A 30 per cent devaluation of the Egyptian pound seems likely

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There are expectations that the Egyptian pound will be devalued by 30 per cent amid speculation that the IMF will increase its financing during the first quarter of 2024, writes Ahmad Abdel-Rahman.

The Central Bank of Egypt (CBE) could reduce the value of the Egyptian pound by about 30 per cent against the US dollar, according to a recent report by Bloomberg Intelligence. This will coincide with the International Monetary Fund's (IMF) approval to increase its financing to the country to USD3 billion. This was announced in December 2022.

The IMF may allow Egypt to move to a less stringent foreign exchange regime in stages. Non-deliverable futures contracts (of the Egyptian pound against the US dollar) indicate a devaluation of the pound to 39.7 against the dollar in three months, and 48.9 in 12 months.

According to Bloomberg Intelligence estimates, Egypt's financing needs may exceed USD6 billion in the current fiscal year 2023-2024, if they are covered by an official aid package led by the IMF. At the same time, the Capital Economics Research Foundation predicts that a devaluation of the Egyptian pound would be likely and would be accompanied by a significant rise in interest rates, expected to increase by 300 basis points to 22.25 per cent.

A breakthrough in the IMF negotiations

Cairo signed a financing programme with the IMF at the end of 2022 but it faltered due to the failure of the CBE to implement the IMF's requirements, most notably the commitment to liberalise the exchange market and leave the Egyptian pound to the forces of supply and demand. The IMF's communications director, Julie Kozack, said that the availability of a larger financing package from the IMF is crucial to the success of Egypt's loan programme, which amounts to $3 billion currently. However, she did not reveal any details regarding the size of the larger package or its timetable.

"Egypt is already facing a complex and difficult macroeconomic situation," she said. "This situation has become even more complex due to the conflict between Israel and Gaza." Kozack noted the war's impact on "areas that support the current account" such as tourism and the Red Sea.

The IMF is in discussions with the Egyptian authorities regarding the policy requirements necessary for it to sign on to the first and second reviews of the loan programme. These requirements include tightening fiscal and monetary policy and moving towards a flexible exchange rate, according to Kozack.

Egypt is anticipating the expansion of the IMF loan after the IMF's director general, Kristalina Georgieva, said last November that it is "seriously considering" increasing its USD3 billion loan programme provided to Egypt, given the economic difficulties the country is facing due to the Israeli war on Gaza.

This is confirmed by Bloomberg, which has said that the Egyptian government is holding talks with the IMF regarding increasing the value of the loan to more than USD5 billion. Local reports suggest that the loan could be increased to between $10 billion and $12 billion.

The sixth social package in three years

As a result of the crisis caused by the scarcity of the dollar, JP Morgan said it would exclude Egypt from its emerging market government bond index. The index, which will start at the end of February, is designed to track the performance of government bonds in local currencies issued by governments in emerging markets. The IMF will exclude Egypt from its Domestic Emerging Markets Index, a set of indices that track the total returns of local currency money market instruments in emerging markets, as of March 29 due to the country's ongoing shortage of foreign exchange.

As inflation rates and prices continue to rise in the country, the Egyptian Ministry of Finance is preparing a social protection package. This includes increasing wages and pensions and raising the tax exemption limit and will accord with presidential mandates.

A recent statement, the Egyptian Minister of Finance, Mohamed Maait, said that when the new IMF package is approved, it would be the sixth package in about three years. Egypt raised the minimum wage five times, doubling it to 4,000 EGP (USD129.6 per month), compared to EGP2,000 (USD 64.8 per month) in March 2019. The Ministry of Finance also raised the tax exemption limit three times from EGP24,000 (USD778) to EGP36,000 (USD1167), then finally to EGP45,000 (USD1458). This move is aimed at mitigating the effects of the global economic crisis and its repercussions on citizens.

At the beginning of this year, the Egyptian government raised the prices of several administratively specified commodities, including electricity, metro tickets, and fixed and mobile internet. Maait said that his ministry will present Egypt's tax policy strategy 2024-2030 to community dialogue next month, and will present a new income law for approval, before taking the necessary measures by referring it to the Council of Ministers and then the House of Representatives.