Egypt may let pound slide against dollar, says EFG report

Theodore May
5 Min Read

CAIRO: The Egyptian pound has made small but steady gains against the dollar this year. But at least one firm is predicting a potential shift.

The pound has gained 1.1 percent against the dollar this year and 2.7 percent since mid-March.

But with a strengthening pound has come a decline in exports. According to Bloomberg, Egyptian exports fell 7 percent during the first nine months of the 2008-2009 fiscal year.

EFG-Hermes economist Simon Kitchen posited in a note to investors that the Central Bank of Egypt (CBE) may let the pound slide as a means to boost exports and spur the Egyptian economy.

“With credit growth slow and low loan-to-deposit ratios, exchange rates are a more effective channel than bank lending for supporting growth, by improving export competitiveness. The Nominal Effective Exchange Rate (NEER) has been stable since June, but we think that the authorities will encourage some trade-weighted EGP depreciation before the end of 2009, Kitchen wrote.

The EFG-Hermes report noted its prediction that the pound, relative to the dollar, would fall to LE 5.70 by the end of 2009 and LE 5.90 by the end of June 2010.

Since the beginning of the year the Monetary Policy Committee (MPC) at the CBE has continued to cut interest rates in an effort to stimulate the economy. Even though Egypt’s GDP has fared better than many of the developed economies, growth has contracted in light of the global economic crisis.

GDP growth hit 4.7 percent for the first nine months of the 2008-2009 fiscal year.

“In the meantime, the global financial crisis continues to interrupt the domestic growth momentum, bringing domestic GDP growth in the 2008/09 third quarter to 4.3 percent compared to 7 percent on average over the past three years, wrote Rania Al-Mashat, head of the Monetary Policy Unit.

“Moreover, despite tentative signs that the worst of the global downturn may be over, consensual projections point to a sluggish and uneven global economic recovery in 2010, she said.

While many see a return of inflationary pressure as the point at which the CBE begins to rethink its rate cutting strategy, a certain amount of inflation may be healthy in promoting Egyptian exports, which are so critical to the growth of the economy.

And the CBE may have real cause to improve the competitiveness of Egyptian exports if the economic recovery is as soft as some predict.

Kitchen wrote that GDP growth may fall to 3.1 percent for the 2009-2010 fiscal year – now in its second month – down from 4.1 percent in the 2008-2009 fiscal year. This prediction comes despite the fact that many economists say the worst of the economic crisis is over. Kitchen said that a slow recovery of European economies will contribute to this.

Should the MPC allow the pound to slide relative to the dollar as a means of boosting exports, it could mean a return of inflationary pressures. This is an especially sensitive time since the approach of Ramadan typically means increasing prices.

Inflationary fluctuations, wrote Reham ElDesoki of Beltone Financial, “will continue to reflect food inflation, mainly, and some non-food inflationary pressures, which we expect to arise at the beginning of the school year, and during and after Ramadan, as increased consumption and preparations for post-Ramadan festivities drive non-food inflation.

Food prices continue to be the key commodity economists continue to watch. When fruits and vegetables are removed from the equation, according to the MPC, inflation fell to 3.1 percent for the first half of 2009, down from 11.5 percent for the same six months a year earlier.

Food prices are so important because of their historical volatility. If the government tries to boost exports by allowing the value of the pound to slide, it may create new inflationary pressures, the result of which could be volatility in food prices.

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