2023-04-28 12:22:00
The Egyptian pound witnessed a state of stability during the past weeks, contrary to the expectations of banks and international institutions regarding the necessity of devaluing the Egyptian currency for various reasons indicated by several reports.
However, the Egyptian government did not drift behind reports that indicated the necessity of devaluing the currency during the last period, as a number of experts indicated that the financial authorities in Egypt are waiting for the right time to make the most of the depreciation of the pound once morest foreign currencies, given that dollar liquidity is not enough. It is still not available, and therefore there is no point in reducing the pound now.
In the next few lines, we will monitor the reasons for the delay in the decline of the Egyptian pound, in addition to referring to the expectations of experts regarding the movements of the pound and the Egyptian economy in the coming period.
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Why was the pound reduction delayed?
The main motive behind the delay in the depreciation of the Egyptian pound is that the government is waiting for the availability of cash liquidity in hard currency, and the appropriate timing to achieve flotation, in order to ensure a flexible exchange rate capable of confronting the price of the dollar in the parallel market and reducing the gap with non-deliverable futures prices that have crossed the days ago levels. The 44 pounds for one dollar.
However, one of the other most important reasons that did not encourage the Central Bank of Egypt to devalue the pound is waiting for the outcome of government offerings, as it is expected that the sale of state-owned assets will provide dollar liquidity that would provide stability in the markets following the devaluation of the pound. Goldman Sachs (NYSE:) excludes that the central bank will resort to any move to devalue the pound once morest the dollar, before the government achieves significant progress in the asset sale file.
Egypt aims to collect $2 billion in the current fiscal year and regarding $4.6 billion in the next fiscal year, but progress has been slow and hampered by expectations of further depreciation of the pound, and there are indications that conflicting interests are hampering asset sales.
Also in this context, Goldman Sachs indicated that the reasons for the Egyptian government not adopting a more flexible exchange rate in recent weeks are due to the futility of further reductions in resolving external imbalances with the already depreciating value of the pound, and the near-term benefit of export growth. The depreciation of foreign currencies is questionable.
The bank also indicated that the failure to devalue the pound is due to the risk of entering an inflationary spiral and devaluing the currency, as further weakness in exchange rates is expected to exacerbate already high inflationary pressures, which in itself is undesirable for Egyptian policymakers.
The bank continued: “Egypt’s financial authorities did not want to move to a flexible exchange rate because the pound is already undervalued. Multiple devaluations over the past year have left the Egyptian pound roughly 25% below its ‘fair value’ in the long run. long on a spot basis, as quoted from the 10-year average real effective exchange rate (REER).
Is reducing the pound necessary?
Several economic reports indicate that the pound will inevitably fall, due to the continuing crisis of dollar scarcity, in addition to the government’s need for liquidity to bridge the chronic deficit between exports and imports. In addition to the widening gap between the official price and the price in the parallel market and non-deliverable futures contracts. In addition to the recent treasury bond bids and the low yield, as well as the record rise in the prices and share price of the Commercial International Bank (EGX:) on the Egyptian Stock Exchange compared to the price of certificates of deposit on the London Stock Exchange. Besides, the Monetary Fund demanded a flexible exchange rate subject to supply and demand.
All of the aforementioned reasons indicate that the devaluation of the pound has become necessary, but the question is when will this decline occur, as choosing the appropriate timing is a decisive factor in achieving the desired benefit from the depreciation of the pound, which explains why the financial authorities in Egypt did not resort to devaluing their currency in the last period.
The International Monetary Fund’s director for the Middle East, North Africa and Central Asia, Jihad Azour, had confirmed in recent statements that “the flexibility of the exchange rate is the best way for Egypt to protect its economy from external shocks.”
In this regard, Standard & Poor’s credit rating agency expects the depreciation of the Egyptian pound to reach regarding 53 percent by the end of the current fiscal year until June 30, 2023, compared to the exchange rate 12 months ago.
The agency notes that the delay in implementing the flexible exchange rate and structural reforms has increased pressure on the pound, and economic risks, which appear in sharp devaluations, high inflation and interest rates, which led to a reduction in its view of Egypt from stable to negative, with fears of risk of internal disturbances.
Moody’s, the credit rating agency, confirmed that the strategy it follows in selling assets is proceeding at a slower pace than expected, which negatively affects foreign currency liquidity and exacerbates a scarcity crisis.
In its report, the agency confirmed that this slowdown in the process of selling state-owned assets increases pressures on the depreciation of the Egyptian pound, in addition to negative risks related to the ability to repay debts.
She added that the withdrawal of foreign liquidity, as indicated by the position of net foreign assets of the banking sector, continued in January and February, following it had stopped at the end of 2022.
According to Egypt’s program with the IMF, the sale of assets is the main channel through which the government hopes to bridge the shortfall in foreign liquidity.
Pound forecast and economy
Economists polled by Archyde.com expected the Egyptian pound to drop to 34 to the dollar by the end of December 2023, to 35 by the end of December 2024 and 35.07 a year later.
The survey found that the overnight lending rate of 19.25% is expected to rise to 19.75% by the end of June before falling to 18.25% the following year and 13.75% the following year.
The poll showed that the Egyptian economy will grow 4% in the current fiscal year and 4.5% in the next year, even with the country’s continuous depreciation of its currency, which is in line with the government’s expectations for the current year.
The survey predicted that urban consumer price inflation would average 24 percent in 2022-2023 and 20.9 percent the following year, before declining to 9.3 percent in 2024-2025. That would be above the central bank’s target range of 5-9% by the fourth quarter of 2024 and 3-7% by the fourth quarter of 2026.
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