Egyptian Pound Crashes to Save Economy

[ABS News Service/06.09.2024]

Egypt narrowly averted an economic crisis this year when the International Monetary Fund and others gave Cairo a financial lifeline. The latest crisis was caused by long-standing institutional and policy deficiencies, including maintaining an overvalued exchange rate, and the COVID-19 pandemic and the wars in Ukraine and Gaza.

The latest crisis is the eighth that Egypt has faced since 1952, when Egypt adopted a state-led, inward-looking economic framework. Throughout this period, Egypt’s economic performance has also been affected by political turmoil, wars, shifts in global political alignments, regional conflicts, and terms-of-trade shocks. Each episode entailed a buildup of external pressures that forced a currency devaluation.

The devaluation of the Egyptian pound in 1979 occurred when Egypt attempted to transition from socialist policies to an open-door economic policy. Reforms were slow and accompanied by rising inflation and budget deficits, and the Egyptian pound dropped in value from $2.50 to $1.40, or a 44% decrease.

Another significant drop occurred in 1989–91, when Egypt faced economic pressures from falling oil prices and declining tourism, coupled with reduced remittances and elevated public spending. In three years, the exchange rate changed from $0.90 to $0.50 to $0.30 per Egyptian pound, resulting in devaluations of 35%, 45%, and 40%, respectively.

In 2016, the Egyptian pound was devalued by 45% as a part of a number of reforms, including reduced subsidies, increased taxes, and structural reforms to enhance growth. Most recently, Egypt devalued the currency in January 2023 by 40% to $0.03 and floated it in March 2024, dropping the value to $0.02.

Despite repeated interventions and devaluations, Egypt has been reluctant to embrace a floating exchange rate system, fearing that such flexibility would fuel food price inflation and social unrest. A fixed or highly stabilized exchange rate has not served Egypt well. Egypt needs to break free from its recurring crises by undertaking major reforms and relying less on the military in its economy and foreign financial inflows.