New warnings of imminent losses for the Egyptian pound

The Egyptian currency lost 50 per cent of its value in 2022

The Egyptian currency lost more than 50 per cent of its value in 2022, amid expectations of more pressure. Ahmad Adul-Rahman explains.

A recent report by the bank, Societe Generale (SocGen) has suggested that Egypt could announce a devaluation of the Egyptian pound soon. It predicted a potential cut of 10 per cent. "Egypt will need a cheaper currency given the large current account deficit and dollar shortage," said the bank's strategic analysts. They added that although the pound has lost about 50 per cent of its value against the US dollar over the past year, after devaluing it three times, the currency has not yet reached a balanced short-term exchange rate.

This follows on from the Egyptian government ending the crisis of the build up of goods in the ports and thereby saving about USD18 billion,

Negative interest rates

"The lack of decisive monetary tightening by the Central Bank of Egypt (CBE) raises questions about the credibility of its commitment to implementing its pledge to target inflation. Real interest rates remain negative based on the decisions that have been taken or those that are planning to implement them," analysts from SocGen said. 

Meanwhile, Egypt faces economic distress and its worst foreign liquidity crisis in years. Its credit rating has been downgraded to below investment grade. amid soaring food price inflation in the wake of Covid-19 and Russia's war in Ukraine.

The Egyptian government is working on implementing a three-billion-dollar rescue plan from the International Monetary Fund (IMF), with its financing gap reaching USD17 billion. This puts pressure on the Egyptian pound, which has been the fifth worst performing currency in the world over the past year, according to international reports.

SocGen analysts' added: "The pound will end the current quarter at 34 [pounds] against the US dollar, compared to its current price of 30.62 per dollar." They noted: "With the return of inflows of foreign investment portfolios, the central bank will need to prioritize rebuilding its foreign exchange reserves, which will put additional pressure on the pound."

The black market is nearing collapse

The gap between the official and black-market exchange rates peaked during the last week of 2022, when the dollar-exchange rate outside the official market reached EGP38. However, with the Central Bank of Egypt's (CBE) moves to end the crisis of stockpiled goods, the exchange rate of the dollar collapsed to a level of EGP31, compared to about EGP30.62 in the official market.

Due to the collapse of the demand by importers and importing companies for the black market dollar, a large number of major traders and speculators in the exchange market stopped working. The volume of supply of US dollars also worsened, which has led to a narrowing of the price gap between the official and black markets.

Since last March, the exchange market in Egypt has been witnessing intense moves by the Egyptian government and the CBE, to control the largest crisis in the exchange market since the launch of the economic reform programmes at the beginning of November 2016. However, since December 2022, the government has been able to release goods totalling between USD17 and USD18 billion.

Egypt's indebtedness

Egypt is one of the most indebted countries in the Middle East. Its USD400 billion economy was made worse by the Covid-19 pandemic and the Russian invasion of Ukraine. This is primarily because Egypt is one of the largest importers of wheat in the world. The two conflicting countries are also among the most important sources of tourism to Egypt, The problem is magnified by the fact that Egypt also faces a shortage of foreign currency.

Within the framework of reforming its economy, to enhance its chances of obtaining financial support from international financial institutions, the Egyptian authorities have revived the government-offering programme. This will start with 32 companies. Moreover, Egypt's latest USD3 billion programme with the International Monetary Fund (IMF) which will last for 46 months, includes a commitment to reduce control over state-run companies.

According to data from the CBE, the volume of the country's external debt is about USD155 billion, and Egypt has outstanding debts of about 39 billion in dollars and euros, of which USD1.75 billion is due this year, and USD3 billion is due next year.

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Friday, 02 June 2023