Egypt’s Currency Crisis

by Amira Salah-Ahmed | 30 October 2016

 

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The delay in Egypt's currency devaluation is weighing heavily on the pound's value in the black market while causing concern and an air of uncertainty among citizens and investors alike.

It was early in 2016 when newly-appointed Central Bank Governor Tarek Amer oversaw the biggest devaluation in years, letting the pound drop 13 percent against the US dollar. Even at this level, however, the exchange rate was not close enough to the growing gap between the official and black market rates.

In turn, the parallel market has continued to thrive and the pound currently hovers between LE15-LE16 against the US dollar.

In late July, Egypt finally reached an initial agreement with the International Monetary Fund for a three-year US$12 billion loan after months of negotiations, taken as a positive sign by the international market.

The loan carries with it a set of conditions that obligate Egypt to instill a slew of reforms to do with subsidies, taxes, and investment laws, which the government has been pushing forward in the past months.

While some of the conditions are less clear than others, there is no lack of transparency around the IMF's insistence on seeing a more a more flexible exchange rate regime implemented by the Egyptian government. 

The significant devaluation expected to happen in the weeks after the loan's initial approval has yet to materialize, however, resulting in further downward pressure on the pound and an anticipatory hike in prices of goods and services across the board.

In late October, the IMF's Managing Director Christine Lagarde said, “In terms of exchange rates, there is currently a crisis, because if you look at the official price, and you look at the gray market price there is a 100 percent difference, and that needs to be addressed,” Lagarde said.

Said currency crisis has resulted in shortages of an array of goods, most recently hitting the basic commodity of sugar which Egypt imports tons of to fill the supply gap. Meanwhile, already restrictive capital controls instilled by the Central Bank have been tightened even further, limiting Egyptians access to their money from outside the country.

A quick resolution to the currency crisis and an overhaul of the controls and restrictions implemented over the past year are needed to boost confidence in the local market, by Egyptians first and foreign investors second.

Once there is clarity around which exchange rate regime Egypt will be following, markets can begin to settle as both citizens and investors plan more confidently for the medium term.

There is hope that this will happen in the very near future. As Lagarde added, Egypt is “very close” to securing the necessary financing needed to officially close the $12 billion loan deal from the IMF, a sign many have been awaiting for business in Egypt to return to relative normalcy.