5 indicators.. Is the central bank’s devaluation of the pound against the dollar “imminent”?

02:45 PM

Saturday, March 2, 2024

Written by Manal Al-Masry:

The financial and business community is currently awaiting the return of the Central Bank to reduce the price of the pound – not a complete float – against the dollar and other foreign currencies after 5 indicators appeared during the month of February and the beginning of this March indicating that a devaluation of the local currency may seem imminent.

Egypt seeks to reduce the value of the pound against the dollar to control the exchange market and eliminate the phenomenon of dollarization – the black market for currency trade – and to complete discussions with the International Monetary Fund to obtain additional financing, the most important requirement of which is commitment to exchange rate flexibility.

During the last two years, Egypt has been facing pressure from a shortage of foreign exchange and the spread of the black market, in which in previous times the price of the dollar reached double the official price due to the inability of banks to sufficiently obtain currency for importers or individuals.

Ras Al-Hikma dollars

On Thursday and Friday, the Central Bank of Egypt received $10 billion, which represents the value of the first installment of the largest investment deal with the UAE in the city of Ras El Hekma, in addition to settling another $5 billion deposit owed by Egypt to the UAE.

These dollar flows, at a time when Egypt is facing severe economic pressures, mean a major breakthrough after the entry of foreign exchange flows from direct investments and not from debts, enabling it to finance the import of some basic goods that the Egyptian market needs, and reducing the burden of repaying the debt service owed.

Counselor Mohamed Al-Homsani, the official spokesman for the Presidency of the Council of Ministers, said in a statement on Friday that the Egyptian government received today another $5 billion from the first installment of the investment partnership deal with the United Arab Emirates, regarding the project to develop the city of “Ras El Hekma” on the northwestern coast. To Egypt, the first batch has effectively been completed.

The total value of the deal amounts to $35 billion, which Abu Dhabi Developmental Holding Company (ADQ) will transfer to Egypt in two installments. After transferring the first payment, the second and final payment, worth $20 billion, will be transferred within two months, including the settlement of another deposit worth $6 billion due to the Emirates.

Bankers and international banks had suggested that the Central Bank would need $8 billion to $10 billion to help it liberalize the exchange rate to avoid an unexpected decline in the pound due to increased foreign exchange pressures.

It would seem that these dollar inflows will enable the central bank to manage the exchange rate without acute fears of a significant depreciation of the pound.

In its previous report in 2023, Goldman Sachs International Bank estimated that Egypt needed about $5 billion to return to exchange rate flexibility to alleviate the expected pressures on the pound while financing the accumulated import orders.

The dollar price converged between the parallel and official market

The price of the dollar in the currency’s parallel market witnessed a sharp decline by about 18 pounds within 10 days to record – according to what is circulating among observers – 45 and 50 pounds per dollar, a decrease from about 64 pounds before that, as a result of increased fears of speculators after the entry of dollars from the Ras al-Hikma deal in Egypt.

It seems that narrowing the price gap between the official and parallel prices will facilitate the task of the Central Bank in reducing the value of the pound in a relative manner that may range between 40 and 45 pounds per dollar from close to 31 pounds, according to what bankers Masrawy spoke to said.

The black market reduced the banks’ share of the remittance flows of Egyptians working abroad, which are one of the country’s most important dollar resources, by about 30% during the first quarter of the current fiscal year 2023-2024 on an annual basis, according to the balance of payments performance report issued on the Central Bank of Egypt’s website.

Accelerating import financing through banks

Over the last two weeks, the Central Bank of Egypt has addressed the banks to restrict the collection documents for the goods that arrived at the ports, which some bank officials interpreted to Masrawy as the Central Bank’s willingness to devalue the pound.

International Monetary Fund loan

Egypt seeks to complete discussions with the International Monetary Fund to obtain additional financing and conduct the first and second postponed reviews of the Egyptian economic reform program after officially confirming the continuation of negotiations with the announcement of the Ras El Hekma deal.

The International Monetary Fund had agreed to loan Egypt the remaining $3 billion from December 2022, but it received only one tranche worth $347 million. The two short reviews last March and September were postponed, which some interpreted as Egypt’s lack of commitment to exchange rate flexibility.

But the International Monetary Fund announced before the end of last year that it was considering providing additional financing to Egypt, and it was close to starting the completion of the first and second reviews with the aim of supporting the Egyptian economy after it was damaged by the Israeli war in Gaza.

After announcing the details of Ras El Hekma investments, Prime Minister Dr. Mostafa Madbouly confirmed that the discussions with the International Monetary Fund are close to ending.

Kristalina Georgieva, Executive Director of the International Monetary Fund, said earlier that discussions with Egypt about the additional loan would be resolved within weeks.

Pound futures decline

The value of the pound in non-deliverable futures contracts for 12 months rose during yesterday’s trading, Friday, to 50 pounds to the dollar, which is the strongest level for Egyptian currency contracts since mid-January, according to what was published by some “international and regional” websites.

A forward contract is an agreement between a buyer and seller to trade an asset, usually a currency, at a price agreed upon by both parties and a specific date.

ظهرت في الأصل على www.masrawy.com

Leave a Comment