Egypt faces a dilemma over its currency policy

The moment of truth for the Eyptian pound may come in a few weeks.

What to do about that unmanageable Egyptian pound?

The currency is still overvalued and no longer floats freely. We can no longer say that the central bank floated the currency. As things stand now, it simply devalued it.

A new currency crunch may be inevitable in the coming few weeks when the central bank eases restrictions on transferring money out of the country.

After keeping the pound way overvalued for more than five years, the bank in November announced it was “floating” the currency. It set a target price of 13 pounds to the dollar, far weaker than the previous official rate of 8.88. It also said it would let the pound move according to supply and demand.

And indeed, the pound promptly began sliding, more than expected and confounding the central bank. By December 20 it hit 19.63, dangerously close to the psychological barrier of 20 to the dollar.

The central bank seems at that point to have quietly started wrestling the pound back up.

The IMF also said it was surprised by how far the pound had weakened.

“The exchange rate appreciated quite a bit, more than we expected,” the IMF’s mission chief in Egypt, Chris Jarvis, said in a January 18 press briefing. The central bank seems to have taken the IMF statement as a green light to strong-arm the currency back up again in the belief it had unfairly weakened. By February 22 it had strengthened to 15.80. Unfortunately, the market did not agree with that price and soon the black market, which had largely disappeared since “flotation” in November, began flourishing once more.

After that, the central bank seems to have abandoned any pretence of a freely floating currency. Since mid-March the pound has been stuck at around 18.10 to the dollar, with almost no fluctuation. If you need any evidence that there is a new peg, compare the pound’s price against the dollar over the past three months compared to its price against the euro, which is all over the place.

The central bank on May 7 thought it necessary to remind banks that money changers were not allowed to set their own prices. Each money-changing company has to be associated with a bank and buy and sell foreign exchange at the prices set by the banks, which regularly sends them lists of prices. Money changers tell me the central bank has sent inspectors who sit in their shops all day long to make sure no trades are made outside the official rates.

Far from trading freely, the pound seems to have been getting less and less convertible. My bank, Emirates NBD, told me last week I could not renew my US$6 per month New York Times subscription because it was now considered a “commercial transaction”.

It cannot be easy being a central bank governor these days. The obvious step would be to let the pound weaken even more, even if gradually. But the country’s leadership seems to have decided that political and economic fatigue has set in, and that 20 pounds to the dollar is a step too far. Since the great devaluation of November, inflation has jumped to more than 31 per cent annually from around 15 per cent before.

But the 20 pounds to the dollar benchmark will almost certainly have to be breached at some point. Egypt’s money supply has been growing by about 20 per cent per year, while GDP has hovered below 4 per cent. That means the pound is losing approximately 16 per cent of its value every year.

The moment of truth may come in a few weeks.

Egypt has promised the IMF it would scrap the $100,000 yearly limit it has placed on individual bank transfers and a $50,000 deposit cap on non-priority imports.

It has apparently pledged to do this by the end of this month. This could lead to a spike in demand for dollars, putting renewed pressure on the pound. That could partly explain why the central bank raised interest rates by 2 percentage points three weeks ago. The higher interest rates should help to encourage investors to keep their funds in Egyptian pounds.

Banks that deposit money with the central bank now receive 16.75 per cent interest. This is still less than the rate of inflation, which on a monthly basis is now running well over 20 per cent a year. The central bank says it expects inflation to decline to 13 per cent by the end of 2018.

Patrick Werr has worked as a financial writer in Egypt for 27 years

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