Will Egypt propose to float the pound after the “Ras El Hekma” deal?

Part of the signing of the Ras Al-Hekma investment deal in Egypt (Egyptian Press)

Cairo

- In the coming days, Egyptians expect news of an increase in the exchange rate of the US dollar in banks, marking a “new float,” as has been the norm in recent years.

The research unit at the American investment bank Morgan Stanley suggested moving the exchange rate to between 40 and 45 pounds against the dollar, from the level of 30.92 pounds, which would be “a good opportunity to settle the accumulation of foreign currencies and narrow the gap between official and parallel market prices,” according to the unit.

This comes after the government announced the “Ras El Hekma” joint investment deal with the UAE, which is expected to generate $35 billion in income for Egypt.

Egypt collected about $5.6 billion between April 2022 and December 2023 from selling stakes in 14 different state-owned companies, according to Morgan Stanley.

The research unit at the American Bank expected that the investment deal in Ras al-Hikma would pave the way for “the long-awaited adjustment in the currency market,” referring to the flotation, which it considered the last major political step to obtain a larger loan from the International Monetary Fund, expected to exceed 10 billion. $ (with additional multilateral financing).

The dollar fell in the parallel market to levels ranging between 47 pounds and a little more than 50 pounds, from levels exceeding 70 pounds during the past month, amid a state of anticipation and transactions mostly by individuals.

Egypt is suffering from a scarcity of dollar resources, which prompted it to resort to the IMF in 2022 to borrow $3 billion according to a 46-month program, but the fund’s reviews (which pave the way for the disbursement of the loan installments) faltered after Egypt refrained from implementing its pledge to move to a flexible exchange rate system and also as a result of slow... Progress in selling government assets, according to Reuters.

The big deal

Last Friday, Mostafa Madbouly, Egyptian Prime Minister, announced the details of the largest foreign direct investment project ever, according to these details:

A tourist real estate project called “New Ras El Hekma” with an area of ​​170.8 million square meters (about 40,600 acres).

The project is expected to generate $35 billion within two months, including $24 billion in direct liquidity, and $11 billion in Emirati deposits that will be transferred into Egyptian pounds in the project.

The project is part of Egypt's urban development plan for the year 2052. There are expectations that the huge city will attract at least 8 million additional tourists to Egypt.

The UAE expects to invest no less than $150 billion throughout the duration of the project’s implementation, with Egypt receiving 35% of the project’s profits.

Egyptian dollar sovereign bonds jumped by more than one cent today, Monday, continuing the rise achieved on Friday after the announcement of joint investment with the UAE.

Tradeweb data showed that dollar-denominated bonds due 2029 achieved the largest gains, rising by up to 1.8 cents to trade at about 85.3 cents, which is their highest level in just over a year.

IMF comment

Jihad Azour, Director of the Middle East, Central Asia and North Africa Department at the International Monetary Fund, said that Ras El Hekma is a “good economic development,” but it is not linked to the Fund’s discussions with Egypt.

He confirmed, in televised statements, that the discussions with Egypt for the first and second review are based on the program developed by the Egyptian government in 2022, and is based on axes related to enhancing economic stability and restoring the movement to economic growth through the role of the private sector and enhancing social protection.

Azour stressed that the flexibility of the local currency exchange rate is fundamental to the Egyptian economy’s reform program to protect it from shocks.

Julie Kozak, spokeswoman for the Fund, said last Thursday that talks with Egypt to strengthen a loan program from the Fund were making “excellent” progress, and that the country needed a “very comprehensive support package” to deal with economic challenges, including the pressures imposed by the war in Gaza.

The financing gap in Egypt for the fiscal year 2023/2024 is about $7 billion, according to the Institute of International Finance.

Rising prices

Sayed Ahmed, an Egyptian citizen, told Al Jazeera Net that he read on social media pages about the rise and fall of the dollar exchange rate, but the prices of commodities, especially food, continue to rise with the approaching month of Ramadan.

Egypt imports the majority of the needs of its citizens, who number more than 105 million people, which means that the need for the dollar does not stop. Government measures have stopped imported goods at the ports due to a decline in the ability to provide the dollar to importers.

The official spokesman for the Presidency of the Council of Ministers, Muhammad Al-Homsani, said yesterday that the Council is working to provide foreign exchange financing for strategic goods and medicines.

He said that a Cabinet meeting - today - found that the total value of food commodities, medicines, and fodder in customs is about 1.3 billion dollars.

What then?

Economist Samir Raouf told Al Jazeera Net that the Ras El Hekma deal could keep the dollar low if the dollar is provided in banks after the exchange rate reduction procedure, expecting food commodity prices to decline in the short term as the government provides liquidity for strategic commodities, while it is likely that Durable goods prices decline in the medium term.

He pointed out that importers obtained current materials at the high price of the US dollar in the past period, so the decline in the exchange rate, whether in the official or parallel market, may not have an immediate impact, especially on durable goods such as appliances and cars.

Regarding the current exchange rates, economist Samir Raouf says that one of the main factors that led to the dollar’s ​​decline is the Chinese holiday season scheduled to end early next month, which will lead to importers returning to demand the dollar to resume import operations.

Raouf expects that the exchange rate of the pound will be reduced to a level of slightly more than 40 pounds at most.

Inflation and stability

Hani Genena, head of the research department at Cairo Financial Holding, said in a comment to Al Jazeera Net that the recent increase in minimum salaries and the expected float will likely raise inflation in the first half of this year.

The level of inflation is expected to increase from its current range from 29% to 30% to between 33% and 35% in the second quarter of the year with an expected rise in the prices of medicines and goods imported from abroad, before price levels begin to decline.

Genena expects inflation rates to decline to 15% over the next year.

It is also likely that the exchange rate of the pound will reach about 50 pounds by the end of the current year, given the return to import rates that constitute many goods.

Source: Al Jazeera + agencies