The Egyptian Pound was one of the world’s best performing currencies in 2019 and has started the New Year with a bang, with local banks seeing $1.7 billion of inflows in the five days through January 13 alone.
At 15.92 per dollar, the Egyptian pound has risen to its strongest level since March 2017. Societe Generale SA expects the pound to appreciate another 3.7 percent by the end of the year, as the currency benefits from high yields on government securities and a raft of economic reforms undertaken by President Abdel-Fattah El-Sisi.
While the Egyptian pound is showing signs of strength, it’s a completely different tale some 2000 miles away in Nigeria where talk of a possible naira devaluation is on.
The naira has struggled for the better part of a year now. Though the market rate has barely budged over the past two years, it’s the level of external reserves that reflects signs of discomfort.
External reserves, where the CBN stashes foreign currency, shed $4.5 billion in 2019 alone, sliding 10 percent to $38.6 billion in December 2019 from $43 billion in January 2019.
The decline was due to increased interventions by the CBN in the foreign exchange market.
External reserves have continued to fall this year and at $38.2 billion are now within $8 billion of the level where the CBN Governor Godwin Emefiele said last year that he may be forced to pull the plugs on the naira.
Although Emefiele also said it will take a $45 per barrel oil price to get to that point. Though oil prices have been closer to $65 per barrel this year, the threat of a devaluation is dominating boardroom discussions.
The naira has shed 125 percent in the past five years, causing untold hardship for Nigerians who have had to balance rising inflation with shrinking incomes.
Egypt’s bold reform path continues to cast an uncomfortable spotlight on Nigeria with Egypt looking the country to have made the winning call when both nations were faced with tricky paths in 2016.
Egypt opted to float its currency while Nigeria dithered. But it’s Egypt that has killed off speculations over currency devaluation, something that still trends in Nigeria.
The matter here is less of whether the naira should have been floated in 2016 but more of Nigeria taking a longer term view with its monetary policy, rather than going with a short-term fix that still displays considerable loopholes three years later.
“The lesson is not much about whether Nigeria should have floated its currency or not like Egypt did but that we should have taken a long-term approach to our monetary policy like Egypt,” one investment banker told Business Day.
“We have given investors the room to doubt if we know what we are doing with the currency and the possibility of a devaluation this year is one of those symptoms that no one has long-term confidence in what we are doing,” the investment banker who did not want to be quoted to speak freely said.
Nigeria’s problems stretch beyond functional monetary policies to the lack of sustainable fiscal policies. Egypt’s currency floatation was backed with reforms that included the gradual phasing out of energy and petrol subsidies and incentivising private investment.
In Nigeria’s case, nearly a trillion naira was spent in 2019 alone on an expensive petrol subsidy while schools, roads and hospitals decay.
“Nigeria’s problem is bigger than our exchange rate policy, it’s the fiscal policy makers that need to pull their weight,” said Ayodeji Ebo, managing director at Lagos-based investment bank, Afrinvest Securities Ltd.
“Egypt’s success is not hinged on floating the pound alone but implementing economic reforms that opened up the economy to FDI. While Egypt is phasing out subsidies, we are digging ourselves deeper into it which is inimical to the economy,” Ebo added.
Not only has the Egyptian pound turned the corner after weakening to as much as 30 pounds per dollar after the float in 2016, inflation rate has collapsed and businesses are heaving a sigh of relief after pain.
When Cairo followed up its floatation of the Egyptian pound by raising taxes almost immediately, it sparked runaway inflation, the very problem the Nigerian monetary authorities were trying to avoid when the central bank kept the naira pegged to the dollar at the official window.
But today, inflation in Egypt is lower than Nigeria’s.
Egypt’s annual consumer price inflation rate rose to 7.1 percent in December 2019, the highest since August, from 3.6 percent in November.
Inflation in Egypt has stayed within single digits since June 2019.
In Nigeria, however, inflation probably touched 12 percent in December 2019 from 11.85 percent in November.
“Another lesson to be learnt here for Nigeria is the need to implement big ticket economic reforms that will spur confidence in the economy and the naira,” one business leader with knowledge of the matter said on condition of anonymity.
The source however admits that the political cost of non-populist reforms like an upward review in electricity tariffs and petrol prices make it difficult for the government to go the route of bold reforms.
There was little opposition in Egypt when the currency was devalued, because they practise a dictatorial system of government, the source said. “So it’s not entirely the same as Nigeria, but that is no excuse for government to drag on reforms.”