With devaluation comes inflation.
As Egypt’s foreign currency shortage intensifies and the gap between official and unofficial currency rates widens, economists say another devaluation is inevitable this fiscal year.
Foreign currency inflows have been severely hit in import-dependent Egypt after a 2011 uprising drove away tourists and foreign investors, two major sources of hard currency.
The dollar shortage has stifled business activity and hit confidence in the Egyptian economy. Egypt devalued the pound by 13% in March in an effort to close the gap between the official and parallel rates but the move failed to boost dollar liquidity or close the gap.
“The devaluation will have to happen in my view,” said Hany Farahat, economist at CI Capital.
“I think that this is something that would have to happen to preserve the country’s FX resources that are currently declining as we have seen in the net foreign assets,” he added.
In May net foreign assets dropped to negative $9.4 billion, down from a surplus of $6.1 billion in the same month a year earlier, Farahat said.
Egypt’s Central Bank Governor Tarek Amer said reserves would reach $25 billion by year-end. While reserves have slightly risen since October last year, several bankers said it had become harder to access dollars within the banking system.
In remarks published in local media on Sunday, Amer said that since he took up his post in November his focus has been to address stagnation and stimulate the economy while targeting a flexible exchange rate that reflects supply and demand.
“As a central bank we had the choice to either keep the pound stable or get the factories working,” Amer was quoted as saying in Al-Mal financial newspaper.
“Personally, I would not be happy if the exchange rate is stable but factories are halted,” he said.
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The central bank has been rationing its dollar reserves through regular weekly sales, keeping the pound artificially strong at 8.78 per dollar but black market traders said they were selling dollars at a range of 11-11.04 per dollar on Sunday, without giving volumes of trade.
Another devaluation could trigger a jump in inflation if it is implemented early this year, economists say, a major concern in the country of 90 million where millions live hand to mouth.
“There are other sources of inflationary pressures so they will wait until… end of the first quarter or early second quarter for the devaluation (to allow) inflationary pressures to be contained,” said Eman Negm, an economist at Prime Holding.
Egypt’s fiscal year starts in July.
Annual urban consumer inflation jumped for the second month in May to 12.3% from 10.3% in April, prompting the central bank to raise interest rates by 100 basis points at its monetary policy meeting last month.
With a plan to cut energy subsidies further and introduce a value added tax this fiscal year, inflationary pressures are expected to intensify.
“There is always a cost of any policy reform,” said one economist who declined to be named.
“You can’t fix everything at the same time. You either need to structurally reform the economy or just maintain everything at a standstill for fear of very high inflationary pressures.”