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Will stronger Egyptian pound really lead to drop in prices?

Citizens are waiting to see if the Egyptian pound can sustain its comeback against the dollar.
An employee counts Egyptian pounds in a bank in Cairo, Egypt, November 3, 2016. REUTERS/Mohamed Abd El Ghany - RTX2RPB3

Following the Egyptian government's devaluation of the pound in November, citizens and investors are waiting to see what will be next in terms of inflation and the country's business climate.

Six years after the January 25 Revolution, the country is facing a transition period to secure its economy. According to Trading Economics, “Egypt's consumer prices rose 28.1% year-on-year in January 2017, accelerating from a 23.3% increase in the previous month [December 2016]. It is the highest inflation rate since December 1989, mainly boosted by a 37.2% increase in cost of food and beverages.”

Egypt has many challenges — to increase its foreign reserves, lower inflation and decrease its imports, depending more on local products.

The country's foreign reserves rose to $26.5 million by the end of February, according to the Central Bank of Egypt (CBE). In February, Egypt received $4 billion in yields from Eurobonds, issued on the global bond market.

In November, the CBE received an initial $2.75 billion from the International Monetary Fund as part of a $12 billion loan, after the CBE decision to float the pound.

The Egyptian pound lost roughly half its value in the devaluation, as it went from around 9 to the dollar to around 18. At one point it took more than 19 pounds to buy a dollar.

The Egyptian currency revived somewhat in early March, averaging around 15-16 pounds to the dollar.

Economist Ahmed Kamel said an inflow of foreign investment into Egypt and stability in Egypt's foreign reserves helped strengthen the pound against the dollar.

Kamel said the pound strengthened only for a number of days and then fell in value to more than 17 pounds to the dollar. It traded at 17.55 March 9.

Many ordinary citizens had been pleased about the increase in value of the Egyptian pound, as when the dollar loses strength, imported commodity prices often decrease.

Ahmed Sheha, the head of the Importers Section at the Cairo Chamber of Commerce, said exchange rate changes won't be immediately reflected in prices because the commodity import process takes around 60-90 days to deal with the changes.

"Most importers don't update their prices until they run out of the current commodities," said Sheha.

Another scenario is that some traders keep the new commodities they imported at intermediate prices between the new and old customs exchange rates. The government has announced the customs exchange rate at 16 Egyptian pounds instead of 18 Egyptian pounds.

Alaa Ezz, the secretary-general of the Federation of Egyptian Chambers of Commerce, said the new customs exchange rate will have a positive impact on the prices of some imported commodities, such as appliances and cars.

Ezz said traders are looking forward to Egyptians' strengthening their purchasing power again, after the Egyptian market witnessed a noticeable stagnation due to skyrocketing prices.

Economist Salah Eddin said the CBE has announced that the government will intervene in the foreign exchange market to guarantee stability for traders, investors and ordinary citizens.

Still, Kamel said he thought the pound would likely further weaken against the dollar.

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