Will the Egyptian Pound Fall Towards the 40 Level Against the Dollar?

The Egyptian pound has fallen again in the past few days on the black market, a sign that the halving of its official value over the past year is still not enough and that the central bank should allow it to fall further.

Despite pledging in October that supply and demand would be the mechanism for determining the exchange rate, the central bank has managed the currency in a narrow range, hovering around 30.80/90 to the dollar three weeks ago, while the pound fell. 35 to 36 in the black market.

The renewed pressure on the pound has fueled speculation that the central bank may need to act again, possibly when the Monetary Policy Committee meets to set overnight rates on Thursday.

Egypt has sharply devalued the pound three times since late February 2022.

But with each devaluation, the central bank tried to keep the pound stable, but the black market and undeliverable forward contracts accelerated the new rate.

Société Générale’s George Yurmushi said a large-scale depreciation of the pound was only a matter of time, as the pound crossed 40 to the dollar on forward contracts that could not be delivered in 12 months.

“Now is not the time to align exchange rates to fundamentals,” Yurmushi added, adding that the policy announcement on March 30 was “one of the most anticipated events in the region” in Africa.

A weak currency and rising inflation, at 31.9 percent in February, increased pressure on the central bank to raise interest rates, even as the cost of servicing government debt increased.

Of Egypt’s huge foreign debt, $3.5 billion is owed to previous IMF programs by the end of the year.

The black market marks a continuation of the severe currency shortage Egypt has been experiencing for more than a year.

“Demand for foreign exchange continues to outstrip supply, providing conditions for growth in the parallel market,” said Goldman Sachs’ Farooq Chose.

He added, “Egypt’s options have been reduced to a simple choice: either improve the foreign exchange supply situation through asset sales and reforms, or reduce demand for the hard currency through more painful measures.”

Such measures include a further depreciation of the pound, higher interest rates, higher inflation and a lower standard of living for the average Egyptian, Suess said.

Egypt announced an ambitious plan to sell state assets a year ago. However, the plan has stalled as Egypt agreed to a $3 billion financial assistance package with the International Monetary Fund in October 2022. The deal involves a move to a flexible exchange rate.

Analysts say the currency’s weakness and its buoyancy will cushion the dollar’s slide by encouraging imports, encouraging dollar remittances and tourism from Egyptians working abroad.

Egyptians abroad are choosing to keep what they earn or use black market traders to send money back to Egypt, bankers say.

“Further demonetisation is widely expected, but that alone is unlikely to bring much-needed capital inflows,” said Abu Dhabi Commercial Bank’s Monica Malik.

“There should be meaningful signs of continued reform to help rebuild investor confidence, in which the pound is truly flexible, monetary policy and the privatization program very tough,” he added. and then breaching that level at the start of 38 against the dollar. (Reuters)