Egyptian pound rebounds, with the state’s help
Cairo - Egypt’s monetary policymakers are playing a dangerous game to rein in the runaway fall of the Egyptian pound against the US dollar, triggering fears their efforts will backfire, analysts said.
The Egyptian Central Bank has been using foreign currency reserves to make dollars available at the banks and control the exchange rate, financial analysts said.
“This is very dangerous because, among other things, such a policy will bring us back to square one,” said financial analyst Wael el-Nahas. “By using foreign currency reserves to put the exchange rate of the US dollar under control, the Central Bank is backpedalling on its decision to free float the national currency and this will have adverse ramifications.”
Soon after the Central Bank free-floated the pound on November 3rd, the exchange rate of the dollar shot up from 8.88 pounds to 19 pounds, which more than doubled Egypt’s import bill and raised commodity prices to unprecedented levels.
The pound flotation was among economic reforms aimed at eradicating a rampant foreign currency black market, boosting foreign currency reserves and winning approval for a $12 billion loan from the International Monetary Fund (IMF).
A short time after the flotation, the black market shrivelled up, foreign currency reserves rose from $19.6 billion in November to $26.2 billion in January and Egypt got $2.75 billion as the first part of the IMF loan.
As of February, however, the exchange rate of the US dollar had come down to 15 pounds to the dollar.
Authorities called this a gradual recovery of the national currency, citing economic reforms and the availability of dollars. The falling dollar created a stampede of dollar hoarders at the banks, who wanted to exchange their dollars for Egyptian pounds.
The banks bought $800 million from Egyptians over three days in mid-February and the dollar exchange rate keeps falling.
This, however, is far from a recovery, Nahas said. The Central Bank is using the dollars it collected in the months that followed the pound flotation to buy dollars from citizens at a low rate, he said.
Nahas calculated the $12.5 billion that entered the Egyptian Treasury in the past three months included $2.8 billion in a currency swap deal with China, the first tranche of the IMF loan, $2 billion from the sale of Treasury bonds at the Irish Stock Exchange, $1 billion from the World Bank, $500 million from the African Development Bank and $4 billion from the sale of Eurobonds at the Luxembourg Stock Exchange.
Thus, Egypt’s foreign currency reserves should have increased to $32 billion from $19.5 billion in November. Nonetheless, the Central Bank in January said foreign currency reserves were $26.2 billion.
“This means that the Central Bank had used the missing $5.8 billion to create a greenback offer to reduce its exchange rate against the pound,” Nahas said, adding that such a move “will eat away at the reserves and bring the foreign currency black market back to life”.
The Central Bank said its decision to free float the pound was final and it would not go back to the decades-old controlled foreign currency exchange rate regime.
“We do not interfere to decide the exchange rate of foreign currencies,” Central Bank Governor Tarek Amer told the private DMC network. “We cannot interfere because we want to create a balance in the market.”
Cabinet spokesman Ashraf Sultan attributed the rise in the exchange rate of the Egyptian pound to reforms initiated by the government.
“We even expect the value of the pound to increase in the future when exports rise, imports decrease, foreign tourists come back and international trade improves, which will reflect positively on revenues from the Suez Canal,” he said in a telephone interview.
Nevertheless, experts argue that the Egyptian pound will pick up only when foreign currency revenues pick up.
“Egypt imports almost 80% of its needs from other countries, which means that there will always be pressure on foreign currency reserves and subsequently a high US dollar exchange rate,” said Alia el- Mahdi, an economics professor at Cairo University. “This is particularly true as foreign currency earners remain the same.”
Tourism revenues, at $14 billion in 2010, totalled only $5.6 billion in 2016. Revenues from the Suez Canal have declined. Exports, especially agricultural ones, have risen 17% in the past three months but economists say the rise is not enough to bring in enough dollars.
“This means that there was nothing new to justify the decline in the exchange rate of the US currency,” Mahdi said. “We need to attract investments, raise exports and bring the tourists back to get enough dollars for a strengthening of our national currency.”