“Fasten your seat belt, Egypt, and brace yourself for some turbulence,” this is how Dr. Ayman Ismail, Business Administration Professor at the American University in Cairo (AUC) started his post.
Here is a quick brief on what to expect when authorities announce the floating of the Egyptian Pound rate, expected soon according to various resources.
US Dollar Exchange Rate To Spike & Drop
With a free float, a real economic equilibrium between supply and demand would determine the rate. Upon reading current inputs, Dr. Ismail expects this rate to be between EGP13 &13.25, which is almost equivalent to the average between the USD black market rate after inflation and the official bank rate before the floating.
There might also be a spike in USD rate following the turbulence for the coming quarter, according to Dr. Ismail, but it is expected to balance back afterwards. Now here is the good news, US Dollar might also back off to an even lower rate than its current levels.
That said, Dr. Ismail thinks this will be an effective move towards a more open exchange market without control from the black market.
Day-To-Day Prices To Rocket
According to Dr. Ismail, following a planned jump in inflation, prices will immediately and dramatically rise, causing “unpleasant choices” to be made by the middle and even upper middle class. “Individuals will experience a substantial decline in their standard of living, with unpleasant choices to prioritize their spending,” said Dr. Ismail.
Real Estate Prices To Correct
Whether the correction is upward or downward, what Dr. Ismail is sure of is that it will self-correct following the economic pressures. Many analysts, including our very own, expect Real Estate prices to drop because it is over valued already. Read our article from last year here.
Temporary Economic Halt
Dr. Ismail expects a “wave of stagnation in the economy” which he explains by saying that most people won’t buy or sell commodities and assets until the turbulence passes. Small businesses might struggle, according to Dr. Ismail, specifically because of delays in collection and cash flow delays.
Exports To Shine
The upside is that our exports will be able to have a price competitiveness because local cost will drop against imports in all aspects. Dr. Ismail also reflects on our export highlights stating that local supplies will be more available for industrial, agricultural touristic and labor exports.
Did we really have a choice? Dr. Ismail also explained that we didn’t. The current or expected situation is nothing but the reflection of many wrong decisions that were made by previous administration of the Central Bank of Egypt. We might have gotten to the same state in a smoother way. The government has a valid plan to reach an acceptable rate and avail more US Dollars. Also, it is a goal to increase interest rates in order to match the inflation and reflect the required growth we need to achieve. The point Dr. Ismail made is that this good plan might have been executed in a better and smoother way.
Dr. Ayman Ismail
|Dr. Ismail is an assistant professor at the American University in Cairo (AUC) and the Abdul Latif Jameel endowed chair of entrepreneurship at AUC.
Dr. Ismail is a Harvard research fellow and he received his PhD in International Economic Development as well as his Master degree in city planning from Massachusetts Institute of Technology (MIT). Dr. Ismail also holds an MBA and Bachelor degree from AUC.