The decline of the Egyptian pound...no recovery on the horizon

Highlights: The exchange rate of the Egyptian pound against the dollar continued to fall to record levels in the parallel market. Since the beginning of the year, the pound has declined on the black market - the actual market for daily transactions - by about 19%. Market traders told Al Jazeera Net that the dollar jumped from 53 pounds to 63 pounds on average, in the middle of this week. The local currency did not receive any positive boost from the presence of the International Monetary Fund mission in Cairo to discuss the Egyptian reform program.

The exchange rate of the Egyptian pound against the dollar continued to fall to record levels in the parallel market, but at a faster pace during the past few days, raising questions about the reasons for the deterioration of its value and the effects of this on the consumer and the merchant.

Egypt's debts amounted to $165 billion (Reuters)

Cairo -

So what do analysts’ expectations look like about the future of the pound?

The local currency did not receive any positive boost from the presence of the International Monetary Fund mission in Cairo to discuss the first and second review of the Egyptian reform program supported by the Extended Fund Facility and to obtain additional financing to ease the pressures associated with the Israeli war on the Gaza Strip on Egypt.

Since the beginning of the year, the pound has declined on the black market - the actual market for daily transactions - by about 19%, and market traders told Al Jazeera Net that the dollar jumped from 53 pounds to 63 pounds on average, in the middle of this week, with the increase in demand for hard currency.

They pointed out that the rapid decline of the pound since the start of the war in the Gaza Strip on the seventh of last October raised concerns among traders and created a state of turmoil in the markets, as the exchange rate of the dollar against the pound was about 38 pounds.

No recovery for the pound

The price of the dollar in the parallel market seems very far from the Egyptian government’s estimates of 33.45 pounds in 2024, 35.5 pounds in 2025, then 37.12 pounds in 2026, and 38.45 pounds in 2027, reaching 39.61 pounds in 2028, but these estimates It indicates that there is no recovery for the pound on the horizon.

Thus, the gap between the official and parallel prices widened to 100%, as the US dollar trades at 63 pounds on the black market compared to 31 pounds in local banks, without change since last March.

This decline is an extension of the series of decline that began since the liberalization of the pound’s exchange rate in November 2016 to meet the conditions of the International Monetary Fund.

The dollar rose from the level of 8.8 pounds to the level of 19 pounds, then its price ranged between 18 and 15.6 pounds in the period from 2017 until February 2022.

High cost cycle

This rapid and sharp decline in the value of the pound was translated into Egyptian markets just as quickly by a rise in the prices of various types of goods and at a higher rate than the value of the decline, due to the state of turmoil resulting from such movements, which constitutes a burden on consumers and merchants.

Explaining the effects of the decline in the value of the pound on the markets, Ahmed Shiha, a member of the Importers Division of the Federation of Egyptian Chambers of Commerce, says, “Any decrease in the pound and an increase in the dollar raises prices, because it increases the cost of the product, because the majority of industry and production components are imported from abroad, and thus the cost is charged to final consumer.

He explained in his speech to Al Jazeera Net that merchants and importers are suffering - on the other hand - a decline in buying and selling activity, and a lack of stock of goods and merchandise due to restrictions imposed on imports against the backdrop of a shortage of foreign currency, while some merchants resort to compensating for the decline in profits and sales by increasing the prices of the goods.

Shiha expressed his belief that the exchange rate of the dollar against the pound is exaggerated, and this situation is exceptional as a result of speculation in the market on the dollar, which has turned into a trade and not a cash payment paper for the value of goods, and thus this sends negative messages to foreign investors, harms real investment opportunities, and negatively affects the Egyptian economy.

Egypt's debts and financing needs

Egypt's external debt rose to about $164.52 billion by the end of September 2023, equivalent to about 40% of the country's domestic product, and five times the Central Bank's cash reserve of $35.2 billion.

The Egyptian Ministry of Finance expects the state's general budget deficit to rise to 7.5% during the current fiscal year.

The budget deficit jumped during the first 5 months of the current fiscal year by 92% to 5.51%, compared to 3.37% during the corresponding period of the last fiscal year.

The Egyptian government estimates the size of the financing gap for the current fiscal year 2023-2024 at between 6 and 8 billion dollars, and Finance Minister Mohamed Maait indicated that it will be filled by issuing international bonds and financing from banks with guarantees.

The size of Egypt's financing needs is about 2.14 trillion pounds ($69.26 billion) in the 2023-2024 budget, an increase of about 27% compared to last year, and it will be financed through treasury bills and bonds (short-term borrowing).

The gap between the official and parallel prices has widened to 100%, with the US dollar trading at 63 pounds on the black market compared to 31 pounds in local banks, without change since last March.

The pressing and difficult pressures on the Egyptian economy prompted Moody's, the credit rating agency, to change its future outlook for Egypt from "stable" to "negative" and to fix the sovereign credit rating at "Caa1" (Caa1).

In its first comment, the Ministry of Finance confirmed, in a statement, that “the government is working to manage macroeconomic risks with flexibility to contain successive external shocks and the negative effects resulting from geopolitical tensions affecting economic activity.”

The statement downplayed the impact of the negative outlook on the Egyptian economy and stated that “the IPO program enhances Egypt’s ability to meet financing needs during the next two years, contributes to attracting more investment flows, and reducing the need for external financing.”

Economic repercussions

For her part, Sahar El-Damaty, a banking and economic expert and former Vice President of the Bank of Egypt, attributed the deterioration in the value of the pound to several reasons, including:

Decline in remittances from Egyptians abroad
The war in Gaza affected revenues from the Suez Canal and tourism, which opened the door to speculation in hard currency.

She added, in statements to Al Jazeera Net, that the currency shortage crisis resulting from the lack of dollar revenues and the increase in the size of the financing gap has put the Egyptian economy under severe pressure that will be translated into a decline in growth and a reduction in Egypt’s credit rating by all credit rating institutions, which led to its recent exit from the index. J.P. Morgan's government bonds for emerging markets, and thus affects the volume of foreign investment.

El-Damaty called for exploiting the available alternatives in order to relieve pressure on the pound and reduce demand for the dollar by:

Benefiting from its membership in the BRICS economic group and trading in the local currencies of those countries.
Expanding the local currency swap agreement with countries.

The decline of the Egyptian pound heralds a rise in the prices of goods and services (Al Jazeera)

The future of the pound

Regarding the future of the pound against foreign currencies, Egyptian-American economist and businessman Mohamed Rizk expected that “the pound will witness further decline during the current fiscal year, which the government described as the most difficult.”

He told Al Jazeera Net, "In light of the uncertainty, the year may extend to two years and three years, and perhaps until 2030, to get out of the bottleneck, according to the Prime Minister's own statements."

Rizk stressed that the chances of doubling the International Monetary Fund loan to Egypt will not be a permanent or fundamental solution, and its effect will end with the loan being spent on items that are difficult to count, most notably interest and installments of the debt and deficit.

The economic crisis - according to Rizk - lies in excessive borrowing, an increase in the volume of debt over the volume of production (export), and the expansion of infrastructure projects. It is not a crisis that was born today, but rather a complex crisis that began more than 10 years ago, and the snowball had to grow due to a series of... Wrong monetary and financial policies, as he put it.

About 70% of Egypt's debt goes to service development projects, according to statements by the head of the Planning and Budget Committee of the Egyptian House of Representatives, Fakhri al-Feki, pointing out that Egypt's hard currency income is $10 billion annually.

Al-Fiqi explained, in televised statements, that Egypt’s debts amounted to about $29 billion during the current fiscal year 2023-2024.

Source: Al Jazeera