Egypt appears on track to break with past practice and let its currency float in line with IMF-backed reforms, but structural changes that could pull the country out of a cycle of bailouts look less likely.
After two years of foreign currency shortages, Egypt has secured a windfall of funding since late February including $24bn in new funds for a UAE project to develop a city on the Mediterranean coast and more than $15bn from the International Monetary Fund, European Union, and World Bank.
As part of a deal with the IMF in March, the central bank allowed the pound to depreciate sharply, a step it took repeatedly in previous years only to revert to tight control of the exchange rate when the pound came under pressure.
This time could be different: while some restrictions remain in place, the currency is mostly trading freely, bankers and analysts said.
After the float, foreign investors twice tested the central bank’s commitment to a flexible exchange rate, on March 25 and April 15, by selling hundreds of millions of dollars worth of Egyptian pound treasury bills and repatriating the profits, senior commercial bankers said.
The central bank did not intervene either time, but rather let the pound weaken against the dollar, leading investors to believe the currency really was floating, the bankers said.
Observers see other signs of change. The government has been slowing spending on large infrastructure projects that have caused Egypt’s foreign debt to surge, two bankers and several businessmen said.
The funding influx reinforced the perception that against the backdrop of the war in Gaza on Egypt’s border and fears over migration towards Europe, Western and Gulf states consider Egypt too big to fail, regardless of economic or political reform.
“Our cash flow issue has been resolved temporarily, but we need to solve the root causes,” said one of the bankers.
“It’s very, very tempting for everyone: we have the money now, let’s go and spend it.” The government thinks Egypt’s problems are imported and remains focused on building cities and infrastructure, rather than investing in health and education and implementing reform, Abla Abdel Latif, head of Cairo think-tank the Egyptian Centre for Economic Studies, told a recent seminar.
“We have always been trapped in our vicious circle of poor economic performance where only surface level symptom treatment takes place,” she said.
For now, some currency controls remain. Citizens trying to buy foreign currency need to show proof they need it for travel, healthcare, or education abroad, bankers said.
The central bank continues to prevent banks from providing foreign currency to import 13 goods, including fully assembled vehicles, mobile phones and their accessories, fresh fruit, jewellery, televisions, electrical appliances and clothing, according to two of the bankers.
The central bank did not respond to a request for comment. Some importers and travellers buy dollars on the black market and the police have been cracking down on trading, even though it differs little from the official rate.
The IMF has tightened its monitoring of Egypt’s exchange market, tying its semi-annual disbursement of funds to currency flexibility. It says it will monitor backlogs in foreign exchange requests at banks, the spread between the official and black market exchange rates, and interbank foreign exchange turnover.
But it was unclear Egypt’s various funders could come together and agree on wider reforms that would avoid the need for future bailouts, said Amr Adly, an assistant professor at the American University in Cairo.
“This is not an easy feat,” he said. “And more importantly, who’s going to enforce this?”