Internal and external causes have devalued and raised inflation in several Arab countries beyond the Gulf.
Muhammad, a Nile Delta driver, says, “I cannot feed bridges to my children,” referring to the Egyptian government’s massive infrastructure building program amid a cost-of-living crisis.
I can hardly afford the basics. Eight years have passed during this administration. He was furious.
“This government treated me [when I had] the hepatitis C virus for free,” said his friend Sami, alluding to the 2014 Egyptian government push to treat HCV, one of Egypt’s largest health issues.
Arab countries regularly argue about inflation and currency devaluations.
The central bank governor was fired Monday after the Iraqi dinar fell 7% since mid-November.
As the Tunisian president attempts to manage an economic and political crisis, the dinar hit a record low against the dollar in September.
In 2022, Syria, Sudan, Lebanon, and Egypt had the worst-performing currencies.
Devaluations and rising global prices have caused sky-high inflation.
The Central Bank of Egypt reported 21.3 percent headline inflation in 2022 and 24.5 percent core inflation, excluding volatile fuel and food costs. According to the World Bank, Lebanon’s recent triple-digit inflation dwarfs these figures.
Some blame governments for inflation. The Ukraine war, COVID-19 epidemic, and US interest rate hikes have been blamed by governments.
Ukraine war and US rate hikes
Egypt, Jordan, and Lebanon have lost foreign currency because to the COVID-19 outbreak and increased food prices from Ukraine’s war.
Trade deficits and foreign debt contribute to currency devaluations.
“A continuous trade imbalance leads in a loss of foreign reserves which is typically necessary to service foreign lending,” said Georgetown University in Qatar assistant professor of economics Dennis McCornac.
The US Federal Reserve raised interest rates to manage global inflation. Higher interest rates make borrowing more expensive, discouraging expenditure. Spending decreases demand, which lowers costs.
US interest rates also deter investors from developing country risky assets.
Qatar University associate economics professor Zouheir el-Sahli argued that rising US interest rates made the US dollar a safer investment.
As Hankuk University professor of Middle East economics Moamen Gouda explained, foreign investors in local debt instruments quit a market by selling their local currency to buy US dollars, causing the local currency to depreciate in value.
“[This leads] to devaluation unless the government intervenes to prop up its currency to avert social upheaval due to increased prices,” Gouda said.
Structural issues
Egypt has sought IMF assistance four times in six years. Cairo has to adopt a flexible exchange rate regime based on supply and demand to get IMF funds, something successive Egyptian governments have opposed.
A rigid exchange rate regime is one of many structural issues stifling Middle Eastern economies.
El-Sahli noted that Egypt is not attracting much foreign direct investment (FDI) due to a lack of confidence in its economic policies.
Lack of FDI caused a foreign cash shortage and devaluation of the Egyptian pound.
Gouda agrees with other economists that structural issues plague the Egyptian economy. He said the Ukraine crisis and US interest rate hikes showed the region’s fragile economic systems and the need for costly structural adjustments.
Egypt has failed to attract FDI by signaling that the private sector, which has contracted for eight years, is not welcome. Gouda said the military has squeezed out the private sector in practically every economic sector over the past eight years.
IMF reforms included reducing the military’s economic influence. The IMF said in January 2023 that Egypt has pledged to reduce the state’s role in the economy and level the playing field between the public and private sectors.
Lebanon has unique difficulties. “The government suffers from persistent deficits and a political gridlock that has stopped it from striking an agreement with the IMF to offer a lifeline to the economy,” said el-Sahli.
Mohammad Fadel, a University of Toronto law professor, stated, “Lebanon has managed its economy like a Ponzi scheme,” borrowing money to pay off investors. “Lebanese banks were drawing deposits from Lebanese overseas with outrageously high interest rates,” he continued.
The World Bank says the Lebanese authorities utilized “excessive debt buildup” to create a “illusion of riches” and attract investors. Lebanon depositors didn’t realize the risks.
The system crumbled when political upheaval in Lebanon dried up foreign investment.
Long-term currency devaluation can boost an economy.
McCornac said it would lower export prices and raise import prices, slowing foreign reserve loss.
Devaluations can boost exports, reduce the trade deficit, and boost economy, but only alongside structural changes.
