Egypt is suffering from both the lower oil price and the currency wars

Today I intend to take a trip to a country which has a rich history. There are of course the Pyramids for starters but also the city of Alexandria which has been described thus in the Guardian today.

“Alexandria was the greatest mental crucible the world has ever known,” claim Justin Pollard and Howard Reid, authors of a book on the city’s origins. “In these halls the true foundations of the modern world were laid – not in stone, but in ideas.”

The lighthouse,library and museum went on to achieve great fame but the man whom it was all named after never lived to see it as Alexander the Great went off on other campaigns and met his own demise. However this rich history is clashing with a very troubled present as the groundswell of the Arab spring meet a lower oil price and both actual terrorism and the fear of it impact.

The Egyptian Pound

This morning’s news comes to us from Arab Economic News.

The Egyptian central bank devalued the pound by almost 13 percent at an “exceptional” sale of dollars on Monday.

The central bank said it sold $198.1 million to local lenders at 8.85 pounds per dollar. That compares with a previous exchange rate of 7.73 pounds. It wasn’t immediately clear whether the lower price is just limited to Monday’s dollar sale. Central bank officials weren’t immediately available for comment.

I do like the idea that you could devalue just for one day! Especially as we are immediately given a clue as to why this has happened.

Egypt is grappling with a dollar squeeze that is threatening economic growth in the most populous Arab country. Foreign-currency reserves have tumbled by more than 50 percent since 2011, though they have stabilized at just over $16 billion in the past six months.

When a country sees a rush for US Dollars that is invariably a sign of what Taylor Swift would call “trouble,trouble,trouble” and can end up in the sort of situation I have described in the past in Ukraine were it becomes a parallel currency for some anyway.If we return to the foreign reserves situation we see another familiar tale as Reuters take up the story.

Egypt’s reserves have dropped from $36 billion in 2011 to $16.53 billion at the end of February.

Over this time the currency has been falling as @RtrsAgAnalyst points out.

As you can see the period after the Arab Spring has seen both currency declines and foreign exchange reserve falls in a familiar pattern for a fixed exchange rate. According to Renaissance Capital it had the most overvalued currency in real terms of any of the Emerging Markets. That is no doubt related to pegging your currency against the strong US Dollar. In a way this from Gerry Rice of the International Monetary Fund in January confirms this.

We would like to stress the need to raise exports in order to promote growth and for exchange rate flexibility to support this, allowing the exchange rate to move to a market clearing rate where supply meets demand, would boost exports, and prevent foreign exchange shortages.

Those who have followed the disastrous policies the same IMF has applied to Greece may reasonably be wondering why a “market clearing (exchange) rate has been denied to it? Perhaps it might provide an antidote to the usually sycophantic media coverage of its Managing Director Christine Lagarde if style could be replaced by substance. After all the quote about is a clear critique and indictment of IMF policy in Greece.

Why are devaluations invariably too late?

I think that there are three major reasons for this. The first is that establishments and what are considered to be elites tend to be much less intelligent than they think they are. Secondly reality is rarely a friend of theirs. Thirdly and interrelated to all this is that they usually try to get their own money out first! In a way this news from China from Saturday highlights this. From Bloomberg.

China is tightening restrictions on the use of third-party payment providers to buy insurance products in Hong Kong as authorities move to stem outflows of the yuan.

I am sure we will find investment elements in these products as we note how inventive people can be. Personally I believe that sometimes the authorities are slow to close down such channels – after all some US $1 Trillion has reported fled China in the last year -because they want a slice of the pie!

The economy

Last September the IMF pointed out that it was not all bad news.

Macroeconomic figures also point to some improvement, with growth rebounding to 4.2 percent in 2014/15, and inflation has declined.

However we feel a chill down our spines as we see the word “resilience” applied to the banking sector as that usually means it is either going to need it or a bailout will be required. Also at a time of political disquiet we are reminded of “trouble,trouble,trouble” again.

At the same time, unemployment remains high notably among the youth

Only six months before Christine Lagarde had pointed out this.

Over the coming five years, there will be more than 600,000 new entrants to the labor market per year.

Have you noticed how according to the world establishment both growing and shrinking workforces are a bad idea?! Poor old Goldilocks never seems to have her porridge just right or in IMF speak.

This is a moment of opportunity.

For those of you wondering things are not as bad a being “on track”. Although perhaps the IMF will inform us as to how raising taxes such as introducing the same VAT which has cause so much economic pain in Greece will help the poor in Egypt.

What now?

The currency controls imposed a year ago had created a bit of a crunch on the economy according to Reuters.

At the same time, the central bank lifted caps on withdrawals and deposits of foreign currencies for individuals and companies importing essential goods, easing forex controls imposed a year ago that had all but paralysed trade……..Businesses who saw a devaluation as inevitable were holding back on investment.

Also there is the issue of lower receipts from tourism as the impact of the Russian plane crash in Sinai and as we mull lower figures for the Baltic Dry Index this consequence from the Middle East Monitor.

a decline in revenue from the Suez Canal

The latest economic growth numbers showed 4.5% but they are from the middle of last year and with the workforce growth we note that per capita growth will be less. Any slowing will only reduce progress on that front and reinforce Egypt’s long-standing problems with poverty and inequality. As to interest-rates some 15% is being offered to investors today on some 3 year bills as long as you can provide some foreign exchange and inflation is 9.1%. For a description of that mixture let me hand you over to Ms. Britney Spears.

Don’t you know that you’re toxic


Any economic woe poses its own problem in a country that is already so troubled. For example lawmakers have accused the European Parliament of being influenced by the Muslim Brotherhood which as far as I know not even Nigel Farage accuses them of. Meanwhile the economy is one of those being affected by the lower oil price as the US EIA indirectly highlights.

Egypt is the largest non-OPEC oil producer in Africa and the second-largest dry natural gas producer on the continent.

Also Egypt has relied on loans from Saudi Arabia and the United Arab Emirates to finance its balance of payments problems and such funds must be in shorter supply. Add the issues described above and 2016 will be hard going especially as the troubles have seen falling gas production in spite of new fields being found.

On the upside there is this from the IMF research although of course it is not clear how this can coexist with the spread of fundamental Islam.

For instance, Aguirre and others (2012) suggest that raising female labor force participation to country-specific male levels would boost GDP in the United States by 5 percent,
in Japan by 9 percent, in the United Arab Emirates by 12 percent, and in Egypt by 34 percent.

Oh and who always benefits from establishment moves?

Commercial International Bank surged 7.0 percent and investment bank EFG Hermes jumped 9.9 percent. Real estate developers Egyptian Resorts and Talaat Mostafa Group each climbed more than 8.0 percent. (Reuters)







18 thoughts on “Egypt is suffering from both the lower oil price and the currency wars

  1. Hi Shaun
    Very interesting (and depressing). I know that you don’t do politics, but there does seem to be a horrible cycle going on in the Arab world:
    1. Dictators/disastrous regimes are deposed (Gaddafi/Saddam Hussein/Taleban etc);
    2. Numerous factions appear in the vacuum and the country falls apart;
    3. Strong arm Islamic fundamentalists take over at least part of the country;
    4. The economy falls apart during one or all of 1, 2 or 3 above;
    5. The disaffected turn to Islamic fundamentalism and try to destroy the economies of various neighbours (see Ivory Coast/Egypt/Kenya for attacks on tourists, designed to create a cycle of poverty).
    I am actually quite surprised that the neighbouring economies such as Egypt are not in even worse trouble than they appear to be.

  2. “Secondly reality is rarely a friend of theirs.”

    Rarely even a casual acquaintance.

    There are 160 fundamentalist groups in Egypt.
    The authorities treat non-Muslims in shocking fashion.
    The sooner their economy bombs the better.

    • ouch!

      like syria or iraq ?

      the last thing the Egyptians need is a tanked economy – MB , ISIL and all the rest would benifit

      93 million – and even if only 10% fled to Europe – where would we house them ?

      if they follow syria 45% will leave , possible mostly coptic. then what ?

      becareful of what you wish for , buzz


      • Wise words Forbin,look at the trouble 2 million Syrians are causing for the EU.

        Having said that,I personally think we’re headed for some sort of seismic world event.So many bad things are falling into place to create a perfect storm,many of which are discussed on here.

        I always remember Steve keen saying sometime in 2008/9 that;
        ‘The last time we had a contraction like this,it ended after ten years with WW2.’ I realise I may be taking the quote out of context but it really struck me at the time.

        You then watch CB’s use monetary policy/accounting tricks discussed on this blog to try and paper over the cracks and telling Joe Public that despite the fact his food and fuel are up in price,it doesn’t matter because GDP is up.

        They think Joe Public is dumb,but actually Joe Public can tell there’s less in wallet come the 30th of the month,that his kids are paying £50,000 for a job at B&Q and that their best chance of getting a house is for him to die.

        The reality of life in places like Egypt is that their ‘Joe Public’ doesn’t have hard currency to fall back on.

  3. Hello Shaun ,

    It has been inevitable it seems that where ever the ” Arab Spring ” has sprung then those countries have declined , if not crashed .

    Although we joke that war increases GDP , that appears to work only if you can keep control yourself and to be an arms maker …..

    Net energy for Egypt has been stagnent for the past decade whilst it has failed to keep a grip on population increases **.

    so the people get poorer and wiish for a “strong man” to lead them . In mnay North African countries this has proven difficult with many smaller factions vying for power who will not co-operate with each other except in some vague meaningless ways.

    Thus they remain devided and cannot have the clought needed to unite and rebuild their economies .

    the political and economic guidance from the West appears to consist of bombs and more debt .- when will they ever learn ?


    PS: how do makev sure you dont eat all my popcorn ? by making sure you can get your own

    ** PPS: the UK is doing the same thing , we’re more united but the strains get stronger each day

    • Hi Forbin

      You are right that whilst speaking of democracy the West speaks loudest in the Middle East via an F-16, Mirage or Tornado bomber. Not only destruction but in a way the worst sort as it is at arms length and a lot further than that as drone technology advances.

      Speaking of technology I note this on Pi day.

      Oil is down 3.14%. The machines are not without a sense of humor.

      Corn prices are pretty much where they were last year.

  4. Great blog as usual, Shaun. My friend Sam Boshra is a Coptic Christian from Egypt, and I thought I knew something about the Egyptian economy, but there was sure a lot of stuff in your blog that I was unaware of.

    On a totally unrelated topic, it seems that I was wrong in thinking that the plans of the State Statistical Service of Ukraine (SSSU) to develop their own HICP had just disappeared down a rabbit hole after the ouster of President Yanukovych. This IMF report, from David Fenwick, who used to be responsible for the ONS price index program:…/0/ukraine/ENG_Mission-report-3-3-(part-2)–doc

    indicates that the SSSU plans to produce a Ukrainian HICP by 2017. There are also plans to produce a Housing Price Index and, it would seem, a series for owner-occupied housing based on the net acquisitions approach. The Ukrainians don’t, I am sure you are not surprised, appear to have any plans to calculate their own CPIH and CPIHY series.

    Nice to see that a former ONS statistician and a firm supporter of the net acquisitions approach to OOH was given the mission of trying to improve Ukraine’s consumer price measures.

  5. ‘Why are devaluations invariably too late?

    I think that there are three major reasons for this. The first is that establishments and what are considered to be elites tend to be much less intelligent than they think they are. Secondly reality is rarely a friend of theirs. Thirdly and interrelated to all this is that they usually try to get their own money out first! ‘

    This is an interesting line of thought.

    I have long suspected that our own OxBridge elite are completely out of touch with reality-please see my earlier reply to Forbin.

    They just don’t get it either because they don’t want to or because they just can’t square reality with what they learned in their text books.

    This is just history playing through.Elites historically,fail to see their end coming.

    Now I’d normally start ranting about RBS,7 years of losses and 7 years of bonuses ‘to keep the talent’

    • Hi Dutch

      The history of elites is that they get feather bedded and away from the experience of ordinary people. The UK for example has seen the spread of Spads (Special Advisors) which keep ministers even further from real life. Also reality for them is pleasant and very different. For example if you go to any of the Parliamentary buildings you see police everywhere both inside and out whereas if you move around Battersea you rarely see them especially since the police station on Battersea Bridge Road was sold off.

      • You are far too kind to elites: Marie Antoinette did not say, “Let them eat cake.” she said, “Let them eat grass.”

  6. Hi Shaun,
    Thanks for an article on a country I’d never given a thought to. This is one of the reasons I keep coming back to your blog, you go down the alternative paths no-one else does, by the way – ” As to interest-rates some 15% is being offered to investors today on some 3 year bills as long as you can provide some foreign exchange and inflation is 9.1%. For a description of that mixture let me hand you over to Ms. Britney Spears.

    Don’t you know that you’re toxic”

    Reminds me of the UK in the late 80’s when I bought my first house – “uuuuuuggggghhh” as Lurch would say in The Addams family.

    Yet, the UK came through that shambles, admittedly with change of Prime Minister who actually knew what he was doing (I’m not partisan politic. Major just did know what he was doing economically). So Egypt may come through too, probably in a different way and the real question is: “Are things actually worse now in Egypt than they have been in the last 20 years?”

    • Hi Noo2

      It is interesting to find what people take out of an article. I should have had some 80s music quotes! Actually I was thinking of the consequence of the modern version of a fixed exchange rate which outside the Euro is mostly a currency peg to the US Dollar which has caused much of the trouble by appreciating. Egypt may not be the last to devalue just in the Middle East.

      As to looking back here is the World Bank and the last bit is making me think too.

      “Egypt has made great strides along a number of important human development indicators, but economic growth has been moderate, albeit insufficient to absorb the rapidly growing population and labor force. Child mortality, life expectancy, primary and secondary school enrollment, and literacy rates have improved dramatically in the past thirty years, while average per capita income growth has been around 2% per year since 1980 resulting in an increase in unemployment rates and poverty rates.”

      • Yes, challenges preconceptions about links between poverty, education and life expectancy does it not? And worst of all leaves us with no clear answer!

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