Egypt turns off lights to boost foreign exchange reserves

By Bassem Aboualabass

CAIRO, Egypt—A war-spurred economic crisis in Ukraine darkens Egyptian streets, as the government turns off lights to free up energy for export and bolster hard currency reserves.

Russia’s invasion of Ukraine had an immediate impact on Egypt, the world’s largest wheat importer, which depended on ex-Soviet states for more than 80% of its grain.

This photo taken on August 24, 2022 from Cairo’s famous tower shows a nighttime view of vehicles driving past illuminated billboards along the ‘October 6’ highway that runs through the Zamalek district (right) of the Egyptian capital Cairo to the Agouza district (left) in its twin city of Giza. Dwindling foreign currency reserves cast a shadow over the streets of Egypt as the government switches to dim lights to free up energy for export. AFP

Egypt, which turned to the International Monetary Fund for a loan after the outbreak of war, is pumping more natural gas abroad to boost its foreign currency reserves, a move that has drawn criticism.

And while the government this month announced power rationing, signs of waste are met with scorn.

“I see the streetlights are still working during daylight hours…and we are suffering from high electricity bills,” said a disgruntled Cairo man in his 30s who spoke as the anonymity.

The country’s vital tourism sector has also been hit by the conflict in Ukraine, reducing the flow of holidaymakers to a country still affected by the 2011 revolution and the COVID-19 pandemic.

Economic growth slowed to 3.2% in the fourth quarter of 2021-22 from 7.7% last year, although the annual expansion was 6.6%.

Despite the better-than-expected annual figure, the government said growth had slowed in the wake of “global political and economic developments”.

Egypt’s monetary policy has been caught between a rock and a hard place since Russia invaded Ukraine in February.

Inflation hit a three-year high of 14.6% in July after Egypt devalued the pound, pushing up the price of imports and depleting foreign exchange reserves by $7.8 billion since February to 33 .1 billion in July.

capital flight

Egypt is negotiating an IMF loan to help ease the fallout from the war against Ukraine in the country, where 30% of the 103 million people live in poverty.

But the talks dragged on for six months, raising analysts’ eyebrows.

“The fact that talks with the IMF are dragging on is likely a sign that some officials are hesitant to act on IMF demands and would rather rely on support from the oil-rich Gulf economies,” Capital Economics of London said.

“We need to speed up negotiations with the IMF,” said Hany Genena, an economist and senior lecturer at the American University in Cairo.

“Since last week, there has been a severe shortage of dollars provided to importers by banks in various sectors.”

Cairo had already secured a $12 billion loan from the IMF in 2016 that required it to cut subsidies and devalue the pound.

In 2020, Egypt received two more loans, including $5.4 billion related to reforms and $2.8 billion to fight COVID.

Genena said Egypt needed to undertake more “drastic” reforms to restore its foreign exchange reserves, including a full float of the pound.

Last week, as the currency plunged to a near-historic low of 19.1 to the dollar, central bank governor Tarek Amer resigned.

It is unclear why Amer quit, but Egyptian media suggested it was because of his reluctance to implement a full float.

James Swanston of Capital Economics said the currency needed to depreciate to 25 pounds to the dollar by the end of 2024 “to avoid the reconstruction of external imbalances”.

But $14.6 billion in investments left the country in the first quarter of 2022, reflecting concerns over the war in Ukraine.

Capital Economics, however, said the $22 billion worth of investment pledges from the Gulf countries “will help alleviate external financing problems”.

Gas lifeline

Among Egypt’s list of measures to preserve foreign currencies was a decision to let the pound slide 17% against the greenback in March. AFP

The government said the electricity rationing aims to achieve “an additional surplus – on average 15% of the natural gas pumped to power stations – which can be exported and bring in hard currency”.

Among the energy-saving measures were “reducing lighting in streets and public squares.”

Since 2018, Egypt has increased its natural gas capacity, now turning to an energy-hungry Europe eager to reduce its dependence on Russian gas.

The government this month announced “exceptional assistance to nine million families at a cost of $52 million a month”, but for many the soaring cost of living had already done enough damage.

Mahmoud al-Saeedy, a fruit vendor in Cairo, depleted his savings trying to keep up with rising prices.

“I go back to my village in the south every 40 or 50 days, with only 600 pounds (31.3 dollars) to give to my family,” he told AFP.

“What can they do with it?”