Egypt averts collapse, for now
EGYPT took an important step toward saving its economy from collapse when it decided on Thursday to allow its currency to float freely, thus paving the way for a $12 billion loan from the International Monetary Fund (IMF). Yet much more remains to be done to bring the country back from the edge of economic disaster, where it has teetered since the 2011 Arab uprising, which pretty much destroyed tourism and ushered in years of political instability.
A result has been a lack of foreign currency, which has forced Egyptians to buy dollars on the black market, reduced imports of everything from sugar to cars and led to layoffs. After President Abdel Fattah el-Sisi seized power in 2013, Saudi Arabia and the United Arab Emirates provided billions of dollars in aid. That saved Egypt, but it also allowed Sisi to ignore the IMF and its demands for reforms as a condition of its lending. Several factors – further economic deterioration, rising criticism of his government and pressure from the United States – have combined to change his mind.
Ahead of the float, which was set to begin yesterday, the Egyptian central bank had devalued the currency by nearly 50 percent. The move was designed to wipe out the advantage of the black market, which siphoned money from the banking system. Fuel subsidies were also cut. Egypt had already been addressing the IMF requirements that it pass a value added tax, cut electric subsidies and raise $6 billion in external financing.
The IMF welcomed the flexible exchange rate and said the new system means that people will be prepared to sell dollars as well as buy them, injecting more money into the economy by attracting foreign investment and encouraging tourism and exports. But as Tarek Amer, the head of Egypt’s central bank, acknowledged on Thursday, “It’s going to take around one and a half years to see changes” in the economy as a result of the decision.
Whether poor Egyptians can hang on that long is unclear. Sisi and other Egyptian leaders will have to convince the public that they have a plan that can rescue the economy without hurting the poor. To put Egypt on a path to revival, they must educate and provide jobs for millions of young Egyptians; attract foreign investment to help move many of the nearly seven million government workers to the private sector; reduce the army’s role in the economy; and develop a political system in which ordinary Egyptians, not just the military, can have a voice.