Breakfast Wrap: Why Morsi is Behind Egypt’s Dollarization Crisis

What happens when a president of a newly democratic country decides to act more like a tyrannical than post-revolutionary leader? 

It’s clear that it leads to a severe crisis of confidence from the public; the same people that elected this president (albeit, by a narrow margin) to his place less than six months ago.

President Morsi’s decision to issue a decree that granted him far-reaching powers effectively began an avalanche of economic mayhem not seen since the revolution broke out in early 2011.

The swift backflip on this decision did not make any difference, because Morsi had decided to go ahead with a referendum on the constitution, despite calls to delay it.  That has now been passed but there was no landslide victory and Morsi must accommodate a slim mandate that will make it difficult to enforce any economic reform measures.

Above all, the political turmoil that has ensued over the last month has prompted fears that the government is not in control of its finances and the economy.

As a result, fears have grown over the pressure on the pound currency and there has been a rush by Egyptians to withdraw their savings from banks. Initially, the Central Bank sent out a cryptic message of reassurance that it would protect the public’s bank deposits.  

Al Arabiya flashed a headline two days ago:

BANK

Then the bank made its move in an attempt to nip in the bud a dangerous path of dollarization, which would put increasing pressure on the pound and the nation’s dwindling international reserves. 

Egypt banned travelers from carrying more than US$10,000 in foreign currency cash in or out of the country. It was part of a presidential decree that modified the central bank law in order to tighten foreign currency transfers amid another wave of dollarization that hasn’t been seen since last year.

AP reports:

The anxiety over the economy was visible at currency exchanges in the upscale Cairo neighborhood of Zamalek, which ran out of dollars by midday and offered only euros — a rare occurrence. Some banks, too, said they had run out of cash dollars, forcing people to seek foreign currency from exchanges around the city.

There were also reports from the local media that an Emirati aircraft delivered cargo loads of cash amounting to $30 million to Egypt to help plug the shortage of dollars.  In another blow, the ratings agency Standard & Poor’s cut the government’s credit rating citing the political turbulence and warning that another cut could come if political problems persist.

The panic prompted a full-scale media management.

The Central Bank of Egypt issued a statement on Monday calling on banks not to listen to rumours circulating about the fiscal health of the nation.

The official English website of the Muslim Brotherhood published an interview with the Freedom and Justice Party’s economist Mohammed Gouda “refuting rumours” about the economic health of Egypt:

Dr. Mohamed Gouda refuted rumors being persistently reported in print and broadcast media about the poor economic situation in Egypt, pointing out that there is a difference between explaining the economic situation and spreading panic.

“Economic problems can be solved. There is nothing impossible about them. But security and political stability are essential to help the economy and implement the reform plan.”

Well, those aren’t rumours. Egypt is in a dire economic situation and denying this will only prolong the pain.

Finally the prime minister, Hisham Qandil, pointed out the obvious saying political stability was crucial to luring back foreign investors and tourists to help plug the budget deficit and heal the country’s struggling economy.

Meanwhile, Morsi is taking advice from a man that the New York Times described as someone who “frightens most economists”: Hamdeen Sabahi, an outspoken opponent of free-market economic moves in general as well as of a pending $4.8 billion loan from the IMF.

The president made a terrible decision just over a month ago, and now the nation is paying for it. It’s time we saw Morsi making some sacrifices and leading a nation rather than his Brotherhood colleagues.



2 Comments


  • Haitham Essam
    Posted December 26, 2012 at 8:36 am | Permalink

    Add to that, the decision to backoff on the much needed tax reforms sacrificing the approval of the IMF loan on the 19th Dec. in favour of winning the referendum did have a devastating effect. Not only it meant less gov. revenue, but also continued pressure on Egyptian Pound given that the foreign reserve will reach a record low by the end of jan – when Egypt pays its $ 700mn foreign debt interest

  • Posted December 26, 2012 at 8:38 am | Permalink

    An important addition! Thank you



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