Wednesday,20 February, 2019
Current issue | Issue 1230, (22 - 28 January 2015)
Wednesday,20 February, 2019
Issue 1230, (22 - 28 January 2015)

Ahram Weekly

De facto devaluation

The value of the Egyptian pound against the US dollar is falling, writes Niveen Wahish

Al-Ahram Weekly

The Central Bank of Egypt (CBE) has been allowing the value of the pound to slide. This week the pound’s official rate against the US dollar fell around LE0.15 to LE7.29 by Tuesday. Just prior to the weekend it stood at LE7.14. The move appears to indicate a willingness on the part of the CBE to allow the pound’s value to fall.

The drop in the value of the pound came on the back of several measures taken by the CBE. The CBE’s monetary policy committee decided at its regular meeting to cut the overnight deposit and lending rates, and the rate of the CBE’s main operations, by 50 basis points to 8.75 per cent, 9.75 per cent and 9.25 per cent, respectively.

It also increased the official rate at which it auctions dollars to the market by LE0.15 on Sunday, Monday and Tuesday in three successive auctions, each by LE0.05, pushing the rate to LE7.29, the highest in seven months. The auctions determine the official rate for hard currency. The pound was trading at around LE5.5 to the dollar when the 25 January Revolution broke out four years ago.

The aim of the move is to close the gap with the black market, where the dollar had been trading at around eight per cent above the official rate. Despite the CBE move, however, the black market rate was not tamed and the dollar was still trading at LE7.88 on Tuesday.

“If the CBE wants to make a dent in the rate, LE0.10 is not enough,” said one banker, who preferred to remain anonymous. “This is only delaying the inevitable and causing a haemorrhage of foreign currency.” To really hit the black market, the banker said, the CBE would need to devalue the pound to LE8 per dollar.

Analysts believe the CBE move aims to contribute to a more favourable investment climate, and set the stage for the Egypt Economic Development Conference scheduled for mid-March.

“The government has a clear intention of stimulating and encouraging investment and is taking the right steps to prepare the business environment,” Eman Negm, an economist with investment bank Prime Securities, told the Weekly.

The anonymous banker agreed, saying that policy-makers are aware that investors are worried about the black market and want to put their fears at ease ahead of the meeting in March. “At one point or another the pound is bound to be devalued, as long as there is a black market there is a need for a devaluation,” he said.

The pressure on the Egyptian pound had been mounting in recent months, especially with Egypt’s foreign reserves dropping to $15.3 billion in December, compared to $15.9 billion the month before, and around $20 billion a year ago. Since the Revolution, vital sources of hard currency revenue, such as tourism, have been hit hard. Tourism revenues came to $5 billion in the 2013-2014 financial year, compared to around $12 billion in 2010.

According to Negm, with importers already basing their operations on the black market rate, the CBE thought it best to focus on investor concerns, especially since the inflation risk is contained as food and oil prices are at an all-time low.

She believes that the devaluation will help the economy, explaining that among other things a cheaper currency encourages tourism and makes Egyptian exports more attractive abroad. She estimated that tourism revenues for the 2014-2015 financial year will reach $8.5 billion.

Negm has a more moderate estimate for the value that will be reached by the pound. If the inflation rate remains steady, within the 10 per cent range, Negm predicts that the pound will reach LE7.35 and LE7.40 against the dollar ahead of the March conference.

The CBE’s monetary policy committee said it based its decision on the fact that inflation has slowed down and growth has been showing improvement, reaching 6.8 per cent in the first quarter of the 2014-2015 fiscal year. The headline consumer price index fell by 1.53 per cent month-on-month and 0.07 per cent month-on-month in November and December, respectively, it added.

The committee said this is due to a “seasonal deceleration in the prices of fruit and vegetables, coupled with the decline in the prices of other food items supported by the decrease in international prices.” It added that lower oil prices and the consequent revision in international food price forecasts means that risks from imported inflation continues to be contained.

According to Negm, the decision to cut rates by half a percentage point is a wise one. She explained that the better economic activity “indicates that investors’ confidence in the Egyptian economy is back, ringing the bell for more policies favouring investments.”

Foreign direct investment reached around $4 billion in the 2013-2014 financial year, compared to $3.75 billion the previous year, but still lower than the pre-Revolution level of $6 billion.

Negm also said that local currency saving deposits have noticeably increased to reach LE891.6 billion in October 2014, compared to LE766.12 billion in October 2013, an increase of 16.4 per cent, creating an incentive to invest money rather than leave it deposited in banks.

The anonymous banker, however, disagreed with the decision to cut interest rates, saying that this will make deposits in Egyptian pounds less attractive and cause a further run on dollars, making it more difficult to close the gap with the black market. He said that the obstacle to improving the investment climate is not the interest rate, but red tape and bureaucracy.

Another banker, who also preferred to remain unnamed, concurred. He said that the general political and economic environment is causing both investors and lenders to hold back from taking any risks.

Monette Doss, chief economist at HC Securities and investment, said that cutting interest rates is good for encouraging private borrowing and pushing economic growth. She explained that interbank liquidity has relatively eased, coming in at four per cent of total banking assets in October, compared to an average of 1.6 per cent in the 2012-2013 financial year.

However, she pointed, “The margin is very thin compared to pre-Revolution excess liquidity of 11 per cent of banking assets.” In addition, she worries about future inflationary pressures for reasons including the weak currency and expected subsidy cuts.

Should inflation remain at its current rate, Negm expects another half per cent cut before the meeting in March.

The CBE cut its rates by 1.5 percentage points during the 2013-2014 financial year in an attempt to stimulate economic growth and boosting investment. In July it raised interest rates by one percentage point to contain the inflationary pressures caused by the partial lifting of energy subsidies.

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