On March 14, 2016, the Central Bank of Egypt slashed the value of its currency to 8.85 pounds from the previous exchange rate of 7.73. The Egyptian pound experienced a single free-fall devaluation of 13%. Meanwhile, the Central Bank announced plans to decouple from the US dollar and adopt a "more flexible exchange rate" policy. As comments spread following the announcement, what lessons should emerging market economies learn from the Egyptian devaluation?

Long-term Shortage of Foreign Exchange Reserves

The devaluation may be economically expedient, which is easy to understand. It is not a problem of bankruptcy but of impossibility for the Egyptian pound to keep a stable exchange rate against the US dollar. Devaluation is a better way to ease the shortage of foreign exchange reserves.

Since the political transition of 2011, Egypt has suffered from continuous political upheaval, foreign investment withdrawal and economic recession. The four sources of foreign exchanges –petroleum export, tourism, the Suez Canal and overseas remittance – have decreased. The foreign exchange reserves have dropped by more than 50 percents from 36 billion dollars, and have hovered around 16 billion dollars, an amount that can only suffice for three months' imports. As a result, industrial production and exports have decreased due to less imports. In turn, weak exports have exacerbated the shortage of foreign exchange reserves. To break this vicious cycle, the Egyptian government has made great efforts to increase the reserves to 30 billion dollars but perhaps it is in vain.

Lesson 1: Relying Heavily on Foreign Aid and Ignoring Structural Adjustment

After failing to seek financial support from the IMF, Mr Sisi turned to the Gulf states, the World Bank and the China Development Bank. Saudi Arabia, the United Arab Emirates and Kuwait promised to give Egypt 12 billion dollars, including a 6 billion dollar deposit to the Central Bank of Egypt. The World Bank and China Development Bank provided Egypt a loan of 2 billion dollars and a loan of 1 billion dollars respectively. Nevertheless, such loans still couldn't bridge the great economic gap. In 2016, the Egyptian pound faced enormous pressures of devaluation due to the weak economy and shortage of foreign exchange reserves. Due to domestic and international pressures, the Central Bank started to make reforms and adjust the exchange rate to 8.25 against the US dollar, signalling devaluation.

Lesson 2: Selling State Assets at Low Prices

From Nasir’s policy of import substitution to Sadat's economic opening-up and Mubarak’s Neoliberalism, the Egyptian economy experienced great changes and the economic situation worsened. Most national industries established during the reign of Nasir were sold by Mubarak at low prices, leaving petroleum exports, tourism, the Suez Canal and overseas remittance as the only economic pillars. Over the past 30 years, the Egyptian population has more than doubled forcing Egypt, an agricultural power, to import 10 million tons of wheat annually. Mubarak had to adopt Neoliberal economic policies and to sell state assets at low price in order to borrow from international financial institutions.

Lesson 3: "Economic Populism"

Mr Sisi's newly adopted policy of economic populism connects nationalism to the economic development. Sisi raised nearly 10 billion dollars to build the second Suez Canal in one year. The basic logic of Sisi’s economic policy is to lead large-scale projects and to attract domestic and foreign capital. However, Egypt currently does not have stable conditions to implement such projects due to lack of money and other resources. In addition, it appears that Sisi has little political wisdom as he has pinned the hopes of his country to foreign aid.