CAIRO - 22 May 2023: unlike the international expectations of Egyptian pound devaluation as a step forward to boosting the economic situation after the economy being affected by the global circumstances, Citigroup anticipated that the Central Bank of Egypt (CBE) will hold any move on its currency until the end of current fiscal year, which ends on June 30.
Citigroup clarified that the CBE would freeze any movement of the pound not to derail the government's target of a 6.5 percent budget deficit and not to negatively affect the gross domestic product (GDP).
According to the Citigroup report which is cited by Bloomberg, the CBE will also probably wait for “bumper tourism” revenues of about $14 billion to filter through the economy before deciding on the need for another pound recalibration.
The Egyptian pound, which recorded stable records at the banks during the last period, witnessed a surge in the black market in a step that caused a delay in the International Monetary Fund (IMF) review of Egypt receiving the second tranche of the $3 billion loan agreement. In addition, investors questioned the state’s flexible currency regime. As a result, Gulf countries asked for a liberalized currency before investing in the Egyptian public offering program, which could provide Egypt with about $2 billion, according to official estimations.
As part of a broader program to reform the economy and secure foreign currency, Egypt has revived a plan to sell stakes in state-run companies, including two of the military. The program witnessed the sale of a 9.5 percent stake in the state-owned Telecom Egypt LE 3.75 billion ($122 million) and a 0.5 percent stake is being offered to current employees. This came after the UAE’s National Paints acquired 81 percent of Egypt’s state-owned Paint and Chemicals Industries (PACHIN), purchasing a total of 19.358 million of the company’s shares for LE 770.4 million (about $25 million).
For his part, Director of the Middle East and Central Asia Department at the International Monetary Fund (IMF), Jihad Azour, said that Egypt is serious about implementing a flexible exchange rate system.
“Egypt is working to restore investor confidence in an economy that was damaged by the repercussions of the Russian invasion of Ukraine,” according to Azour’s televised statements.
The Citigroup report gave away a space for asking what would happen if Egypt adopted a non-devalued currency strategy for around 45 days and whether it could stand this step economically.
What if Egypt won’t devalue its currency in the short term?
Capital Economics stated that authorities need to act soon to arrest the current situation. There have been positive moves in terms of privatizations and fiscal policy recently. But, more than anything, the pound needs to be allowed to move more in line with market forces.
“The longer that officials hold onto the currency, the more difficult it will be to get foreign investors (and the IMF) back onside and the narrower the path out of the current crisis will become,” it said in a report, elaborating that time is of the essence; failure to shift soon will raise the threat of a more disorderly devaluation of the pound, higher inflation and interest rates, and a sovereign default.
On another hand, Economist, Mohamed Anis, commented that the Egyptian government adopts a plan that doesn't include a currency devaluation in the short term, depending on different source of dollar inflows during the coming period, with an around $5 billion exceptional revenue increase, which is represented in the hike in tourism proceeds from about $10 billion to $14 billion, besides the revenues of the Egyptian expat customs-free car import initiative which amounts to $1 billion, in addition to the expected $2 billion of the offering program.
The customs-free car import initiative, which kicked off late last year, has allowed tens of thousands of Egyptian expats to register to transfer vehicles from abroad to Egypt by purchasing a five-year certificate of deposit (CD) using foreign currency, which is equivalent to the value of the taxes and customs duties on the vehicle. Citizens can then withdraw their deposits after the end of the five-year period but in Egyptian currency.
Anis elaborated that this amount of dollars covers Egypt’s need from the foreign currency if it is only committed to the strategic needs, decreasing the imports as much as possible, controlling the dollar costs that go into the arteries of Egyptian production.
Furthermore, the review of the International Monetary Fund (IMF) of the Egyptian economy is postponed till July, the economist stated.
“This is a situation that allows the postponement of currency movement during the coming 45 days,” Anis said.
According to Anis, the fair value of the exchange rate is LE 30-32 per dollar, which means it’s equivalent to the trade price at banks.
As for the reasons behind the existence of the black market, Anis stated that there is still a gap in the market between supply and demand, which has opened the way for the black market and pushed the price of the dollar to rise. In addition, the high inflation rate has an inevitable reflection on future prices with regard to the exchange rate of the pound. When talking about deliverable contracts after a year, the inflation factor remains a decisive factor in these calculations.
“The decline in the inflation rate during the second half of 2023, as expected, with a flexible exchange rate, will result in a decrease in prices in the black market and the future contracts,” he added, noting that after the issuance of the Citigroup report, the prices of future contracts for 1/2/3 months drop from LE36/37 to LE 32/33.
The above mentioned reasons gave a room to the government plan to be “applicable” until the end of the fiscal year, according to Anis, especially since these resources will cover Egypt’s obligations at this stage, and it is possible later that a small reduction in the Egyptian pound will remain in response to the increased requests, not differences in the fair value.
He added that the subsequent reduction in the exchange rate will fulfill the IMF’s request to adopt a more flexible exchange rate regime and bridge the gap between supply and demand, noting that filling the gap between the supply and demand through direct and indirect investments during the second half of 2023, it could cause a recession in the black market, and prices would equal the fair value.
The effect of the exchange rate on the credit rating
As for Moody’s which placed Egypt on a review for a downgrade, the rating agency said that an inability to arrest a further drawdown in foreign currency liquidity in the monetary system or improve its net foreign reserve position, that could jeopardize IMF financial support would likely lead to a downgrade.
However, Anis believed that the credit rating institutions resorted to place Egypt’s rating on review for downgrade because they see the Egyptian state’s fulfillment of its dollar obligations regarding loan installments is challenging, not because there is no flexible exchange rate, adding that the impact of the exchange rate on the credit rating is indirect.
The economist clarified that the direct impact would be if the state wouldn't be able to meet its debt installments. He added that Egypt was able to meet its obligations by paying about $4.5 billion during the first quarter of 2023 when the deficit was higher than in May and the expected rate in June, which means the state wouldn’t face a problem during the coming period.
As for the main impact of not devalue the currency till the end of fiscal year, Anis said that the main effect would be the continuation of the existence of a parallel market for currency exchange against the dollar in particular, to the extent that there are still dollar flows that bridge the gap between supply and demand through the banking system. When this happens, the black market will disappear as a phenomenon and the differences in prices will disappear.
“We will not be able to reach a healthy equilibrium price unless the supply meets the demand in the Egyptian market,” he stated.
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