Solutions on hard currency

Niveen Wahish and Sherine Abdel-Razek , Wednesday 24 Jan 2024

With an IMF delegation in Cairo this week to discuss Egypt’s loan programme, moves are underway to find a solution to the country’s hard-currency problem.

The Central Bank of Egypt
The Central Bank of Egypt


A delegation from the International Monetary Fund (IMF) was in Cairo this week to discuss Egypt’s $3 billion loan programme and the possibilities of increasing its value.

Hopes are high that a new deal will unlock other assistance packages from international donors and help to cushion the adverse effects that geopolitical tensions are expected to have on an economy already grappling with an inflated foreign debt bill, spiralling inflation, and a dollar crunch shown in the gap between the official exchange rate, currently standing at LE31, and that on the parallel market, hovering around LE60.

Not a day goes by without many people asking what the rate is, as they are aware that the parallel market rate is being priced into the cost of many goods and services.

On Thursday, Moody’s Investors Service revised its outlook for the Egyptian economy to negative from stable. The change reflects the increasing risk that Egypt’s credit profile will continue to weaken amid difficult macroeconomic and exchange-rate rebalancing, it said.

A day before the move, the Kuwaiti Alshaya Group, the owner of several retail franchises in Egypt, said it was scaling down its operations in Egypt by closing down some brands and downsizing others due to current economic challenges.

While the conclusion of the first and second reviews of the IMF loan will mean unlocking new foreign currency funds, many fear that it will also mean a further devaluation of the pound. The IMF had originally delayed its reviews because Egypt was not allowing the currency to float freely.

“Devaluation is, no doubt, the expected and needed course of action. However, it has to be done very cautiously and to consider the special characteristics of the Egyptian economy in order to minimise the unpleasant implications,” Sarah El-Khishin, an associate professor of economics at the British University in Egypt, told Al-Ahram Weekly.

“For now, we have input an exchange rate of LE45 per dollar into our models for 2024,” Allen Sandeep, head of research at Naeem Brokerage, said.

However, some observers are more optimistic. On Thursday, the exchange rate in three-month Non-Deliverable Forwards (NDFs), financial instruments that allow investors to bet on future currency movements, dropped below LE40 per dollar, marking a notable decrease from its record high of LE45 at the end of December.

“This means investors are anticipating a softer devaluation, not a harsh one, reflecting complexities in the IMF negotiations and the country’s hopes for a larger rescue package,” noted a commentary by Thundr, an online stock-trading platform.

However, while it would be a definite boost to confidence and investor sentiments, the IMF deal alone will not address the entire problem, Sandeep told the Weekly, adding that Egypt will also need the support of other multilateral creditors, among them the World Bank, the European Investment Bank, and the European Bank for Reconstruction and Development, as well as the Gulf Cooperation Council (GCC).

“The revised deal, purported to be $6 to $8 billion [versus $3 billion before], would fall short of what is required, even if some of the disbursements are front-loaded,” he added.  

Sandeep explained that Egypt’s total net foreign liability (NFL) position, which shows the banking sector’s reliance on foreign funding and the difference between its local and foreign assets, stands at a whopping negative $27 billion.

Excluding the Central Bank of Egypt (CBE), the banks’ NFLs amount to $15.8 billion. “As per our analysis, we need an injection of $20 billion to achieve exchange-rate stability and fix the foreign-exchange hole,” he added.

The reason behind the dollar crunch is the need to make debt repayments, according to a source who preferred to remain anonymous. “The immediate solution is to potentially reschedule, restructure, or refinance the debt,” he said.

“It is not normal to have a debt amortisation schedule where 33 per cent of the total medium-term debt is to be repaid over three years. That is very harsh,” the source added.

A huge contributor to the recent rise in the dollar is the speculation factor resulting from the loss of confidence and deteriorating credibility, El-Khishin said. She believes that immediate measures to restore confidence in the government’s economic and financial policies are needed.

Exchange-rate management should be implemented within a wider macroeconomic policy that sets realistic growth targets and reins in inflation to single-digit levels in the near term and close to the CBE’s announced five to nine per cent target over the medium term, she said.

In the longer term, the anonymous source believes that the government’s recently released 2030 strategy sets out the basic outlines of the course of action that is needed: to encourage the private sector, boost exports, build an industrial base, and achieve a higher rate of investment.

Two weeks ago, the cabinet released a strategy for the coming six years targeting tripling foreign-exchange receipts to $300 billion, securitising part of the country’s dollar revenues, and exchanging part of its foreign debt for stakes in state-owned companies.

The government should continue to implement its structural reform programme, which addresses the fundamental reasons behind the deterioration in receipts of hard currency and deals with the sources of vulnerabilities, El-Khishin said, adding that it was important to acknowledge the current geopolitical dynamics in the process and introduce prudent monetary and financial policies to disincentivise hot money activities and fragile finance schemes.

The flight of $20 billion of portfolio investments from Egypt since the outbreak of the Russia-Ukraine war is one of the main reasons for the current dollar crunch.

According to El-Khishin, the reform programme must also revise the sources of growth and assess domestic versus imported input components in the agricultural, industrial, and services sectors in order to close the trade exchange gap.

This is in addition to encouraging a growing role for the private sector, she added.

Meanwhile, people frustrated by their daily struggle to make ends meet have been calling for a cabinet reshuffle.  

“Some political changes in the executive or in some of its figures can signal future reform and an anticipated change in macroeconomic policy. This is usually received positively by the public and domestic and foreign investors and is expected to leverage confidence in the economy and lessen to some extent speculative practices,” El-Khishin said.

However, what is most important is speeding up the needed corrective measures and hence avoiding the addition of more burdens on the population, she added.

According to Sandeep, reaching a deal with the IMF would certainly come with riders such as a more flexible currency regime, subsidy cuts, and other fiscal austerity measures such as energy and fuel tariff hikes, all of which would push up already high inflation.

Egypt’s annual headline inflation stood at 33.7 per cent in December 2023, considerably lower than the around 38 per cent recorded in September 2023. However, observers believe it will take an upward trend in the coming months following the recent announcement of hikes in the prices of metro tickets and electricity tariffs as well as mobile recharge cards.

“Managing inflation needs to be done through understanding its core sources. Inflation caused by an increase in demand requires different measures from that driven by limited supply or driven by structural problems,” El-Khishin said.

In order to deal with inflation in the short term while moving on with exchange-rate liberalisation, El-Khishin suggested the adoption of a multiple exchange-rate system on an exceptional and short-term basis.

“This is one of the known ‘quasi-fiscal activities’ that the CBE can use to peg the exchange rate at its current levels for strategic commodities and basic needs, while the banking sector would adopt a higher and more market-driven exchange rate,” she explained.

“This is a known practice and an implicit form of managing inflation driven by exchange-rate misalignments while providing protection for the more vulnerable categories in the economy from the repercussions of an exchange-rate devaluation.”

* A version of this article appears in print in the 25 January, 2024 edition of Al-Ahram Weekly

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