Outside the Cairo bicycle shop where he works as a mechanic, Ahmed bemoaned soaring prices and the absence of customers in Egypt’s crisis-hit economy.
“People have stopped buying and there isn’t as much repair work,” said the father of three teenagers, who did not want to give his surname. “So we’re buying less meat — it’s once or twice a month at most,” he said, adding that his modest wages had failed to keep up with the surging cost of basic goods.
“Look at the price of eggs. If I gave each child an egg for breakfast, how much would that cost?”
After three devaluations in 2022, the Central Bank of Egypt floated the pound in January to meet an IMF condition for a $3bn loan, the country’s fourth bailout from the fund since 2016. The move, coupled with a foreign currency crunch causing shortages in imported goods, has sent inflation soaring and imposed even greater hardship on millions of poor families.
The Egyptian pound has halved in value against the dollar, falling from E£15.8 to the US currency in March 2022 to E£30.5 this week. Annual urban inflation stood at 25.8 per cent in January, its highest level in five years. Annual food price inflation in urban areas soared 48 per cent in January.
The dollar shortage was partly sparked by Russia’s full-scale invasion of Ukraine, which led portfolio investors to pull $20bn from the country. This has eased slightly as a result of the devaluation but the cost of living crisis is affecting Egyptians of all classes and not just the poor such as Ahmed.
Inji, a homeopath living in an upscale part of Cairo who also did not give her surname, tries to avoid visiting the dentist to save money and instead waits for her toothache to recede.
“If I go, I’ll have to pay for an X-ray and E£400 for the journey there and back,” she said. “Now I calculate every trip I make.”
For Egyptians this is a grim reminder of the 2016 devaluation that accompanied a $12bn IMF loan package. Inflation soared to 30 per cent and millions were driven into poverty. Seven years later, 60 per cent of Egypt’s 105mn population can be classified as poor or vulnerable, according to the World Bank.
The ramifications of the Ukraine war exposed the weakness of the country’s economic model since the 2016 agreement, analysts said. Inflows of “hot money” from investors attracted by one of the highest interest rates in the world into short-term debt ensured that foreign currency was readily available.
But the exit of those funds has created a currency crisis in a country that is heavily dependent on imports of food and other goods.
Despite international praise for reforms that were part of the IMF deal, such as cuts in energy subsidies, Egypt’s private sector has stagnated while the government poured billions into infrastructure projects, usually overseen by the military.
Some of these ventures were needed but others were criticised as vanity projects, such as the building of a new capital outside Cairo. Businesses have argued that the expanding role of the military in the economy had spooked private and foreign investments wary of competing with the country’s most powerful institution.
Under its latest agreement with the IMF, Cairo will implement reforms to boost private sector participation. A state-ownership policy endorsed by President Abdel Fattah al-Sisi defines the sectors that are not considered strategic, from which the state has undertaken to withdraw. The government last week announced plans to offer stakes in dozens of state companies for privatisation.
The IMF has also demanded greater transparency and regular reporting of the finances and tax payments of state and military enterprises.
Sisi said this month that military-owned companies paid tax and utility bills and did not compete unfairly with the private sector. He also repeated an earlier assertion that all could be opened up for private sector participation.
“We’ve argued for some time that a crucial step to unlocking faster productivity growth and higher economic growth in the long run will be to reduce the footprint of both the state and the military in the economy,” said James Swanston, an economist at Capital Economics, a London-based consultancy.
“This will allow for greater competition and entice foreign investors into Egypt, which should allow for a transfer of technology and knowledge to boost economic growth over a longer horizon.”
In the short-term, however, inflation is expected to increase further, to “peak at around 26 to 27 per cent year on year as the impact of earlier falls in the pound continues to push up non-food inflation”, he added.
The government has postponed electricity price increases and expanded social protection programmes to cover almost a quarter of the population to mitigate the effects of inflation.
But Egyptians already battered by high prices fear they will face even steeper inflation. “All prices have increased but incomes have not,” said Robert Botros, a family therapist, who added that clients were cutting down on visits to save money.
His children’s school fees have jumped 50 per cent since the start of the school year in September, and the family has stopped going to fast-food restaurants to rein in their expenses.
“I’m now worried they’ll increase fuel prices, which will increase the cost of everything, starting with fruit and vegetables,” Botros said. “I don’t see anything to make me feel reassured.”
Source: Economy - ft.com
