New indications that a flotation of the Egyptian pound is imminent

The Egyptian pound will soon be floated (Adobe)

The flotation of the Egyptian pound seems imminent highlighted by the likely issuance of new US dollar certificates by Egyptian banks, along with an increase in hard currency earnings, explains Ahmad Abdel-Rahman.

Current data indicates that a flotation of the Egyptian pound in September or October is likely. Moreover, it seems likely that Egyptian banks will issue new dollar certificates which will have an annual return of seven per cent. This is in addition to the increase in the proceeds of the government's public offering programme. Mostafa Madbouly, Prime Minister, announced that the Egyptian offerings programme succeeded in obtaining USD1.9 billion as of last June 30.These are strong indicators that a flotation of the Egyptian pound is likely and reinforces the trend that a new devaluation of the Egyptian pound against the dollar is imminent.

Informed sources said that the dollar proceeds from the Egyptian government that it obtained over the last few months (as a result of its tight control over imports and the growth of tourism and Suez Canal revenues) has reinforced the necessity to implement one of the most important requirements of the International Monetary Fund (IMF) - that is to ensure that a flexible exchange rate between the Egyptian pound and the US dollar is maintained.

In a recent report, the IMF expected economic growth in Egypt would decline to 3.7 per cent this year from 6.6 per cent in 2022, a forecast that it had predicted last April.

It expected the economy to grow by 4.1 per cent in 2024, down from five per cent in its forecast issued last April. The upswing is due to poor exchange rate flexibility, which has led to a shortage of hard currency in the foreign exchange market. This has affected the movement of imports and discouraged investor confidence, according to the deputy director of the Research Department at the IMF, Petya Cova Brooks.

The IMF also expects inflation to rise to 32 per cent in 2024, compared with average inflation of 24.4 per cent this year. Last April, it expected average inflation would reach 21.6 per cent this year and decline to18 per cent in 2024.

In June, inflation accelerated to an all-time high as food prices continued to rise on the back of a series of pound devaluations and rising seasonal demand. The general annual inflation rate in Egyptian cities jumped to 35.7 per cent in that month.

Brooks attributed these changes mostly to the depreciation of the local currency. This supports recommendations by the IMF that the Egyptian government adopt policies that restore macroeconomic balance and control inflation. The IMF has also advocated that Egypt adopt a more flexible exchange policy.

Issuance of dollar certificates with a return of 7 percent

Banque Misr and the National Bank of Egypt have also began issuing two new savings certificates in dollars, as part of their efforts to enhance hard currency reserves. The two banks announced the issuance of two savings certificates in dollars for three years: the first with a return paid in advance in pounds equivalent to 27 per cent of the deposit amount, and the second with an annual return of seven per cent paid every three months in dollars.

This step is an attempt to bring more foreign currency into the banking system, as the new savings certificates are designed to attract foreign currency, especially from remittances, which are finally declining. The National Bank of Egypt does not rule out attracting more than four billion dollars of new foreign currencies through the new certificates.

At the same time, remittances from Egyptians abroad are declining despite the booming economies of the Gulf States, which indicates that many Egyptians working abroad are sending money through informal channels away from the banking system.

Egypt has long been suffering from a hard currency shortage, which has been exacerbated by the outbreak of the Ukrainian war and the rise in interest rates. The local currency has lost about half of its value against the dollar since March 2022. This has led to the growth of the black market, which has compounded the crisis and put more pressure on the banking system, especially in regard to providing cash liquidity for hard currency.