Egyptian pound devaluation could improve trade competitiveness; limits parallel market

Amal Mahmoud, Sunday 5 Jul 2015

Egypt's Central Bank let the Egyptian pound slip further Sunday at auction, in a continuance of a policy of controlled devaluation

A man stands outside an exchange bureau in Cairo December 30, 2012. (Photo: Reuters)

The Central Bank of Egypt (CBE) allowed the pound to weaken at its official currency auction Sunday, a move that could protect the country’s trade competitiveness and squeeze the parallel currency market, according to analysts.

The CBE sold $39.6 million at the cut-off rate of 7.73 per dollar to banks at its auction today, the second auction in July, sending the official rate to clients to 7.83 per dollar.

The CBE had let the pound depreciate Thursday to 7.6301 from 7.5301 — a rate at which it had held for five months.

Since December 2012, the CBE has managed a gradual devaluation of the pound through currency auctions to account for negative economic conditions in the country since the popular uprising in 2011.

The Egyptian pound (EGP) has lost to date nearly 32 percent of its value since 2011.

Yet, the domestic currency remains overvalued, three analysts who spoke to Ahram Online noted.

An overvalued/appreciating currency makes imports cheaper and exports more expensive, harming the competitiveness of the domestic producers and exporters.

Egypt's imports from the Eurozone and Turkey constitute nearly half of its total imports, Hany Genena, economist at Pharos Holding, told Ahram Online.

The Euro (EUR) and the Turkish lira (TRY), the currencies of these two trading partners, have depreciated due to quantitative easing and the Greek crisis in the Eurozone and political uncertainty in Turkey.

Along with an overvalued EGP, "The EGP has already appreciated 17 percent versus the EUR and TRY since mid-2014," Genena noted.

Egypt's merchandise imports rose by 14.7 percent, to $32.4 billion, while merchandise exports fell by seven percent to around $12.2 billion in the first half of financial year 2014/15, rendering a 33.6 percent rise in the trade deficit, according to CBE figures.

Another round of devaluation will "protect Egyptian producers — and the balance of payments — from severe competition," Genena added.

However, competitiveness gains from a weaker currency may be limited since "Export growth is declining due to energy disruptions, supply bottlenecks, lack of US dollars necessary to import production components, and regional instability," according to Hany Farahat, economist at CI Capital.

"The most likely and immediate benefit from devaluation is to encourage US dollar black market traders to offload their hoarded US dollar inventory to local banks, a needed step to increase dollar liquidity in the system," Farahat told Ahram Online.

The black market in currency had flourished in the past few years as a slump in tourism and investment since the overthrow of Hosni Mubarak in 2011 limited supply of foreign currency. This pushed the CBE to allow a gradual devaluation of the pound through regular FX auctions since December 2012, in addition to limiting cash deposits in US dollars in Egypt's banks to $10,000 per day and $50,000 per month.

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