“I can’t give my children a bridge because the country is suffering from a cost-of-living crisis,” says Mohamed, a driver who lives in the Nile Delta, referring to the Egyptian government’s massive infrastructure construction.
I can hardly meet the most basic needs. This government has been in power for more than eight years. “They have done nothing for the common man.” he said angrily.
This government treated me [when I had] Hepatitis C virus for free. His friend Sami responded by referring to a campaign launched by the Egyptian government in 2014 to treat people infected with hepatitis C virus (HCV), one of Egypt’s biggest health challenges.
These heated debates about inflation and currency devaluation have become common in many Arab countries.
The Iraqi dinar has lost 7 percent of its value since mid-November, leading to the sacking of the central bank chief on Monday.
The Tunisian dinar hit record lows against the US dollar in September as the country’s president struggles to deal with an ongoing economic and political crisis.
Meanwhile, the currencies of other countries, including Syria, Sudan, Lebanon and Egypt, were among the worst currencies in the world in 2022.
These devaluations, along with rising prices around the world, have contributed to high levels of inflation.
According to the Central Bank of Egypt, headline inflation in 2022 was 21.3 percent, while core inflation, excluding fuel and food prices, reached 24.5 percent. According to a World Bank report, these numbers pale in comparison to Lebanon’s triple-digit inflation in the past few years.
Some people blame their governments for inflation. On the other hand, governments tend to point the finger at external factors beyond their control, such as the war in Ukraine, the Covid-19 pandemic, and rising interest rates in the United States.
US interest rate hike and Ukraine war
Several countries in the region, such as Egypt, Jordan and Lebanon, have suffered from dwindling foreign exchange due to a sharp drop in tourism revenues due to the Covid-19 pandemic, as well as rising food prices due to the war in Ukraine.
Currency depreciation is caused by several factors including trade deficit and foreign debt.
Persistent trade deficits lead to the loss of foreign reserves, which are often necessary to provide foreign loans, said Dennis McCornack, an assistant professor of economics at Georgetown University in Qatar.
Rising inflation around the world has prompted the US Federal Reserve to raise interest rates to control rising prices. Higher interest rates make it more expensive to borrow money, thus discouraging people from spending. When costs fall, demand falls and the prices of goods and services follow.
Higher interest rates in the US are also driving investors away from riskier assets in developing countries.
“Rising interest rates in the United States makes the US dollar more attractive as a safe haven for investment,” said Zuhair Al-Sahli, an assistant professor of economics at Qatar University.
And when foreign investors exit the market in domestic debt instruments, they sell their local currency to buy U.S. dollars, devaluing the local currency, as explained by Momin Gowda, professor of Middle East economics at Hancock University.
“[This leads] Until the government intervenes to strengthen its currency, Gowda said, to prevent social unrest due to rising prices.
Chronic structural problems
Egypt has now turned to the International Monetary Fund for the fourth time in the last six years. To secure IMF funding, Cairo was forced to move toward a flexible exchange rate regime in which supply and demand determine the currency’s value, something successive Egyptian governments have consistently resisted.
The inflexible exchange rate regime is only one of the many structural problems that hinder economic progress in many Middle Eastern countries.
For example, Egypt does not attract much foreign direct investment [FDI] Sohli said that due to the loss of trust in the current economic policies.
The lack of FDI has contributed to the foreign exchange crisis and ultimately the devaluation of the Egyptian pound.
Gouda agrees with other economists that the main problem of the Egyptian economy is structural. According to him, the war in Ukraine and the increase in American interest rates only revealed the fragility of the economic systems of several countries in the region and the need for deep and painful structural reforms.
According to him, Egypt has not been welcomed in attracting foreign direct investment by showing that the private sector has been continuously shrinking for the past eight years. “During the last eight years, the military has destroyed the private sector in almost all aspects of economic life,” Gowda said.
Reducing the large role of the military in the economy was one of the main reforms requested by the International Monetary Fund. In its January 2023 report on Egypt, the International Monetary Fund stated that Egyptian authorities have committed to reducing the role of the state in the economy and leveling the playing field between the public and private sectors.
Lebanon has its own issues. “In addition to running chronic deficits, the country suffers from a political deadlock that has prevented it from signing an agreement with the International Monetary Fund to extend a lifeline to the economy,” Sahli explained.
“Lebanon has run its economy like a Ponzi scheme, where it borrows new money to pay off debt to investors,” said Mohamed Fadel, a law professor at the University of Toronto. He added: “Lebanese banks used to attract deposits from Lebanese abroad with very high interest rates.”
The World Bank agrees with this reading, saying that the Lebanese government ended up using “excessive debt accumulation” to create an “illusion of wealth” and encourage investment. These depositors did not understand the risks they were taking by depositing their money in Lebanon.
And when political turmoil in Lebanon helped dry up foreign investment, the whole system collapsed.
A devaluation can be beneficial to the economy in the long run.
“Export prices are expected to decrease and import prices to increase, which will hopefully slow the loss of foreign reserves,” McCornock said.
But without meaningful structural reforms, devaluation is ultimately a missed opportunity to boost exports, reduce the trade deficit and stimulate growth.