Is Egypt facing a new devaluation of its currency?

CAIRO -

The Egyptian market is still suffering the consequences of the decision to liberalize the price of the local currency (the pound), which was issued late last year. However, it seems that more suffering awaits the Egyptians. There are expectations of a new depreciation of the pound in the coming days, in light of negative indicators surrounding the country's economy as a whole.

International banks such as Credit Suisse and Societe Generale expected a loss of about 10% of the value of the Egyptian pound before the end of the first quarter of the year, that is, the end of March.

Societe Generale Bank stated - in a research note issued at the end of last February - that the price of 34 pounds against one dollar may be a reality by the end of this month.

Yesterday, Wednesday, the official price of the dollar reached about 30.89 pounds, and the price fluctuated up and down by a few piasters per day. According to Bloomberg, the price of the dollar in the parallel market reached about 33.50 pounds.

Recently, Credit Suisse suggested that the price of the dollar in Egypt would reach 35 pounds, while Bank of America did not specify a specific level for the pound's decline, but at the same time expected it to drop significantly during the coming period.

The non-deliverable futures contracts 12 months ago, on Tuesday, witnessed a rise in the price of the dollar against the local currency, to reach 38 pounds.

These negative expectations for the pound are overshadowed by a tense economic reality, as the level of general inflation reached about 26.5% and core inflation at 31.2%, last January, and the external debt recorded nearly $155 billion by the end of the first quarter of 2022-2023.

Last month, Moody's downgraded Egypt's rating from "B2" (B2) to "B3" (B3) due to the decline in the country's foreign exchange reserves.

Why is the pound falling?

Societe Generale Bank attributed its expectations of the pound's decline to the fact that Egypt needs a cheaper currency than the current level, in light of the high deficit in the current account and the balance of payments, along with the dollar shortage in the market.

On the other hand, Credit Suisse built its weightings towards the Egyptian pound for several reasons, including the lack of clarity in the government companies' offering program on the stock exchange.

Last February, the Egyptian government announced a program to offer 32 government companies on the stock exchange.

This March, Egypt is preparing to review its economic performance by the International Monetary Fund to assess domestic monetary policies, as a step before disbursing the second tranche of the loan that the Fund agreed to grant to Cairo last October.

The liberalization of the Egyptian pound exchange rate is one of the priorities of the financial reform program imposed by the IMF on Egypt as a condition for granting tranches of the $3 billion loan, as well as $6 billion from the Sustainability Fund and international partners.

During a press conference held on Wednesday, Prime Minister Mostafa Madbouly said that the government has taken the decision to be flexible in the exchange rate, and is aware of the steps it is taking in coordination with the Central Bank, explaining the commitment to pay international obligations such as installments or interest on foreign debts.

And he indicated that the government had developed a vision to provide dollar resources over a whole year, adding that the flotation of the pound benefited the industry because it increased the competitiveness of the Egyptian product.

flotation trip

The journey of depreciating the pound against foreign currencies began in November 2016, coinciding with the approval of the International Monetary Fund to grant Egypt a loan of $12 billion, according to certain conditions, including the liberalization of the local currency exchange rate.

And between day and night, the Egyptians had to deal with the reality of losing their currency more than twice its value, as the price of the dollar jumped from 8 pounds to 19 pounds, to settle after about a year at the price of 15 pounds, with a fluctuating increase that does not exceed a few piasters.

In the wake of the outbreak of the Russian-Ukrainian war, the Central Bank of Egypt was forced, last March, to devalue the pound by 15%, bringing the price of the dollar to 18 pounds.

And for the third time, the Central Bank adopted a flexible exchange rate for the pound, so that its price against the dollar became 22 pounds, last October, in conjunction with the International Monetary Fund's announcement of its agreement to grant Cairo a new loan.

A few weeks after that flotation, the official price of the dollar became close to 25 pounds, while in the parallel market the price was more than 35 pounds. Then, a few days after the beginning of the new year, the dollar jumped to equal 30 pounds.

Coin bleeding

Economic expert Abd al-Nabi Abd al-Muttalib predicted a new decline for the pound during the current month, and perhaps another depreciation will occur during the next two months as well.

And he expressed - in statements to Al-Jazeera Net - his hope that the Egyptian monetary policy administration would have the ability to keep the exchange rate of the pound at a level below 35 pounds per dollar.

"What I hope is that the price of the dollar does not reach the point of 35 pounds, because if it reaches it, it will jump directly to the point of 37 pounds by the end of next June, and it may exceed it," Abdel Muttalib continued.

He touched on the reasons for further devaluation of the pound, including Egypt's need for approximately $8.3 billion to pay installments and interest on foreign debts until the end of next June, and the inability of income sources in foreign currencies to provide the required needs, as well as the increased demand for imports. .

The value of Egyptian imports amounted to about $86.6 billion during the period from January to November of last year 2022, compared to $80.7 billion during the same period in 2021, an increase of $5.9 billion, an increase of 7.3%.

Regarding the extent to which the Egyptian market was affected by more floating of the local currency, the economist said that the devaluation of the pound contributes to an increase in the costs of imports, and thus their prices rise, which accordingly reduces the demand for imports, and thus reduces the demand for hard currencies.

"Also, the devaluation of the Egyptian pound may increase the competitiveness of Egyptian exports in the global markets, thus increasing exports and increasing the flow of hard currency," he added.

However, there is a crack that concerns ordinary people - as Abdel Muttalib pointed out - as the suffering of Egyptians will increase as a result of the high prices of commodities, most of which are imported from abroad.

Parallel market recovery

In turn, Professor of Economics at the American University of Auckland, Mustafa Shaheen, said that economic indicators are pushing towards the collapse of the pound, expecting more recovery of the parallel market during the coming period due to the scarcity of the dollar.

Shaheen added - in an interview with Al-Jazeera Net - that it is difficult to predict the level of the pound's decline against the dollar, saying, "It may rise to 40 or 50 pounds, and it may decrease to 25 pounds," stressing that all matters depend on the decisions of government officials.

He explained the need for government spending on priorities only as a serious step to curb the depreciation of the pound, but he does not build hopes on the current government to follow the right path, criticizing the continuation of the implementation of projects that he "promotes as national and is useless while continuing to sell assets, whether bodies Or economic companies that are of paramount national security importance.

The International Monetary Fund believes that the Egyptian government aims to achieve expected revenues of about 2.5 billion dollars from the government asset sale program by the end of next June, with a tendency to sell assets of about 6.7 billion until mid-2028.

What is the solution?

The journalist specialized in economic affairs, Mostafa Abdel Salam, exceeds expectations regarding the exchange rate of the pound, to try to search for effective solutions before the collapse of the Egyptian currency.

In his article entitled "The Truth of the Fourth Floating of the Egyptian Pound," Abdel Salam called on the responsible authorities to take urgent and strict steps to stop what he described as the pound's collapse and put an end to the local currency's decline for the worse.

Among the most prominent of these steps is reducing external borrowing, increasing the state’s dollar resources and efficient use of them, activating strategic sectors such as tourism, exports, expatriate remittances, and direct investment, while addressing the chronic trade balance deficit problem, and stopping allocating resources and dollar loans to finance projects that do not generate returns in foreign exchange and can be Financed in the local currency.

And he added, "It is not acceptable to continue establishing the largest opera house and the largest amusement park in the Middle East, and to construct government headquarters in the new administrative capital with external loans."

The journalist specialized in economic affairs stressed the need to restore confidence among dollar holders and reassure them of their money deposited with banks, especially those who withdrew their dollar savings from banks in light of the spread of rumors about the imminent bankruptcy of the state.