The Central Bank of Egypt (CBE) would allow the Egyptian pound to decline against the dollar to EGP 7.24 in bank transactions Monday, according to Mohamed Farid, DCode Economic and Financial Consulting Head.
He expressed optimism toward the long-term investment atmosphere in Egypt, because it sends a reassuring message to foreign investors wishing to invest in Egypt in dollars.
He added that the CBE’s lowering of the interest rate expresses the bank’s inflation expectations, which are not to raise the interest rate. Farid added that the Egyptian pound’s rate against the dollar reflects its expectations for inflation, as well as targeting the short-term economic growth.
On Thursday, the CBE’s Monetary Policy Committee lowered the interest rate for deposits and loans by 50 points in one night, to reach 8.75% and 9.75%, respectively.
“The leadership of the Central Bank allowed for a controlled and gradual decline of the pound against the dollar on Sunday and Monday as a message to financial communities and international markets that their expectations of future inflation are optimistic and will not increase,” Farid said. He added that the CBE’s decision to allow the pound to fall against the dollar was a positive but late decision.
Farid added that foreign investors wishing to inject investments into Egypt in the future prefer that the exchange rate reflects the political structure and the expectations on inflation. The EGP 7.18 exchange rate, he said, would not have helped.
“It would have been better to gradually lower the Egyptian pound’s exchange rate against the dollar within the last two years in order to make use of the monetary reserve of hard currency through the availability of dollar and eliminating the black market, or at least limiting imports and encouraging Egyptian exports and tourism,” Farid said.
On Monday, the Egyptian pound decreased from EGP 7.19 against the dollar to EGP 7.24 during the CBE tender, the lowest formal price, and continued to go down for the second day in a row this week. In CBE’s website, the dollar was at EGP 7.28 for Monday transactions.
CBE stated that it offered $40m and sold $38.4m, the lowest acceptable price being EGP 7.24.
Farid said he expects the Egyptian pound will see more declines in the formal market during the coming days to reach EGP 7.45 against the dollar by the end of the fiscal year (FY) 2014/2015. He confirmed that this is not a negative long-term step, as it becomes clearer to investors how the foreign exchange rate will be like in Egypt. It will also make it easier for them to take the right investment decisions and allows for boosting investments through the pumping in of new foreign capital.
Bank trade prices in dollars are set according to the CBE’s tender, which makes it in control of the formal exchange rate, while the black market stays active .
According to Farid, the Egyptian pound’s decreased exchange rate against the dollar will have only a short-term negative impact on goods and commodities.