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Death Spiral For the Egyptian Pound?

Egyptians have lived through two years of instability and revolution. Recently, they’ve faced a new menace: a crash in the Egyptian pound. Not only is the local money losing value; when crowds of panicky Egyptians stormed to the banks and money changers looking to switch pounds for dollars and euros, supplies of foreign currency ran out.

The currency crisis is the direct result of the country’s political woes. In December, Egypt, suffering from political unrest and struggling to adopt budget-balancing austerity measures, asked the IMF to delay a critical $4.8 billion loan the country was scheduled to receive as the conditions for the loan could not be met on time. Egypt’s currency woes reflect the alarm from investors over this decision.

After the IMF loan was postponed, citizens feared that the country’s currency would soon be devalued, and started buying up American dollars. Now the pound has reached an historic 6.3 low against the dollar, and for the first time in eight years, banks have started to refuse citizens looking to change their savings over to dollars. The government is holding foreign currency auctions to protect the country’s rapidly depleting reserves.

Currency devaluation is particularly dangerous for a high import economy like Egypt’s. Since the country imports much of what its people need, a decline in the currency automatically leads to price increases in sensitive commodities, including food and energy. The government then has to pay more to cover the cost of subsidies, and this bigger deficit in turn leads to more concern about the future of the currency, which then leads to further falls in its value. Repeat until something changes, or until doom strikes.

The most urgent challenge now facing Egypt’s Islamist government is to break this cycle before the economy fails. That won’t be easy to do.

Qatar and Turkey have already stepped in to help Egypt, but the country’s long term future depends on reaching a deal with the IMF. Talks resume this month, and an agreement between the two could give Egypt access to as much as $14.5 billion in support money.  The trouble is that the IMF’s conditions are going to be tough and will likely require cuts in the unsustainable but very popular subsidies the Egyptian government provides for things like gas and bread. The Salafists among others can be counted on to lead enraged popular protests against any such cutbacks.

Until then, there is one bright spot of hope: if there are still any tourists hardy enough to go to Egypt, the bargains of the century are waiting to be picked up. The tourists are gone and the money is cheap.

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