Currency float tamed inflation in Egypt and put the country on a path to prosperity
Inflation in Egypt, Africa’s third-biggest economy, slowed to single digits for the first time since the pound was floated in 2016. It had rocketed as high as 33percent soon after President Abdel-Fattah el-Sisi’s administration said a devaluation was needed to ease severe shortages of foreign exchange and get a $12billion (R167bn) loan from the International Monetary Fund (IMF).
Though the decision was painful, it turned the Arab nation into a darling of bond and carry traders, and set Egypt apart from Nigeria. Africa’s biggest oil producer was also suffering from a dollar squeeze, but opted instead to keep a tight grip on its currency via a system of multiple exchange rates and import restrictions.
Foreign exchange is no longer scarce, but Nigeria’s inflation rate was 11.2percent last month, one of the highest levels on the continent, and has been above the central bank’s target of 6 to 9percent for four years.
It’s not just inflation. Egypt is also looking the healthier of the two in terms of economic growth.
Its output will expand 5.5percent this year, more than twice as much as Nigeria’s and the most among Middle Eastern nations, according to a surveys of analysts.
Portfolio flows into Egypt soared following the devaluation and the start of IMF-supported reforms, which included cutting subsidies that soaked up much of the budget.
And it got more foreign direct investment last year than anywhere else in Africa, according to the UN.
Nigeria has managed to attract plenty of hot money by keeping bond yields high and pledging not to let the naira weaken, but foreign direct investment has plunged.
The IMF says the Nigerian currency regime deters investors and hurts the economy, which is growing more slowly than the population.
President Muhammadu Buhari argues it’s needed to boost local manufacturers and stop inflation accelerating. Those hot-money flows and rising oil prices have caused Nigeria’s local and external bonds to perform solidly this year. But weak growth has turned investors off stocks.
The main equity index in Lagos has lost 9.4percent in dollar terms this year, one of the worst performances globally. Egyptian stocks have been falling along with others in emerging markets since April, but they’re still up 12percent year-to-date. That’s partly due to the pound appreciating 8percent against the greenback, a performance bettered only by Russia.
Political and security risks remain high in both countries, according to Bloomberg Country Risk Scores. Egypt’s risk score has climbed since el-Sisi came to power in 2014.
His administration is trying to quell an Islamic State (IS)-linked insurgency in the Sinai peninsula and has jailed tens of thousands of political opponents. Lawmakers passed a constitutional change in April that allows for him to remain in office until 2030.
In Nigeria, which is also battling IS militants and experiencing deadly clashes between farmers and herders, political risk is deemed higher. Its reserves have risen almost 9percent since last year to $45bn. That gives central bank governor Godwin Emefiele plenty of firepower to defend the naira, which Renaissance Capital estimates is about 20percent overvalued.
But stresses on the currency are rising, according to Citigroup’s Early Warning Signal Indexes. The opposite is happening in Egypt. Analysts at Societe Generale SA said last week its currency could strengthen another 4percent to the dollar this year.