Inflation has taken its toll on Egypt’s economy in the past years, with the market having been particularly hard-hit between the Egypt Economic Development Conference in March 2015 until July 2016. Moreover, with foreign debt skyrocketing, the state, in league with the central bank, had no option but to turn to the International Monetary Fund (IMF) to loan them out of this crisis.

The loan was conditioned upon a number of reforms, on top of which was liberalizing the local currency’s exchange rate, and so for the first time in its modern history, Egypt underwent a free currency flotation on November 3, 2016. In the aftermath, prices spiralled out of control. “The IMF is the only hope for the Egyptian pound, if that also failed we should bury the currency and create a new one,” independent economist Omar ElShenety said at a seminar at DAAL for Media and Research on December 27.

Businessmen and investors associations from the 10th of Ramadan, Obour and 6th of October cities held a press conference on December 26, where they discussed the crises they fell into with the banks regarding the dollar debts, due to the flotation of the pound.

A call for assistance was also published in several newspapers on the December 27, addressed to the president of the republic, appealing to him that unless things change, they will go bankrupt and let go of 2 mn workers.

These entrepreneurs went against their leader’s will; Mohamed Fareed Khamees, the head of the Federation of Investors Associations, wanted to refrain from resorting to media escalation and instead keep the discussion behind closed doors with the government.

ElShenety explained that these importers have opened lines of credit in dollars, but are expected to repay the debts in Egyptian pounds. That is because in 2015, when these importing companies requested USD 10 mn from the bank, the banks were unable to provide them with dollars. However, they could submit EGP 90 mn in return for the bank issuing a Letter of Guarantee for credit of $10 mn. As the importers had already secured payments for their products in Egyptian pounds according to pre-flotation rates, they were faced with a 100% markup on their loans, since they had to repay it in Egyptian pounds according to the new exchange rate.

Real Estate Market Susceptible to Flotation Backlash

“The flotation decree was essential but came late,” Egypt’s Chief Projects Officer at Capital Group Properties, Amgad Hassanein, told Invest-Gate.

Nonetheless, despite his support for the decision, the flotation has taken its toll on their industry due to the price increase. Real estate developers are poised to face potentially acute losses on units that were sold previously but are yet to be built. “Yet, at the same time, after the devaluation of the Egyptian pound, we found that many foreigners and Egyptians living abroad were tempted to buy from the Egyptian real estate market,” he added.

In contrast, the real estate expert, Muhammad El-Haggan, believes that the flotation of the Egyptian pound has had an adverse effect on the real estate market in Egypt.

“The severe devaluation of currency since last November affected the real estate market in a way that significantly exceeds the increase in property prices. As people tend to lock their liquidity into properties to retain value of purchasing power, this is not exactly applicable after flotation. For example, if someone bought a property for EGP 1 mn before flotation, its value would not be retained if the buyer decides to sell the property after floatation,” he told Invest-Gate.

“This is in the sense that the property’s price would not compete with the so-far 60% devaluation of the Egyptian pound. Simply, the buyer will not resell for 1.6 mn because it is not expected that buyers would be willing and able to buy for that figure. That does not mean the property’s price did not increase. However, the increment will not match the devaluation, it would rather be less increment. Under this situation, there is a loss in value, as opposed to purchasing power,” El-Haggan clarified.

The IMF Loan: Pro and Contra

The flotation was one of the pivotal conditions the IMF had imposed on the Egyptian government in order to issue the loan. The other condition was to lift subsidies on energy.

“Before the effects of the flotation took place, the business sector met the presidential decree with open arms,” veteran economic journalist Wael Gamal said in the same seminar at DAAL.

“But of course, all the indicators after the flotation say that there is a problem; the Purchasing Managers’ Index (PMI) declined later in November to the lowest levels in the last 40 months, the new import orders declined to their lowest levels in the last 39 months and – of course – employment declined in its 18th consecutive month consecutively,” Gamal listed down.

ElShenety is not a major supporter of the IMF loan either, but he argues that since the loan was inevitable, certain benefits can be reaped from the situation

“The IMF loan, despite of all its flaws, will stabilize the currency’s value after a few months,” ElShenety said.

El-Haggan nods to that rationale; “As seen by many, the IMF’s approval for the loan in itself is a sort of indication to the investors of the country’s potential economic growth. The procedures and changes required for the loan promote optimism on the long-term,” he said.

However, he is not sure if the impact will be positive on the short and medium terms. The removal of subsidies, customs increases, the devaluation of the Egyptian pound and imposing the VAT in a relatively very short period of time have collectively had a severe impact on the investment climate in Egypt, he observed.

But there is hope, ElShenety, Hassanein and El-Haggan agree.

“Under the assumption that the government follows the IMF requirements and plan on the long term and sustain economic development, there is definitely hope of potential growth on the long term,” El-Haggan said.

Hassanein, on the same level, considers the IMF loan a vote of confidence in the Egyptian economy, thereby attracting more investments.  

This state of fluctuation is, in ElShenety’s analysis, normal due to the sudden free flotation that he described as “aggressive” and “violent.” He predicts a heavier blow to strike the Egyptian pound, but projects that it will later stabilize, to eventually land at EGP 13 per US dollar, within three to six months from the date of floatation.

ElShenety’s theory is based on experiences of many countries with the free currency floatation, although not necessarily via the IMF. “What made our experience worse, other than the sudden flotation instead of the gradual, was that it happened by the end of the year, when companies started collecting their gains from their banks.”

“On the short and medium term, the impact will change the market dynamics due to significant changes in a very short period of time. We are hopeful the real estate market will not reach stagnation, since buyers will continue buying property in an attempt to retain at least part of the purchasing power,” El-Haggan concluded.