Approving depreciation

The pound is heading south and for the first time in years the Central Bank is not cushioning the fall, reports Nesma Nowar

At the start of the week, the dollar was sold at LE6.1, the lowest in seven years. The recent decline continues a trend that stripped the local currency of 5.5 per cent of its value since the toppling of ousted president Hosni Mubarak's regime in January 2012.

The demise in sources of foreign currency like tourism, foreign direct investments (FDIs) and exports depleted the international reserves in the Central Bank of Egypt, and put downward pressure on the pound.

The increase in the dollar value is not based on an extra demand on the currency, said Ezzat Abu Zeid, executive director of Brent, a foreign exchange company. The dollar exchange rate, he said, is determined by the bank's intervention to balance the market.

Abu Zeid's opinion echoed a general agreement among market observers that it is the first time in years that the Central Bank has not intervened quickly by pumping dollars withdrawn from its foreign reserves to support the pound. According to Reuters, the Central Bank has spent more than $20 billion to support the local currency during the 20 months following the uprising.

The news agency quoted a press release by EFG-Hermes, Egypt's largest investment bank, saying that the Central Bank seems committed to a policy of allowing the pound to decline gradually.

The weakening indicated that "the Central Bank is moving relatively more aggressively than we expected, suggesting that our end-2013 forecast of LE6.4 may be realised earlier," the note said.

Beltone Financial, another leading investment bank, noted that the depreciation in the dollar-pound exchange rate in spite of the increase in the balance of payments and net international reserve (NIR) positions during August suggests that the CBE is "intentionally allowing the pound to slightly depreciate."

Egypt's NIR gained $0.7 billion in August 2012 reaching $15.1 billion. "It is the external financing that has helped the balance of payments performance and permitted the Central Bank of Egypt to begin accumulating reserves and building its reserve position once again," said a Beltone note.

Egypt received an initial $500 million from Qatar during the last week of August 2012, and it also sold one-year treasury bills with a total value of 513 million euros. This represents the first offering of euro-denominated domestic debt, where foreign investors bought 20 per cent of the amount sold.

Beltone's macroeconomic analysts believe the Central Bank's reluctance to use this increase to support the pound reflects a decision to maintain NIRs at a comfortable level to cover three months of imports. This is equivalent to $15 billion.

Holding this money tight is justified in light of the expected increase in import bills due to hikes in wheat and other grain prices. "This means that if Egypt receives more external financing, the Central Bank of Egypt will most likely work on stabilising the NIR level at $15 billion and will not opt to use the NIR to help appreciate the pound from current levels," it said.

While Beltone expects the exchange rate to modestly depreciate to an average 6.2 during this year, EFG-Hermes revised its forecast for the pound to fall to 6.25 to the dollar by the end of this year instead of its previous forecast of 6.1.

Analysts also agree that the value of the pound during the coming period is linked to the amount of external financing received to bridge a multi-billion gap in the balance of payments.

"Without an International Monetary Fund [IMF] loan and associated funding, the dollar-pound [exchange rate] should witness a deprecation of 15 per cent, to an average of LE7 during 2012/2013," said Beltone.

Egypt asked for a $4.8 billion loan from the IMF in August. In addition, Qatar will deposit the remaining $1.5 billion of the $2 billion it pledged. Egypt liberalised the pound in 2003 but kept a de facto peg to the dollar since then. Though the depreciation in the Egyptian pound's value has its own disadvantages which will be reflected in an increase in commodity prices, Abu Zeid pointed out that the weakening could boost export activities on the short term, which would benefit the Egyptian economy.

Additional reporting

Sherine Abdel-Razek

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