Egypt urged to devalue pound to progress IMF talks

Reuters

• Devalution is ‘simply needed’
• IMF pushes for ‘flexible’ exchange rate
• Action unlikely before election

Financial analysts have called on Egypt to devalue the country’s pound to ensure progress in negotiations with the International Monetary Fund and stabilise the economy.

In a call on Wednesday, Capital Economics’ Middle East and North Africa economist, James Swanston, said that a further devaluation is “simply needed”, suggesting that the Central Bank of Egypt (CBE) should allow the pound to slide 12 percent against the US dollar.

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The Institute of International Finance (IIF), meanwhile, has published a note saying that CBE’s official rate overvalues the pound by 10 percent and that this could expand to 20 percent by the end of the year.

The CBE has fixed the pound at 30.96 to the dollar since March, while a growing black market dollar rate is currently around 30 percent higher than the official rate.

The IIF recommended that Egypt conduct a full float of the pound, which “would allow the real exchange rate to fall closer to its fair value level, benefitting the export sector, reducing the current deficit, helping bring in capital, and taking Egypt one step closer towards macroeconomic stability”.

Disagreement over the exchange rate is among the most pervasive sticking points in the negotiations between Egypt and the IMF, which has been pressuring Cairo to adopt a “durable flexible exchange rate regime” as outlined in the staff-level agreement reached in October. 

But analysts say it is unlikely that Egypt will implement a devaluation before the next review, which had been expected to be conducted this month.

Mena economist at Goldman Sachs Farouk Soussa agreed that the Egyptian pound is overvalued “from a market perspective”. But he said that Egypt is unlikely to devalue the pound before presidential elections, the dates for which are yet to be announced but could be called for the end of this year. 

President Abdel Fattah al-Sisi will not want to run for re-election following a price spike in politically sensitive commodities such as food and fuel, Soussa said. 

Since March 2022, the Egyptian pound has already lost over half of its value through devaluations following a hard currency shortage and global inflation caused in part by the Russian invasion of Ukraine. 

Inflation in Egypt subsequently climbed to record levels. In August, headline inflation reached 39.7 percent year on year for the first time in the country’s history.  

Amid soaring commodities prices, the Egyptian government has shown reluctance to allow the pound to fall any further.

In a speech in June, al-Sisi appeared to address the IMF directly, saying: “We are flexible on the exchange rate, but not when it comes to Egypt’s national security and the harm to the Egyptian people. 

“When the effect of the exchange rate is taking a toll on the lives of Egyptians, we don’t sit in place.”