Egyptian Devaluation – For Better or Worse?

Egyptian Devaluation – For Better or Worse?

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At last, Egypt devalued its Pound. It has been expected for a long time, and the longer it was delayed, the more damage would the rampant black market have caused.

There is no devaluation without pain. But, if pain leads to eventual recovery, then, as medicine, it must be taken with courage and perseverance – the alternative would be a lot worse.

However, for any recovery to succeed, a proper regimen must be followed. Failure to provide short-term as well as long-term treatment, may negate the benefits of the devaluation, and hit the country with a double whammy.

I am sure that the Egyptian economic experts are fully aware of what needs to be done to encourage and induce recovery: at the macro-economic, the social and political levels. They have already taken quite a few steps in the right direction and have begun many promising projects, and it is a matter of time before results begin to appear.

But the short-term is where the best of plans can be derailed. Egypt’s immediate problems are feeding the population, providing fuel and creating jobs. These are dangerous landmines that must be adroitly steered away from. Temporary or even partial solutions must be quickly found, to defuse the rumbling social and political tensions, that can easily erupt and overflow onto the streets in the form of protests and riots.

The first of the problems is the subsidized basic staples, especially wheat/bread, which is a big-ticket item and need lots of foreign currency. The second, is crude oil and refined fuel products, which is a similar problem, but was thought to have been partially alleviated by the Saudi 5 year/$26 Billion supply deal.

Who has the most wheat? And the most oil?

Russia, thanks to the US and EU sanctions, has dramatically improved it agricultural capabilities and efficiencies and has ended up with surplus wheat. The Arab oil producers (and Russia) are bloated with oil that barely fetches a decent price. Ergo, what does it take to strike a deal with Egypt? With a reasonable quid pro quo? This is not the time for fancy diplomatic maneuvers, arm twisting or hard bargaining while the other party’s back is up against the wall. We should not forget that, should Egypt stumble now, the consequences would be very dire for the entire Middle East – the fallout would eventually taint one and all.

Jobs, Jobs, Jobs and More Jobs!

The third main problem is employment, which remains the most difficult for Egypt, and whose remedy has been most elusive.

A lot has been done to reduce unemployment, and the latest figures indicate that the third quarter of 2016 was positive with 218,000 new jobs added, and the unemployment rate dropped slightly to 12.8%, which is lower than one year ago at 13.1%. While this is positive, it needs to be repeated for several consecutive quarters before it can be called a trend. The past four quarters have had ups and downs, and do not comfortably reflect consistency.

On the negative side, the present unemployed number is approximately 3.5 million! And what is worse, 27.4% of the unemployed are young people (and it is higher than the previous quarter figure of 26%). This is not good, especially as the unemployed young were a critical catalyst of the 2011 “revolution” and its ensuing riots. It should be noted, however, that the portion of the unemployed young in 2011 was 50%. So, there seems to be maneuvering space before steam builds up to a precarious level.

Possible Ways Through the Bottleneck

Foreign Investors: Egypt has an abundant and skilled workforce that would be attractive to many foreign investors. However, some more incentives are needed to attract them. The Labor Law, for one, should be adjusted to make it less onerous to employers. Alternatively, introduce an “Offshore Company Registration” law that would insulate foreign investors from the myriad of red tape and crippling regulations.

Invest in Agriculture: To increase economic growth, reduce poverty, and reduce, if not reverse, urban congestion. There are interesting studies on the benefits of supporting agriculture with many case studies. This “Ruralization” may be suitable for Egypt, and would create jobs as well as boost total food production.

The Army: Absorb some of the unemployed into the army in non-combat roles. This can be a temporary measure to immediately chip away at the mountain of unemployed, as well as provide them with further training and new skills. The Army can utilize this workforce in a variety of construction projects as well as other vocational jobs. An example to emulate, is the South Korean successful utilization of its army conscripts for local and overseas construction projects in the 1970’s.

Slow Population Growth: No matter what successes are achieved, excessive population growth remains a critical factor that has in the past, and will continue in the future, to negate or dilute economic gains. The government must address the high birth rate problem to ensure net economic growth. Egypt’s population in 200 B.C. (before 2200 years) was only 3 million. It took it 2160 years to reach 27 million in 1960. Thereafter, it took a mere 50 years to increase 57 million to reach 84 million in 2010! This not sustainable, and countries with similar problems have addressed them successfully. It is Egypt’s turn follow in the path of China, India and Turkey, who by 2010 reduced their population growth to 0.49%, 1.38%, and 1.27% respectively, while Egypt’s population growth remained at 2%!

Egypt has again arrived at major crossroads; difficult decisions must made and adhered to. It is doubtful that easier alternatives are likely to appear in the foreseeable future. Nevertheless, Egypt has lots of potential and it should eventually emerge from its present dire straits.

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4 thoughts on “Egyptian Devaluation – For Better or Worse?”

  1. أجبرت مصر للحصول على قرض صندوق النقد الدولي أن تقوم بهذا الحل…
    و المسألة أعتقد فيها خطأ سياسي أدى إلى هذه المرحله

    1. ربما… ولكن هذه سياسة صندوق النقد الأزلية… وقد دمرت دول كثيرة اقتصادياً… وبنفس الوقت فإنهم يتبعون النظريات الاقتصادية المعتمدة في توصياتهم… أحياناً الاقتصاد لوحده لا يكفي ، بل يحتاج أن يردف معه أمور سياسية واجتماعية وكذلك أن تقتنع الدول المتعثرة بأهمية مبدأ “الحوكمة السليمة ” ، وهو مفهوم لم يتبلور في عقول معظم شعوب العالم…

  2. أعتقد أنه من الضروري التركيز على جانبين:
    1 الإنتاج الموجهه إلى التصدير و ذلك بهدف الحصول على النقد الأجانبي قدر الإمكان (بسبب نقصه و كذا لتميز الواردات )
    2 البحث و العمل على سبل إنتاج بدائل للواردات Important substitutes

    1. طبعاً… كلامك صحيح… وهو اقتصادياً سليم… ونفترض بأن المسؤولين الاقتصاديين المصريين يعلمون ذلك وقد وجهوا الاقتصاد نحو ذلك الهدف… وعليه ذكرنا في المقالة التالي:
      “… لا شك أن خبراء الاقتصاد المصريين على دراية كاملة عنما يجب عمله لتنشيط وتعافي الاقتصاد من نواحي الاقتصادية البحتة ، والاجتماعية ، والسياسية. بل قد اتخذوا منذ فترة خطوات عديدة في الاتجاه الصحيح وبدأوا عدة مشاريع واعدة ، وما هو إلا بعض الوقت حتى تظهر نتائجها…”
      ما حاولنا التركيز عليه وإظهاره هو الأمور المستعجلة والفورية المطلوب مواجهتها لكي تنجح عملية تخفيض الجنيه ولا تولد ردة فعل تعرقلها أو تعكسها…
      شكراً لملاحظاتك القيمة…

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