Egyptian, living in Egypt & earning a living in Egyptian Pound, but what if I look at all my money with a dollar lens on? What if I convert every Egyptian Pound value I see to its USD equivalent?

The USD rate is affecting our life now more than never, and it’s getting only more significant. And since it’s already affecting prices, people came up with this name for the nightmare we all fear: “dolarization” which basically means that the local currency gets neglected and that main day-to-day transactions are normally held in USD, just like in Lebanon. That’s definitely a bad situation to be at, but we might as well explore what this means to us for real and be ready for it. So let’s try it out, and see what observations we can make out of that.

newbigmac2dt
In the process, let’s explore some concepts that will help understand our figures better: The Big Mac Index is published by The Economist as an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries.
Big Mac price in the US is $3.75.
Big Mac price in Egypt is EGP 31.00, equivalent to $2.05 (at EGP 15.00 a dollar)

A quick look at the Big Mac Index obviously shows us that the real purchasing power in the US is almost 8 times stronger than it is in Egypt. What this also tells us is that the USD should be equivalent to 8x the EGP, but it’s not the case. It’s actually much worse, almost 100% worse: It’s around 16x. However, we will use the average of EGP 15.00 a dollar, which is the estimate that experts like Dr. Aliaa Basiouny & Dr. Ayman Ismail of AUC, as well as Omar Elshenety, industry expert, agreed on for the coming few months.

Take a moment and gather your data:

  • Monthly income in EGP
  • Now divide it by 15 to get the USD equivalent (tough moment, we know)
  • Average monthly spending in EGP
  • Happy moment: divide that by 15 to get the USD equivalent

shopping-woman-money-290116-640x457

Now let’s take a look at the observations we can make in this hypothetical situation.

My Income, Disaster!

  • In EGP: My income is more than double the average income in Egypt. And if you can read those words in English now, most probably your income is above average too
  • In USD equivalent:  My income is less than 25% of the average income in the US

I would accept this fact if my average spending is less than 25% as well. But it’s not. Take a look at your salary in USD. How does it feel? Disaster, we know.

First Shot at Prices, Doubling!

  • Trip from Cairo to Dubai: $300, more than an average domestic trip in US
    This should be OK if my monthly income is $3,000 (~EGP 45,000 per month)
  • Kia Picanto: $18,000, which is almost enough to buy a BMW in the US
  • Fruits & Vegetables: as expensive as they are in the US, while our incomes are way different
  • Other food: way more expensive than in the US if both are considered in USD
  • Fuel Prices: Ridiculously cheap, actually a tiny fraction of a dollar in Egypt and 5 times more expensive in the US
paycheck
Real income is the difference between income and basic spending. The bigger the difference the bigger the real income that can either be spent on luxury or saved.

If we convert our life from EGP into USD, this gap remains the same. It’s so tight anyway due to inflation. There are 2 ways to bridge the gap: spend less or earn more. If we look at our very low income in USD or EGP, and our inevitably high spending in USD or EGP, it’s easier for us as individuals to actually try and increase our income. It sounds hard, and it is, but it’s still easier than trying to spend less.

 It sounds hard, and it is.

Advertisements

Written by The Wall Corp Journal

The WCJ team manages the firm's journal and serves as a main platform to broadcast our views, analyses, comments and advice on the economy, investment scene and business outlooks.