- Egypt has two choices: defend pound or get factories working
- Central bank chief says March’s devaluation ‘corrective move’
Egypt’s central bank Governor Tarek Amer said the focus on defending the pound over the past five years was a “grave mistake,” signaling the possibility of another devaluation after he weakened the currency by 13 percent in March.
Amer, who took office in November, outlined views on the currency, the economy and monetary policy in three separate newspaper interviews published on Sunday. He said authorities can no longer delay measures that would control the use of foreign currency. Under his leadership, the central bank is focusing on reviving the economy rather than stabilizing the exchange rate, he said.
“We have two choices: either keep the pound stable or get factories working,” Amer told the Cairo-based daily Al-Mal. The exchange rate should reflect market and economic forces, he said. “I will take what I think are the right decisions, in my view, and bear the responsibility.”
The biggest one-time devaluation since 2003, which Amer described as a “corrective move,” has failed to rein in a thriving black market, undermining the central bank’s efforts to attract investments that would bolster its reserves and make more hard currency available for businesses. The pound is trading at a discount of almost 20 percent to its official rate versus the dollar, according to Bloomberg surveys.
Amer’s remarks are “a clear signal another round of devaluation is around the corner,” said Hany Farahat, senior economist at Cairo-based CI Capital Holding, a unit of the country’s biggest publicly traded lender. “The governor reiterated the direction of opening up and liberalizing the pound, and adopting a more flexible exchange rate,” Farahat said.
The central bank has taken steps to ease restrictions on dollar transactions since Amer took office. In announcing the March 14 devaluation, policy makers also said they would adopt a more flexible exchange rate. However, the pound has been little changed in the central bank’s weekly foreign-exchange sale.
Egypt’s main stocks index added 6.4 percent since the devaluation. The EGX30 is among the 10 worst performers of all indexes Bloomberg tracks in dollar terms since the beginning of 2016.
The timing of the next devaluation will depend on the central bank’s ability to inject foreign currency into the market after weakening the currency, according to Reham El-Desoki, senior economist at Dubai-based investment bank Arqaam Capital.
“A Month or Two”
“Once there are enough dollars to manage this step properly, they will devalue,” she said. “And this could happen in a month or two.”
Saudi Arabia and United Arab Emirates have pledged a total of about $4.5 billion in deposits and grants, of which $1.5 billion could materialize soon, according to local media reports. The World Bank will release a $1 billion loan once Egyptian lawmakers approve value-added taxation. The African Development Bank has also pledged $500 million.
“In March, the central bank lacked the firepower to manage the exchange rate in a flexible manner,” El-Desoki said. “This time it could be different as they will be able to increase the availability of foreign currency and support the process.”