Tag: managing compensation in volatile markets

Egypt Inflation

Egypt’s Surging Inflation: What is Happening and How Employers Can Prepare

Written by Kai Donesa on . Posted in Uncategorized.

Birches Group reports on the current state of labor markets that are making headlines around the world, bringing you up to date on the news.

Egypt, Africa’s third-largest economy, has been battling inflation for almost a year. Supply chain issues and tight financial conditions have also made Egypt vulnerable to external shocks.

Egypt’s inflation rose to 26.5% in January 2023, up from 21.9% in the previous month and 8% in January 2022. Steve Hanke, an economist at Johns Hopkins University, estimates the actual inflation rate to be 101%.

A currency crunch

The crisis began in February 2022 with Russia’s invasion of Ukraine. The conflict has severely affected Egypt’s economy. The country saw food and energy prices soar. Its tourism industry, which relies on Russian and Ukrainian visitors, further declined. Foreign investors also pulled out over US$20 billion in investments. The Egyptian government responded to the flight of capital by restricting imports. Inflation, which was at 8% the month before, entered the double digits zone at 10%.

With dwindling foreign currency reserves and teetering on the brink of an economic collapse, Egyptian authorities turned to the International Monetary Fund (IMF) for aid in March 2022.

A new IMF loan

After several months of meetings and negotiations, Egypt and the IMF reached a staff-level agreement in October 2022. (The loan agreement was approved by the IMF’s Executive Board in December 2022 but only publicly published in January 2023.) The IMF would provide a support package totaling US$ 3 billion in exchange for implementing several economic reforms, including:

  • Liberalizing the exchange rate,
  • Raising interest rates by 2%, and
  • Scaling back the economic role of the state and military.

The support package would be gradually given to Egypt within four years, subject to periodic reviews. The IMF loan is also expected to catalyze another $14 billion in funding from international and regional partners.

The shift to a flexible exchange rate

One of the IMF’s conditions for its latest loan was to liberalize the exchange rate. With a permanent shift to a flexible exchange rate, the Egyptian pound’s value would be determined by forces of supply and demand rather than set by the central bank.

To comply with the IMF’s terms, the Central Bank of Egypt (CBE) announced in October 2022 the shift to a flexible exchange rate. The CBE has since been devaluing the Egyptian pound in phases. Since the end of January 2023, it has been trading at above EGP 30. The Egyptian pound lost over half of its value in less than a year.

As a result, the depreciating pound has been fueling inflation and adding to the woes of Egypt’s 106-million population.

An economic crisis

Egypt’s fiscal measures have strained its citizens, especially the poor and middle class.

Egyptians are feeling the pinch. Many imported products are unavailable, and food staples have doubled in price. Tens of millions of people cannot afford basic staples, limiting their spending. Families have been cutting back on meat, medicine, and clothing.

Citizens are complaining about their income shrinking. More middle-class Egyptians have turned to charities for support.

In an opinion piece for Middle East Eye, former investment minister Yehia Hamed cites that nearly 70% of Egyptians believe the government is “doing too little to meet people’s need for an acceptable standard of living.”

How is the government responding

According to the World Bank, the government announced various measures to help alleviate the impact of higher prices on the vulnerable. These measures include revising the minimum wage, delaying adjustments to electricity prices, and extending existing food subsidies and cash transfers. The government has also opened outlets where food is sold at lower prices.

But conditions are still problematic. Poverty is elevated in Egypt: roughly 1 in 3 Egyptians live below the poverty line, according to official figures as of 2020.

What analysts say

The immediate outlook for the Egyptian pound is more challenging, says S&P Global. Experts predict that, over the next 3 to 12 months, the Egyptian pound will trade at 32 to 35 pounds against the dollar.

Analysts also predict that inflation will continue to rise in the short term. The World Bank (WB) forecasts Egypt’s inflation to remain double-digit until the fiscal year ends in June 2023. WB also notes that economic activity and real incomes are expected to be adversely impacted.

What our Market Monitor indicates

Egypt has been on our Market Monitor report since its first publication in mid-June 2022. From mid-July to September, the North African country was at Level Two for two months. Level Two reflects dynamic market conditions where there has been a movement of over 20% in the exchange rate in the past year.

In October, Egypt was dropped from our list of volatile labor markets as the movement in the local exchange rate fell below 10%. Nonetheless, we continued to examine the Egyptian Pound’s exchange rate movement against the US Dollar. Egypt reentered the list in November and remained at Level Two until early January 2023.

In mid-January 2023, Egypt’s level of volatility jumped from Level Two to Level Four. As of the time of writing, Egypt’s exchange rate movement for the past six months is 59.2%, showing sudden and rapidly evolving conditions.

How Birches Group can help

Employers in Egypt should keep a close eye on the local situation, as rapid economic events can drastically impact business continuity.

As inflation rises, organizations must respond proactively to the emerging crisis. In the 15 February edition of our Market Monitor report, we highlight Egypt as a case study of what organizations can do in a turbulent market. Join our mailing list today to learn about our recommendations for special measures in Egypt and other volatile labor markets.

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Crisis in Syria

A Closer Look at the Economic Crisis in Syria

Written by Kai Donesa on . Posted in Uncategorized.

Birches Group monitors labor markets that are making headlines worldwide and wants to share news and updates on the conditions in these markets.

Now approaching its 12th year, the conflict in Syria is one of the most complex geopolitical and humanitarian emergencies of our time. The International Crisis Group describes the situation as a “constellation of overlapping crises” with years of ongoing hostility.

What began as part of the Arab Spring uprisings has developed into an unending civil war involving world powers. Today, the Syrian Arab Republic faces massive economic hardships and limited political progress. 15.3 million Syrians—almost 70% of the population—need humanitarian aid, says the United Nations Office for the Coordination of Humanitarian Affairs (UN OCHA).

A matter of strength and survival

Over a decade of conflict has had disastrous effects on the local economy. 90% of Syrians live below the poverty line, and unemployment among the youth has reached 60%, the UN Development Programme reports.

The socioeconomic impact of the conflict in Syria is growing and ever-deepening. Conditions are deteriorating, and life is more challenging than ever. Syrians are dealing with a multitude of shocks, especially the following:

The Syrian pound depreciates. The Syrian pound’s unprecedented weakness is one of many indicators of a worsening economy. The Syrian pound has lost almost 75% of its value against the United States (US) dollar throughout 2022. The Central Bank reduced the official exchange rate for the second time in four months from 3,015 to 4,522 Syrian pounds for one US dollar. The rate in the parallel market, which is used for most local economic activity, is much higher at around 6,500 Syrian pounds.

Basic commodity prices skyrocket. The depreciation of the Syrian pound has led to rampant inflation, eroding real wages. According to Euro-Med Monitor, necessities are unaffordable, with prices increasing eightfold in the past two years. The Syrian regime has also led an austerity campaign, pulling subsidies for essential goods and services. And yet the income of most families has not increased.

A fuel and electricity crisis hits Syria. A longstanding agreement with Iran has faltered as shipments have stalled. The Wall Street Journal reports that Iran has restricted its monthly oil supply to Syria due to price increases and high demand in winter. This recent development has crippling effects. Since December, a severe fuel crisis has affected almost every sector in Syria. Three-quarters of Syrian households have less than eight hours of electricity every day. The power outages have driven many to rely on candles to light their homes. People burn shoes, clothes, trash, tires, and even pistachio shells for heat. The government has cut its work week to four days to save on energy costs, and working overtime has been banned.

Syria’s economy may have hit its lowest point since the start of the civil war in March 2011. Associated Press reports that, since wages don’t come close to meeting the cost of living, most Syrians live on remittances, multiple jobs, and humanitarian aid. The Center for Disaster Philanthropy also notes that the situation has forced people into survival strategies, such as eating less and selling fuel aid to buy food.

Without a political solution to the conflict, the economic crisis in Syria is expected to continue, and analysts expect hyperinflation to begin this 2023. The situation is still bleak as the country goes deeper into the crisis.

What our Market Monitor shows

Since we first published the Market Monitor report in mid-June 2022, Syria has been on Level One in the first five months of our monitoring. Level One reflects standard market conditions, with a 0 to 20% movement in the local exchange rate over the past 12 months.

But in our November and December 2022 reports, Syria was excluded from our list of volatile markets. During this time, the movement in the local exchange rate fell below 10%. By early January 2023, the exchange rate had not significantly moved in the last two months.

Syria reentered our list at Level Four in our latest (mid-January 2023) report. This abrupt level increase shows a sudden and unexpected socioeconomic event and a local currency devaluation of 50% or more in the past six months.

How Birches Group can help

Policies and procedures for keeping pay programs functioning in markets like Syria are critical. Develop a Special Measures Policy with triggers and immediate responses for supporting staff. Also, decide how your organization plans to carry out its next steps. Employees need to know they can rely on their employer to help them during times of crisis.

Birches Group can help your organization design responses to recent developments in Syria. We are experts in developing Special Measures Policies for organizations across sectors, including nonprofits and leading multinational companies. Get in touch with our consultants today to learn how we can create a Special Measures Policy for you.

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