On Wednesday, Egypt’s pound touched a new low below 32 after declining 13% against the US dollar, as the country’s central bank made the shift to a more flexible exchange rate.
This shift was made in accordance with the terms of the financial support package that the International Monetary Fund (IMF) is providing.
The decline of the pound resulted in speculation about how far the currency would eventually drop. Analysts were hoping that the Egyptian market may see some foreign investors return.
They were also expecting Egyptians working abroad to start sending some of their savings homes. Egypt had to seek the assistance of the IMF after the war broke out between Russia and Ukraine.
Its bill for oil and wheat increased, while tourism, which is a major source of hard currency, took a hit from both Ukraine and Russia, which are two of its biggest markets.
On Wednesday, the pound had opened trading at a value of 27.60 but dropped to a low of 32.14. Since March, there has been a 51% decline in the currency against the US dollar.
Single days have recorded sharp drops and last week saw more fluid movement in the currency. The pound later rebounded to reach 29.60.
Flexible exchange rate
Egypt had reached an agreement for a financial support package in October with the IMF worth $3 billion and said that they would make the shift to a flexible exchange rate.
On Tuesday, the IMF published a submission, which showed that the Egyptian government stated that the central bank could occasionally step in when there is volatility in the exchange rate.
However, they would not stabilize the currency by using the net foreign assets of the bank. According to some analysts, one important sign to check is the use of dollars by households and investors for buying the Egyptian pound at its existing low rates.
This suggested that analysts believe the currency’s decline could have hit its limit.
The analysts said that the market would only reach equilibrium when portfolio investors make a return. There should also be a decline in the local demand for dollars, as there would be a jump in the price of Egyptian imports.
However, some analysts said that there are still risks of the currency sliding, even after its latest decline. They said that it may not be enough to bring back private capital.
That would only happen when there is a clear indication that the forex backlog has been cleared, which would need new US dollar liquidity.
Unfortunately, there are currently no signs of when this liquidity will return.
Even before the war in Ukraine broke out, Egypt had been dealing with financial pressure and then its tourism also took a hit.
Its commodity import bills surged and this prompted foreign investors to withdraw about $20 billion from the Egyptian economy.
There was a rise in the annual urban consumer inflation in Egypt to 21.3% in December, which is the highest it has been since 2017.