An endless struggle between the Egyptian pound and the US dollar, despite the loss of the first against the second of more than 20% of its value over the course of about eight months. However, the green currency was not satisfied with its gains while the Egyptian currency resisted without a protective shield , after the erosion of the foreign exchange reserve balance, one of the most important weapons of deterring the currency of the country of the toxic uncle.
Since last March, the Egyptian pound has voluntarily lost more than 20 percent of its value, after the Egyptian government decided to devalue its currency following the decisions of the Central Bank of Egypt to raise interest rates by 300 basis points, equivalent to three percent, since the beginning of the current year 2022. At the same time, the financial and business community is awaiting the night of next Thursday, August 18th, when the Monetary Policy Committee of the Central Bank will meet to decide on the interest rates position.
International financial institutions have begun to pay attention to the value of the Egyptian currency, as they see that the exchange rate of the Egyptian pound is still higher than its real or fair value against foreign currencies, especially the US dollar. Its value is reduced by 10 percent according to the value of the actual currency,” while the “Citigroup” group indicated the need to reduce the value by about five percent, according to “Bloomberg” agency.
“Policy makers may be concerned about the side effects of currency devaluation, such as higher inflation, which is already in the double digits, and the risk of social unrest, and Egypt may end up weakening its currency, but by less,” said Ziad Daoud, chief emerging market economist at Bloomberg. What the economy needs.
He pointed out that “derivatives traders are trading the currency at lower levels, even after the Egyptian currency recorded losses for about 11 weeks in the foreign market, which is its worst consecutive streak in nearly a decade, while in the non-deliverable futures market was the contract that A three-month period is trading at about 21 pounds per dollar last Tuesday, which is nine percent weaker than the spot rate offshore.
The Egyptian government is seeking to conclude a new agreement with the International Monetary Fund to obtain a loan whose value has not been determined so far to address the shortage in foreign currencies since the migration of hot money from Cairo since the beginning of this year, which allowed the leakage of the Egyptian reserve balance of foreign currencies until it plummeted to 33.14 billion dollars. Last July, the lowest level since June 2017.
“The Independent Arabia” spoke to analysts about the actual value of the pound and the scenarios for the Cairo government to deal with the demands of the International Monetary Fund to devalue its local currency. The negotiations take place between two parties that have tools to control the negotiating process, adding that “Egypt does not have sufficient scenarios to impose its word with the IMF officials, unlike previous agreements.”
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He added, “Most of the sources of hard currency are damaged at the present time. The exit of hot money (foreigners’ investments in Egyptian debt instruments) coincided with the decline in tourism revenues and the value of exports in light of the stability of Egyptian remittances abroad and the revenues of the Suez Canal, with the pressures surrounding the state’s general budget due to the high Expenditures with an increase in the import bill of basic commodities such as wheat, oils and oil, and their prices rising to record levels.
Al-Nahhas pointed out that “the Egyptian government is obliged to accept the conditions of the International Monetary Fund, and perhaps the most prominent points of contention is the devaluation of the local currency at once by about 10 percent before signing the agreement, which the Cairo government does not want to implement because of its direct impact on inflation and high prices in the markets, which leads to It threatens the economic conditions with instability and its reflection on social conditions.” He expected “Egypt’s acceptance of the required currency devaluation, but gradually in two batches,” saying “five percent before the end of this month and then another five percent in September (September) before the agreement is terminated.” In November or December 2022.”
Egypt’s foreign exchange reserves bled about $7.8 billion since the beginning of 2022, at a rate of nearly 20%, after it fell from 40.93 billion dollars in December 2021 to about 33.14 billion dollars until the end of last month, as the balance eroded in light of covering Cairo’s import bill for goods. The basic principles came with the beginning of the Russian war in Ukraine, and coinciding with the exit of hot money with more than 20 billion dollars until last June, according to statements by Egyptian Prime Minister Mostafa Madbouly.
The real value
To clarify the real or actual value of the local currency, the lecturer at the American University, Hani Genena, said that “the official exchange rate is announced by the Central Bank of Egypt,” explaining that “this rate that appears on the screens of the Central Bank of Egypt is not the actual exchange rate of the currency.”
He added that “the real exchange rate of the currency must achieve a balance between import and export, and therefore does not lead to a chronic deficit in the trade balance, which means that the price of the commodity in Egypt is equivalent to the price of the commodity anywhere in the world as long as the specifications and standards of the commodity are the same,” explaining that With examples, things become clear. If the official dollar exchange rate today is at 20 pounds, it means that a liter of milk in America is worth one dollar, which is equivalent to 20 pounds in Cairo, and this means the balance.
With another example, Genena explained, “If the price of a liter of milk in Cairo is 30 pounds (with an inflation rate of 50 percent) and the same liter in Washington is at one dollar (the inflation rate is zero), while the exchange rate in the central bank remains at 20 pounds, this means that it is not a real exchange rate. As the consumer will buy a liter of milk in Cairo for 30 pounds, but in America for one dollar (ie 20 pounds), everyone will turn to imports, which creates a gap in the trade balance.”
Regarding the Egyptian government’s scenarios for dealing with the exchange rate, Geneina said that “it has two options, the first is to stabilize the exchange rate, and in this case it must harness the entire fiscal and monetary policy to ensure the stability of the inflation rate, and at the present time it is very difficult, in light of a declining and suffering economy, While the second option is to adjust the exchange rate or reduce the value of the currency,” he added, “I expect Cairo to devalue its currency before next November by about 10 percent.”
Geneina added that “the government’s crisis with the International Monetary Fund does not depend only on the exchange rate, while the matter amounts to reducing subsidies on basic commodities, especially bread and fuel completely, which Cairo does not want to implement due to its negative repercussions on social peace.” There is a “gradual reduction of subsidies on bread and fuel, in batches, not all at once.”
For her part, Yomna El-Hamaky, professor of economics at Ain Shams University in Cairo, said, “Reducing the value of the Egyptian pound to 23 pounds against the dollar is extremely dangerous for the performance of the economy and its negative damage to the consumer, producer and importer, and commodity prices will rise to record levels that the street will not bear. Egyptian”.
On the solutions, she said, “The only solution is not to yield to the demands of the International Monetary Fund to devalue the currency. In return, the government must manage the exchange markets with the managed float system (leaving the currency to the forces of supply and demand and intervening in times of sharp rise or sharp decline), using what it possesses of tools. Monetary policy, in addition to preparing an emergency plan that can be implemented as quickly as possible to rationalize imports from outside the country in order to preserve the balance of foreign reserves, and a temporary halt to the import of luxury goods such as cars and other recreational goods, until the economy crosses that dangerous trend.