Third devaluation in less than a year sends Egyptian pound plummeting
On Wednesday, the Egyptian pound fell to a new low as authorities dealt with the greatest foreign exchange crisis the nation has experienced in a decade.
According to data collated by Bloomberg, the currency was on track to experience its worst decline since a devaluation in October after falling as much as 7% to roughly 26.5 per dollar in the offshore market. The pound is still more valuable than what is being sold on the illegal market.
According to Monica Malik, head economist at Abu Dhabi Commercial Bank, “This is unquestionably another devaluation.” It is caused by the significant difference between official and black market rates, which has made FX liquidity even more scarce and restricted.
Egypt allowed its currency to decline twice in 2022, but was ultimately successful in obtaining a $3 billion loan from the IMF thanks to a commitment made in October to implement a flexible exchange-rate policy. The country of North Africa is one of the biggest wheat importers in the world, and it has had to deal with the inflation-causing economic effects of Russia’s invasion of Ukraine.
Following a decline in the value of the pound on Wednesday, Egypt dollar bonds led advances among emerging-market sovereign bond peers, reiterating hopes that the government will adhere to IMF demands. According to indicative pricing information gathered by Bloomberg, the price of notes due in 2061 increased by as much as 2.5 cents to reach 65 cents, the highest price since August.
According to Patrick Curran, a senior economist at Tellimer Ltd., a company that specialises in emerging-market research, “markets are probably viewing this as a possible indication that, after many false starts, Egypt is finally ready to commit to a flexible exchange-rate system.”
According to him, an inflated currency has made it difficult for the nation to draw in investment and reduce its current-account deficit. “Another devaluation will contribute to the reduction of external imbalances and increase the amount of money available to pay bondholders.”
The two largest state-run banks in Egypt released one-year certificates of deposit at a 25% interest rate before to the currency change on Wednesday, ostensibly in an effort to persuade savers to surrender their dollars and control inflation by soaking up excess liquidity.
The most recent period of depreciation, according to Allen Sandeep, director of research at Naeem Holding in Cairo, “lays the groundwork for an increase in inflation to about 23%-25% and higher government borrowing rates.” Sandeep stated that going forward, he also anticipates “greater visibility in terms of FX liquidity.”
The decrease in the pound occurred as the most populous country in the Arab world battles to clear a $5 billion backlog of imports that accumulated at ports as a result of a letter of credit requirement that has since been removed. Due to the shortage of foreign currencies, that regulation had been implemented.