News Analysis: Egypt's currency devaluation mixed blessing to ailing economy: experts

As Egypt's central bank (CBE) toughens measures to combat the black market, reduce inflation and increase foreign reserves, the U.S. dollar gains versus the Egyptian pound.

On Wednesday, Egypt's pound weakened to 7.63 per one dollar from 7.49 a day earlier after a central bank auction. It was the lowest official level since the auction began in December 2012.

The CBE announced a surprise 50-base-point cut in benchmark interest rates on Jan. 18. The move caused so far a 49-piaster leap in the dollar selling prices at the official market ranging between 7.14 to 7.63 dollars in two weeks.

According to financial experts, the devaluation of the Egyptian pound was necessary to revive Egypt's ailing economy after four years of turmoil.

Meanwhile, some economists criticized the mechanism and the timing of the new measures which came weeks before a planned economic summit in March.

"The new moves caused a state of perplexity in the foreign exchange market, with more speculations and flourishing at the black market," said Fakhry al-Fiqy, professor of economics at Cairo University.

Egypt is under pressure of "unifying the foreign exchange" as a member of the International Monetary Fund, with pledges by CBE chief Hisham Ramez to unify the exchange rates to assure business people over investment climate in Egypt.

However, the "new hasty measures," as the expert described, will make the investors "reluctant to pump their funds in an unstable monetary system that enables the black market to dominate the economic life in Egypt," while the North African country is exerting much effort to attract huge investments in its expected economic event, he said.

Meanwhile, Bassant Fahmy, banking professor with the French University in Cairo, hailed the timing of the move, before the economic summit, as "very good" to assure the investors on the exchange rate.

The CBE has, in eight sessions, devalued the pound with five piaster, while only in one session on Thursday, it weakened the pound by 12 piaster versus the dollars.

"The new monetary measures aren't random or hurried," Fahmy added, lauding the process of devaluating the pound, which she believes was required four years ago, to balance the slide in the foreign reserve from 36 billion dollars in 2011 to 15 billion at the end of December 2014.

Nevertheless, Fahmy described the measures of the move as "shocking."

For a country which has been engulfed in political disorder and is battling against terrorism, Fahmy argued, the economic conditions in Egypt needs more "tranquility rather than shocking management in solving the exchange rate problem."

The CBE said the devaluation of the local currency "will narrow the gap in the dollar exchange rates on the official and parallel markets."

Governor Hisham Ramez said the move is on time and came amid declining world prices and will not harm the economy.

Rashad Abdo, head of the Egyptian Forum for Economic Studies, echoes the banking expert Fahmy.

She said the merits of reducing the pound are "huge," reiterating criticism over "the severity of the action and stiffness of decision-making."

The world is suffering "a war of currencies" not only Egypt, Abdo said while explaining that devaluating 12 piaster in one session is "negative message for investors" who opened an appropriation in banks with certain price, then they were surprisingly faced by changes in the currency value in few days.

The dollar is like any commodity governed by the rule of "demand and supply," Abdo said, lamenting that deficit in supply of dollars will encourage the black market instead of uprooting it.

However, the expert said the government should seek austerity measures to improve the economic climate in Egypt and alleviate pressure on the cash reserves.

She added that the government should adopt "direct importation" without mediators to decrease the costs while encouraging citizens to buy local products by improving its quality, given the fact that Egypt's imports stand at around 60 billion dollars annually. Endit