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CAIRO - Egypt will have to see serious inflows of foreign direct investment, a tighter trade balance, and returning tourists for its pound to gather strength, but a slow and sustainable appreciation is necessary, economists say.
The Egyptian pound is still trading at half of its once-pegged value exactly a year after it was floated, despite a surge in foreign reserves and a positive outlook from the International Monetary Fund which agreed to lend Egypt $12 billion shortly after.
The central bank abandoned a peg of 8.8 Egyptian pounds to the U.S. dollar on Nov. 3 last year, hoping to pull foreign currency back into the official banking system after scarcity resulted in a swelling black market.
The pound has been trading at about 17.6 to the dollar, up from almost 20 pounds immediately after the float.
"For quite some time, there had been a lot of pent-up demand on the dollar, and it has only recently, I would say 3-5 months ago, started to see balance between supply and demand," said Radwa El-Sawify, head of research at Pharos Holding.
Foreign reserves surged above $36 billion in July, the highest since a 2011 uprising drove foreign investors and tourists away and almost double the amount of late 2016.
A surge in the buying of domestic debt because of high interest rates, grants, and loans amounted for much of the jump in the reserves however, as opposed to FDI, exports or tourism.
To avoid a short-lived pound appreciation or rate fluctuations that would push up already record-high inflation, the central bank adopted a repatriation mechanism, an escrow account for money coming unto the country, over the past year to tighten the circulation of FX outflows.
Hany Farahat, senior economist at CI Capital, said a slow appreciation was also necessary to ensure the sustainability of bringing foreign currency back into formal channels.
"More than $30 billion have migrated into the [official banking] system since the float. Also, an undervalued pound is the natural stimulus for the economy in the period following the floatation," he said.
The pound's post-float depreciation helped Egyptian exports, reducing the import-dependant country's trade balance by 37 percent amid stricter import restrictions, but a poor manufacturing environment has meant non-agricultural exports have remained low.
A sudden and short-lived pound appreciation would have also pushed foreign investment in domestic debt out, economists said, expecting an abandonment of the repatriation mechanism in coming months as inflation eases.
They expected the pound to strengthen in the next year as tourism, which has begun showing signs of recovery, returns, and FDI, which the government is promoting with new legislation aimed at luring back investors, picks up.
(Reporting by Arwa Gaballa; Editing by Ahmed Aboulenein and Robin Pomeroy) ((arwa.gaballa@thomsonreuters.com; +20 2 2578 3290;))
The Egyptian pound is still trading at half of its once-pegged value exactly a year after it was floated, despite a surge in foreign reserves and a positive outlook from the International Monetary Fund which agreed to lend Egypt $12 billion shortly after.
The central bank abandoned a peg of 8.8 Egyptian pounds to the U.S. dollar on Nov. 3 last year, hoping to pull foreign currency back into the official banking system after scarcity resulted in a swelling black market.
The pound has been trading at about 17.6 to the dollar, up from almost 20 pounds immediately after the float.
"For quite some time, there had been a lot of pent-up demand on the dollar, and it has only recently, I would say 3-5 months ago, started to see balance between supply and demand," said Radwa El-Sawify, head of research at Pharos Holding.
Foreign reserves surged above $36 billion in July, the highest since a 2011 uprising drove foreign investors and tourists away and almost double the amount of late 2016.
A surge in the buying of domestic debt because of high interest rates, grants, and loans amounted for much of the jump in the reserves however, as opposed to FDI, exports or tourism.
To avoid a short-lived pound appreciation or rate fluctuations that would push up already record-high inflation, the central bank adopted a repatriation mechanism, an escrow account for money coming unto the country, over the past year to tighten the circulation of FX outflows.
Hany Farahat, senior economist at CI Capital, said a slow appreciation was also necessary to ensure the sustainability of bringing foreign currency back into formal channels.
"More than $30 billion have migrated into the [official banking] system since the float. Also, an undervalued pound is the natural stimulus for the economy in the period following the floatation," he said.
The pound's post-float depreciation helped Egyptian exports, reducing the import-dependant country's trade balance by 37 percent amid stricter import restrictions, but a poor manufacturing environment has meant non-agricultural exports have remained low.
A sudden and short-lived pound appreciation would have also pushed foreign investment in domestic debt out, economists said, expecting an abandonment of the repatriation mechanism in coming months as inflation eases.
They expected the pound to strengthen in the next year as tourism, which has begun showing signs of recovery, returns, and FDI, which the government is promoting with new legislation aimed at luring back investors, picks up.
(Reporting by Arwa Gaballa; Editing by Ahmed Aboulenein and Robin Pomeroy) ((arwa.gaballa@thomsonreuters.com; +20 2 2578 3290;))
