Last Update 10:21
Tuesday, 16 July 2019

Favourable economic winds help Egypt as Pound depreciates to court investors

Analysts see the move as an effort to boost foreign reserves, investment and Egypt's competitiveness in exports markets

Waad Ahmed , Tuesday 20 Jan 2015
Egypt
Egypt's pound notes are pictured in stacks of 100 as employees count money at an exchange office in downtown Cairo June 5, 2014 (Photo: Reuters)
Share/Bookmark
Views: 3485
Share/Bookmark
Views: 3485

Egypt will likely avoid the inflationary implications of a weaker currency as the pound depreciates ahead of a much anticipated investor conference in March, economists said.

The Central Bank of Egypt allowed the pound to depreciate three times this week, the first such move for six months. The pound reached 7.29 per dollar on Tuesday on the official market, while the black market rate averaged 7.856 per dollar, according to two traders.

Depreciation has long been feared amid concerns it could lead to an uncontrollable rise of prices across the economy, since Egypt is a net importer of goods, but analysts say that those fears are unlikely to be realised in the immediate future.

Favourable circumstances, mainly the fall in oil prices globally, means that the cost of imported goods is dropping, Hany Genena, chief economist at investment bank Pharos Holding said. Oil prices have fallen to $48.99 a barrel on Tuesday for Brent on oversupply and weak demand from Europe and Asia.

Egyptian households have seen their expenses grow after the government partially removed fuel subsidies in July, raising prices at the pump by up to 78 percent – leading to a hike in the general price level in the economy. Inflation spiked to 11.8 percent in October before easing to 10.13 percent in December.

No official comments were announced regarding the change in policy, but analysts see it as an effort to boost foreign reserves, investments and Egypt's competitiveness in exports markets.

Orthodox Economic Policy

The central bank defended the pound against sharp devaluations after the 2011 popular uprising caused investors to flee and tourism revenues to tumble. This has led to the creation of a currency black market. The gap between the official and unofficial exchange rates widened more than 80 percent in 2014.

London-based Capital Economics predicted that the CBE will closely manage further devaluation of the pound through 2015. "We forecast the pound to end this year at 7.50/US$ and fall to 8.00/US$ by end-2016," Jason Tuvey, Middle East economist at Capital Economics, said in a policy note yesterday.

In November, central bank governor Hisham Ramez said he plans to eliminate the currency black market in less than a year. Eliminating the black market is seen as necessary step to encourage investors, especially before March's economic summit which the government banks on to attract at least $10-12 billion worth of investments.

"As preparations are stepped up for March’s investor conference, by loosening their grip on the pound the Egyptian authorities may be signalling a shift towards more orthodox economic policy," Tuvey said.

The CBE also cut key deposit and lending interest rates by half a percent last week to 8.75 percent and 9.75 percent respectively.

Trading with Europe

Letting the pound depreciate would also boost the competitiveness of Egypt's trading with the European Union, its main export destination.

"Since the pound has been pegged to the US dollar, it has strengthened by almost 20% against the euro, a result of the latter’s slide against the dollar," Tuvey said.

The euro reached its weakest level against the dollar since 2003 last week. It is currently traded at 1.1577 per dollar.

Egyptian "policymakers may have anticipated further euro weakness ahead of an expected announcement later this week by the ECB of a full-blown quantitative easing (QE) programme," Tuvey said.

Egypt’s $10.1 billion worth of exports to the EU made up 40 percent of its total exports in 2013/14, according to central bank data.

Reserves

Defending the currency has proved to be a costly affair for Egypt as the central bank burnt through more than $20 billion of foreign reserves doing so since 2011.

Egypt's foreign reserves reached $15.3 billion at the end of 2014, from about $36 billion at the beginning of 2011.

"The Egyptian authorities may have judged that the FX scarcity associated with maintaining an overvalued exchange rate was taking too heavy a toll on the economy," Tuvey said in an emailed answer to questions on Monday.

Short link:

 

Email
 
Name
 
Comment's
Title
 
Comment
Ahram Online welcomes readers' comments on all issues covered by the site, along with any criticisms and/or corrections. Readers are asked to limit their feedback to a maximum of 1000 characters (roughly 200 words). All comments/criticisms will, however, be subject to the following code
  • We will not publish comments which contain rude or abusive language, libelous statements, slander and personal attacks against any person/s.
  • We will not publish comments which contain racist remarks or any kind of racial or religious incitement against any group of people, in Egypt or outside it.
  • We welcome criticism of our reports and articles but we will not publish personal attacks, slander or fabrications directed against our reporters and contributing writers.
  • We reserve the right to correct, when at all possible, obvious errors in spelling and grammar. However, due to time and staffing constraints such corrections will not be made across the board or on a regular basis.
1



Allen Henry
20-01-2015 08:35pm
53-
1+
The Egyptian pound will collapse completely
And the Sissi gang will collapse with it And Egypt will be declared a failed state
Email
 
Name
 
Comment's Title
 
Comment
Latest

© 2010 Ahram Online.