Dollar price: Is floating the pound in Egypt considered a solution to the financial crisis or a prelude to new loans?

In recent months, Egypt has faced a severe crisis in the availability of foreign currencies, which has led to an increase in most commodity prices and a shortage of some. The parallel market has revived for the first time in Egypt in years, as the price of the dollar on the black market exceeded double its price at the bank on some days.

The severe shortage was driven by a decline in tourism revenues, and a decline in remittances from Egyptians abroad by about a third during the fiscal year 2022/2023 compared to the previous year.

Suez Canal revenues also decreased significantly this year, due to the navigation crisis in the Red Sea that resulted from Houthi attacks on some ships.

At the same time, Egypt was preparing to pay the largest amount of interest and debt installments in its history this year, which the Central Bank estimated at $42.3 billion.

The rate of external debt had reached its highest level in history, recording about $165 billion at the beginning of this year.

Therefore, Egypt sought to obtain late payments from the loan that it agreed to at the end of 2022 with the International Monetary Fund, in addition to expanding the loan, but the IMF was insisting on a “flexible exchange rate for the Egyptian pound.”

Economist Alaa Abdel Halim believes that this step was long overdue. He told the BBC: “The government should have dealt with the crisis before, but it needed the influx of some foreign funds, such as the one that entered the country with the Ras al-Hikma deal, which allowed the Central Bank of Egypt to move the price of the pound.”

About two weeks ago, the Egyptian government announced a deal it described as historic with the UAE worth $35 billion to invest in the coastal city of Ras El Hekma on the Mediterranean Sea, from which the government received $10 billion, which helped reduce the exchange rate of the pound in the parallel market.

In 2016, Egypt faced a similar economic crisis, as Egypt’s foreign currency reserves declined sharply.

Egypt resorted to borrowing from the IMF and reduced the value of the Egyptian pound against foreign currencies, as the dollar exchange rate rose from 8 pounds to 18 pounds.

Economist Khaled Ramadan believes that there is a difference between the two times, saying: “Devaluing the pound is different this time, because there are factors that help make it successful. There are promised Gulf investments, and foreign currency returns from the Ras El Hekma project, in addition to the International Monetary Fund.”

But he believes that the success of the step depends on the government not repeating the “mistakes of the past,” and that it must not expand projects that deplete the dollar without having an economic return.

Eliminating the black market for dollar circulation will also take time, according to Ramadan, who added, “There are several prices for the dollar in the markets. There is a price for the gold market, an official price, and a price for the black market, and all of them will remain in place until the dollar is available at the official price in banks, and confidence among investors returns.” And the banking sector, and the obstacles to obtaining the dollar for import operations are removed.”

Egyptians are awaiting the arrival of the month of Ramadan within days, and citizen Ahmed Mohamed, who spoke to BBC Arabic, fears that the timing in which the decision was taken will affect the prices of commodities, especially basic commodities.

He says: “I have not bought Ramadan goods yet. They have cost a lot. I am not talking about nuts, walnuts, etc., but rather basic goods such as vegetables and rice.”

He adds: “Even goods that do not have a direct relationship to the dollar are rising. What is the relationship of the price of an option to the dollar, for example? As for electrical appliances, if you ask about the price of any commodity and come the next day to buy it, you will find that the price has also risen.”

Egypt relies heavily on imported goods. Recently, Egypt restricted the import of goods due to the foreign currency shortage crisis.

Due to these measures, some goods decreased from the markets and the prices of some increased several times.

Haitham, a contractor who spoke to BBC Arabic, hopes that the missing goods and raw materials will be available. He told the BBC: “The rise in the price of the dollar will give traders a greater opportunity to raise prices. There is no commodity whose price has not increased. Some electrical wires rose in price by 60 percent just last week. I hope that things will stabilize in the coming period.”

Khaled Ramadan, an economic analyst, says: “I expect prices to rise immediately due to the float. There is a battle that the central bank must wage at the present time against inflation.”

Economist Alaa Abdel Halim believes that solving the currency shortage crisis will help the government focus on confronting inflation and rising prices. He adds: “In my estimation, the difficult days have passed and that now is the time to confront the problem.”

But the coming days will reveal more about the extent of the impact of this step on the Egyptian economy and on citizens as well.