Egypt central bank currently has no intention to devalue pound

As Egypt faces a dollar crisis, the Central Bank of Egypt (CBE) says it has “no intention” of devaluing the Egyptian pound in this period, a source at the bank told Aswat Masriya Tuesday.

The source, who requested anonymity, refused to comment on plans for the currency over the next six months of the year. Investment banks, though, had previously told Aswat Masriya they expect the dollar to be changing hands in Egypt for between 8.5 to 9.5 Egyptian pounds this fiscal year, up from its current official price, 7.73 pounds.

Investment banks and analysts expect the depreciation to take place in one sudden move.

The CBE source, however, said “we currently have no intention of reducing the Egyptian pound.”

Senior economist at CI Capital investment bank Hany Farahat had previously said the exchange rate “has to drop a single time” to send a “clear message” to investors who are waiting for the depreciation of the Egyptian pound, that the Central Bank of Egypt (CBE) is working on solving the problem.

The cash-strapped Egyptian government is suffering from a serious dollar shortage and has devalued the pound multiple times throughout the past year, as observers say the government can no longer sustain the high cost of supporting the pound against the dollar. This comes as tourism and exports, once main sources of supplies of foreign reserves, are struggling.

The dollar surged on the black market today, jumping up to 9 pounds against the dollar after the government’s decision on Monday to raise the cap on foreign currency deposits for exporters to $1 million a month, according to Reuters.

Farahat projects that the CBE will devalue the pound to change hands for between 9 to 9.5 pounds against the dollar and keep it this way for the end of FY16, which expires at the end of June. Farahat did not give an estimate on when he expects the CBE to do so.

Similarly, investment banks EFG Hermes and Beltone Financial both project that the dollar will be changing hands for 9 pounds.

Hany Genena the head of equities at Beltone Financial had said the pound can be devalued through the  (Tri-weekly) dollar auctions held by the CBE three times each week or it can be depreciated at once, which “is a better step,” added Genena.

Genena also did not provide an estimated time for the projected devaluation but said there was no justification to delaying it. “The price on the black market deteriorates day by day and investors’ complaints are increasing, reflecting a negative image abroad on investment in Egypt,” he said.

While investment analyst Eman Negm at Prime Holding agrees that the pound should be devalued on a single time, she expects the dollar to be changing hands for only 8.40 to 8.50 pounds to the dollar and to stay at that rate for the end of the year.

Any further depreciation of the Egyptian currency would have negative social and political implications because it will increase inflation and flare up prices. CI Capital expected the inflation rate in Egypt this year to range between 11 and 11.5 per cent, while Prime Holding expects it to be 10.8 per cent.

The urban consumer price inflation fell to 10.1 per cent in January compared to 11.1 in December, according to figures by the Central Agency for Public Mobilisation and Statistics.

The pound started off 2015 changing hands at 7.14 pounds against the dollar but over three devaluations it lost around 70 piasters, ending the year at an official price of 7.73 to the dollar.

Last October, the pound was depreciated twice dropping to 7.93 pounds to the dollar in official auction but Egypt’s CBE revalued the pound in November, raising it by 20 piasters. Observers say the revaluing aims to “confuse” currency manipulators, traders on the black or parallel market. But despite the revaluing and a series of other measures aimed at capping the black market, the pound has continued to fall against the dollar on the unofficial market.

Negm believes that the timing of the devaluation is mainly connected with the CBE’s ability to provide foreign reserves through loans, assistance and other agreements.

Last month, the CBE received a loan worth $500 million from the African Development Bank, part of programme to support the Egyptian state budget worth $1.5 billion, to be disbursed over three years. Earlier in February, the CBE received another boost worth $900 million from China, part of a $1 billion financing agreement signed with the China Development Bank.

The World Bank agreed last December to grant Egypt a loan worth $3 billion, to be disbursed over three annual loans worth $1 billion each. Negm believes the government’s current attempts to quickly approve the Value Added Tax (VAT) is geared at receiving the first payment of the World Bank’s loan.

The World Bank revealed in January the details of the $3 billion loan which entail reducing the government’s wages bill, energy subsidies, while raising tax revenue and electricity prices.

Negm expects the government and CBE to take the necessary measures to allow the bank to devalue the pound by April.

Egyptian foreign reserves are currently less than half of their value five years ago, before the 2011 Uprising when they were worth $36 billion. At the end of January, foreign reserves were worth $16.4 billion.

The government set an exchange rate of 8.25 pounds to the dollar in the state’s draft budget for FY17, compared 7.75 pounds for the ongoing fiscal year. The CBE source did not comment on the exchange rate for the draft budget.

Source: Aswat Masriya

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