The decision of the Central Bank of Egypt (CBE) to keep the value of the Egyptian pound against the US dollar unchanged stirred many questions in the market, as it came against the expectations of many analysts as well as local and international financial research institutions.
The market had expected the CBE to once again devaluate the Egyptian pound during the weekly US dollar tender last Tuesday, after a previous devaluation of 14% in March.
Market expectations were based on the remarks of the CBE governor, Tarek Amer, earlier in July when he emphasised the CBE’s keenness to pursue a more flexible exchange rate policy.
Did the market misunderstand Amer’s remarks, or was someone pushing this scenario forward for personal gain? Did Amer deliberately utter those words to confuse speculators, or does he actually intend to devaluate the Egyptian pound again?
Experts and bankers agreed that a further devaluation must have been on the way, but they did not expect it to happen on Tuesday. They said the timing of this move lies in the hands of the CBE alone, and if the decision was to truly come about, it would not be announced in order to prevent speculation on the US dollar.
I do not expect a complete float of the pound in the short term period
Board member of both the Suez Canal Bank and Arab Sudanese Bank Mohamed Abdel Aal believes that the interpretations and analyses of recent statements by the governor of the Central Bank of Egypt (CBE) are just whims, wishes, and aspirations of their interpreters.
Abdel Aal explained that there were variable reactions for the devaluation of the Egyptian pound. While US dollar holders and dollarisation amateurs, and the emperors of currency traders were happy about it, while importers were sad.
A lot of people are waiting for that step, such as those who are working abroad—key funding sources to the informal market.
Thus, Abdel Aal wondered: does that mean the CBE’s statements means that the Egyptian pound will be floated due to supply and demand conditions, and a foreign exchange shortage for reasons imposed due to global, regional, and local conditions?
This is contrary to reality, as the most important functions of the CBE are to maintain the exchange rate stability and restrict inflation. The CBE can strategically achieve this through its monetary policy, and tactically through a set of compatible steps. One of the important steps is what the CBE’s governor has mentioned about supporting the broken factories, helping the factories to produce goods for export, to reduce the demand on the US dollar, and stimulate the flow of foreign exchange, according to Abdel Aal.
Abdel Aal said what Amer meant in his recent statements is that instead of intervening in the market through banks following the known traditional style as a buyer of Egyptian pounds and a seller of US dollars, the country can support the export-oriented sectors, tourism, and factories to produce alternatives for the imports. Thus, we provide forex, and balance the exchange rate at a fair price, for the sake of the homeland and the citizen.
Amer’s statements are tactics for resolving the issue, and there will not be a full managed floating of the Egyptian pound in the short term, according to Abdel Aal.
I did not expect any devaluation of the pound on Tuesday
Tamer Youssef, head of the treasury sector at a foreign bank operating in Egypt, said that the market did not misunderstand the CBE governor’s remarks, but that the market’s expectations were wrong.
He added that another devaluation of the Egyptian pound is coming up, which the market knows. Only the CBE can decide on the time of the move, and it has to do so discreetly, he noted.
Youssef said that he did not expect the devaluation of the Egyptian pound in the CBE’s tender on Tuesday, noting that the CBE governor’s remarks about adopting a more flexible exchange rate have just come to confirm his statement, which was issued in March after he cut the value of the pound by EGP 1.12 all at once.
This statement has affirmed the adoption of a more flexible policy regarding the exchange rate, to treat the distortions in the exchange rate system. The CBE aimed to restore the trading of foreign exchange within the banking system on a regular and sustainable basis, which reflects the supply and demand mechanisms.
He pointed out that this measure aims to provide cash for economic development, and place Egypt among the list of countries with efficient and transparent exchange markets. This measure will also increase liquidity and enhance the state’s ability to attract investment.
The CBE hoped that those decisions would bring the exchange rates to accurate levels, reflecting the real value of the local currency within a short period of time.
According to Youssef, the emphasis on this statement sent a message to local and foreign investors that the stability of the US dollar exchange rate against the Egyptian pound is no longer acceptable.
He ruled out that the announcement of the rise in inflation at the end of May was the reason for the postponement of the Egyptian pound’s devaluation, as was reported last week. He pointed out that the CBE was aware of these indicators a long time ago.
There are those who promoted the idea that the Egyptian pound would be devaluated in the US dollar auction last Tuesday. Some of them wanted to achieve personal gains from speculating on the US dollar’s price, while others expected this step in good faith, according to Youssef.
He explained that it is very important for the CBE’s decisions to come in a surprising manner. Major central banks across the entire world adopt this same strategy. Usually, they announce their important decisions directly after the official days off, in order to prevent those who seek personal gains from benefitting from such decisions.
I expect a third devaluation before the end of the year
Ezz El-Din Hassanein, a banking and economic expert and general manager at a bank operating in Egypt, said that the upcoming devaluation of the Egyptian pound will happen before the end of September.
Hassanein is expecting the official US dollar price to reach EGP 9 by the end of September. In addition, he is expecting the CBE to devaluate the Egyptian pound again before the end of this year, which would increase the official price of the US dollar to EGP 10.
“Any other devaluation of the Egyptian pound will have negative effects, the most important of which is the increase of the exchange rate in the informal market, because the CBE will not be able to pump enough US dollars into the market to support its new price,” said Hassanein.
He stated that without a strong US dollar balance supporting any change in the dollar’s price against the pound, the CBE will be in a very hard situation.
“I did not expect the devaluation on Tuesday, but I was hoping the CBE would not take this step in order for the speculators—who bought large amounts of US dollar— to incur heavy losses so as not to repeat it again,” Hassanein said.