CAIRO — The US dollar registered its biggest decline in nine months against the Egyptian pound Jan. 27, falling by more than 0.20 pounds, or a little more than 1%. The drop in the dollar's value, which is expected to be temporary, surprised the Egyptian exchange market and caused many traders to suffer losses.
The pound's rise appears to be related to the Central Bank of Egypt's Dec. 4 termination of the foreign exchange repatriation mechanism, which guaranteed that foreign investors could convert investment earnings from Egyptian pounds back into their home currency.
The bank's governor, Tarek Amer, told Bloomberg on Jan. 22 that this means that Egypt can expect to see more fluctuations in the pound's exchange rate. “We will witness more volatility in the currency [since] the repatriation mechanism was shut down [for new investments], as investors will now have to go through the interbank market,” Amer said. The interbank market is a foreign exchange market common among all banks.
Amer reaffirmed Egypt’s commitment to keeping the market free, but added, “At the same time, we have reserves that help us to confront speculators or disorderly market practices.”
Mohamed Abu Pasha, a macroeconomics analyst at EFG Hermes, told Al-Monitor that Amer's statements were designed to reassure overseas investors about the free circulation of currency without state interference in line with Egypt's economic reform program, supported by a three-year extended fund facility from the International Monetary Fund. It had been reported in November that state banks were helping support the pound, keeping it at a range of 17.78 to 17.98 to the dollar over the previous six months.
On Feb. 13, the dollar was buying about 17.58 Egyptian pounds.
In December, for undisclosed reasons, the IMF delayed payment of the $2 billion fifth tranche of Egypt's loan, which Abu Pasha said prompted Amer to allow greater liberalization of the foreign exchange rate. The tranche is part of a $12 billion loan facility signed in 2016 when Egypt agreed to implement the IMF's recommended economic reform program.
On Feb. 4, Egyptian Minister of Finance Mohamed Maait said the IMF executive board had approved disbursement of the fifth tranche. Officials told Egyptian newspapers that this tranche will be allocated to narrowing Egypt’s budget deficit. Observers said that while this development won't affect the dollar exchange rate directly, it will increase the country's cash reserves.
Abu Pasha said the ending of the repatriation mechanism will continue to affect the exchange rate. He said foreign investors aren't transferring their earnings overnight in one batch, but rather in accordance with more practical decisions. Under the mechanism, the Central Bank of Egypt had allowed foreign investors to transfer dollars out of the Egyptian market at any time.
Abu Pasha predicted the dollar exchange rate would rise to 19 to 20 pounds to the dollar in the third quarter of 2019. He also said it could further rise to 21 by the beginning of 2020, which would entail higher prices for goods and services provided to citizens.
The bank's cash reserves rose from $15 billion in 2014, before the exchange rate was floated, to $44.5 billion in November 2018. In December, after Egypt settled some of its foreign debt, cash reserves fell to $42.5 billion.
Abu Pasha said some foreign investors question the need for a floating exchange rate, particularly considering that the pound has been stable, trading at 18 pounds or less.
Ali al-Hariri, deputy head of the Foreign Exchange Bureau Division at the Federation of Chambers of Commerce, said the exchange rate was expected to fluctuate after the central bank's decision to cancel the repatriation mechanism, with the general trend being a drop in value of the pound. He told Al-Monitor that the first effects of the decision brought about “stagnation in the foreign exchange market, with sales dropping significantly.”
He said currency exchange shops and companies suffered heavy losses after purchasing dollars from citizens at 17.79 pounds but then having to sell at 17.75 pounds in the wake of the pound's strengthening. “They halted transactions to prevent losses,” he said.
Hariri said the central bank can intervene indirectly by controlling exchange rates. “This happened and led to a pro forma hike" of the Egyptian pound, he said, while adding that the pound is expected to lose ground to the dollar "in the next period."
Omar el-Shenety, CEO of the asset management and financial consulting firm Multiples Investment Group, described the Egyptian pound's strengthening as a mere price bubble. He said, “Amer’s statements to Bloomberg about volatility could mean fluctuations, whether upward or downward.”
Shenety told Al-Monitor in a phone conversation that currency exchange shops and companies are showing reluctance to convert pounds into dollars at the new rates and they have stopped dollar transactions. “This sudden upsurge of the Egyptian (pound) is only a temporary phenomenon with no tangible effects," he added.
He said the drop in the value of the dollar against the pound is aimed at calming markets and showing that the pound is truly being floated against the dollar. Shenety also expected the dollar to recover against the pound and later reach its strongest position against the Egyptian currency yet.
In a report published Aug. 19, Capital Economics predicted the dollar would be at 20 pounds by the end of 2019 and would rise to 21 pounds by the end of 2020.
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