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EGP-USD: When Will Egypt’s Next Currency (Pound) Devaluation Happen?
Michael Gunn
A foreign currency exchange bureau in the Nasr City district of Cairo in January.
Photographer: Islam Safwat/Bloomberg
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Egypt is mired in a grueling economic crisis that’s left its 105 million-plus people gripped by uncertainty, but one thing seems all but assured: another currency devaluation is likely on the way.
The anticipated move would be the fourth major round of weakening for the Egyptian pound since early 2022 — and potentially the largest yet. Done correctly, it could help bring closer to an end the nation’s worst hard-currency crunch in decades, drawing foreign capital to the $400 billion economy and pulling it back from the brink.
Urgency is building for Egypt, given that it faces total financing needs Goldman Sachs Group Inc. estimates at around $25 billion over the next four years.
The timing, though, depends on a range of foreign and domestic issues, with authorities wary of the impact that an accompanying inflation spike will have on an already struggling population.
The following are five key areas to watch:
Narrowing of gap between black market and official rate
After hitting a record of more than 70 per US dollar on Egypt’s black market earlier this month, the pound has seen a partial reversal. With a fresh crackdown forcing many illegal traders to shutter operations, the rate is now between 60-65.
While still about double the official bank rate of about 30.9, further cooling will make it easier to devalue. Egyptian billionaire Naguib Sawiris recently suggested authorities should try to align the two rates.
The derivatives market, used both to hedge risks and for speculation, signals a steep depreciation ahead even as traders pare bets for the Egyptian currency’s decline. Non-deliverable forward contracts on the pound have eased slightly from a record high, with the 12-month tenor now just short of 59, compared with a peak of nearly 67 in late January.
Some global banks see a smaller adjustment than priced in by investors. Societe Generale SA anticipates Egypt will allow the exchange rate to weaken to the range of 40-45, a prediction similar to Deutsche Bank AG’s call.
“Authorities are likely to tread carefully in light of the uncertain and volatile external backdrop,” Deutsche Bank strategists Anna Friedemann and Oliver Harvey said in a note. “We still see the exchange rate as a symptom and not as the cause of the difficult situation Egypt finds itself in.”
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Clues from the IMF
The International Monetary Fund has been urging Egypt to weaken its currency for months. The issue is a key factor in talks about a new, expanded deal with the lender and partners that may secure Egypt some $10 billion in financing.
Pleased to meet with Mostafa Madbouly,
’s Prime Minister. Working with Egypt is a high priority for the IMF and we have made significant progress in our discussions of a comprehensive policy package needed to complete the 1st & 2nd reviews of Egypt’s economic reform program. pic.twitter.com/suJ0g7dL4L
— Kristalina Georgieva (@KGeorgieva) February 12, 2024
That makes any comment by IMF Managing Director Kristalina Georgieva useful to study for signs regarding the timing of a devaluation. This month, she said the fund and Egypt were in the “very last stretch” toward reaching a deal and called working with Egypt “a high priority for the IMF” at a meeting with its prime minister. There may be further clues to come.
What Bloomberg Economics Says...
“As the situation turns more dire for Egypt, there’s one silver lining. External funders — the Gulf Cooperation Council, IMF and Europe — are likely intervene in a desperate situation to avoid another pocket of instability in the Middle East.”
— Ziad Daoud, chief emerging-markets economist.
Interest rates rising
Egypt has typically weakened its currency in tandem with monetary tightening — a step that seeks to curb local demand and attract investment in domestic assets by making returns more lucrative.
Read More: Egypt Hikes Rates in Sign IMF Deal, Devaluation May Be Near
The central bank increased its benchmark rate on the same day as two devaluations in 2022, and delivered a jumbo hike less than two weeks before the most recent one. Authorities on Feb. 1 raised the deposit rate for the first time since August to 21.25% — an all-time high — although that doesn’t rule out another move soon.
The latest move “could herald a more wide-ranging policy package, potentially prescribed by the IMF to unlock funding,” SocGen strategists said in a report.
Big deals come to fruition
Egypt has put more than two dozen state-owned assets — from banks to power plants and gas stations — on the auction block in a quest to secure foreign exchange. Sales have picked up after a sluggish start, with Egypt announcing more than $2 billion in the second half of 2023.
A major new investment could give authorities the financial fire-power needed to devalue the pound without running the risk of overshoot. One such prospect involves talks by Abu Dhabi to buy and develop Ras El-Hekma, a premium area on Egypt’s Mediterranean coast — a project initially estimated to cost $22 billion.
But analysts at Barclays Plc question if any deal’s likely protracted timeline would “yield immediate benefits” for Egypt, especially as it’s uncertain how much foreign direct investment the country may receive as a result. “Egypt’s pressing funding needs have weighed on its outlook, pointing to limited near-term effects from the Ras El-Hekma project,” Barclays economists including Brahim Razgallah said in a report.
And finally, is it Ramadan?
One timing hiccup comes in the form of the Muslim holy month of Ramadan, which is set to begin this year about March 10 and may pose an informal deadline to get a devaluation done before. It’s a period of big family gatherings and expansive evening meals, and authorities are unlikely to wait until then to hand Egyptians a sudden price shock.
The government may be preparing the population for the inflation hike. Last Wednesday, it announced a 50% rise in the minimum wage for state workers, effective from March. It’s part of a wider social protection package that authorities say is worth some 180 billion pounds ($5.8 billion), although they didn’t give a timeframe.
It’s possible Egypt would allow greater flexibility in the pound while continuing “to manage the official exchange rate for the foreseeable future,” said Farouk Soussa, an economist at Goldman. Demand for hard currency is still high at a time when the banking system doesn’t have enough FX liquidity.
“To overcome these challenges, we believe further policy tightening is required and the official sector must build sufficient FX liquidity buffers ahead of any attempt to unify the exchange rate via a devaluation,” Soussa said.
а я говориииииииииил!
’s Prime Minister. Working with Egypt is a high priority for the IMF and we have made significant progress in our discussions of a comprehensive policy package needed to complete the 1st & 2nd reviews of Egypt’s economic reform program. pic.twitter.com/suJ0g7dL4L