The Egyptian pound is unlikely to depreciate this year if the country manages to secure a long-awaited IMF loan, a prominent Cairo-based economist has told Ahram Online.
Since the country's uprising began in early 2011, analysts say Egypt's currency has been at risk of devaluation. Foreign reserves have dropped by more than half in 11 months.
Capital flight, along with a plunge in foreign direct investment (FDI), portfolio investments and tourist revenues, have all put heavy pressure on Egypt's balance of payments (BOP).
"We have seen the worst in 2011, as almost all of the BOP deficit was due to the flight of hot money," Hani Genena, chief economist at Pharos Holdings told Ahram Online. "In 2012 we should not face such problems."
Egypt's BOP deficit reached $18 billion in 2011, a drop from a surplus of $1.3 billion the year before.
"We expect the deficit to reach $7 billion or a maximum of $10 billion in 2012, which is controllable," said Genena.
Significant rebounds of most of Egypt's foreign currency sources are likely, he added, concluding that the country would not have difficulties in financing the deficit.
Genena's positive expectation that the pound will not depreciate is based on two pillars, the first relating to flow and the other to the Central Bank of Egypt's (CBE) policy.
"Judging from several meetings with foreign investors, especially from the region, I can say that [a return in] FDI is pending an agreement with the IMF and some political stability," he said.
Genena also referred to the International Finance Group (IFC), the World Bank unit that recently announced plans to invest close to $1 billion by the end of June in countries including Egypt, Iraq, Jordan and Libya.
"Egypt's isn’t also facing problem in issuing dollar denominated bonds," Genena explained. "Also, tourism, especially from the Arab countries seems to be recovering."
In terms of central bank policy, the economist believes all CBE actions since last January show its willingness to stabilise Egypt's currency.
"I know that Dr El-Okda [Farouk El-Okda, the Central Bank of Egypt's governor] strongly dislikes speculation and all the CBE's policies indicate so," said Genena.
The central bank decided to raise its policy rates last November in a bid to fight a growing tendency by investors to "dollarise" and make
speculative gains on the back of a depreciating pound.
"Now if you keep your money in dollars at a near zero interest rate, you are losing the 10-12 per cent in interest that you get if you keep your funds in Egyptian pounds."
Should things get better later in the year, Genena expects the Egyptian pound to actually climb against the dollar.
"The currency will appreciate some 2 per cent by third quarter of 2012 as a further punishment for speculators," he said.
Genena recalled a similar incident in early 2005 where the CBE suddenly appreciated the Pound versus the dollar by some 5 per cent to effectively counter a developing black market in the currenct.
"When the situation improves after 2012 is over, the currency could be left to depreciate by 5 or 10 per cent to compensate for the increase in inflation," he said.