News Analysis: Egypt spurs economic recovery with currency devaluation

The Central Bank of Egypt (CBE) devalued its currency on Monday in a move seen by analysts as "positive" and would narrow the gap between the pound-U.S. dollar exchange rates on the official and the parallel markets.

The CBE devalued the Egyptian pounds to 8.85 per dollar from 7.73 and pumped 200 million dollars in an exceptional auction.

"This is a positive attempt to rebalance the markets after the black market has recently flourished," said Rashad Abdo, an economic expert and head of the Egyptian Forum for Economic Studies.

The devaluation will narrow the gap between the official exchange rate and the one of the black market, as the pound had weakened to nearly 10 pounds per dollar last week, for the first time since it began trading on the Egyptian market, Abdo told Xinhua.

The move directly sent a positive message to the soaring stock market. On the Cairo stock exchange, the benchmark EGX30 rose more than 6 percent on Monday, buoyed by news of the long awaited devaluation.

In a statement, the CBE said it has decided to follow more flexible policy with regard to the exchange rate, aiming to resolve distortions in the exchange rate system and to restore the circulation of foreign currency inside the banking system in an orderly way.

The statement added the new measure is also a bid to boost the market supply and bolster the nation's potential to attract foreign investments.

"Egypt needs to build as much liquidity as it could through the central bank so it can both devalue and supply the market at the same time without causing currency depreciation," Abdo explained.

The CBE seeks to reassure the investors who depend totally in their business on the dollar by pumping more liquidity in the banks, he noted.

The Egyptian foreign currency has dropped from 36 billion U.S. dollars in the aftermath of the 2011 revolution that overthrew then President Hosni Mubarak to 16.48 billion dollars at the end of this January.

The political turmoil that hit the country due to two uprisings in five years has caused foreign investments to flee, Abdo said.

The tourism, an essential source of foreign currency that has seen slight recovery, was again negatively affected by the crash of a Russian airliner last October, he added.

Additionally, the Suez Canal's revenues declined as a result of slow global trade, which has further worsened the currency shortage.

"The currency is like any commodity, when demand on it increases, while supply isn't enough, black market flourishes," he added.

The shortage of foreign currency that hit the local market which mostly depends on imports added pressure on the country to devalue its currency, but the CBE resists devaluation, said Mohamed Youssef, executive director for Egyptian Businessmen Association.

The central bank has been attempting to keep cash levels while combating the black market, but the liquidity at the banks hasn't met the demand on dollars," Youssef said, noting that procedures have shaken the people's trust in the central bank's decision which left the businessmen vulnerable to deal with the informal markets.

Also the central bank was reluctant to devalue the pound for fear of increasing inflation, added the expert.

Urban inflation reached an annual 9.1 percent in February and the Egyptian government has been attempting hard to hold down the prices of food and basic commodities to avoid any political unrest by poor people.

Both analysts welcomed the CBE's new unexpected measure. However, Abdo said the pound may need to be weakened again, urging the central bank to be brave in adopting more necessary measures when required.

He added the economic group of the cabinet should find solutions to tolerate the rise in inflation that the devaluation will certainly brings.

"Devaluation of the currency will increase exportation, but will further raise the importation prices, which means inflation rate up."

He agrees with the Central Bank's policy to secure the dollar's liquidity first.

The Egyptian importations in 2015 reached 80 billion dollars, and the informal market seized the opportunity to cover the dollar deficiency, Abdo explained.

In parallel with the currency devaluation, the country should adopt urgent and decisive decisions to control the internal market amid fluctuation of currency that would refrain the businessmen from investing in Egypt because they don't know the actual value of the dollar, Abdo reiterated.

"The government also should encourage the expatriates with new saving schemes to attract remittances in hard currency," Abdo said, suggesting more measures to be taken to increase the foreign cash reserve. Endit