Cairo -
The limits of the flexible exchange rate of the Egyptian pound exceeded all speculations, and it fell below the worst expectations of local and international investment banks, economists and financial analysts, amid a state of confusion and astonishment in the Egyptian markets.
A report by the American Bloomberg Agency - before the decision to float the pound at the end of last October - estimated the Egyptian pound's decline to about 24.60 pounds against the dollar instead of 19.70 pounds, before Egypt completed the International Monetary Fund loan agreement.
However, the pound broke this barrier at the level of local banks and the central bank, and exceeded this number, which seemed far from the expectations of many financial institutions and economists, whose estimates ranged between 22 and 23 pounds per dollar.
As for the parallel market and the gold market, the numbers tell worse than all these expectations.
As the exchange rate of the pound on the black market exceeded 27 pounds per dollar, and in the gold market, the calculation of the dollar exceeded the barrier of 30 pounds.
Two sources in the black market and the gold market told Al-Jazeera Net that no one knows where the price of the dollar will reach against the pound, which has crossed all red lines, price and psychological, which means that there is no bottom for this decline.
They pointed out that 3 factors contributed to increasing pressure on the pound and pushing it beyond expectations and speculation, namely:
Hard currency scarcity in local banks and the central bank.
Poor inflow of funds from abroad.
Speculation on the price of the dollar.
At the end of last month, the Central Bank of Egypt adopted a flexible rate system for exchanging the value of the pound against foreign currencies, based on the mechanism of supply and demand in the market, in conjunction with Egypt reaching an agreement on a new loan with the International Monetary Fund, indicating its intention to issue a new "pound index".
According to the Central Bank, the flexible exchange rate system will reflect the value of the Egyptian pound against other foreign currencies through supply and demand, while giving priority to the central bank's primary goal of achieving price stability.
The Central Bank of Egypt justified the decision by saying that “the global economy faced many shocks and challenges the likes of which it had not seen in years,” referring to “the repercussions of the Corona pandemic and the Russian-Ukrainian war, which caused pressure on the Egyptian economy, as it faced an exit of foreign investors’ capital, as well as of a rise in commodity prices.
It seems that the pound's gains against other foreign currencies such as the euro and the pound sterling - mentioned by the Governor of the Central Bank of Egypt, Hassan Abdullah - have also dissipated, with the local currency continuing to decline against all other currencies, and against gold as well.
Central Bank Governor Hassan Abdullah says in a session of the economic conference that Egypt is not an oil-exporting country to continue linking the pound to the dollar pic.twitter.com/JMkK43ezIv
- Al-Jazeera Egypt (@ AJA_Egypt) October 23, 2022
Risky financial situation
Talk of breaking the barrier of 24.60 pounds to the dollar - which Bloomberg Agency referred to - has become a thing of the past, and the new talk has become a barrier much further at 28 pounds to the dollar, according to a Reuters report.
The agency indicated, in its report, that despite the two major devaluations of the local currency and an agreement on a new bailout package with the International Monetary Fund worth $3 billion, economists believe that the country's financial situation is precarious.
The report indicated that foreign exchange dealers have become convinced that the exchange rate of the pound will reach 28 pounds against the dollar at this time next year, and the Japanese “Nomura” bank placed Egypt - in a recent report - at the top of the list of countries that are highly at risk of a currency crisis. .
Causes of collapse and mechanisms to stop it
In his assessment of the causes of the crisis, economist Nawar Ibrahim said, "Unfortunately, following up on developments in market realities, macroeconomic variables, and economic policy measures indicates a severe deterioration since the initial agreement (letter of intent) was announced at the expert level between Egypt and the Fund."
He added to Al-Jazeera Net that there are developments that would put pressure on the value of the pound to exceed expectations, and he talked about:
The emergence of a black market for foreign currencies.
Speculation on the dollar in Egypt and abroad.
Remittances of Egyptians working abroad declined during the first months of the current fiscal year.
An increase in the current account deficit.
Nawar Ibrahim referred to other factors, such as the deterioration of the overall balances in the state's public finances, with the continued increase in public spending, and financing this by increasing domestic borrowing to unprecedented levels.
He said that it is noticeable that the expansionary fiscal policy is moving in a direction that contradicts the direction of the strict monetary policy, indicating that the government obtains more liquidity to cover its financing needs, while the liquidity available to the private sector is subject to contraction due to the high cost and the central bank's absorption of liquidity from banks in favor of the government. .
The economist believed that the free fall of the value of the pound may stop temporarily, if Egypt obtains the first tranche of the loan before the end of next December, but the basic factors that pressure the value of the pound downward will continue to influence.
The essential solution, according to Nawar Ibrahim, is:
Stop increasing and decreasing public spending.
Ending the mismatch between fiscal and monetary policies.
Re-allocation of resources on sound economic bases.
Increasing public revenues by subjecting all economic entities to law, taxes and fees.
Huge financial burden
Egypt's bloated current account deficit, and what is due for repayment of external debt, amounts to $33.9 billion until mid-2025, leaving the country vulnerable, "and subjecting the country's rating to a downgrade, according to Fitch Ratings.
No country spends more than 41% of government revenue on interest payments, with the exception of Sri Lanka, which has defaulted, and Ghana, which soon will, according to the agency's troubling report.
currency weakening
The founder and head of the investment consulting company “Boise Investments”, Sherif Othman, attributed the pound’s decline at a greater rate than expected to the increase in demand for the dollar, and said: “It is clear until this moment, despite the significant devaluation of the pound, that the demand for the dollar is still more than what is available and supplied, especially with Presence of deferred external liabilities.
He explained, in statements to Al-Jazeera Net, that any dollar that was saved and most of it from hot money is directed to fill late requests for imported goods, knowing that the Central Bank sold large quantities through its banking arms - Al-Ahly and Egypt - in order to fill the deficit centers that they had for more than year despite the losses.
In Othman's belief, this problem will not be solved until imports are halted and pressure groups resisted by major importers, limiting it to necessities and correcting the order of priorities such as providing medicine, food commodities and basic production inputs.
Allowing the pound to decline to these levels means - according to the banking expert - that Egypt is seeking to overcome the currency shortage by devaluing the pound until it reaches a level that foreign investors like, whether in terms of direct or indirect investment, and thus stops the decline of the pound, indicating that Egypt is trying to solve a shortage crisis. The dollar by weakening the currency instead of defaulting.
Egypt topped the list among the 32 emerging markets listed on the Damocles index of the Japanese Nomura Bank, which is an indication of a strong chance that the country will be exposed to an exchange rate crisis in the coming months, according to observers.
The Damocles model is an early warning adopted by Nomura for exchange rate crises in emerging markets. There are key indicators of the index, including foreign currency reserves, short-term external debt, and interest rate.