“All the portfolio flows on the debt side that came in over the course of 14 months flew out in only a month and a half,” said Abu Basha.
Tourism revenues, considered a vital source of foreign currency and equal to 4.2 percent of the total GDP, have dropped from over $4 billion in the first quarter of 2020 to less than $3 billion in Q2, according to the Central Bank of Egypt (CBE). More losses are expected in the coming quarters, and it remains uncertain when global tourism can resume.
At the same time, Egypt’s other sources of hard currency have also been dealt a blow. There has been a decline in demand for Egypt’s exports, most of which go to the pandemic-ravaged Europe. In addition, the slowdown in global trade is weighing on the Suez Canal revenues, equal to around 2 percent of GDP, according to Capital Economics, a leading independent macroeconomic research firm.
“We are also expecting remittances to drop by 15 percent compared with last year,” said Abu Basha.
The CBE noted that remittances increased in January and February by nearly 34 percent, jumping from $3.9 billion to $5.2 billion, compared to the same time last year. However, they are bound to drop for the remainder of the year, with Egyptian workers in the Gulf countries set to suffer loss of income, according to Jason Tuvey, Senior Emerging Markets Economist at Capital Economics.
On May 11, the IMF Executive Board approved Egypt’s request for emergency financial assistance of $2.772 billion under the Rapid Financing Instrument (RFI). Egypt has also applied for an IMF Stand-By Arrangement.
Abu Basha believes that IMF assistance and a potential SBA loan could cover 60 percent of Egypt’s 2020 balance of payment gap, which he estimates at $10–12 billion.
“One of the priorities for the Fund is likely to be for the Central Bank to loosen its grip on the pound. That said, there is unlikely to be a repeat of the 50 percent fall in the currency against the dollar in late 2016,” said Tuvey, who also expects the pound to fall by 7.5 percent by end of the year.
To secure an IMF loan worth $12 billion in 2016, the Egyptian government had to meet a set of structural economic reforms, including the floatation of the pound. Following the move, the value of the local currency plunged from 8.88/$ to 19.62/$ within a month, which resulted in a monthly core inflation rate of over 30 percent. This scenario is unlikely to re-occur, Tuvey said, as Egypt’s external position is “much better” compared with 2016.
Egypt’s economic growth has been steadily improving at rate of 5.5 percent, the budget for the 2018/19 fiscal year reached a primary surplus of 2 percent of the GDP (excluding interest payments), inflation has been reduced, and unemployment has declined to around 8 percent, the lowest in 20 years.
The value of the Egyptian pound rose by nearly 11 percent against the greenback in 2019 alone. In January 2020, the pound traded at 15.87/$, compared to 17.84/$ at the same time in 2019.
“We expect the depreciation against the dollar to be stronger towards the end of the year, as the strategy of using the foreign reserves to prop up the currency becomes less viable, and potential conditionalities for exchange rate reform kick in under an SBA arrangement with the IMF,” said Callee Davis, an economist at NKC African Economics.
Many observers have speculated that the CBE has interfered with the foreign exchange market in recent months. “The pound has weakened by a little under 1 percent against the dollar since the start of March, when fears about the coronavirus outbreak escalated. That is a much better performance than other EM currencies,” said Tuvey.
Tuvey believes that the CBE has recently used foreign reserves to prop up the pound and keep it at a steady rate of $15.7. “The experience from the previous decade is that such efforts ultimately prove futile,” he said. “The longer policymakers keep a tight grip on the pound, the greater the imbalances that will build up.”
(Writing by Noha El Hennawy, editing by Seban Scaria)
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