The recent statements of Dr. Mostafa Madbouly, Prime Minister, about the exchange rate and the movements of the pound against the dollar, raised concern among some economists, while at the same time others welcomed them and considered them positive.
Experts criticized Madbouly’s talk about the exchange rate, considering that the governor of the Central Bank is the only person authorized to talk about trends in the local currency and the interest rate, while others expressed their admiration for the Prime Minister’s statements, explaining that he sends messages of reassurance to the investor community.
Prime Minister Dr. Mostafa Madbouly said that Egypt will not repeat the mistakes of the past regarding fixing the exchange rate of the pound against a basket of currencies, most notably the dollar, indicating that the exchange rate of the pound may move in the range of 4-5% up or down, commenting: “This is normal.” “.
Madbouly stressed that the exchange rate is subject to supply and demand mechanisms, and our goal is to maintain a flexible banking system that enjoys global confidence, indicating to the ministers that there are positive reactions from investors towards monetary policies.
Analysts and investors said that the Central Bank and the Ministry of Finance deserve a great deal of praise, and perhaps Central Bank Governor Hassan Abdullah and Finance Minister Ahmed Kojak are the only officials who have received praise from the local and international business community.
After Madbouly pledged not to repeat the mistakes of the past, the question remains: What does Egypt need to convince long-term investors that this time will be different?
New policies and exchange rate reform
After Egypt came alarmingly close to a full-blown economic crisis, this year saw things turn around and the government promised new policies, a privatization programme, a host of reforms, and a thriving private sector.
In early 2024, specifically on February 23, the UAE pumped $35 billion in direct investment into Egypt in exchange for development rights in part of Egypt’s coast on the Mediterranean Sea – the Ras El Hekma area.
A few weeks after the Ras Al-Hikma UAE deal, a new agreement was reached with the International Monetary Fund that provided Egypt with another $8 billion, and a feeling of “euphoria” was felt from investors, as confidence improved dramatically, especially as foreign capital began flowing back into the country. Egyptian treasury bonds are short-term, representing “quick victories reflected in the balance of payments.”
The devaluation of the Egyptian pound in March 2024 was also an important step taken by the Central Bank of Egypt to eliminate the gap between the black market and official exchange rates, and restore confidence in the Egyptian system.
“The best indicator of future behavior is past behavior,” said Peter du Preez, chief economist at Oxford Economics Africa. “As for Egypt, 8 months after the devaluation of the pound, the currency is still in the spotlight and in fulfillment of its promise, the government has largely allowed the market to determine the value of the pound.” If we look at the currency’s movements over the past few months, it shows the government’s willingness to let the markets determine its course and this Really a good sign for long-term investment.”
Efforts of the Central Bank of Egypt
The Central Bank of Egypt, led by Hassan Abdullah, worked tirelessly to ensure that inflation was on a downward path. Tightening interest rates and unifying exchange rates had an impact, as well as ensuring the accuracy of forecasts in the future. This is what restored confidence in the banking sector and the Central Bank successfully passed the foreign exchange test.
The Central Bank of Egypt and the Ministry of Finance are also participating in efforts to reduce the debt file, and in July 2023, the Ministry of Finance announced that it expects the country’s debt-to-GDP ratio to reach 97% during the summer and interest payments as a percentage of total government revenues have exceeded – within some time. Quarters – 100%.
Egypt adopted a tougher fiscal stance, which was the “cornerstone” of Egypt’s ability to instill new confidence in investors, as there is no point in tightening monetary policy only to make fiscal spending move in the opposite direction, and a lack of fiscal discipline can weaken and even paralyze the transmission of monetary policy. Then the efforts must be more intense and the decisions more aggressive. Today we are seeing more discipline on this front and this helps to enact monetary policy in a more effective manner.
Has Egypt demonstrated sufficient control over public spending?
In early 2024, the government reduced its allocated investment funding by 15% for that fiscal year, and said it would prioritize projects that were more than 70% complete.
The government continues to emphasize that reform is real and that the priorities are to use the right policies, restore stability, address structural issues and get on the path to having its fiscal reserves consist of more foreign direct investment and competitive exports – not hot money flows.
What will happen after the IMF program ends?
In late October, President Abdel Fattah El-Sisi called for the need to renegotiate the International Monetary Fund program due to economic pressures resulting from geopolitical fluctuations, in balance with the state’s endeavor to create new sources of demand by supporting the private sector and encouraging foreign direct investment. This is a clear shift in thinking in Egypt at all levels: Instead of relying on policies that will provide short-term relief, Egypt knows that it needs to think more about medium- and long-term sustainability if it wants to regain investor confidence.
Address deficiencies in governance and policies
The Egyptian government has adopted a radical shift in its economic approach, as it has worked and is still working to address deficiencies in governance and policies, implement necessary economic reforms and break the cycle of recurring crises, instead of relying on international financial bailouts.
In order to enable the country to achieve stability and attract foreign investment, the government prioritized overall stability and regulatory reform using four steps:
First: Maintaining a flexible exchange rate helps reduce speculative pressure on the Egyptian pound, creating a more predictable environment for investors.
Second: Focusing on controlling inflation through targeted subsidies and improving the supply chain would further support this stability.
Third: By adopting global standards in transparency and corporate governance, Egypt can build investor confidence. Simplifying regulatory processes would make foreign investment easier
Fourth: Curbing nepotism and implementing anti-corruption measures would help establish a more equitable environment for private companies.
