Egypt's pound under renewed pressure as dollar shortage persists

The strain on the currency, devalued three times in the past year, comes against forecasts for higher inflation

A bakery worker delivering bread in Cairo. EPA

Egypt’s currency, which has already been devalued three times over the past year, is under renewed pressure caused by a continuing shortage of US dollars and rising inflation in the country.

The country's economy has been facing immense strain since the Russia-Ukraine war began 12 months ago, with the conflict compounding Egypt's woes.

Over the past year, the Egyptian pound lost nearly 50 per cent of its value against the US dollar.

Inflation is up nearly 32 per cent year on year, primarily on soaring food prices, and is forecast to rise more.

In the middle of the currency crisis, Egypt faces a review this month by the International Monetary Fund on how its economy is faring after the Washington-based lender extended a $3 billion facility to Cairo last year, linked to carrying out structural reforms.

Foremost among these is a genuinely flexible foreign exchange regime, something that analysts say is not being thoroughly implemented.

This, in turn, is perpetuating the dollar shortage in the country, allowing a backlog of imports estimated at about $4 billion to grow even bigger and paralyse local industries dependent on foreign materials.

The dollar is trading in banks at nearly 31 pounds, up from nearly 16 pounds on the eve of the first devaluation in March last year.

This has led to a thriving black market for dollars, with the US currency selling for about 35 pounds.

“It is a very realistic possibility,” a Cairo-based senior executive at an international bank, who did not want to be named, said about growing speculation of another devaluation.

“With inflation rates heading above 40 per cent and continuing scarce liquidity in the market, and almost no movement on the exchange rate front, they have no options but to float again and increase interest rates,” he told The National.

“Judging by its activity, the pound does not seem to be floating.”

With year on year inflation in February well past forecasts at 31.9 per cent, the Central Bank of Egypt is now expected to increase interest rates by as much as 300 basis points when its monetary committee meets on March 30.

That increase will probably accommodate a further rise in inflation for March, which will have been fuelled by a recent rise in petrol prices of about10 per cent.

The March inflation figures are expected to be announced in the first week of April.

“Going forward, we expect inflation to peak in the third quarter of 2023, north of 35 per cent year on year, absent any further Egyptian pound devaluations,” said a research note issued this week by Japanese bank MUFG.

“From a monetary policy perspective, despite the 800 basis points of hikes delivered in 2022, containing inflation expectations and improving foreign exchange liquidity to ease pressure on the pound will require the Central Bank of Egypt to maintain a hawkish profile in the months ahead," it said.

Egypt has been pursuing diverse methods to secure dollars, from dimming street lights to make more natural gas available for export and charging tourists in dollars or euros for their train rides, to expanding requirements to obtain its citizenship to include dollar payments and curtailing the use of credit cards by Egyptians travelling abroad.

Currency devaluation, particularly when linked to IMF deals, has long been an unpopular term in Egypt’s political diction.

At present, devaluations are associated with rising costs of living in a country of nearly 105 million people of whom about 60 per cent are thought to live below or close to the poverty line.

Moreover, the country’s debt burden has been worsening, with the government forecasting it at 93 per cent of gross domestic product by the end of the current financial year on June 30.

Increasing interest rates and a sliding currency have combined to raise the cost of the country’s huge debt, with interest payments expected to account for at least 45 per cent of revenues in the current financial year.

The ongoing struggle being faced by the majority of Egyptians under these economic conditions dates back to 2016, when the pound was devalued, state subsidies on basic goods and services began to be gradually removed and new taxes were introduced — all part of a deal with the IMF that secured Egypt a $12 billion loan.

But the magnitude of the current economic crisis has not been seen in living memory, although it has not triggered the social unrest witnessed during past economic crisis.

That is chiefly because of the government’s efforts to shield the most vulnerable segments of the population with tax breaks, salary and pension increases as well as maintaining subsidies on bread, a staple for most Egyptians, and offering more subsidised food items.