JP Morgan sees devaluation of Egyptian Pound by 35% in 2016

US-based financial services firm, JP Morgan forecasts that the Egyptian pound will be devalued by 35 percent in 2016, it said in a report issued on 15 March.

According to J.P Morgan, 35 percent reduction will be witnessed including 14 percent devaluation by the Central Bank of Egypt (CBE) on 13 March, in additional to further gradual moves.

In the same path, the CBE’s Monetary Policy Committee (MPC) would increase the interest rates by 50 basis points as expected by JP Morgan. In addition, an annual inflation is also anticipated to accelerate to 14 percent amid the application of the value-added tax (VAT).

The Egyptian government will finalize an International Monetary Fund (IMF) loan before the end of the fiscal year, as anticipated by the US financial firm. J.P. Morgan report interpreted the reduction policy as a prior step to the (IMF) loan despite denial of the Egyptian government, “Although government officials have denied any IMF negotiations, we believe reduced availability of financial support will likely accelerate IMF talks during the IMF/World Bank meetings in April,” the report said.

This makes it appear that an IMF loan is looming for Egypt. The timing of the “floating” decision is significant; it came days after the IMF delegation visited Cairo with discussions about the exchange rate and monetary policies. The IMF has made it clear more than once that it is ready to engage with Egypt once it shows more commitment to the fund’s financial reforms programme.

JPMorgan said that “it expected Egypt to agree with the IMF on a loan programme before the end of the fiscal year in June”. The report described it as a politically difficult step for the government; as when the IMF and the World Bank lend money it comes with tough conditions. For Egypt, the currency devaluation will be one of these conditions as well as privatization, sharp austerity measures – such as cutting subsidies for goods and services – and reducing the wage bill for civil servants.

This clearly justifies what was stated by the Egyptian Prime Minister Sherif Ismail that the government will soon announce “tough economic measures”. This means more measures are heading to attack the Egyptian society that is already suffering since the military coup in 2013.

However, the IMF loan would unlock multilateral support with a continuous reduction in the deficit in Egypt’s balance of payment as a result of a growing trade deficit, and a decline in foreign direct investment (FDI) and support from the Gulf.

In the same context, the CBE’s Tarek Amer previously said the government would consider floating the Egyptian pound when the foreign reserves reach $25-30 billion.

The Central Bank Egypt -under Tarek Amer administration- adopted a conservative policy sailing against tides in dealing with dollar crisis by announcing exchange rates that have no connection with reality.

The first decision, taken by Tarek Amer after taking office, was raising the value of the Egyptian pound by 20 piasters against the US dollar. A decision that was not based on economic grounds and it was attacked by economists and businessmen as it does not reflect the reality.

On the other hand, the black market had another path while Amer exploited millions of dollars under the preserving pound policy through the central bank’s weekly auctions .Then finally due to the continuous withdrawal in the dollar resources, he resorted to meeting with the exchange firms to agree on a black market price that does not exceed 9.25 pounds per dollar.

After the Central Bank decision to devalue the Egyptian pound, 112 piasters by 14.5% which had its impact on the black market contrary to the central bank calculations that aimed to bring the two prices close together, the devaluation of the Egyptian currency won’t stop at this point; as it’s expected to continue declining against the US dollar and other currencies.

The reason behind the economic problem in Egypt lies in the hands of the economic policy maker governing Egypt since the military coup in 2013. The devaluation of the Egyptian currency can’t be resolved while the Egyptian government failed to find solutions for the high poverty rates with 26 percent of the Egyptian population and the unemployment of 4 million Egyptians. The inflation rates exceeded 12 percent with continuous deficit in trade balance with 40 billion dollars annually, in addition to the budget deficit that reached 36 billion dollars that won’t change except if the government focuses on the production activities.
The consequences of the devaluation of the Egyptian pound will have negative results on the Egyptian economy that is already suffering from the withdrawal of dollar inputs coming from various resources as the exported commodities, petroleum, the Suez Canal, tourism, or remittances from the Egyptians working abroad.

As a result, the government will have no choice but waiting for more devaluation of the Egyptian currency as it won’t achieve the accurate balance between the dollar demand and supply. For example, the quick devaluation of the Egyptian currency by 14.5 percent will have its repercussions on the prices of imports which will lead to what is known as the imported inflation.

On the other hand, there will be an increase in the production costs in Egypt due to dependence on the imported foreign equipment; as a result, the Egyptian society is waiting for a tsunami wave of inflation that would reach more than 20%. In addition, the general budget will carry many burdens to cover up the deficit resulted from the rise in dollar price. On the other side, the external debt will widen due to the devaluation of the Egyptian currency.
In fact, the total floating any currency is not found in reality but there is what is called the directed floating that is adopted by America and other capitalist states, and this is the case in the Egyptian reality.

The Egyptian economic crisis is in a very critical condition due to the continuous internal economic deterioration that makes it difficult for the Egyptian currency to remain stable without further reduction and its floating value will rise based on this process. There is no doubt that the coming period will be one of the toughest period in the Egyptian economic history.

Source: The Middle East Monitor & The Daily News Egypt