Take a look at this chart, which the Central Bank has been proudly parading this month:[caption id="attachment_1917" align="aligncenter" width="552"] Bloomberg[/caption]
It shows how the pound’s official price, controlled by the central bank, has been appreciating slowly since the overthrow of Islamist president Mohammed Morsi.
If we were to take this graph at face value, we might conclude that the pound has strengthened as the interim government (and military) took over, and billions of dollars worth of Gulf aid is helping the country’s currency stabilise.
However, traders on the black market tell a very different story, and say the Central Bank is ensuring the pound strengthens just to give the impression that the economy is stable and improving despite the turmoil.
Here, where the pound is traded illegally, the domestic currency has actually weakened to LE7.20 (from LE7.10 a few days earlier, according to Reuters) reflecting Egypt’s volatile economic and political situation.
The pound actually fell as low as around LE8 per dollar at one point earlier this year on the black market, prompting the central bank to turn to a few different measures to reduce pressure on the currency and revive the economy:
But none of that is working. This graph puts the currency’s performance in context, showing how the pound has rapidly fallen in value this year:
And as the pound depreciates further, the more foreign currency reserves are drained and the less the central bank can support the official rate for the currency. This is why the country is spending foreign currency at a rate of about $1.5 billion a month.
Add to that, the few foreign investors left are moving to withdrawals but currency controls are making it difficult to convert Egyptian pounds to dollars. Earlier this month, Emad Mostaque, a strategist at Noah Capital Markets in London told me around half a billion dollars worth of investment is trying to leave Egypt at the moment.
So the picture isn’t as rosy as the interim government may want you to think.
In fact, the volatility we see on Egypt’s currency cycle will be another black mark to add to the nation’s problematic currency history, marked by the Central Bank’s repeated efforts to keep the pound’s value elevated, sometimes at the expense of the country’s precious foreign reserves.
The people at Dcode, an Egyptian business consultancy, put together a comprehensive graph detailing just how volatile the Egyptian pound has fared in the last three decades:[caption id="attachment_1907" align="aligncenter" width="650"] Dcode[/caption]
As long as the central bank and government refuse to accept that massive political turmoil and violence on the streets alarmed investors and traders, the pound will continue to fall, foreign reserves will bleed faster and the Gulf will have even more power over Cairo as it comes to the rescue once more with billions of cash.
That’s the short answer. Here’s the long one:
I’m afraid Egypt still has a long way to go before we never experience a power cut or experience gas shortages again.
The country’s fuel shortages seemed to have miraculously disappeared, just as Islamist president, Mohammed Morsi was overthrown. There were no gas lines and suddenly no electricity cuts:
“We went to sleep one night, woke up the next day, and the crisis was gone,” Ahmed Nabawi, a gas station manager told the New York Times.
Supporters of the interim government predictably seized on this saying the “improvements in recent days were a reflection of Mr. Morsi’s incompetence, not a conspiracy,” according to the NYT story. While the former president is guilty of a lackadaisical approach to the economy, there is little truth in this. It looks more like severe wishful thinking shared by Morsi’s opponents after his ouster.
First of all, there have in fact been power cuts and long queues for gas since Morsi’s ouster. I experienced a power cut myself yesterday and I’m lucky enough to live in the quite pleasant island of Zamalek. Journalists who travelled to the Upper Egypt city of Beni Seuf in recent days also witnessed extended queues for gas at petrol stations there.
The second point, a technical but very important one, is that much of the gas used in cars is actually refined locally. It is not imported from other countries, so any explanation that has attributed the queues to fill up gas tanks to the wider economic downturn is inaccurate. Egypt imports gas and other types of energy products for factories, businesses and power stations, not for cars.
Thirdly, for those conspiracy theorists out there, it is very likely that the Gulf money to Egypt was part of quite a substantial reward arrangement. Therefore, the removal of Morsi would have seen the $12 billion (which includes a hefty supply of badly needed oil products) from Saudi Arabia, the United Arab Emirates and Kuwait funnelled through a few days earlier than it had been announced, lessening pressure on demand for energy locally.
Fourthly, the simplest answer is usually the right one.
Did anyone consider the fact that as millions of Egyptians took to the streets, very few people were actually at home or at work using electricity or filling up their cars? It is rational to expect that with business pretty much at a standstill on the anniversary of Mohammed Morsi’s presidency, the demand on domestic energy was actually quite low, meaning we were in a comfortable position for the days leading up and after his ouster. Electricity-generating power stations are by and large run with natural gas, and with demand much lower for that week, it’s likely the capacity would not have been overcome as it has in the past.
There are other “theories” out there that suggest the Army used its own funds to pay for fuel, and “Saved Egypt”. Groups blamed each other.
Some liberals suggested that the Muslim Brotherhood was behind the fuel shortage as an attempt to demobilise the masses and prevent large demonstrations from forming. But others who served under Morsi said there was a conspiracy to create a crisis from the opposition:
“This was preparing for the coup,” said Naser el-Farash, who served as the spokesman for the Ministry of Supply and Internal Trade under Mr. Morsi. “Different circles in the state, from the storage facilities to the cars that transport petrol products to the gas stations, all participated in creating the crisis.”
Forget these hypotheses that are not proved and will probably remain that way.
What is clear is that the country’s addiction to subsidies is still very much a problem, and that this eclipses every single theory on how shortages may or may not have started or ended. Of course, Mohammed Morsi made many mistakes, as detailed here.
But Egypt, has for a long time, bought energy products at international prices, and sold these locally at a severely subsidised price, costing the nation billions of dollars (in fact energy subsidies swallow up to a quarter, and increasingly more, of the budget – more than what is spent on health and education combined).
Not only is this an expensive way of distributing subsidies, but the system is not targeted so effectively everyone gets cheap fuel – and the rich naturally consume more of it, leaving the poor still in need. Add to that, Egypt has actually begun consuming more energy than it is producing, exacerbating the problem. This problem may have been inherited by Morsi, but it is not his fault.
The painful truth is that when a new government convenes, it will be up against the same debilitating problems that Morsi’s administration was having difficulties with. Nasser created subsidies, but neither Sadat nor Mubarak or Morsi would touch them.
Who will dare to be the fact that is associated with these reforms?
Instead of focusing our energy on these pointless theories that are fabricated by those who are greedy for power, the interim government should focus on how to relieve pressure building up as a result of this system soon, before Egypt experiences another bout of shortages which will no doubt be blamed on one unsuspecting group.
Guest post by Erin Conroy, a journalist working in the United Arab Emirates.
Eid, the Muslim holiday at the end of Ramadan, has come and gone.
And with its passing, questions linger for as many as tens of thousands of people in the United Arab Emirates who, despite never setting foot outside of the country, are clutching brand new passports from the Comoros Islands, a small archipelago about 5,000km away off the southeast coast of Africa.
They were recently promised UAE passports and, along with them, the cradle-to-grave benefits of citizenship: government jobs, plots of land, wedding funds. Some were told they would have the Emirati passport in hand by the end of the holy month of Ramadan, but only if they agreed to assume another nationality in the meantime. The reason for this, officials said, is to legalise their status in the country.
But that didn’t happen, and many thousands still hold on to a passport for the four small Islands despite promises of Emirati citizenship.
Four decades after the UAE’s formation, human rights groups have estimated that there remain as many as 100,000 “bidoon,” or people born in the country without documentation.[caption id="attachment_451" align="aligncenter" width="331"] The Comoros Islands[/caption]
Their frustrations with increasingly limited access to healthcare, education and some basic services have made them louder – and at a time in which the UAE is tempering dissent in two ways. The country has shown it is willing to both placate the masses and crush those vocally critical of the ruling family’s wealth and power through sweeping arrests and deportations. The political activists stripped of their citizenship this year are perhaps the best example of just how the country sees its passport as a tool.
So, was the government’s promise last month to issue citizenship to those it deems deserving an effort to appease the people, or to silence them?
Perhaps the best explanation for the UAE to quietly dismiss its semi-citizens might be to preserve benefits for the small number who already have the coveted citizenship.
Plus, the Comoros Islands owes the Gulf a favour, otherwise why would it agree to distribute passports to thousands of people that it does not plan to embrace in any way?
Ranked by the IMF as the sixth poorest country in the world with GDP of $614 million last year, Comoros has experienced more than 20 coups and attempted coups since it became independent from French rule less than 40 years ago. It has welcomed help from Gulf countries with open arms, mostly in the form of multi-billion dollar injections from two investment groups: Dubai-based HSS Holding and Kuwait-based Comoro Gulf Holding, which has offices in the UAE.
Both groups have injected more than $3 billon together into infrastructural investments, education, healthcare and banking.
Dubai World, the Dubai government’s investment company, meanwhile, said in 2008 that it would spend $70 million on a luxury resort development on one of the islands, to be managed by Kempinski Hotels, and would create a tourism master plan for the country with the blessing of the government.
The Comoros Islands, the southernmost member of the Arab League, has made the citizenship process surprisingly simple for entire villages of people who have no connection to the country. UAE ministry officials have made visits to communities in the remote northern parts of the UAE, gathering names and later returning with Comoros passports.
But some are hesitant to accept citizenship to a country they knew little about. In the Northern Emirates’ Baluchi village in Ras al Khaimah, for instance, people who have named their children after the UAE’s ruling family members are questioning the move.
Jalal Mohamad, 26, was among those in the village who seemed torn about receiving the Comoros passport. He was born in the UAE, as was his mother, he told The National.
“Before when they suggested we take this [Comoros] passport, we said ‘no’, because we belong in the UAE. Now we say ‘yes’. Citizens with this passport can work for the Government,” he said.
In June, a month before the country’s promise to make the process somewhat transparent, the Comoros ambassador to the UAE told the Financial Times that a thousand passports had already been handed out to the UAE’s stateless.
One of those passports went to Ahmed Abdul Khaleq, author of a pro-democracy blog and among the UAE 5 arrested and convicted of insulting the ruling family. Last month he became an accidental tourist in Bangkok after UAE officials deported him on a tourist visa that was pasted into a crisp, new Comoros passport, “the result of a current UAE policy to prevent the bidoon from campaigning for citizenship in the country.”
“I don’t even know where the Comoros is,” he said, “except that it’s in Africa somewhere.”
The quiet involvement of the Comoros Islands is a tool to pacify a group of people by giving them citizenship to a country practically owned by the UAE, without sharing the benefits of the UAE.
It is also a back-up plan for any of those who choose to make a fuss. The UAE has time and time again said it is wary of outside influence. It most recently launched a public campaign against what it is calling “foreign-linked groups” it fears are infiltrating the country and threatening state security.
More than 50 people have been arrested since March, including the lawyers who have represented activists in court. And this month, a handful of rulers and the country’s minister of foreign affairs called for support of the ruling family, seemingly in response to a video (see below) released at the same time by an Islamic political party looking to build what it describes to be a better ruling system.
An English translation of this video is available on request. Email email@example.com.
One thing is clear: the UAE is trusting few.
Think tanks and academics have also seen backlash and blacklisting. The polling organisation Gallup and the local branch of a German think tank were shut this year; last year, the Gulf Research Centre was forced out of the country at around the same time the founding dean of the Dubai School of Government was pushed out, and boards of non-government organisations such as the Jurists’ Association and The Teachers’ Association were dissolved and replaced with government appointees.
Academics have found themselves frustrated with restrictions on speech, including the economics professor at the Abu Dhabi branch of the Sorbonne University who was among the Emirati activists arrested last year.
Matt Duffy, an assistant professor of communication at Zayed University in Abu Dhabi who kept a pointed blog about the state of press freedoms in the UAE, announced in a post Tuesday that both he and his wife found out over the summer that their contracts had been terminated and their visas revoked under the orders of the government.
In the UAE’s efforts to continue balancing a sense of security for investors and global markets, it has cast a heedful eye on those it perceives as outsiders – including the stateless.
Authorities fear that many are originally of Iranian, Syrian or Palestinian descent who have destroyed their documents in an effort to gain UAE citizenship.
Those with the right paperwork, tribal lines and a favourable last name may indeed soon receive the passports that they have held out hope for. But the majority of the tens of thousands without a nationality have just been persuaded to obtain a passport just like the one given to Ahmed Abdul Khaleq, and perhaps even a visa to Bangkok if they still are not happy with the way things are.
What will ultimately happen to them is unclear.
Still, there are some who are cautiously optimistic.
“We grew up here, this is our country,” said Mohamad, the unemployed bidoon in the Baluchi village who chooses his words carefully. “We are from here, my mother was born here. From the first time we opened our eyes this is what we saw.
“We thank the Government, they give us everything.”
Egypt’s reserves tumbled $1.1 billion to $14.42 billion in July, from $15.53 billion in June after the country had to repay maturing Egyptian bonds and Paris Club debt totaling some $1.64 billion. Signals fragility in Egypt’s macroeconomics and a “reminder that devaluation of the pound remains a real and likely prospect”, economists at Capital Economics wrote in a note yesterday.
With reserves falling to dangerously low levels, “net FX reserves are not enough to cover three months worth of imports – the minimum recommended by the IMF”, the economists’ write. Against this backdrop, this month’s visit from the IMF will be imperative.
Egypt wants to bolster economic ties with Libya, statement from the finance ministry said yesterday after Egypt’s Finance Minister Momtaz al- Saied met with his Libyan counterpart Hassan Zilkam.
It is also worth noting that the president Mohamed Morsi yesterday met with Ahmed Ali Madani, the chairman of the Islamic Development Bank in Saudi Arabia which last month provided $1 billion in financing for Egypt. This is one of Morsi’s more strategic meetings, and reflected well in this Arabic press report from Al Ahram this morning, where IDB’s Madani agrees to pump another $250 million into the Helwan power station to boost investments in electricity, which is at peak levels.
But all this help from Saudi Arabia is starting to drag on the kingdom’s economy, according to an IMF report out yesterday that said Saudi Arabia is spending more than it should.
Partly in response to unrest in the Arab world, Saudi Arabia boosted spending to a record 804 billion riyals ($214 billion) in 2011, 39 percent more than initially planned and 23 percent higher than in 2010, its fastest growth in a decade.
Arabtec, the biggest builder in the United Arab Emirates, swung to a second quarter loss as costs and expenses increased. Abu Dhabi government-controlled Aabar Investments raised its stake in Dubai-based Arabtec this year to 21.6% , prompting a surge in the shares.
Telecom Egypt, the Arab country’s fixed-line monopoly, said second quarter results dropped 25% on higher salary costs
Political turmoil dragged Kuwait’s stock market to a 7 month low after members of the parliament boycotted a session of the country’s assembly.
Global agricultural prices have risen by around 17% in July, raising fresh fears that food inflation will increase in the oil-rich Gulf. But given subdued core price pressures in most of these countries and the strength of the US dollar, overall inflationary pressures should remain weak, Capital Economics says. Egypt may not escape that lightly.
Full research note here: Middle East Economics Update – GCC Inflation (Jul 12) (1)
This Ramadan, fasting Arabs were warned against overeating. But this didn’t stop hundreds of Qataris being hospitalised after doing exactly that. In fact, overeating is not confined to this month but is a chronic problem for the Middle East.
Egypt comes fifth on the list of the top ten of the world’s most obese nations, according to research compiled from UN and World Health Organisation data. Kuwait, Bahrain, Qatar and the United Arab Emirates also feature on the list, beaten only by the US, which of course takes the number one spot.
The conclusion of the report: “Increasing population fatness could have the same implications for world food energy demands as an extra half a billion people living on the earth”.
On average, an Egyptian family spends 40% of its income on food and beverages, while annual expenditure on education is just 3.9%, Egyptian government statistics show. Last year, Egyptians spent close to 8 billion Egyptian pounds on salty snacks, treats and sweets. Egypt even has it’s own line-up of speciality obesity doctors that perform life-saving surgery, like Dr Khaled Gawdat, who pioneered morbid obesity surgery in Egypt in 1996.
Widening waistlines are a scary prospect when when food and oil prices are on the rise, impacting Egypt’s ability to pay for crucial wheat and petroleum imports (Egypt is the biggest net importer of wheat, and has increasingly relied on petroleum imports to meet energy subsidy demands in domestic and corporate markets).
[caption id="attachment_149" align="aligncenter" width="614"] World Health Organisation, 2011: The darkest red areas on the map (Pacific islands) represent obesity rates of 40% or more. The next darkest areas (US, Egypt, Saudi Arabia, Panama, and United Arab Emirates) represent obesity rates of 30-40%. Progressively lighter colors represent 20-30% obesity rates, 10-20% obesity rates, 5-10% obesity rates, and 0-5% obesity rates. The grey areas are not represented on the scale.[/caption]
Doctors have routinely linked poverty and lack of education in developing countries to high obesity levels. But Egypt’s scenario could be more frightening. Could a food subsidy system that swallows about $5.5 billion of the government’s budget be breeding a climate of heavy dependance on cheap, filling subsidised bread that costs just 4 cents a loaf? Vegetable, milk and dairy prices are rising every month tempting consumers to fat-filled salty snacks and treats.