ECONOMIC CONCERNS ON RISE AS CURRENCY VALUES FALL
▶ Increased food prices have led to dietary changes in Egypt and street protests in Iraq and Lebanon
The economic woes of Iraq, Lebanon and Egypt differ in many ways, but they have one thing in common: instability of the local currency against the dollar.
The three countries, whose currencies are either pegged to the dollar or deeply affected by changes in its value, have recorded their sharpest increases in food prices in years.
The effects of the war in Ukraine and the Covid-19 pandemic have played a part, while the crises have also been exacerbated by US foreign and fiscal policies.
Iraq’s foreign reserves this year reached a high of $100 billion following increases in the global price of oil.
But since the US-led invasion in 2003, the Iraqi Central Bank has made regular requests for dollars from the US Federal Reserve.
After the funds are transferred, they are sold off in auctions to banks and exchange houses in Iraq.
The Fed has recently reduced cash inflows to the central bank by about 80 per cent in an effort to tackle money laundering, which Iraqi officials say benefits Iran and Syria – countries under US sanctions.
Having less access to its dollar funds amid growing demand has increased Iraq’s import bill – which it pays in dollars – and invigorated its black markets. The value of the dollar has reached about 1,500 dinars.
The official exchange rate was fixed at 1,460 dinars to the dollar in 2020, but the government announced this year it was being reset to 1,300.
As the value of the dinar has dropped, the prices of many goods have risen by at least 50 per cent.
That has increased the burden on a country where the poverty rate is now more than 30 per cent.
Hundreds took to the streets of Baghdad in January to protest against the dinar’s drop in value and higher food prices.
Lebanese have also held several protests over their weakened local currency, with crowds taking to the streets of Beirut last month.
The Lebanese pound is officially pegged at 15,000 to the dollar, but it has been trading at more than 100,000 on the black market, the exchange rate used for most transactions in the country.
After the country’s economic collapse in 2019, many supermarkets removed price tags, listed in pounds, from goods because the value fluctuated on a daily basis.
Price tags returned this year, but with costs listed in dollars instead of the pound, which had lost 98 per cent of its value on the black market.
While putting prices in dollars may be more convenient for supermarkets, many Lebanese have raised concerns about the economy’s increasing reliance on the dollar.
That dependence fails to address the issue of the collapsed local currency, which is still used to pay the salaries of public servants and many private sector employees.
Wages paid in pounds have not kept up with the rate of inflation, which reached about 124 per cent in January – one of the highest in the world.
The collapse of the local currency has also created a divide
in the country’s workforce. Some of those paid in pounds have become impoverished, while those who receive their salaries in dollars can afford to eat out at restaurants and drive luxury cars.
Years of financial corruption, political instability and mounting public debt have diminished previously reliable sources of foreign currency, including remittances and tourism revenue.
The country’s once prolific financial sector, made attractive by discreet banking practices and competitive interest rates, has now all but disappeared as the country’s political elite face investigations into their financial dealings.
The effects of Lebanon’s economic crisis were laid bare by the pandemic, when the amount of foreign cash flowing into the country hit critically low levels.
Siham Rizkallah, professor of economics at Saint Joseph University in Beirut, told The National the so-called dollar addiction in the country was having a disastrous effect on the economy and public.
“It is creating a Lebanon for US dollar holders that we see in restaurants, shopping malls, big hospitals and touristic venues, versus workers whose incomes are in lira and who have become excluded from the socio-economic tissue,” she said.
“Lebanon needs a new exchange rate regime to put an end to the current chaos.”
The deadly Beirut Port blast in 2020 caused billions of dollars worth of damage and left hundreds of thousands homeless.
After officials from the International Monetary Fund visited Lebanon last year, the organisation said it would not approve financial aid until reforms were put in place.
The IMF has also called on Egypt to introduce a programme of reforms.
The announcement from the organisation contributed to a sharp drop in the value of the Egyptian pound against the dollar.
At least $20 billion worth of investment in the debt market left Egypt after Russia’s invasion of Ukraine last year. Cairo faced dwindling foreign reserves and turned to the IMF for its fourth loan in six years.
Egypt is the organisation’s second biggest borrower after Argentina.
The reforms the IMF asked for include a free-floating local currency and increased social welfare for the poorest members of society.
Three consecutive devaluations of the pound followed, reducing its value from about 15 pounds to the dollar last year to about 30 this year.
The drop in Egypt’s foreign reserves prompted Cairo to tighten controls on imports to prevent the further departure of dollars from its economy, which had been hit hard by the pandemic.
Like Iraq and Lebanon, Egypt relies heavily on imports to feed its population – which is now about 104 million – and to keep its industries running.
The import ban led to billions of dollars of goods, including chicken feed, medicine and raw materials, being held up at the country’s ports for months.
The prices of essential food items such as chicken, grains and cooking oil have doubled or tripled since last year, with analysts predicting further increases in the coming months.
This has caused significant changes in the lives of millions of Egyptians.
While some have cut more expensive foods, including meat, from their diets, others have started to buy cheaper items of lower quality.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said the cost of living crisis in Egypt was not yet over.
“We expect the Consumer Price Index to accelerate further in coming months, with the Egyptian pound devaluation still continuing to filter into prices,” she said. “Meanwhile, we see the pound settling in the 36.0 to 38.0 range against the US dollar by the end of 2023.”
The pound this week traded at 31 to the dollar.
To help mitigate the effects of increasing food prices, the Egyptian government has launched a programme to provide essential items, including sugar, bread, flour and cooking oil, at subsidised prices.
Iraq has also introduced subsidies for basic items.
But those policies are not enough to mitigate growing food insecurity across the region, a the UN has said.
Egypt last month raised the minimum wage for government employees by about 15 per cent.
The minimum wage for state staff was last raised in October.
But with the value of the local currency dropping by more than 50 per cent, reducing the purchasing power of the public, the increase has not been enough to alleviate financial pressures some people feel.
While local currencies in parts of the region have decreased in value, the dollar strengthened last year.
This was largely due to repeated interest rate increases imposed by the Fed in an effort to reduce inflation.
Analysts have predicted that people across the Arab world will continue to face economic challenges for some time.
A World Bank forecast in January said the global economy was “perilously close to falling into recession”.
Food and energy prices are also expected to remain high this year as the war in Ukraine continues, analysts have said.
There is a Lebanon for US dollar holders that we see, versus workers who are excluded from the socio-economic tissue SIHAM RIZKALLAH
Saint Joseph University
Soaring food prices will weigh on the growth of Middle East and North African economies this year, as double-digit food inflation hits poorer households and intensifies long-term food insecurity, a report by the World Bank said on Thursday.
Mena countries’ gross domestic product is expected to slow to 3 per cent in 2023, from 5.8 per cent in 2022, while real GDP per capita – a measure of living standards – will decelerate to 1.6 per cent this year from 4.4 per cent in 2022.
About one in five people living in developing countries in the Mena region are likely to face food insecurity this year and almost eight million children under the age of five will be hungry, said the report, which examined the impact of rising food prices on the region.
“Food price inflation is having a devastating impact on poor families,” Ferid Belhaj, World Bank vice president for the Mena region, said.
“The long-term implications of food insecurity will be felt for generations and sadly limit prospects for many, many young people.
“The human and economic cost of inaction is immense and bold policies are needed in a region where young people make up more than half of the population.”
A household is classified as severely food insecure when at least one adult in the household in the past 12 months has been forced to reduce the quantity of food consumed, to have skipped meals, to have gone hungry, or gone a day without eating because of a lack of money or other resources.
More than 141 million people in the Arab world are exposed to food insecurity, as Russia’s invasion of Ukraine has affected grain supplies, the International Monetary Fund said last year.
“Food price inflation, even if it is temporary, can cause longterm and often irreversible damage,” said Roberta Gatti, World Bank chief economist for the Mena region.
Average year-on-year food inflation in the Mena region between March 2022 and December 2022 was 29 per cent – above 19.4 per cent headline inflation. These surges in food prices can have long lasting effects on future generations, the lender said.
The increase in food prices associated with the war in Ukraine may have increased the risk of stunting in children by between 17 per cent and 24 per cent in developing countries in Mena region. This translates to about 200,000 to 285,000 stunted newborn babies, the report said.
“Inadequate nutrition in utero and early childhood has the potential to disrupt the destinies of children, setting them on paths to limited prosperity,” Ms Gatti said.
The prevalence of food insecurity in the Mena region is high and projected to increase to 17.6 per cent this year, from about 11.8 per cent in 2006, the World Bank said.
This is largely due to extreme situations in Syria and Yemen that have been identified by the Integrated Food Security Phase Classification initiative as having areas in crisis.
“The time to act is now, even when the macroeconomic conditions are unhelpful,” the World Bank report said.
“Governments in the region need to act now, not only for humanitarian reasons but for economic reasons as well – undernourished children grow
Long-term implications of food insecurity will be felt for generations and sadly limit prospects for many, many young people
FERID BELHAJ
World Bank vice president Mena region
up to become less productive workers. The challenge of food insecurity is enormous in scale.”
The projected development financing needs for people facing severe food insecurity in the Mena region run to billions of dollars annually.
Policy tools that could alleviate the problem include targeted cash and in-kind transfers that could be introduced immediately to stem acute food insecurity, the World Bank said.
Mothers, in particular, would benefit from improved parental leave, childcare and medical care, which are vital for a child’s development, the report said.
Improved and more current data on childhood health and nutrition are needed, along with better access to administrative information that would help target priorities and reach vulnerable populations more easily, said the World Bank.
Making food systems more resilient, especially in the face of climate and market shocks, is essential, it said.