Analysts forecasted that the Egyptian pound will be devalued again by the Central Bank of Egypt (CBE) in the upcoming period.
The CBE depreciated the Egyptian pound against the US dollar on 14 March by 112 piasters, bringing the value of the dollar to EGP 8.85. A week later, the CBE slightly devalued the dollar by 7 piasters, to register a value of EGP 8.78 against the pound.
Tamer Youssef, head of the treasury at a foreign bank operating in the Egyptian market, said the predictions prevalent in the local market regarding the possibility of further devaluation of the pound against the dollar are mostly based on reports by foreign and local financial institutions.
He noted that these institutions previously predicted that the CBE will devalue the pound against the dollar by 34%. In March, the CBE devalued the pound by only 14%, so it is expected to make another devaluation of a similar percentage, or even higher.
“The CBE is the only authority capable of determining the timing and percentage of devaluation based on available indicators and foreign currency reserves,” Youssef said.
If the government is moving towards encouraging the flow of foreign investments to the Egyptian market, the CBE will be obliged to further devalue of the pound against the dollar, he said.
Furthermore, it is natural that the value of the local currency reflects the real status of the economy and the state’s foreign exchange reserves.
Youssef said the decline of the country’s foreign exchange resources, especially from tourism, as well as the shortage of foreign currency reserves, have pressured the local currency and led to the devaluation of the pound against the dollar.
However, Youssef ruled out any pressure from the World Bank or the International Monetary Fund (IMF) on the CBE to devalue the pound against the dollar.
He highlighted that the CBE’s decisions in this regard come in coordination with the government, and in the framework of a comprehensive plan to restore confidence in the economy and attract foreign direct and indirect investments.
Youssef added that the CBE adopted a number of steps over the past few months to achieve these goals. They included the devaluation of the pound against the dollar, and eliminating the cap on foreign currency withdrawals and deposits for individuals and importers of commodities. Also among the steps were raising the interest rate on the pound by 1.5%, issuing contracts for foreign investors in debt instruments, and issuing savings certificates in foreign and local currencies with attractive returns to attract the savings of Egyptian expatriates.
According to Youssef, the negative side-effects of the devaluation of the pound have already appeared, as most of the commodities in the market are priced based on forecasting for approximately the next six months, valued at EGP 9.5 and 10 per dollar. Therefore, further devaluation of the pound is not expected to cause further price increases, especially in terms of imported commodities, which depend on the informal market.
He pointed out that the goods which depend on the banks to provide foreign currency may undergo price hikes, the large part of which fall under the commodities subsidised by the government, and therefore will not be majorly affected.
Osama El-Menilawy, the assistant general manager of financial sector at a private bank operating in Egypt, also contended that it is highly expected that the CBE will further slash the value of the pound against the dollar.
He justified that the CBE’s expected step for several reasons, including the stagnation of the country’s economic situation, the shortage of dollar inflows to bridge the large gap between export and import, the decline of tourist arrivals, and the slow process of attracting direct investment.
However, El-Menilawy believes the timing and rate of devaluation cannot be predicted, in light of the gravity and confidentiality of this decision.
El-Menilawy views inflation is the most prominent disadvantage of the devaluation of the pound, noting that it has already become apparent as most importers obtain their required currency from the informal market.
Regarding the benefits of devaluation, he stated that it would lead to a more accurate reflection of the real value of the pound, which will encourage investors to enter the local market without worrying about major changes in the local currency exchange rate.
Banking expert Ezz El-Din Hassanein, the director general of an Arab bank operating in Egypt, said CBE decisions aiming to control the dollar exchange rate have faced major backlash in the market.
He explained that the CBE targeted the standardisation of the dollar value on both the formal and the informal markets, thus raising the dollar value to EGP 8.85, but the dollar jumped to EGP 10 on the informal market. Hassanein cited the shortage of dollar resources in the banking sector, and the provision of fewer dollars for importers and manufacturers.
Hence, he expects that the CBE will further devalue the pound to register EGP 9 against the dollar in the near future, compared to EGP 8.85 currently.
He predicted that the dollar would register EGP 12 on the informal market if the CBE takes the step to devalue the pound, thus recommending that the CBE act contrary to expectations and increase the value of the pound against the dollar.
Hassanein stated that such a step would confuse speculators, projecting that, in such a case, the dollar’s exchange value will decline to EGP 9 in less than a month, on the condition that the CBE injects appropriate dollar liquidity into banks.
He added that such a step requires enough foreign currency resources to pump the required dollar liquidity in the market, which is predicated on the state obtaining its agreed loans from the World Bank, the African Development Bank, and other loans and deposits expected from Arab and foreign institutions.