Although the US dollar has lost about 18 percent of its value before the Egyptian pound since 2017, experts believe the gains that the Egyptian Pound claimed are unsustainable and expect they will fade by the end of 2021.
Despite the better performance of the Egyptian Pound against the US dollar in the past few years, even amid the ongoing COVID-19 crisis, the downturn curve of the US traded price in the Egyptian market and the reasons behind such a decline implies non-resilience of such performance at least over the short-term.
In February, the Egyptian Cabinet's media centre published a report showing that the Egyptian pound had attained a robust performance against the US dollar in 2020 despite the COVID-19 crisis, classifying it among the best currency performances in emerging markets.
In 2020, the US dollar traded at EGP 15.8 on average, reached its highest of EGP 15.2 on 4 June and the lowest of EGP 15.4 on 8 March.
Amid the first wave of the pandemic, the Cabinet said that the Egyptian Pound managed to maintain a good performance to remain the most resilient among emerging market currencies against the US dollar over the past three years, and the least affected by the implications of the COVID-19 pandemic.
Tracking the US price in the domestic market since 2017, the US dollar traded at EGP 17.8 on average, recorded its highest of EGP 19 on 23 January 2017 and the lowest of EGP 15.7 on 21 February 2017, according to CBE data.
A year after, the US going price recorded EGP 17.8 in average, reached its highest of EGP 17.9 on 26 December and the lowest of EGP 17.5 on 17 March, also according to the CBE data.
The US prices continued its decline in 2019 to trade at EGP 16.8 on average, posting its highest of EGP 17.9 on 13 Jan and lowest of EGP 16 on 29 December.
In 2021, from January to March, the US dollar price navigated below EGP 16 to trade between EGP 15.5 and EGP 15.8.
The US dollar - so far - has lost about EGP 3.5 of its price before the Egyptian Pound (around 18 percent of its value) since 2017.
A number of agents have contributed in achieving such a performance, including the International Monetary Fund (IMF)’s backed extended fund facility (EFF)’s programme that allowed Egypt to obtain a loan worth $12 billion to implement the country’s economic reform programme.
Such a sum boosted Egypt’s net international reserves (NIR) until the end of the loan programme in July 2019.
The loan amount, together with other loans and facilities Egypt obtained from the international institutions, managed to replenish CBE’s NIR incrementally to reach its top level of $45.5 in February, up from about $16.4 billion.
NIRs reached such a peak before being severely hit by the pandemic, which placed heavy pressure on Egypt’s public budget and pushed the government to pump more liquidity in foreign currency to protect the economy amid the crisis.
A CBE official also announced in November 2020 that the total foreign exchange inflows to the Egyptian banking system have exceeded $400 billion since the liberalisation of the exchange rate in November 2016 following the implementation of the EFF programme.
In 2020, the Minister of International Cooperation Rania Al-Mashat announced that Egypt had secured $9.8 billion as developmental facilities that serve the implementation of the sustainable development goals (SDGs).
Moreover, Egypt secured billions of dollars during 2020 through expanding in debt instruments investments, which contributed in boosting the dollar currency liquidity in the market that resulted in lowering the US dollar price because of the US dollar abundance.
In October, Egypt attracted 16 new investors from Europe, the US, East Asia and the Middle East in terms of asset managers, investment and insurance funds, pension funds and high-quality banks that keep their investments over longer terms to invest in its first of a kind - in the Middle East - green bonds with a total worth of $750 million.
In November 2020, CBE said that it sold $1.5 billion in one-year term treasury bills (T-bills).
In 2020, Egypt filed two requests to the IMF, seeking to obtain two loans under the rabid finance facility (RFI) and the stand-by agreement (SBA) with a total amount approaching $8 billion.
Accordingly, the Egyptian Pound has been benefitting from the foreign exchange inflows headed to Egypt either because of the expanding in governmental debt instrument investments or through securing loans to support the economy amid the pandemic.
Amr El-Alfy, Head of Research at Prime Securities, said that the positive take-up of the Egyptian governmental debt instruments; the increase in CBE’s NIR and the interest on the US dollar in the global market, that reached zero level, all supported the good performance of the Egyptian pound against the US dollar, especially in the last three years, including during the pandemic.
Yet, El-Alfy expected that such a performance is unsustainable as it is projected to last only in the short term, by the end of 2021, with lower interest rates on the US dollar and challenging interest rates in peers in emerging markets across the MENA region.
COVID-19 has hit Egypt's external finances, resulting in $18 billion (five percent of GDP) of outflows from the local currency debt market, loss of tourism revenues (which recorded $13 billion in 2019) and likely some decline in remittance inflows (which were close to $27 billion in 2019), Fitch Ratings said in March.
Fitch, which affirmed Egypt’s credit rating at B+ with stable outlook in March, noted that the worst of the portfolio outflows appears to be over, with some renewed inflows reported in July.
It also said that currency volatility has been minimal so far in 2020 driven by the support of CBE and public sector banks making foreign exchange available at the prevailing exchange rate, adding that real and effective appreciation in recent years has undermined much of the competitiveness gain from the 2016 devaluation.
Over the medium term, the report expected that the continued non-resilient exchange rate will cause further pressure on Egypt's current account deficit and erode the sustainability of its external finances.
On the other hand, banking expert Hani Abo El-Fotouh said that the performance of the Egyptian pound against the US dollar grounds for optimism in light of its downturn trajectory since June 2020, when the US traded at EGP 15.7 the highest level it has posted since October 2016.
Abo El-Fotouh however expected the US dollar price in the Egyptian market to move up by five percent at maximum as a result of the ongoing challenges domestically and globally.
Trading Economics expects the US dollar to trade at EGP 15.7 by the end of the previous quarter (ended in March), forecasting it to trade at EGP 15.8 in 12 months-time.