[Economics] The biggest decline in the history of the Egyptian pound

[Guest High King Eslam]

The Egyptian pound fell against the dollar again to a new record low, following a third partial flotation allowed by the Central Bank today, Wednesday, in an attempt to get out of the biggest crisis facing the Egyptian currency in more than five years.

Bloomberg agency said that the pound declined by 6.6%, to exceed its price of 26.50 pounds per dollar, in foreign market transactions (outside Egypt), while the price of the dollar in the parallel market remained higher than that.

Egypt allowed its currency to weaken twice in 2022, and finally reached an agreement to obtain a $ 3 billion loan from the International Monetary Fund, after it pledged in October to adopt a permanently flexible exchange rate policy, in the wake of the flight of tens of billions of dollars from Hot money early last year.

The economic repercussions of Russia's invasion of Ukraine exacerbated the currency crisis in the country, and the inflation rate rose to its highest level in more than five years, due to Egypt's reliance on imports to provide the necessary wheat to feed more than one hundred million citizens.

The two largest government banks in Egypt anticipated the movement of the currency price on Wednesday by announcing the issuance of certificates of deposit for one year at an interest rate of 25%, in what Bloomberg considered as an attempt to encourage savers to abandon the dollar, and also to contain inflation by absorbing excess liquidity.

Although he expects the recent devaluation to cause inflation in Egypt to rise to a level ranging between 23%-25%, and also to raise the cost of borrowing for the Egyptian government, Allen Sandeep, research officer at Naeem Holding Company, said: “It gives a lot of insight in terms of Foreign currency liquidity in the country during the coming period.

Bloomberg indicated that the pound’s decline came at a time when the largest Arab country in terms of population is struggling to liquidate nearly $ 5 billion in imports accumulated in the ports, due to the request for a letter of credit that has now been canceled, explaining that this rule was imposed several months ago because of scarcity of foreign currency.

It does not seem that the price of the Egyptian pound has already reached the bottom, as bankers confirmed that the Central Bank stopped the rise of the dollar at the level of 26.50 pounds, “but the demand for the dollar is still strong.”

In an exclusive interview with Al-Araby Al-Jadeed, an official in charge of currency exchange operations in an Egyptian bank expected the dollar to rise again in tomorrow’s trading (Thursday), perhaps to the range of 27-27.50, despite the central bank’s intervention in the market today by selling not small quantities.

He explained: “The Central Bank sold to banks today, as it sold in the previous flotation, and we hope that the high interest rates on the Egyptian pound, whether in savings certificates or debt instruments whose return will certainly rise, will attract large sales of foreign currency, to benefit from the high return of the Egyptian pound, which is the factor.” The only one currently who can stop the deterioration of the pound.

And before Wednesday, the return on Egyptian treasury bills recorded 19.20%, and no transactions took place after the flotation, according to one of the fund managers operating in Egypt.

“We will have to wait to see how much foreign currency liquidity will be available, and the exchange rate at which all pending import orders can be met will be pivotal,” Muhammad Abu Basha, a macroeconomic research officer at the investment bank EFG Hermes, told Bloomberg.

Egypt's allies in the Gulf have pledged more than $20 billion in deposits and investments to help a country they see as vital to the region's security and stability. The depreciation of the pound came after a sharp rise in interest rates at the end of last year and what government officials described as progress in removing the crisis of import backlogs at its ports.

According to analysts, the recent flotation is not expected to bear fruit without the Central Bank having enough foreign currency to meet pending purchase orders, in order to eliminate the parallel market.

Foreign derivatives markets, including NDF operations, which the new governor of the Central Bank, Hassan Abdullah, allowed to use in Egyptian banks, showed that dealers expected a further decline of the Egyptian currency, to exceed 32 pounds to the dollar, during the next twelve months.

The Financial Times quoted the London-based think tank Capital Economics as saying: “Concerns remained about the Egyptian authorities' commitment to a flexible exchange rate, as they pledged to the fund, but developments over the past week indicate that they are moving in the right direction.”

Source: Al-Arabi Al-Jed

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