File Photo: The S P Global logo is displayed on its offices in the financial district in New York City, U.S. Reuters
The parallel market currently values the US dollar at over EGP 60, while the official exchange rate remains around EGP 31 per dollar.
This potential devaluation would mark the fourth time Egypt has devalued its currency since March 2022, which has resulted in a depreciation of approximately 70 percent against the USD.
S&P anticipates that this upcoming devaluation is aimed at increasing exchange rate flexibility, which is part of Egypt's commitments under its $3 billion loan programme with the International Monetary Fund (IMF).
In 2022, the IMF approved a 46-month loan programme for Egypt, but due to the country's slowdown in meeting the IMF's conditions, the scheduled reviews for March and September 2023 were postponed.
S&P suggested that if “the exchange rate is adjusted as expected, the IMF loan funding could be disbursed, and the loan itself may be extended.”
S&P emphasized that clarifying the exchange rate policy could have positive effects on Egypt's trade and economic growth, as well as lead to an increase in remittance inflows.
Moody's also highlighted the discrepancy between the official exchange rate and the parallel market rate, which has resulted in a decrease in remittances as individuals seek alternative channels to transfer their savings.
Remittances from Egyptians working abroad decreased by 29.22 percent in the first quarter of the current fiscal year (July-September) compared to the same quarter of the previous fiscal year.
Furthermore, S&P pointed out that adjusting the exchange rate would help alleviate the severe shortage of hard currency in Egypt, which has worsened due to a decline in foreign currency revenues from the Suez Canal caused by tensions in the Red Sea.
“Suez Canal revenues contribute nearly eight percent to the Egyptian government's revenue and constitute a significant portion of the country's foreign currency earnings,” the agency noted.
S&P predicts that Egypt's foreign currency crisis will also negatively impact the foreign currency liquidity positions of its banks.
In addition to the exchange rate adjustments, S&P expects Egypt to continue tightening its monetary policy alongside the fourth wave of Egyptian pound devaluation. This suggests that the Central Bank of Egypt (CBE) may raise interest rates at its first meeting of 2024, scheduled for 1 February.
Apart from implementing flexible exchange and interest rate regimes, Egypt is also committed to promoting private sector participation in the economy, reducing debt and inflation levels to pre-pandemic levels by the end of the IMF programme, and offering 35 state-owned companies to strategic investors by June 2024.
Currently, an IMF mission is in Cairo for discussions on the first and second reviews of Egypt's reform programme, taking into account the country's economic crisis and existing geopolitical tensions.
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