Egypt’s pound sinks to new low in biggest fall since October devaluation

Egypt’s pound plunged on Wednesday to a record low, in the latest sign of the country’s severe foreign currency crunch two months after Cairo agreed a $3bn rescue loan from the IMF.

The currency dropped 6 per cent to 26.4 to the US dollar in the steepest slide since the Central Bank of Egypt in late October devalued the pound in an effort to clinch the IMF deal.

Wednesday’s slide comes as billions of dollars of imports are blocked in Egyptian ports because local banks are unable to secure enough dollars to pay for them because of the shortage of foreign currency.

Russia’s invasion of Ukraine in February 2022 spurred outflows of $20bn in a flight to safety by foreign debt investors. The war also caused prices for raw materials to soar, dealing a powerful blow to Egypt, the world’s biggest importer of wheat.

The IMF pact included a requirement that Egypt implement “a permanent shift to a flexible exchange rate regime” instead of using foreign currency reserves to keep the exchange rate at a targeted level. The CBE devalued the pound in March, before the October move, with the currency losing 40 per cent of its value against the dollar over the period.

Mohamed Abu Basha, head of macroeconomic analysis at Cairo-based investment bank EFG Hermes, said it was not immediately clear whether the fall on Wednesday represented the expected move to a flexible exchange rate regime.

“To judge, we need to monitor the level at which the currency will eventually stabilise, the extent to which this will lead to improved foreign currency liquidity in banks and if we will see more volatility in the pound going forward,” he added.

The central bank late last year revoked the need for importers to use letters of credit, a measure that was initially introduced in March in order to conserve scarce foreign currency resources by slowing down the import process.

Successive Egyptian governments have been reluctant to move to a flexible exchange rate to avoid big jumps in prices in a country reliant on imports for many of its basic needs. But the scarcity of foreign currency in recent months and the emergence of a black market in dollars had already stoked inflation to 18.7 per cent in November, its highest level in five years.

In December, the central bank boosted interest rates by 3 percentage points in an attempt to cool down inflation. State-owned banks on Wednesday began offering one-year deposit certificates at a 25 per cent interest rate — a move aimed at enticing savers to hold on to their Egyptian pounds rather than convert them to dollars.

Analysts will be watching to see if dollars will be available to clear the backlog of imports stuck in ports, which equated to about $9.5bn, Mostafa Madbouly, the prime minister, said last month. These include goods ranging from corn and soya, used as animal feed, to cars, industrial inputs and household appliances.

“Concerns have lingered about the authorities’ commitment to a flexible exchange rate but developments over the past week suggest that they are moving in the right direction,” said Capital Economics, the London-based consultancy.