Suspicious rise of Egyptian pound undermines position of investors

Egypt’s foreign currency reserves totalled about $44.2 billion at the end of April because of aid from the Gulf countries and loans from international lending institutions.
Sunday 02/06/2019
Unstable market. A customer exchanges US dollars for Egyptian pounds in a foreign exchange office in central Cairo.  (Reuters)
Unstable market. A customer exchanges US dollars for Egyptian pounds in a foreign exchange office in central Cairo. (Reuters)

CAIRO - Egypt’s currency exchange market has undergone a suspicious increase in the value of the pound against the US dollar. Authorities explained the phenomenon by the increase in dollar influx and the rise to record levels of the Central Bank’s monetary reserves.

The price of the dollar was, for quite some time, at 17.7 Egyptian pounds but lately it’s been selling for less than 17 pounds.

Egypt’s foreign currency reserves totalled about $44.2 billion at the end of April because of aid from the Gulf countries and loans from international lending institutions, including a $10 billion loan from the International Monetary Fund to support Cairo’s economic reform programme. Cairo expects the distribution of the last instalment of that loan worth $2 billion by July.

The remaining balance comes from Egypt’s sale of international bonds on foreign debt markets and from Arab funds.

Data released in February by the Central Bank indicated that the value of convertible reserves was about $26.3 billion and the remaining balance was in securities and gold bullion.

The reserve-building policy through borrowing represents a complicating factor to the exchange-rate system because the change in reserves was not the result of a monetary influx from production surpluses or increases in exports and that has added to the confusion among investors.

During the first half of the current fiscal year, Egypt’s trade balance showed a deficit of $19.3 billion because of an increase in imports to $33.5 billion while export revenues totalled $14.2 billion.

There were increasing concerns by investors about Cairo’s persistence in shoring up the pound against the dollar. They became reluctant to invest, especially because the foreign exchange market in Egypt had become unstable.

Some investors said that what is taking place in the market reflects Cairo’s insistence to keep the dollar down without convincing economic justification. “The economic scene is expecting an increase in the prices of electricity and fuel this coming July,” said Mustafa Ibrahim, vice-chairman of the Egyptian-Chinese Business Council. He pointed out that Cairo’s monetary policy apparently was planned to drag the dollar to low levels to control inflation ahead of expected increases in energy prices.

The Egyptian Ministry of Electricity and Energy announced an increase in electricity prices by an average of 15% in July.

Ayman Abu Hend, a member of the Egyptian Association for Direct Investment, ruled out foreign direct investments in Egypt in the coming period because of currency exchange rate instability.

He said the slump in the price of the dollar was not logical. The rate of exports and foreign investments, which usually result in an influx of foreign currency, did not grow appreciably and the prices of goods and services in local markets continued to soar.

Capital accounts showed that foreign direct investments in Egypt fell to $2.8 billion during the first six months of this fiscal year, compared to $3.7 billion in the same period last year, further increasing uncertainty in the Egyptian currency exchange rate.

This reflects a decline in productivity and a decrease in the added value of imported raw materials, which led to price inflation beyond the capacity of consumers.

Cairo imposed restrictions on the importation of non-essential commodities to ease pressure on banks to manage foreign currency. That led to a drop in the demand for the dollar and complications in registration of companies that export to Egypt.

Some investors described the measures as leading to an exchange rate that is not free because the restrictions constrain supply-and-demand forces.

Mohamed Abu Basha, a senior economist at EFG-Hermes, said appreciation of the Egyptian pound is a positive indicator for investors. He attributed the rise of the currency to the influx of foreign investments through the debt market.

He said the appreciation of the pound was made sense because many developing countries, including Egypt, were positively affected by the US Federal Reserve not raising its interest rates.

Last December, the Egyptian Central Bank scrapped the mechanism controlling fund transfers by foreigners so investors can transfer money abroad directly through local banks without restrictions. This mechanism dates to 2013, when former Central Bank Governor Hisham Ramez implemented a mechanism for the transfer of funds through the Central Bank to boost confidence of foreign investors in the Egyptian market.

Abu Basha ruled out negative effects of the instability in the foreign exchange market on direct foreign investments in Egypt because those investments do not shift on momentary exchange rate fluctuations but consider changes over at least two years.

If the dollar continues to decline against the pound, it could lead to a return of the black market because speculators will likely keep dollars, hoping they would rebound.

Remittances by expatriates constitute one of Egypt’s most important foreign currency sources. In the first half of this fiscal year, they amounted to $12 billion, compared to $12.9 billion during the same period last year.

Expatriate remittances were at their lowest before freeing the sale of foreign currency in November 2016. High exchange rates on the black market, often double the official exchange rate, led to the emergence of a parallel market that transferred remittances.

Walaa Hazem, an expert on financial and investment markets, warned against intervening in the exchange rate because that would lead to the return of the “black dollar.”

He said to prevent the re-emergence of a currency black market, the dollar must be widely available in banks and importers’ letters of guarantee must be readily covered. In addition, the government should guarantee a constant flow of the US currency by focusing on increasing the relevant sources for the dollar, including tourism, exports and direct foreign investments.