Egypt under more pressure to devalue pound
ACCORDING to Egyptian President Abdel Fattah al-Sisi, the country’s future is at stake.
With the Egyptian pound trading near a record low on the black market, reserves to cover just three months of imports and a widening current account deficit, pressure is mounting on the state to devalue the currency to alleviate a dollar shortage that prompted officials to seek help from the International Monetary Fund (IMF).
Egypt was moving to end the exchange rate problem within “months” as part of its plan to implement economic reforms, said President al-Sisi.
Here are possible scenarios for monetary policy and prospects for stemming the dollar shortage and increasing the stability of the exchange rate:
Egypt may follow Nigeria’s example. Africa’s last big currency devaluation started in June, when policymakers relented to market pressure and ended the naira’s almost 16-month peg to the dollar.
Controls
The currency traded in the black market almost 50 percent below the official exchange rate before controls were lifted and the currency devalued by 30 percent. It has since weakened about 10 percent.
While Nigeria’s strategy has started to bear fruit, overseas investors have been slow to respond and the currency is still trading at about a 20 percent discount in the black market. For Egypt, “going directly into free float is possible, but it’s risky”, said Reham al-Desoki, the senior economist at Arqaam Capital. “It also requires
‘We’ll have managed a float by the end of the year. By that I mean we’re going to see weekly volatility.’
that people have confidence in the system so they would inject their foreign currency holdings in the official channel.”
Egypt could repeat its previous attempt at luring foreign capital in March, when the central bank weakened the pound by the most in 13 years, eased capital controls, increased interest rates and offered foreign buyers of government treasury bills protection against future currency devaluation.
The strategy failed to attract inflows. Foreign holdings of local debt remained near zero, compared with about $10 billion (R136bn) at the end of 2010. “Policymakers would have (to)… get as close as possible to a full float,” said Jason Tuvey, an economist at Capital Economics in London. “Anything less… may not be satisfactory for the IMF and certainly not for investors.”
The move could work if the devaluation was more aggressive and the central bank had more cash on hand to change the perception of the pound being overvalued, said Arqaam’s al-Desoki.
Egypt devalued its currency by about 25 percent in 2003 and implemented a managed float where the central bank allowed the pound to move, but continuously injected dollars into the banking system to maintain some control over its value. The policy held for a decade, during which time Egypt attracted billions of dollars to its debt and equity markets and built a record $36bn of foreign reserves by the end of 2010.
The country is waiting for final IMF approval on standby funds to help backstop the exchange rate. As much as $8bn may come from the IMF and others by October that will allow the central bank to implement a one-off devaluation before letting the interbank market help set the exchange rate, according to Mohamed Abu Basha, an economist at EFG-Hermes Holding.
Hany Genena, the head of research at Beltone Financial who predicted the central bank’s last devaluation in March, agreed. “We’ll have a managed float by the end of the year,” he said. “By that I mean we’re going to see weekly volatility in the Egyptian pound.”
Devaluation
If the past five years of tight currency control are any indication, Egypt will probably only weaken its currency in incremental amounts over the foreseeable future, according to Alan Cameron, an economist at Exotix Partners. “There’s still ideological resistance within policy circles to a full-scale liberalisation of the currency regime, with exchange-rate stability seen as a barometer of regime stability.” – Bloomberg