Cairo should use Brexit to devalue its own pound
Brexit has added an ominous and perilous new turn to the Egyptian central bank’s battle with the laws of supply and demand.
If the bank were clever, it could seize on the moment to sharply devalue or even float the currency. If it does not, Egypt will continue lurching from one currency crisis to the next.
That the Egyptian pound is seriously overvalued is plain to see. The central bank has fixed its official rate at about 8.86 to the US dollar. But as of Tuesday, it was trading for 11.05 to 11.08 on the black market, according to Reuters, despite increasingly onerous capital controls and new rules punishing traders who buy and sell foreign currency at any price but the official rate.
The value of the Egyptian pound began plummeting almost as soon as the first tear gas was fired in the January 2011 uprising, which chased away many of the country’s main sources of foreign currency.
The central bank should have let the official price of the pound fall to reflect its reduced value, but it didn’t. Instead, it has repeatedly waited until acute shortages of foreign currency give it no choice but to devalue.
Now Brexit has come along and added fuel to the fire.
Britain’s vote on June 23 to leave the European Union spurred investors to switch funds out of sterling and the euro and into the safe haven of US dollars, pushing the value of the greenback up.
Egypt’s currency is fixed against the dollar, even though Europe and Britain together account for a much larger share of Egypt’s foreign trade than America does.
Before the Brexit vote, one euro bought 10.14 Egyptian pounds at the official rate, but by Wednesday this had slumped to 9.72. Sterling’s fall was even more dramatic. Before the vote, one British pound bought 13.10 Egyptian pounds, but on Wednesday it fetched only 11.90.
This means that as Egypt’s currency follows the dollar upwards, the price of Egyptian goods and services in its main export markets has soared. Good luck finding buyers, let alone foreign investors willing to sink their funds into the country.
This month, the cabinet announced it had drawn up legislation that would have prison sentences for traders selling foreign currency outside the official exchange rate. The problem with this is that the central bank does not have enough foreign currency to meet local demand. Businessmen who need to import components to keep their factories running are often simply out of luck.
Over the past few years, officials have been flying around the world to convince anyone with the means to give or lend the Egyptian government foreign currency to help it delay the inevitable devaluation. Saudi Arabia, the UAE, Kuwait, China, Japan, South Korea – anyone who might listen.
“This is the Scheherazade economic policy,” one Egyptian financier wryly notes, in a reference to the queen in the Thousand and One Nights who must tell an exciting new story each night to avoid being put to death by the king.
Egypt added $5.4 billion to its external debt in the nine months to end of March, bringing its external debt of all maturities to $53.4bn, according to the central bank’s latest monthly statistical bulletin. Since then it has got more central bank deposits from Saudi Arabia and the UAE. Eventually, all these loans will have to be paid back.
Egypt has also approached the World Bank, and according to a Reuters report, the International Monetary Fund.
The difference with the IMF is that it will demand economic reforms in return for any loan. First among them, no doubt, will be a sharp devaluation of the Egyptian pound.
Curiously, such a devaluation may be one of the easiest conditions on the table: the last time Egypt devalued the pound, during a cash crisis in March, dire predictions of a major jump in domestic prices seem simply to have been wrong.
Despite the 14 per cent devaluation, the consumer price index in May rose only 12.3 per cent year on year, from 10.3 per cent in April. Further, the latest inflation figure was less than the 13.1 per cent recorded in May 2015.
Core inflation, which strips out subsidised goods and volatile items such as fruit and vegetables, was a bit more worrying. It rose to 12.2 per cent in May from 9.5 per cent in April, and up from 8.1 in May last year.
The government could use the political and economic fallout from Brexit as cover for a reform that it should have made years ago, and that it will certainly have to make eventually. The only question should be timing. Do it now, or wait until the end of Ramadan?
Patrick Werr has worked as a financial writer in Egypt for 25 years.
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Published: June 29, 2016 04:00 AM