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Why Egypt’s pound is not strengthening

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By Farah Halime, Rebel Economy

Take a look at this chart, which the Central Bank of Egypt  has been proudly parading this month:

Credit: Bloomberg

Credit: Bloomberg

It shows how the pound’s official price, controlled by the central bank, has been appreciating slowly since the overthrow of Islamist president Mohammed Morsi.

If we were to take this graph at face value, we might conclude that the pound strengthened as the interim government (and military) took over, and billions of dollars worth of Gulf aid is helping the country’s currency stabilise.

 

However, traders on the black market tell a very different story, and say the central bank is ensuring the pound strengthens just to give the impression that the economy is stable and improving despite the turmoil.

 

Here, where the pound is traded illegally, domestic currency has actually weakened to EGP7.20 (from EGP7.10 a few days earlier, according to Reuters) reflecting Egypt’s volatile economic and political situation.

The pound actually fell as low as around EGP8 per dollar at one point earlier this year on the black market, prompting the central bank to turn to a few different measures to reduce pressure on the currency and revive the economy:

  • It put the currency up for sale a few times in December 2012 to prevent a currency crisis and let the pound lose more than 11% of its value on the official market
  • It cut interest rates for the first time since 2009 to revive economic growth
  • The government accepted $12bn of Gulf aid from Saudi Arabia, Kuwait and Abu Dhabi. $5 bn of which has already arrived.

But none of that is working. This graph puts the currency’s performance in context, showing how the pound has rapidly fallen in value this year:

Credit: Bloomberg

Credit: Bloomberg

And as the pound depreciates further, the more foreign currency reserves are drained and the less the central bank can support the official rate for the currency. This is why the country is spending foreign currency at a rate of about $1.5bn a month.

 

Add to that, the few foreign investors left are moving to withdrawals but currency controls are making it difficult to convert Egyptian pounds to dollars. Earlier this month, Emad Mostaque, a strategist at Noah Capital Markets in London told me around half a billion dollars worth of investment is trying to leave Egypt at the moment.

So the picture isn’t as rosy as the interim government may want you to think.

 

In fact, the volatility we see on Egypt’s currency cycle will be another black mark to add to the nation’s problematic currency history, marked by the central bank’s repeated efforts to keep the pound’s value elevated, sometimes at the expense of the country’s precious foreign reserves.

The people at Dcode, an Egyptian business consultancy, put together a comprehensive graph detailing just how volatile the Egyptian pound has fared in the last three decades:

 

Credit: Dcode

Credit: Dcode

As long as the central bank and government refuse to accept that massive political turmoil and violence on the streets alarmed investors and traders, the pound will continue to fall, foreign reserves will bleed faster and the Gulf will have even more power over Cairo as it comes to the rescue once more with billions.

 

Farah is a business journalist and founder of Rebel Economy, a blog focused on how regional economies are rebuilding after the Arab Spring. 

This post originally appeared on Rebel Economy.


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