Egypt: The economic crisis may push the government towards a new depreciation of the pound
Economists monitored the Egyptian government’s tendency to curb inflation by pushing the markets into more stagnation, during the coming period, to confront the high prices that rose to unprecedented rates, by about 35.7% in cities last June, exceeding the record rate achieved in April 2017 by 30.6%. After the first flotation of the Egyptian pound in 2016.
Experts confirmed that the inflation rate accelerated in consumer prices, especially food commodities, which exceeded 62%, with jumps in core inflation to a historical level to exceed 41%, last month, placing the government between two options, both of which passed, either moving towards an urgent liberalization of the exchange rate, which pushes the pound further. From decline and inflation to rates of unknown value, or deflation due to pressure of expenditures and retention of liquidity, and sacrificing the orientation towards stagnation of markets.
Experts explained the central bank’s resort to increasing the money supply, which includes the local currency in circulation and demand deposits in pounds, from 23.1% at the end of June 2022, to reach 31.9% at the end of last May 2023, that the government is stuck between inflation and stagnation, so it resorted to stagnation for fear of risks. The severe inflation rates caused by the alarming prices of commodities and the pressure on the currency.
Central Bank data revealed an increase in the money supply destined for government lending, from 1.06 trillion pounds, in June 2022, to 1.48 trillion pounds by the end of May 2023, which is the period that witnessed the highest rise in the level of public debt, with an increase in the interest rate by 1,000 basis points.
International financing institutions expect inflation rates to rise to 39% by the end of next September, affected by the increase in the prices of electricity, fuel and basic commodities, with the scarcity of the dollar and the depreciation of the pound. And while the dollar is about 31 pounds officially, its price exceeds 40 pounds in the parallel market.
The general budget data revealed a continuous escalation in the fiscal deficit, which in 2021/2022 reached 486 billion pounds, and an achieved deficit in 2022/2023 that amounted to 723 billion pounds, which rose to 824 billion pounds in the 2023/2024 budget.
The government’s tendency to push the markets into stagnation comes to reduce demand for commodities, especially imported ones, in light of the decline in non-oil economic activity, and its continuation at a level below 50 points, for the 31st consecutive month, driven by the depreciation of the pound, scarcity of the dollar, scarcity of production requirements, and restrictions on imports. , inflation, and rising operating costs according to Standard & Poor’s.
The government used to face the budget deficit by printing more money with the risk of raising prices and inflation rates, ignoring the disproportion between the volume of goods and money production and resorting to borrowing from abroad in amounts ranging between 15 and 30 billion dollars annually, from 2016 until 2022.
And the Presidency announced that it had used part of the financial liquidity available to it to buy dollars from the parallel market to cover part of the needs of government agencies for foreign imports of basic commodities, medicines and production requirements during the past fiscal year.
Finance and investment expert Rashad Abdo attributed the government’s tendency to curb demand and choose recession, due to its fear of the severe risks of inflation, which officially exceeded historical rates by about 35.7%, pointing to the difficulty of controlling prices in light of this rising inflation, especially since there are international reports that indicate It is significantly higher than those rates.
In his interview with Al-Araby Al-Jadeed, Abdo denies the government’s ability to print more money in the current period, except for the value of amounts that are not suitable for consumption, and to offer them in new forms, as an alternative to the annual rationed depreciation.
The finance and investment expert attributes the increase in the money supply in the local currency in circulation and demand deposits to the preference of banks, companies, and citizens to save their money in pounds to obtain a periodic return that helps them face the burdens of living, and a high that reached about 25% in the Central Bank, to compensate for part of the losses achieved in the value of the currency, whose returns have become negative. In light of the record high rate of commodity price inflation, which is a basic indicator issued by the Central Bank.
Abdo explains the government’s commitment to an agreement with the International Monetary Fund, which it signed in December 2022, stipulating that it will not resort to printing new money without prior notification and agreement with the fund’s management, noting that the fund’s periodic follow-up committees closely monitor this matter, every 3 months, and in If the review is approved, the fund will provide a financial portion of a total loan of $3 billion, which will extend until 2026.
Abdo confirms that the government does not risk printing more money, otherwise it will remove itself from a commitment it made that provides it with financial guarantees and international loans, indicating that curbing demand will enable it to provide dollars directed to purchase imports and provide financial liquidity that helps it apply the flexibility of the exchange rate, as it is one of the most important Commitments that the IMF emphasizes on circulating in the coming period.
For his part, Professor of Economics at Ain Shams University, Tamer Rady, considers that the increase in cash liquidity and deposits in the central bank is an indication of an increase in cash flows from many productive activities and the movement of markets. Radi pointed to the increase in tourism and the return of Egyptians from abroad, with the government’s tendency to austerity in expenditures, which reduced speculation on the dollar, and prompted people to increase savings and the demand to buy treasury bonds that achieve high profits in pounds.
Radi told Al-Araby Al-Jadeed that the West’s reading of monetary policy related to inflation differs from what is happening in Egypt, as facing inflation in the United States and Europe, for example, requires raising the interest rate on the dollar, euro, and sterling, to reduce liquidity in the hands of consumers, to curb demand for commodities and prompted consumers to increase production, indicating that our inflation is linked to external pressures, which began with the spread of the Corona epidemic and the war in Ukraine with the scarcity of goods and the scarcity of hard currency.
Rady confirms that withdrawing liquidity from the hands of individuals to banks helps curb demand in light of the scarcity of supply and high prices, with the government’s commitment to work to reduce the budget deficit, rationalize expenditures at large rates, and increase production destined for export to generate hard currency.
Rady points out that the waves of economic recession have become a global problem, starting in the United States, and moving to Europe, and affected the markets associated with them, including Egypt, indicating that its solution is taking place there through tax cuts and an increase in public expenditures, which are difficult to implement for us, due to the scarcity of public budget revenues. .
Experts hold the government responsible for the increase in inflation rates due to its lavish spending over 10 years on non-productive projects from expensive loans that raised foreign debts from $42 billion in 2104 to $165 billion at the end of March 2023.
2023-07-17 22:45:09
#Egypt #economic #crisis #push #government #depreciation #pound
