As reserves fall, talk of devaluating the Egyptian pound intensifies

With pressure on Egypt’s foreign reserves mounting, officials have been making increasingly direct statements about the need to allow the Egyptian pound to depreciate.

On Monday, the Central Bank announced that Egypt’s foreign reserves declined again in August, slipping by almost US$44 million to close the month at $18.096 billion.

Speaking at the Euromoney conference Monday, Investment Minister Ashraf Salman suggested that a devaluation was becoming inevitable. 

“Is it better to deplete the reserves or depreciate?” Salman said. “The answer … in this global crisis is to take care and to increase your foreign reserves. Depreciation here is not a choice.”

The Central Bank allowed the pound to depreciate slightly in late January and early July, but has otherwise kept the official exchange rate tightly pegged to the US dollar, even as the dollar's value has soared compared to other global currencies.

Keeping the pound’s official exchange rate above its true market value puts both direct and indirect pressure on reserves. Through its official currency auctions, the Central Bank sells off a portion of its dollar stocks to meet local needs. When investors and traders feel the pound is overvalued — making goods and services more expensive in dollar terms — they shy away from doing business in Egypt, further slowing the flow of foreign currency into the country.

“Even though the currency against the dollar has been steady, in terms of real effective exchange rate it has appreciated, leading to some lost competitiveness,” explained Emirates NBD Chief Economist Tim Fox in a presentation at Euromoney. “It has got to be remembered that with exchange rates, not only the dollar matters, and there has been an appreciation of the Egyptian pound against the Euro.”

Finance Minister Hany Kadry Dimian sidestepped direct questions about the exchange rate, saying such policy was left to the governor of the Central Bank.

Dimian did confirm that Egypt plans to borrow foreign currency via global debt markets sometime this financial year.

“We are indeed going back to international capital markets,” he said. “It’s a bit early to say the amount now, but we have plans to go back to the markets during the course of 2015/16.”