Egypt’s pound hits new lows after shift to more flexible forex regime
Egypt’s pound weakened by more than 13% to a new low below 32 to the U.S. dollar on Wednesday as the central bank moved to a more flexible exchange rate under the terms of an International Monetary Fund financial support package. The pound’s decline prompted speculation as to how far the currency might eventually fall, with some analysts hoping at least some foreign investors may return to the Egyptian market and Egyptians working abroad begin sending more of their savings home.
Egypt turned to the IMF for assistance after Russia’s war in Ukraine pushed up its bills for wheat and oil while dealing a blow to tourism from two of its largest markets, Ukraine and Russia, a key source of hard currency. The pound dropped as low as 32.14 to the dollar from about 27.60 at the opening of trade on Wednesday, Refinitiv data showed. The currency has fallen by a cumulative 51% against the dollar since March, with sharp drops on single days followed by more fluid movement since last week.
It later rebounded to about 29.60 to the dollar. Egypt said it would shift to a “durably flexible” exchange rate when it reached an agreement with the IMF for a $3 billion financial support package in October.
In a submission to the IMF published by the fund on Tuesday, the government said the central bank might occasionally step in at times of excessive exchange rate volatility, but there would be no use of banks’ net foreign assets to stabilise the currency. Some analysts said a key sign to look for would be investors and households using dollars to buy the Egyptian pound at its current low rates, suggesting they think the currency’s fall might have reached a limit.
“When portfolio investors start to come back in, that is when the market will have judged equilibrium. But there is no direct way of observing equilibrium,” said Farouk Soussa of Goldman Sachs. Local demand for dollars should likewise diminish dramatically as the price of imports in Egyptian pounds jump.
Monica Malik, an economist with Abu Dhabi Commercial Bank (ADCB), said she still saw further risks to the currency after the latest slide. “That by itself might not be enough to bring private capital back, until there are signs that the FX backlog is getting cleared, which would require new USD liquidity. There is currently no visibility where this liquidity will come from,” she said.
Egyptian pound non-deliverable forwards (NDFs) – which bankers and investors use to price the currency’s likely moves over the next 3-12 months – jumped to between 32.64 and 35.4 pounds to dollar , suggesting more weakening is expected. Egypt was already under financial pressure before the war in Ukraine hurt tourism revenues, raised commodity import bills and led foreign investors to pull more than $20 billion out of the economy.
Goods began backing up in Egyptian ports after the central bank placed restrictions on imports in February. Last month it removed those restrictions, and importers have been scrounging up dollars to get their goods released. A cabinet statement on Wednesday said goods worth $1.5 billion left the ports in the first 10 days of January, bringing the total released since Dec. 1 to $8.5 billion. The statement did not indicate how large a backlog remained.
Egyptian annual urban consumer inflation in December rose to 21.3%, the highest since the end of 2017, exceeding analyst expectations, data from the statistics agency CAPMAS showed on Tuesday.
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