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Greenback weakening in Egypt as economy improves

Egypt’s pound continues to grow stronger against the US dollar in 2020, thanks to gains in foreign investment, tourism and exports.
An employee counts Egyptian pounds in a foreign exchange office in central Cairo, Egypt December 27, 2016. REUTERS/Mohamed Abd El Ghany - RC1A38C79D70

Egypt’s pound may keep gaining momentum against the US dollar in 2020, thanks to improving macroeconomic indications and the rising influx of the greenback, traders and economists say.

“The dollar may weaken to below 15 pounds (95 cents as of Jan. 21) in the coming few months if the present ratio of decline continues,” Ali al-Hariri, secretary-general of the foreign exchange bureau division at the Federation of Egyptian Chambers of Commerce, told Al-Monitor.

On Jan. 19, he said the dollar had lost at least one piaster (1 pound equals 100 piasters) a day over the past two weeks, noting that on Jan. 14 alone it declined by 10 piasters.

“The US dollar stood at 16.09 [pounds] at the beginning of 2020. It has lost more than 0.16 pounds since Jan. 1. It may fall below 15 pounds in the first quarter of 2020 in the wake of the recent ratio of decline. The pound has been strengthening as inflow of the US dollar has been on the rise as the economy improves,” Hariri added.

By the end of last year, the dollar was trading below 16 pounds for the first time since Egypt floated its currency Nov. 2, 2016. The dollar declined to 15.98 pounds on Dec. 27

As for the outlook this year, Hariri said the US currency will witness further declines as the hard currency influx gets a boost from tourism, exports and remittances from Egyptian expatriates and foreign investment.

“There are no reasons the dollar would rise versus the pound again. The downtrend will continue as the economy grows,” Hariri added.

The World Bank said in Egypt's Economic Update on Oct. 9, "Assuming a continuation of macroeconomic reforms and a gradual improvement in the business environment, economic growth is expected to reach 6% by [fiscal year 2020/21], supported by a recovery in private consumption, investments and exports (notably in tourism and gas).”

“The current account deficit is expected to hover around 2.6% of [gross domestic product] (compared to 2.4% in FY18) due to the balancing effects of an expected improvement in the services trade surplus, against a decline in private transfers (if remittances — especially from the Gulf — continue to inch downwards)," the World Bank added.

Banker Hani Abol Fotouh told the local private TV channel DMC on Jan. 16 the dollar has fallen by 10.5% since December 2017.

Mostafa el-Fiky, senior treasurer and head of planning and financial analysis at oil and energy company Saipem Egypt, agreed with Hariri, forecasting more gains for the pound.

“Dollar inflow has invigorated the pound since the beginning of the year. In fact, the greenback has been weakening since the end of December, with the US currency falling below 16 versus the pound,” Fiky told Al-Monitor on Jan. 17. "We should keep in mind that the fair value of the dollar stands at around 12 to 14 pounds on the local market."

He ascribed the recent decline in the US currency’s exchange rate to an influx of the greenback, especially hot money, over the past two weeks.

The Central Bank of Egypt said Jan. 13 that local banks received inflows worth $1.7 billion on the four business days between Jan. 8 and Jan. 13 from foreign funds investing in Egypt’s treasury bills and the stock market.

Hot money inflows, which are indirect investments for the short term, are hit-and-run instruments that might negatively affect the foreign exchange market if suddenly withdrawn. However, Fiky dismissed that possibility.

“There are abundant foreign reserves at the Central Bank, which can easily cover any outflows of hot money anytime. I don’t think the dollar will strengthen again on the local market as we used to see in the past,” Fiky said.

Egypt’s foreign reserves stood at $45.42 billion at the end of December, according to data from the Central Bank of Egypt. Higher foreign reserves have strengthened the local currency versus the dollar.

The country’s foreign reserves rose by $2.9 billion, or 6.7%, in 2019, the same data showed.

Fiky said the dollar has been weakening thanks to the Egyptian government’s strategy to rein in imports and increase non-oil exports. “That has resulted in a narrower deficit in Egypt’s trade balance,” he noted. 

According to a Dec. 26 Central Bank statement, Egypt’s balance of payments posted a surplus of $227.3 million in the first quarter of fiscal year 2019/20, which began July 1.

The deficit in the trade balance fell to $8.2 billion in the first quarter of fiscal 2019/20, down from $9.2 billion in the same period a year ago. Non-oil exports rose by $707.3 million to $4.7 billion in the first quarter of the 2019/20 fiscal year, compared with the same quarter a year earlier, according to the Dec. 26 Central Bank statement.

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