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Could the appreciation of the pound be construed as indicating real improvement in Egypt's economic performance, asks Al-Ahram Weekly
By Nesma Nowar
For the past two weeks the Egyptian pound has strengthened against the US dollar, reaching a three-month high of LE15.75. The move has heartened many members of the public after months of rocketing inflation on the back of a deteriorating local currency.
For Yehia Hassan it was the best news he has heard in months. The stronger pound means he pays less for his daughter’s dollar denominated school tuition.
The Central Bank of Egypt (CBE) floated the pound in November. Soon the dollar was trading at almost LE19 to the pound compared to LE8.8 before floatation.
Economists had predicted the pound would strengthen in the second half of 2017 when the reform programme currently being implemented starts to pay off.
The current early rally can, says economists Hani Tawfik, be explained by dollar inflows in the form of loans, receipts of dollar-denominated Eurobonds and portfolio foreign investments, including on the stock market and in government debt.
Foreign holdings of Egyptian T-bills doubled to $1.4 billion in January from a month earlier and $4 billion worth of Eurobond revenues helped boost foreign reserves to $26.3 billion by the end of last month, up from $24.2 billion in December. Cairo has also received billions in loans from the IMF, the World Bank and the African Development Bank since November.
“The recent depreciation in the dollar’s value against the pound has prompted dollar holders to sell for fear of further depreciation, increasing the availability of dollars in the banks,” says Tawfik.
The dollar influx, accompanied by a more optimistic outlook for the Egyptian economy, helped strengthen the pound against other foreign currencies. Tawfik warns, however, that incoming foreign investments have been mostly “hot money” capital that is moved from one country to another in search of short-term profits on interest-rate differences and/or anticipated exchange-rate shifts and loans.
“The money is not ours and we could lose it for any reason at any time,” Tawfik told Al-Ahram Weekly.
Egypt has experienced the outflow of such money before, not least in the wake of the 25 January Revolution.
“In a sense the pound has not appreciated for economic but for technical reasons,” says Tawfik. The trend is not sustainable, he cautions, and the government should not depend on such inflows further strengthening the pound. Egypt’s currency will only make solid gains when hard currency earners such as tourism, FDIs and remittances recover.
But while the recent appreciation of the pound cannot be seen as indicative as an overall improvement in the performance of an economy beset by high inflation and unemployment rates all is not doom and gloom, says Tawfik, since the appreciation could be a sign some things are improving.
Remittances increased by 15.4 per cent to $1.6 billion in December 2016 compared to the same month in the previous year, and more than 70 per cent of remittances deposited in the last quarter of 2016 were sent following the decision to float the pound. According to Ahmed Kouchouk, deputy finance minister for financial policies, exports also increased by 25 per cent in the two months following the floatation.
Local investment bank Pharos Holding attributes the current rally to a mix of internal and external factors. Externally, the dollar has depreciated versus other global currencies following the inauguration speech by newly elected US President Donald Trump.
Domestically, Pharos says improved foreign currency liquidity following the floatation has helped the pound to strengthen.
“Remarkably, foreign holdings of Egyptian pound-dominated treasuries witnessed a notable increase starting in January. As the exchange rate started to stabilise, foreign investors seized the opportunity of higher short-term interest rates,” says the investment bank.
While Pharos adds that weaker local demand has also supported the current rally as declining sales volumes across various sectors following the floatation helped reduce pressure for further depreciation Bloomberg has reported that Renaissance Capital and Standard Bank Group both believe the pound’s rally may have already gone too far, a fact reflected in the absence of foreign investors from the two treasury auctions held on Thursday and Sunday.
Importers’ reduced dollar requirements a product of weakening demand in the economy have also had an impact. One banker told Reuters this week that importers have a stockpile of goods. Bloated inventories are a result of the slowdown in demand that resulted from the floatation and the consequent squeeze on purchasing power. In short, sales of most imported goods have slowed, and with it the demand for dollars.
Ahmed Shiha, head of the Importers’ Division at the Cairo Chamber of Commerce, points out that the slowdown in imports actually affects a relatively small number of goods on many which the government had already imposed restrictions. A majority of imports, he says, are either essential for production or else strategic goods, and they have not decreased.
Yet the appreciation of the pound has not only encouraged positive sentiments about economic prospects, it has also raised hopes that inflation will ease. Following the floatation prices increased across the board. The core inflation rate reached a record of 30.86 per cent in January, up from 25.86 per cent the previous month.
Following the pound’s rally the government fixed the custom dollar exchange rate at LE16 until the end of the month, down from LE18.5, and said it would review the rate every two weeks instead of monthly.
Alaa Ezz, secretary-general of the Egyptian Federation of Industries, said in a TV interview this week that the value of the custom dollar constituted only 11 per cent of total customs costs so the move will only lower prices on goods such as cars, refrigerators, washing machines and other appliances, on which high customs are imposed. Ezz expects these goods to fall in price over the next 10 to 15 days. Price reductions, however, are unlikely to figure significantly when it comes to foodstuffs which consume the majority of the budget of lower income Egyptians. The one ray of hope here, says Ezz, is that the price of poultry, which attracts 30 per cent custom duty, may fall.
Looking ahead, Pharos Holding highlighted four domestic events that will affect the pound’s exchange rate in the short term. The seasonal effect of Ramadan the Holy Month has long seen increased levels of consumption, and thus of import demand, compared with the rest of the year might negatively pressure the pound. The back of the recent appreciation, could also encourage importers to resume their activities, albeit in a limited way due to a decline in sales volume, placing further pressure on the pound.
On the other hand, the receipt of $1.25 billion, the second tranche of a $12 billion loan from the International Monetary Fund (IMF), will be viewed as a vote of confidence in the Egyptian economy fanning sentiment that is likely to be positive for the pound. Taken together, such indicators have led some observers to predict the pound will strengthen to LE14-15 to the dollar by the end of April.
© Al Ahram Weekly 2017
