2 years later, how have people’s lives been impacted by the flotation of the Egyptian pound?
 
 

On November 3, 2016, things began to change. Up until that day, I didn’t have to worry about expenses or my daily commute to and from work. My monthly salary, a mere LE1,400, was more than enough. But on that November morning, the government liberalized the foreign currency exchange rate and floated the Egyptian pound. My salary has tripled since and yet I’m still worse off. How did this happen? If middle-income earners are feeling the squeeze, then how are those with less income faring?

The liberalization of the exchange rate came as part of a government economic program that included a series of austerity measures aimed at securing a three-year, US$12 billion loan from the International Monetary Fund (IMF).

The flotation of the pound triggered a steep wave of inflation that reached record highs, unmatched in the past 70 years. In July 2017, inflation peaked at 35.8 percent before gradually falling to 11.5 percent last May. Yet inflation began to rise again in June after the government reduced subsidies on fuel, followed by electricity. The inflation rate hit 15.4 percent in September, while the IMF projects that the rate for 2018 will reach 20.9 percent.

In the lead-up to the flotation, economists warned of the negative impacts the move would likely have on consumer prices and standards of living, particularly in light of Egypt’s severe dependence on imports for basic commodities.

A devaluation in currency is usually tied to an increased demand for exports, which become comparatively cheaper abroad. Yet as Samir Radwan, an economist and the former minister of finance, pointed out in the months before the flotation, this was not necessarily true in Egypt’s case.

“This would work in Switzerland, for example, or in China, because they have a large production and export capacity, and when the exchange rate drops, the demand for their exports increases,” Radwan said in an interview with the partisan Al-Wafd newspaper in May 2016. “We do not have that. We import 60 percent of our needs and 40 percent of the components that go into our exports are imported. As a result, floating the pound would increase import bills and inflation, and the victims will be the poor and those with the lowest incomes.”

Amira and the spiral of inflation

The IMF, European governments and international financial institutions have repeatedly lauded the Egyptian government’s economic reform plan as a bold step toward strengthening the economy, yet they seldom report on the disproportionate effects the currency flotation and austerity measures have had on lower-income groups, which make up the majority of Egypt’s population.

Some economists also point out that the government did not take adequate measures to protect low-income earners who were most at risk from the effects of the flotation.

Amira, a woman in her 40s, had led a relatively stable life; her job in a clothing factory provided her a limited, but fixed, income. When the factory closed down in 2014, she took to selling vegetables at the market, but still managed to earn enough to support her family and make ends meet.

After the currency flotation, Amira’s life started falling apart. The skyrocketing prices of basic goods meant that, for the first time, she and her three daughters could not afford to have dinner, and sometimes would be forced to skip breakfast as well.

She says she is not aware of the macro-economic forces dragging her family further into poverty, only that her life is now harder. “Life was cheerful until two years ago, then all of a sudden, the prices went sky-high,” Amira says, sitting in a corner of the Bahtim market selling vegetables, a short distance from her modest home in the working-class neighborhood of Shubra al-Kheima. She counts the handful of pounds she has earned by the end of the day. “The market is dead because of the prices. Some days I make some money, other days I make none.”

While the government has consistently highlighted the receding inflation rates from the record highs in the months immediately after the floatation, the inflation rate is still high and low-income earners continue to suffer the consequences.

Amira had to take on multiple jobs to limit the impact of rising prices on her small family.

But would it be fair to say that all residents of Cairo, for instance, experience the same inflation rate at any given period? Economist Mohamed Sultan, the author of a paper titled “Inequality in the distribution of economic burdens,” says the reality is more complex.

“If I buy products at the same price, or at an almost identical price, as you do, then we do share a similar inflation rate. This is how statistical bodies and central banks operate. What these institutions try to conceal is that inflation rates are not only linked to changes in commodity prices, but also to our patterns of spending on these commodities.”

Sultan sought to explain what had happened in his research paper, trying to determine each individual’s share of the burden of inflation. He studied the methods used in other countries to measure inflation and its impacts, such as Malaysia, whose central bank declared in its 2015 annual report that the inflation levels experienced by the lowest-income groups in the period from 2011 to 2014 were always higher than those in higher-income groups.

Segments hit the hardest by rising prices

Sultan reiterates that, while inflation impacts everyone, lower-middle income families and those closer to the poverty line have been impacted the most over the past two years since the flotation.

The overall rate of consumer price increases announced by official agencies reached its highest level of around 35 percent in July of 2017 compared to the same month the previous year. However, Sultan explained that prices in 2017 for the lower-middle class had grown by 90 percent since 2013. This meant that “to remain in this segment and maintain your 2013 spending patterns, you would have had to increase your monthly income by 90 percent.”

Most families have not been able to increase their household income by 90 percent over that time period, especially in an environment of limited job opportunities and few wage increases, and so have had to change their spending patterns to stay afloat. After being forced to cut down on goods and services they can no longer afford, lower-middle income families have come to more closely resemble those living near the poverty line.

Meanwhile, Sultan explains, the effects of inflation worsen the further down the socioeconomic ladder you go.

Households that are near the poverty line with barely enough to meet their basic food, shelter and clothing needs faced an inflation rate of 110 percent in 2017 compared to 2013 prices. They would have had to more than double their income during those four years in order to retain the same standard of living or face even worse levels of poverty, where income is insufficient to meet even basic food needs.

Samar, a physics teacher, was hard hit by the soaring prices. Her family had previously been able to save some income for their children’s education and to cover unforeseen medical emergencies. But since late 2016, the combined income of Samar’s teaching salary and her father’s wages was barely enough to cover expenses for food and other basic goods.

Samar’s mother was also diagnosed with leukemia, a costly illness, compelling the family to repeatedly dip into their savings for each treatment, until they had to sell their home in Shubra al-Balad and move to a residence in Bahtim, which her father had began renting years ago.

Salaries and job opportunities

The Egyptian government believes that new job opportunities may help to ease the effects of inflation. In a statement given to the Parliament in July, the Cabinet of Prime Minister Mostafa Madbuly aimed to provide 900,000 jobs annually over the next four years, thus doubling the number of jobs available last year.

Samer Atallah, a professor of political economy at the American University in Cairo, questions whether this target can be achieved, explaining that it would require changes in the government’s economic policies. He previously told Mada Masr that the policies referred to in the government’s statement “offered nothing new” to help create that number of jobs.

Even if the state does succeed in hitting its targeted job creation figures, the notion that new jobs alone would successfully counter the impacts of the inflation crisis is also dubious.

In his book, When Will Inflation End in Egypt? (2017), Mohamed Gad, a journalist and economic researcher, explains that wages have two values: the first is a “nominal value”, which is the numerical value we use in our daily lives. For example, one might say, “My monthly salary used to be LE500, before it was increased to LE1,000.” The other value is the “real value”, which is the actual value after deducting inflation. People are usually frustrated when the real value of their wages deteriorates even if the nominal value is constantly increasing.

Eight years ago, workers vigorously petitioned for a minimum wage that would ensure decent living standards for families. In an attempt to meet these demands, the state adopted an additional bonus incentive that would raise the minimum wage of government employees to LE731, which was lower than the workers’ demand of LE1,200.

In early 2014, the transitional government at the time decided to move toward a level of equal pay by introducing a minimum wage bonus, which would ensure that, in combination with other bonuses and pay-rises, the minimum wage would effectively be LE1,200. There hasn’t been any further increase since then.

Yet after factoring in inflation, it would take LE1,500 in 2014 to equal the same purchasing power as LE1,200 in 2011. When compared to the present day, the true value of LE1,200 in 2011 rises to a whopping LE4,500.

As a result, incomes which were until recently thought to be sufficient, cannot protect the middle class, and even the upper classes, from the consequences of inflation. The living conditions of each socioeconomic class is gradually falling to those on the rung below.

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Hasnaa Mohamed