“Let’s face it. The pound was overvalued” – Egypt devalues its currency


CAIRO, Egypt – Egypt’s unexpected devaluation of its hard-pressed currency is likely to spur foreign investment in the country hampered by a foreign currency crunch and curbs, analysts said.

The Central Bank of Egypt (CBE) devalued the local currency to 8.95 per dollar instead of a previous 7.83. The devaluation is the biggest in the country’s recent years.

“The Central Bank’s decision to devalue the pound by around 14 percent is a long-delayed step, which will deal a painful blow to the black market in currencies in a short period. One major aim of this move is to stop speculations at the foreign currency market in the country, which has seen successive spikes in the value of the dollar against the pound,” Mosbah Fadel, a banking expert said.

Before Monday’s depreciation, the Egyptian pound had already lost nearly 32 percent of its value since the 2011 uprising.

“Now with the rate of the dollar against the pound almost the same at the official and parallel [unofficial] markets, foreign investors will be encouraged to bring their money to Egypt without worries about currency dealings.”

The move came days after the CBE removed caps on deposits and withdrawals by corporations and individuals. Lifting the curbs, imposed last year, is aimed at restoring confidence in Egypt’s banking sector.

Egypt’s foreign currency reserves have dwindled from their peak of $36 billion in 2010 to $16.5 billion in February this year. The decline is blamed on the unrest that has gripped the country following the 2011 uprising, subsequently hitting tourism, a main foreign currency earner for this country of 90 million population, hard.

The CBE on Monday said its target for the country’s foreign currency reserves is $25 billion by the end of this year.

“This will result from attracting foreign investment after lifting curbs,” the bank said.

“The CBE decided to adopt a more flexible policy to remedy the exchange rate distortions and to sustainably and regularly restore the circulation of foreign currency in banks,” the bank said in an statement in Arabic.

Egypt’s central bank expects that its moves will help the “Egyptian economy restore its competitiveness” and result in foreign exchange rates that “will reflect the strength and real value of the local currency.”

Talaat Madkour, a retired banker, described the devaluation of the Egyptian pound as a “good step”, adding that it will stabilize the currency market in the country.

“Let’s face it. The pound was overvalued,” he said. “Billions of dollars have been spent in the last few years in order to shore up the pound. This was a wrong policy that only came to the benefit of traders in the black market. Now, the hoarders of the green currency will be encouraged to deal with banks, making use of their latest incentives.”

On Monday, two Egyptian state-owned banks introduced certificates of deposit bought in foreign currencies with their annual 15 percent interest rate offered in the local pound.

The savings vehicle has a maturity date of three years. However, Madkour warned of a fresh wave of price hikes on the local market as a result of Monday’s currency evaluation.

“Egypt is a big consumer of imported goods, mainly food. The poor and middle class categories [of people] can end up facing higher prices of necessary commodities.”

To Ahmad Al Wakil, the head of Egypt’s Chambers of Commerce Federation, this is unlikely.

“Prices of commodities and services will not rise because they have already gone up in recent months,” he told private newspaper Al Watan. “I expect the prices to go down rather than up.”