IMF sees growth ahead for Algeria    Egyptian pound inches down in early July 1 trading    Madbouly represents Egypt at 4th UN Conference on Financing for Development in Seville    Bloody escalation in Gaza amid warnings of humanitarian, health catastrophe    Egypt, Iran FMs discuss Gaza truce, nuclear talks revival    Egypt's Environment Minister calls for stronger action on desertification, climate resilience in Africa    Egypt in diplomatic push for Gaza truce, Iran-Israel de-escalation    Peace is not imposed by bombing… nor achieved by normalisation peoples reject: Al-Sisi    Spinneys Opens A New Store in Hurghada    Egypt to launch new dialysis filter factory in July, covering 65% of domestic demand    Egypt teams up with private sector to boost university rankings    Egypt reveals heritage e-training portal    Egypt leverages diplomacy to advance global health partnerships    Egypt to toughen truck safety rules following fatal Ring Road accident    Three ancient rock-cut tombs discovered in Aswan    Egypt condemns deadly terrorist attack in Niger    Egypt, Tunisia discuss boosting healthcare cooperation    Egypt's commodity reserves "very reassuring", some stocks sufficient for 9 months — trade chief    Egypt's FM, China's Wang discuss Iran-Israel escalation    Sisi launches new support initiative for families of war, terrorism victims    Egypt's GAH, Spain's Konecta discuss digital health partnership    Grand Egyptian Museum opening delayed to Q4    Egypt expands e-ticketing to 110 heritage sites, adds self-service kiosks at Saqqara    Egypt's Irrigation Minister urges scientific cooperation to tackle water scarcity    Egypt discovers three New Kingdom tombs in Luxor's Dra' Abu El-Naga    Egypt launches "Memory of the City" app to document urban history    Palm Hills Squash Open debuts with 48 international stars, $250,000 prize pool    Egypt's Democratic Generation Party Evaluates 84 Candidates Ahead of Parliamentary Vote    On Sport to broadcast Pan Arab Golf Championship for Juniors and Ladies in Egypt    Golf Festival in Cairo to mark Arab Golf Federation's 50th anniversary    Germany among EU's priciest labour markets – official data    Cabinet approves establishment of national medical tourism council to boost healthcare sector    Egypt's PM follows up on Julius Nyerere dam project in Tanzania    Egypt's FM inspects Julius Nyerere Dam project in Tanzania    Paris Olympic gold '24 medals hit record value    A minute of silence for Egyptian sports    Russia says it's in sync with US, China, Pakistan on Taliban    It's a bit frustrating to draw at home: Real Madrid keeper after Villarreal game    Shoukry reviews with Guterres Egypt's efforts to achieve SDGs, promote human rights    Sudan says countries must cooperate on vaccines    Johnson & Johnson: Second shot boosts antibodies and protection against COVID-19    Egypt to tax bloggers, YouTubers    Egypt's FM asserts importance of stability in Libya, holding elections as scheduled    We mustn't lose touch: Muller after Bayern win in Bundesliga    Egypt records 36 new deaths from Covid-19, highest since mid June    Egypt sells $3 bln US-dollar dominated eurobonds    Gamal Hanafy's ceramic exhibition at Gezira Arts Centre is a must go    Italian Institute Director Davide Scalmani presents activities of the Cairo Institute for ITALIANA.IT platform    







Thank you for reporting!
This image will be automatically disabled when it gets reported by several people.



Economists hail Egyptian Pound devaluation, flexible exchange rate
Published in Amwal Al Ghad on 15 - 03 - 2016

Economists and bankers have welcomed the Central Bank of Egypt's decision to adopt a more flexible exchange rate policy after a sharp devaluation of the Egyptian Pound as much-needed measures to address a foreign currency crunch.
"The CBE decided to adopt a more flexible exchange rate regime that better reflects the underlying forces of supply and demand and, in turn, lead to greater transparency and foreign exchange liquidity through attracting greater investments and the correction of asset prices," the bank said on Monday in a statement explaining the move.
The statement came on the heels of an exceptional auction in which the CBE sold $198 million to local banks on Monday, allowing the Egyptian Pound to depreciate by over 14 percent of its value to EGP 8.85 against the US dollar.
"It's a step in the right direction," a senior banker told Ahram Online on condition of anonymity. "It is a prelude to having a flexible exchange rate and letting the market decide where the pound is."
Stagnating foreign investment and export revenue, plunging tourism revenues, and dwindling Suez Canal receipts have contributed to a shortage of hard currency and the rise of a resilient parallel market over the past years.
"Investors need to see a flexible exchange rate regime, because Egypt is not a country which can afford to peg its currency against the dollar, like oil-rich economies which have massive inflows of foreign currency income," Mohamed Abu Basha, a Cairo-based economist at investment house EFG Hermes, told Ahram Online.
To attract foreign currency into the country, Egypt's largest two state-owned banks National Bank of Egypt and Banque Misr announced on Monday the launch of three-year EGP-denominated investment certificates for individuals, at a 15 percent yield, to be paid for in hard currency.
Some Egyptian public banks have recently begun offering US dollar and Euro-denominated certificates of deposits to Egyptian expats. Also lately, the CBE has lifted restrictions on dollar deposits at Egyptian banks for individuals and companies importing essential goods.
"The decision this morning by the Central Bank of Egypt to devalue the pound and move to a more flexible exchange rate regime is a positive step and should help improve the country's balance of payments position," said Jason Tuvey, Middle East Economist at London-based Capital Economics in an emailed note.
The bank, which has controlled the exchange rate through a regime of weekly foreign currency auctions since December 2012, did not elaborate on what mechanism it would adopt, though it affirmed that it "will continue to closely monitor developments and will not hesitate to use all its tools and authority to maintain an orderly foreign exchange market and ensure price stability over the medium-term."
"Effectively, I think it means a return to a managed float, reflecting market dynamics, as was Egypt's exchange rate regime between 2004 and 2011," said Abu Basha, "though it would have to be gradual, because you need the interbank market to function properly."
Under such a regime, said Abu Basha, the pound would be linked to a basket of currencies rather than being pegged to the dollar as it has in recent years.
"This does not hint at further devaluation as much as it hints at increased volatility in the exchange rate," he said, "as the currency increasingly reflects market dynamics: the currencies of Egypt's trading partners, FX inflows, etc."
Further depreciation
Some believe that the pound should and will fall further than the level it reached on Monday in order for the devaluation to have a lasting impact on the FX crunch.
"The magnitude of the move is not sufficient to clear the market or fully resolve all challenges, because if you look at the Non Deliverable Forwards (NDF) on the Egyptian Pound, the market expects the pound to reach around EGP 10.45 against the dollar by year's end," said Hani Farahat, senior economist at Cairo-based CI Capital.
Welcoming the move towards a flexible exchange rate that will allow the currency to further depreciate, Tuvey said, "We still think the pound has a bit further to fall – we think a level of closer to 9.5/$ would help to restore external competitiveness."
Abu Basha noted that the central bank is operating "under many constraints: slowing global economic growth, slow global trade, the weakening currencies of most of its trading partners, and falling oil prices which negatively affects grants and private investments, tourism and remittances, from the GCC countries."
Egypt's foreign currency reserves, which have been used to prop up the pound since the country's 2011 uprising, have stagnated at around $16.5 billion in recent months.
"Given all these constraints, it's a very positive move which notably reduces the premium on the parallel market against the official rate," Abu Basha said.
An outright floating of the pound "would require stronger and sustainable sources of FX which Egypt currently lacks," according to Farahat.
In a televised interview last month, CBE Governor Tarek Amer ruled out floating the pound until FX reserves recover to at least $25 billion.
Interest rate hike
CBE is expected to hike up interest rates to combat inflation at its next Monetary Policy Committee (MPC) on Thursday.
However, analysts differ over the impact a weaker pound will have on inflation, which had eased for the second consecutive month in February to 9.1 percent after a rate hike in December.
"There will inevitably be some short-term pain – inflation is likely to rise and we've now pencilled in a 100bp rate hike at Thursday's MPC meeting (previously 50bp)," said Tuvey.
Farahat also expects a rate hike of "at least 50 basis points," yet he does not believe the devaluation will have a significant impact on inflation.
"Local suppliers were already pricing the dollar at a much higher price," he said, referring to the black market rate.
Monday's move will have an impact on inflation, argues Abu Basha, "as certain sectors, such as importers of strategic goods, source most of their hard currency needs from the banking system."
Nonetheless, the impact is likely to be gradual, he said, as consumer companies are likely to gradually pass on the increased cost in order to avoid any negative impact on their volumes.
source: Ahram online


Clic here to read the story from its source.