAIRO – 27 April 2017: The flotation of the Egyptian pound was not inevitable and the future depends on government actions, professors at the American University in Cairo (AUC) said Wednesday in a seminar discussing Egypt’s “courageous” and “overdue” decision to float pound.

The seminar entitled "Is the flotation of the Egyptian pound a panacea for Egypt's economic problems?" started with a set of inquiries, looking at where we are headed today and whether we should expect some of the proverbial light at the end of the tunnel.

Neveen Ahmed, assistant professor of finance in the Management Department at AUC and Professor Ayman Ismail, endowed chair of entrepreneurship, set in simple terms the roots of the problem, as well as future prospects.

“There is a mindset in Egypt that our currency represents the strength of our economy and this is completely wrong,” Ismail stated, explaining that Egypt went against the flow and refused to devaluate the currency after the financial crisis in 2009. As a result, “we did not do it gradually, so we had to do it suddenly, ending up in a disaster,” Ismail said.
When asked whether the flotation was inevitable, Ismail stated that it was not; however, the devaluation was.

“Every decade, decision-makers forgot the pain they went through and did the same mistakes again,” Ismail said. “We really like controlling things,” he added, referring to the Egyptian Central Bank.

“You keep depleting your reserves, to the point you cannot pay for your most basic imports,” Ahmed clarified, taking into account the difficulty of the decision due the political unrest that followed the January 25 Revolution.

“There are certain shortcomings out of this flotation but we did not have any other choice,” Ahmed stated, adding that out of three flotation experiences in Egyptian history, the recent one was the most “severe.”

The Egyptian pound has so far witnessed 50 percent devaluation, within months, compared to 70 percent over a period of nine years (1991-2000) and 40 percent over a whole year, between 2003 and 2004, she clarified.

As for the impact of the flotation, Ahmed stressed that the theoretical rule, assuming that depreciation would make national products less expensive in terms of foreign currency and increases exports, does not apply to Egypt.

The theory is based on “an assumption that you can increase your production capacity and cut your imports, which is not the case in Egypt,” Ahmed said.

“With the flotation, there was also an increase in electricity cost for the construction industry that has ranged from 35 to 40 percent, implying a 48 percent average downside to their earnings,” Ahmed said, further referring to dairy products whose prices have significantly surged after the flotation.

When asked about future prospects, Ismail affirmed that the situation will get better within a year or two. He stressed that the first year following the flotation is the most severe, which he called the “shock year.”

“How fast the situation will get better depends on what actions the government is going to do and the politics in the whole region,” Ismail concluded.

The event was part of a lecture series organized by AUC’s Centre of American Studies and Research in cooperation with the School of Business and School of Global Affairs and Public Policy.