Egypt’s economy keeps falling: Imminent new devaluation of the Egyptian pound

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Since the beginning of March 2023, press reports, economists and banks have expected a new flotation of the Egyptian pound against the price of the dollar on top of the ongoing greenback shortage, despite the government’s agreement with the International Monetary Fund on a $3 billion loan, in addition to more Gulf funds, aid and loans estimated at $14 billion.

The Egyptian government, in parallel, issued Sovereign Sukuk (Islamic debt bonds with high returns and raised returns on treasury bills to re-attract hot money after its decline in Egypt because of the war between Russia and Ukraine.

HSBC Bank, one of the most prominent banks in Egypt, expected the dollar price to rise between 30 and 35 Egyptian pounds. Credit Suisse expected the dollar cost to increase to 35 Egyptian pounds, while Goldman Sachs predicted worse, as the dollar price would reach 36 Egyptian pounds. This was after several repeated devaluations of the pound that reduced its price by almost half since March 2022, bringing its price down from 15.7 pounds to 30.68 pounds per dollar. However, expectations confirm that the devaluation will not come as a surprise, given the central bank’s application of the International Monetary Fund’s condition to stop supporting the pound to raise its value against the dollar, which means that the devaluation will not be a single shock, but rather a gradual decrease so that the pound loses a few piasters daily. Banks and experts based their expectations on the existence of scarcity in the dollar with the cessation of opening new documentary credits to import the needs of the Egyptian market in terms of commodities, in addition to the decrease in the waiver of the dollar between banks and some of them.

Why are there no dollars in Egypt?

The scarcity of the dollar is the main reason that pushes more pressure on the local currency and expectations of its further floating or devaluation, so why are no dollars in the country? Economists working in banks that expected this new devaluation enumerated the reasons and summarized them in three senses. The first is directly related to the transformation of Egyptian debt instruments, and this is due to fears of a further decline in the exchange rate, which means they lose more money with the debt maturity date. Indeed, those who bought debts in the Egyptian pound lost in December 2022 after decreasing the price against the dollar. To clarify, who purchased the bills In Egyptian pounds, when the value of the pound is 15.7 per dollar, and then sold it at the price of the dollar is close to 30 pounds.

The second reason is related to interest rate inflation when we see the yield on bills of 20 per cent. In comparison, according to official figures, the inflation rate reaches 31.2 per cent, which means that the loss is significant in light of the Central Bank continuing to fix the interest rate. The Ministry of Finance tried to address the matter by raising the interest on those bills away from the Central Bank. Still, as we mentioned, the number difference needed to be increased, with others waiting for the Central Bank to raise the interest rate again. While the third reason is due to the second part of the government’s dependence on foreign exchange, through more Gulf funds that depend on selling profitable assets, but this process stopped with the crisis of disagreements between Cairo and Riyadh, one of the most prominent Gulf investors in the Egyptian economy, in addition to differences between the government and the Gulf sovereign funds over the price of these assets, as the Gulf people believe that the Egyptian government’s estimation of its assets is exaggerated, just as the government and the army decided to offer 32 companies, including two army companies. This means that private interests in the state and the military will continue to obstruct the offering of assets for sale.

The ideal solution?

With the government’s refusal to attract direct investment, as the president himself sees that this matter requires time and significant assets, it has been decided to choose the easier path: more attracting Gulf money and hot money, and with the absence of immediate solutions to attract money on treasury bills and the failure of sovereign sukuk to provide foreign exchange, the best solution is Gulf money, and more attempts to satisfy it. Gulf money enters the Egyptian economy based on the fact that Egypt is a large market with substantial profit opportunities, an image known to the Gulf investor and supported by the government, as the Egyptian economy is known as its informal economy, in addition to the government’s tests for citizens to attract their money to buy shares in national projects such as the Suez Canal. The government got the confirmation that the middle classes rely on savings to preserve their future, which attracts covetousness.

Therefore, more flotation of the pound and more depreciation of the value of those savings – while the Egyptians need it for more use of those savings to maintain a decent standard of life – is the most significant factor in tempting the Gulf investor, who believes that his profits will increase with a new depreciation of the pound, which makes a balance between the government’s estimate of the excellent asset prices in dollars, and the profits it makes.