Currency devaluation: confronting rumors and anticipating responses

“Egypt would bleed reserves protecting the EGP,” IMF Managing Director Kristalina Georgieva said to Bloomberg on October 5, 2023. She did not mention future currency devaluations, though their inevitability could easily be read between the lines. In fact, “The sooner we can reach an agreement on the road map for [EGP devaluation] the better” according to Enterprise.

Rumors about a future devaluation of the Egyptian pound began making the rounds in August 2023, but they still did not carry the same weight as the remarks that Georgieva made. There were several reasons for that. First, the IMF is one of the leading international financial institutions. Second, Egypt ranks second on the list of largest holders of IMF debt obligations (a shade below $12 billion). Third, Egypt faces external debt maturity worth $29.23 billion in 2024 (84% of current foreign currency reserves at CBE).

There are several layers to why Egypt could be finding it challenging to meet its short-term debt obligations. Its foreign debt-to-GDP has increased to 40%, net international reserves have declined by 22%, and deposits by regional allies have increased to 85% of foreign currency reserves since 2020.

However, it’s safe to say that the country is far from defaulting on its debt obligations, though it may be inching closer to adopting a floating exchange rates policy. According to the IMF, a devaluation is inevitable.

Attempting to get a clearer understanding of the situation and a sense of the future of the Egyptian economy, Business Forward reached out to several experts in the academic community. They are Abeer Elshennawy (AE), professor of economics at the American University in Cairo (AUC) and research fellow at the Economic Research Forum; Dina Abdel Fattah (DA), assistant professor and chair of the Department of Economics at AUC; and Amr Adly (AA), assistant professor of political science at AUC and author of Cleft Capitalism: The Social Origins of Failed Market Making in Egypt (2020). They shared with Business Forward their opinions and outlooks for the coming period and responded to many of the rumors circulating around the Egyptian economy.

Do rumors of a coming devaluation affect the economic performance in Egypt? How?

AE: Yes, they do, in fact, affect the economic performance, because everybody will hold on to the dollars they have in anticipation of a future devaluation. Consequently, the supply of dollars will drop, and businesses will lose access to foreign currency to pay for intermediate imports. This will, in turn, affect their performance.

DA: Yes, they surely do. Because there is a parallel market for foreign currency, the rumors of devaluation can easily affect the supply and demand, adding pressure on its value. We have already seen the value of the foreign currency fluctuate in the parallel market and the efficiency of some business sectors decline.

AA: They definitely do. They stand as cause and effect for macroeconomic instability. The Egyptian government has artificially kept the exchange rate against the US dollar unchanged for the past year. This has fed speculations in the black market where the US dollar is sold at a 40% premium. This only means more uncertainty and it deters investment.

Is a devaluation of the Egyptian pound inevitable in the short-term? Why?

EA: Yes, when the dollar supply is less than the demand, you have to devalue to ration demand and prevent the emergence of a black market.

DA: We have to understand that a devaluation is needed to set the correct value of the Egyptian currency. However, a devaluation alone will not solve the problem. It is not a magical solution; however, it could help in somewhat stabilizing the economy.

AA: The Egyptian pound is overpriced. Nevertheless, a devaluation is not the way out as the IMF claims. The Egyptian economy suffers from structural problems in relation to international trade and finance. These issues must be addressed if we’re looking for a long-term solution.

What does a devaluation of the Egyptian pound mean for the private sector?

AE: It means that exports become more profitable and imports more expensive. This provides some protection to manufacturers whose attention is centered on the domestic market. However, imports of intermediate goods can become more expensive and this affects production.
DA: A devaluation means that the true value of the currency depreciates. In turn, Egyptian exports become relatively cheaper in the global market and imports of raw materials or intermediary goods become more expensive. For the local private sector, this indicates limited economic stability.

AA: It could mean a lot of things. On the upside, it could empower the private sector to make longer-term decisions regarding investment and production. On the downside, it raises the cost of production for import-intensive industries. In between, it promises better access to global markets, but this has not yielded great results in the past.

How can businesses be well-prepared for a future devaluation?

AE: They can adapt their work models towards a more export-oriented strategy.

DA: Business budgets should factor in a devaluation and a limited availability of foreign currency.

AA: I don’t think businesses have much room for maneuvering. The question here is whether or not they would be able to adapt to a crisis-ridden macroeconomy.

Experts agree that rumors would inevitably impact the state and market’s economic performance. Furthermore, there is coincidence in the need to devalue as a short-term solution and address the underlying causes for economic instability for the long-term.

Looking at options they recommended to navigate the situation, including adjusting business models, conscious budgeting, and introducing adaptation strategies, we can only anticipate that the Egyptian economy surviving the many challenges taking place in the world right now.

Note: Answers were edited for clarity and fluidity.

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