Egypt is currently experiencing mounting pressure to further devalue its currency, as the Egyptian pound continues to lose ground on the black market, despite being halved in value over the past year. This is a sign that the official devaluation of the currency may not have been sufficient, and that the central bank may need to let it slide further.
In October of last year, the central bank pledged to allow supply and demand to determine exchange rates. However, it has so far managed the currency in a tight band that has remained virtually unchanged, while the pound has continued to slide to between 35 and 36 in the black market. The renewed pressure on the pound has prompted speculation that the central bank will need to act again, possibly as soon as Thursday, when its monetary policy committee meets to decide overnight interest rates.
Egypt has sharply devalued the currency three times since Russia’s invasion of Ukraine in February 2022 exposed vulnerabilities in the country’s finances. But with each devaluation, the central bank aimed to keep the currency steady afterwards, only for the black market and non-deliverable forwards to quickly push beyond the new rate.
With 12-month NDF rates now over 40 per dollar, another large-scale pound devaluation was just a matter of time, according to Gergely Urmossy at Societe Generale. He stated that “no time like the present to align foreign exchange rates with fundamentals,” and that the March 30 policy announcement was “one of the most anticipated events in the African Frontier space.”
The weakening currency and soaring inflation, which hit a five-and-a-half-year high of 31.9% in February, are also putting more pressure on the central bank to raise rates, even if it adds to the costs of servicing climbing government debt. Among Egypt’s heavy foreign debt liabilities are $3.5 billion in repayments for previous IMF programmes coming due by the end of this year.
Moreover, the black market shows that the hard currency shortage that has plagued Egypt for more than a year persists. According to Farouk Soussa of Goldman Sachs, “demand for foreign exchange continues to outstrip supply, providing the conditions for the parallel market to grow.” He added that “Egypt’s options have narrowed to a simple choice: either improve the foreign exchange supply picture through asset sales and reforms, or bring down demand for hard currency through further painful adjustment.”
Such an adjustment would most likely entail more pound weakness, higher interest rates, higher inflation, and a lower standard of living for the average Egyptian. Egypt aimed to avoid such an adjustment when it announced an ambitious plan for state asset sales a year ago. However, the programme has stalled, with no major sales since Egypt agreed on a $3 billion financial support package with the International Monetary Fund in October. As part of that agreement, Cairo also promised “a durable shift to a flexible exchange rate” that has yet to materialise.
A weaker and floating currency would lessen the drain on dollars by discouraging imports, while increasing dollar transfers by Egyptians working abroad and further boosting tourism, analysts say. For now, Egyptians abroad fear the pound will weaken further, so they either hold onto their earnings or have been using black market traders to repatriate funds, according to bankers. Investors, in the meantime, have shied away from Egyptian treasuries and Eurobonds, leaving the government perilously low on foreign exchange, with billions of dollars worth of imports backlogged at ports for lack of foreign currency to clear them. Foreign currency has all but dried up on the interbank market, with most banks forced to rely on clients’ pound purchases or on remittances from Egyptians working abroad, bankers say.
According to Monica Malik of ADCB, “another devaluation is widely expected, but by itself, we do not see the Egyptian economy has been struggling with a foreign currency shortage for more than a year now, and despite the central bank’s efforts to manage the currency, the pressure on the Egyptian pound continues to mount. The recent devaluation of the Egyptian pound on the black market has led to speculation that the central bank may have to devalue the currency even further.
The central bank has been managing the currency within a tight band that has remained almost unchanged at around 30.80/90 to the dollar for the last three weeks. However, the black market rate for the Egyptian pound has slid to between 35 and 36, prompting renewed pressure on the pound and speculation that the central bank may have to act again, possibly at its monetary policy committee meeting on Thursday.
Despite having sharply devalued the currency three times since Russia’s invasion of Ukraine in February 2022, the central bank aimed to keep the currency steady after each devaluation, only for the black market to quickly push beyond the new rate. As a result, with 12-month non-deliverable forward (NDF) rates now over 40 per dollar, another large-scale pound devaluation was just a matter of time.
Gergely Urmossy at Societe Generale believes that there is no better time than the present to align foreign exchange rates with fundamentals, adding that the March 30 policy announcement was “one of the most anticipated events in the African Frontier space.” However, another devaluation would most likely lead to more pound weakness, higher interest rates, higher inflation, and a lower standard of living for the average Egyptian.
Egypt has been facing heavy foreign debt liabilities, with $3.5 billion in repayments for previous IMF programmes coming due by the end of this year. The weakening currency and soaring inflation have put more pressure on the central bank to raise rates, even if it adds to the costs of servicing climbing government debt.
Egypt had hoped to avoid a painful adjustment when it announced an ambitious plan for state asset sales a year ago, but the program has stalled, with no major sales since Egypt agreed on a $3 billion financial support package with the International Monetary Fund in October. Cairo also promised “a durable shift to a flexible exchange rate” as part of that agreement, which has yet to materialize.
A weaker and floating currency would lessen the drain on dollars by discouraging imports, while increasing dollar transfers by Egyptians working abroad and further boosting tourism. However, for now, Egyptians abroad are fearful that the pound will weaken even further, so they either hold onto their earnings or have been using black market traders to repatriate funds. Investors have also shied away from Egyptian treasuries and Eurobonds, leaving the government perilously low on foreign exchange, with billions of dollars worth of imports backlogged at ports for lack of foreign currency to clear them.