Devaluations usually come as a surprise but Egypt, it seems, is doing things differently. The public has been primed for a devaluation for months now, with anticipation reaching fever pitch in the last week or two. The Central Bank of Egypt (CBE) may have an excuse for flagging the move. Egypt is awaiting approval for a $12 billion loan from the International Monetary Fund (IMF) and the CBE's governor and concerned ministers have already left for Washington to attend IMF/World Bank meetings scheduled between 7 and 10 October. Following the meetings the IMF's executive board will look into the loan to Egypt. Before then Egypt should have taken enough measure to show it is serious about reform. But being ready for the news will not lessen the repercussions. Analysts estimate the pound could lose anything between 35 to 45 per cent of its value either in one go or in stages. The pound will drown, not float, is one joke currently doing the rounds. The pound has already lost 14 per cent of its value against the dollar this year and is officially trading at LE8.88/dollar. “I want to spend my money while it can still buy something,” says Noha Attia, a software engineer. She thought of buying dollars on the black market only to be warned she might lose money because she would be buying at a rate driven up by speculation. The dollar was trading at above LE13.5 on the black market this week. “The dollar is trading at higher than its value because of speculative demand that will disappear once a flexible managed float is introduced and dollars start flowing back into the system from remittances and speculators,” Tarek Allouba, financial consultant, told Al-Ahram Weekly. As a precaution Attia decided to buy gold. But that, too, is at an all-time high. Eighteen carat gold reached LE427 on Monday, up more than 20 per cent since mid-August. “Not only will we lose our savings but everything will become more expensive,” lamented Attia. But some analysts believe prices will remain relatively stable given many importers and manufacturers, unable to meet their dollar needs from banks at the official exchange rate, have already factored the black market rate into their pricing. However, “many companies could potentially wait for the impact of the other reforms, especially the devaluation, delaying an increase in prices pending better visibility of the entire impact on costs,” said a research note titled “Egypt Reforms' Impact” by investment bank Arqaam Capital. Inflation has been on an upward trend for the past couple of months. It reached 16 per cent in August year-on-year, the highest in more than seven years. The impact of the fall in the value of the pound will depend on whether the CBE goes for a sharp devaluation or a free floatation. Many analysts believe it will be a mixture of both and the CBE's choice will depend on the hard currency it has up its sleeve. Arqaam believes the CBE needs to secure “enough hard currency ammunition to meet the knee-jerk spike in demand that will occur once the pound-dollar rate is officially changed and restrictions on obtaining foreign exchange in the official market are eased”. This week the CBE announced that Egypt's net international reserves rose in September to $19.591 billion, up from $16.564 billion in August. Allouba estimates there will be a $6 billion surge in demand for dollars in the month following devaluation. Devaluation will not only dent people's purchasing power, it will also impact the government budget. “The bigger the devaluation, the bigger the negative impact on the budget because of higher import costs and foreign currency debt servicing. The authorities are likely to try to devalue enough to satisfy the market but not by too much,” says Allouba. Moody's credit rating agency does not share Allouba's worries about foreign debt. “The share of foreign currency denominated general government debt is very low and so is the share of externally held government debt,” Steffen Dyck, a senior credit officer at Moody's, said during a media briefing in Cairo. Egypt's external debt stands at around $53 billion. “A free float should not be an option,” said one banker who asked to remain anonymous. He is worried about the inflationary impact of a drastic fall in the value of the pound. Egypt is a net food importer, and imports stand at more than 20 per cent of GDP. “It will place too much pressure on citizens,” said the banker, especially at a time when subsidies are being lifted and cuts in fuel subsidies are being considered. He expects inflation to reach between 18 and 20 per cent by the end of 2016 as reforms are implemented. Subsidy cuts and new taxes aim to narrow the budget deficit which reached 11.8 per cent of GDP in fiscal year 2015/16. The CBE has depleted international reserves, which stood at $36 billion in 2011, as well as some of the loans and grants Egypt has received in the past five years defending the pound. “The [IMF] programme will include a condition that the Central Bank will not intervene to stem the risk of devaluation,” said an economist familiar with the negotiations. The upside of the devaluation, he says, would be to “stem speculation and excessive imports and limit depletion of international reserves”. “The country would live within its means and the exchange rate would reflect the true value of supply and demand of foreign currency.” However, he added, in order for devaluation to work the economy needs to generate hard currency revenues from sources such as tourism and investment. And it needs to capitalise on depreciation to increase the competitiveness of exports. Egypt's exports stand at 13 per cent of GDP. Some observers doubt exporters' ability to boost exports, pointing to their failure to take advantage of previous devaluations. Egypt received nine million tourists in 2015 compared to 15 million in 2010. Revenues from tourism fell to $3.8 billion in fiscal year 2015/16, a drop of 48.9 per cent on the previous year. Net official and private transfers, including workers' remittances, also dropped in fiscal year 2015/16 to $16.9 billion, a 29.5 per cent fall compared to the year before. And even these were channelled to the black market in search of higher exchange rates. Foreign direct investment net inflows rose from $6.4 billion to $6.8 billion during the same period. The capital account is expected to recover faster, according to Arqaam, “as portfolio and foreign direct investments rise following the resolution of the foreign exchange overhang, generating an overall balance of payments surplus that would help replenish the CBE's international reserves.” The anonymous banker remains worried about the management of the economy, whether by the government or by the CBE. “Mistaken government decisions are what put us in this position in the first place,” he said, criticising the dollars invested in mega projects that the economy did not immediately need. “It would have been better for the economy if that money had gone to boosting industrial production,” he says. Devaluation is expected to be followed by an interest rate hike to make the pound more attractive. Research house Capital Economics estimates the CBE will raise its overnight deposit rate by 4.5 per cent by the end of next year though this may have a negative effect on public debt and the ensuing budget deficit. Total government domestic and external debt reached 91.8 of GDP at the end of December 2015, according to Ministry of Finance data. Moody's says the outlook for Egypt's economy is stable, with a B3 rating. It forecasts GDP growth of three per cent for fiscal year 2015-2016 and an average four to 4.5 per cent per year until 2019. Moody's estimates are lower than the government's which says growth reached 4.3 per cent during July-March 2015-16 compared to 5.7 per cent during the same period the year before. The government is targeting a 5.2 per cent of GDP growth rate in fiscal year 2016-17.
