The Central Bank of Egypt’s misdiagnosis of a crisis

The dismal performance of exports, not excessive spending on imports, is behind Egypt’s currency woes.

Correct diagnosis is key to successful treatment. On 21 February, the governor of the Central Bank of Egypt, Tarek Amer, gave a TV interview outlining his diagnosis to the country’s ongoing struggle with a currency crisis, which has led to intense speculations about a possible devaluation of the Egyptian pound. Below are a few remarks on the interview.

1.  What is the central bank’s diagnosis of the problem? The governor was clear in his assessment: the excessive increase in imports over the last few years is to blame for the crisis. This has led to a large demand for the US dollar, which reduced its availability and led to pressures on the Egyptian pound.

2. Is the central bank correct in its diagnosis? No. It is natural for spending on imports to increase with the rise in income. It would only be considered excessive if its growth far exceeded that of national income, which has not been the case in Egypt. Imports grew at an annual rate of 4.7% between 2010 and 2014, lagging the 7.0% annual growth in Egypt’s nominal gross domestic product (GDP), a measure of income for the country. There is nothing excessive about this. In fact, the share of imports in GDP fell from 31% in 2010 to 28% in 2014.

3. If imports are not the root cause of Egypt’s currency crisis, what is? The answer is exports. In 2010, Egypt’s exports were valued at $49bn. In 2014, this number fell to $47bn. As a share of GDP, exports fell from 23% in 2010 to 17% in 2014. The fall in exports meant that Egypt earned fewer US dollars than it did in the past, which led to a shortage of foreign currency.

4. What explains the decline in exports? The main reason is that Egypt lost market share in its export destinations, despite the overall growth of exports to these markets. For example, Egyptian exports accounted for 1.5% of total exports to Saudi Arabia in 2010. But this share fell to 1.2% in 2014. Among the largest 43 trade partners of Egypt, the share of its exports declined in 31 countries between 2010 and 2014.

5. What could explain the dismal performance of Egyptian exports over the last few years? Potential explanations include: First, Egyptian exports may have become less appealing because they have become more expensive, either because inflation has pushed up domestic costs or because the Egyptian currency has appreciated against competitors’ currencies. Second, demand for Egyptian exports could have declined due to either security concerns (affecting tourism), the slowdown in global trade (impacting traffic in the Suez Canal) or the quality of Egyptian exports. Third, the capacity of Egypt to produce exports may have been constrained due to power cuts in factories, the shortage of foreign currency required to buy intermediate goods for production or the destruction of the gas pipeline in Sinai, which reduced exports to Jordan.