Egypt’s pound fell sharply to a new low on Wednesday, signalling Cairo’s readiness to comply with a key requirement of a $3 billion International Monetary Fund loan.
Banks said the currency was trading at around 32 pounds to the dollar in the afternoon, down by 13 per cent from its value at the start of trading on Wednesday as the central bank moved to a flexible exchange rate under the terms of an IMF support package.
The latest slide is the biggest one-day depreciation since the pound was devalued in late October. It fell by about 10 per cent last week.
Analysts say the pound still has some way to go before it steadies around its actual worth. But they say the flexibility shown by the central bank on the pound's value could lure back some of the investors who had fled Egypt's lucrative debt market last year. It could also encourage Egyptian expatriates to remit more money through banking channels.
Egypt turned to the IMF for help after Russia's war in Ukraine boosted its import bills for wheat from the two nations. The war also dealt a blow to its tourism industry with Russians and Ukrainians accounting for more than 30 per cent of its visitors.
The pound dropped as low as 32.14 to the dollar from about 27.60 at the opening of trade on Wednesday. The embattled currency has fallen by a cumulative 51 per cent against the dollar since March. It later rebounded to 29.60 to the dollar.
In a submission to the IMF published by the fund on Tuesday, the government said the central bank might step in at times of excessive exchange rate volatility, but there would be no use of banks' net foreign assets to stabilise the currency.
Some analysts said a key sign to look for would be investors and households using dollars to buy the Egyptian pound at its current low rates, suggesting they think the currency's fall might have bottomed out.
"When portfolio investors start to come back in, that is when the market will have judged equilibrium. But there is no direct way of observing equilibrium," said Farouk Soussa, Mena economist at Goldman Sachs.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said she saw further risks to the currency after the latest slide.
"That by itself might not be enough to bring private capital back, until there are signs that the FX backlog is getting cleared, which would require new dollar liquidity. There is currently no visibility where this liquidity will come from," she said.
The latest drop in the pound's value brought it close to its rate on the black market, which should return all trading in the dollar to official bank channels. Egypt said it would shift to a “durably flexible” exchange rate when it reached an agreement with the Washington-based lender for the financial support package in October.
The latest plunge comes a day after Egypt announced an annual inflation rate of 21.3 per cent, the highest in five years, and amid a persistent foreign currency crunch.
Egypt’s economic crisis is blamed by the government on the war in Ukraine and the coronavirus pandemic.
Critics say the crisis is also caused by propping up the pound for years when its value should have been decided by market forces and spending billions of dollars on mega infrastructure projects.
These projects, which have been vigorously defended by the government, include a new $60 billion capital in the desert east of Cairo, some two dozen new cities, hundreds of bridges, a large network of roads and a nuclear plant.