Contrary to market expectations, CBE holds pound steady against dollar

Egypt’s Central Bank held the official value of the pound steady at LE8.78 to the dollar in its Tuesday currency auction. The decision came as a surprise to analysts, who predicted a devaluation after CBE Governer Tarek Amer said Egypt’s focus on artificially boosting the value of the pound had been a “grave error.”

The pound’s official exchange rate has been steady at LE8.78 to the dollar since March 16, with banks and exchange bureaus allowed to resell dollars to customers at LE8.88. Meanwhile, black market prices have surged to above LE11 per dollar.

In interviews with local media in early July, Amer said he would not “rejoice if the exchange rate stabilized and factories stalled,” an apparent reference to the impact dollar shortages have had on industry.

According to Amer, Egypt’s current weak domestic production is not enough to meet local demand, forcing the state to import commodities, which means that it must spend its currency reserves.

Egypt has received around $22.5 billion in foreign aid since the January 25 revolution, most of which was lost in exchange rate targeting instead of being used for development or to reform fiscal and monetary policy, Amer said. “This was a lost opportunity for us,” he added.

Despite the influx of aid, Egypt’s foreign reserves stand at around $17.5 billion, according to the latest Central Bank data, compared to some $36 billion on the eve of the 2011 revolution.

Amer added that when it comes to future devaluations, he would make what he believes to be the right decisions and bear responsibility for the consequences.

Tuesday’s currency auction was the first scheduled since Amer’s remarks were published, prompting expectations that the pound would be allowed to drop against the dollar.

Amer did not specify a date when a devaluation might take place, however, noted an analyst at CI Capital. “It’s clear that the Central Bank will continue to reduce the price of the pound, but there is no clear evidence for a specific date when this will happen,” added the analyst, who asked not to be named.

Ayman Hadhoud, a researcher specializing in monetary policy, suggests Amer’s comments were intended to deliver a message to the International Monetary Fund, not to the local market. Anonymous officials recently told Reuters that the government has embarked on negotiations for a US$5 billion loan from the IMF, an institution that has long advised Egypt to adopt a flexible exchange rate in order to protect foreign reserves.

President Abdel Fattah al-Sisi also emphasized the need to protect foreign reserves in a recent speech, adding further impetus to calls to adopt a flexible exchange rate, Hadhoud said.

It’s inevitable that Egypt will allow the pound to float freely, Hadhoud said. If the pound is allowed to float, the Central Bank can buy dollars to rebuild foreign reserves rather than spending them to stabilize the exchange rate.

“This means a variable rate per day,” Hadhoud says. “A stable exchange rate will likely be achieved within two months, after the price of the pound reflects its true strength against the US dollar.”